Transcript
Ladies and gentlemen, thank you for standing by, and welcome to the Legacy Housing Corporation First Quarter 2020 Earnings Conference Call. Please be advised that today's conference will be recorded. I would now like to hand the conference over to your speaker today, Curt Hodgson. Thank you, and please go ahead.
Thank you for joining the call today. Before we begin, I want to remind our listeners that management's remarks may include forward-looking statements, which are subject to risks and uncertainties. Management may also make additional forward-looking statements in response to your questions. Therefore, the company seeks the protection of the safe harbor for forward-looking statements as outlined in the Private Securities Litigation Reform Act of 1995. Actual results may differ from current expectations, and we encourage you to refer to a more detailed discussion of the risks and uncertainties in our annual report filed with the Securities and Exchange Commission. Any projections related to future performance represent management's estimates as of today’s call. Legacy housing has no obligation to update these projections unless required by applicable law. Now, I will discuss our first quarter performance and provide some general insights on our business in light of the COVID-19 pandemic. After that, I will hand the call over to our CFO, Cork Van Den Handel, for a more detailed financial discussion. We were pleased with our first quarter results. Compared to the previous quarter, our net income grew by 25%, reaching approximately $9 million, up from $7.2 million in the first quarter of 2019. This growth was driven by several factors: our loan portfolios continued to perform well, resulting in a 16% increase in interest income to $6.4 million, compared to $5.5 million in the same period last year. Both our consumer and commercial loan portfolios have surpassed the $100 million mark. Additionally, we reduced our expenses, lowering SG&A by about 14%. We also experienced a one-time event, receiving approximately $1 million from the settlement of a lawsuit with a former vendor. Given the industry's seasonality, which typically sees lower revenue in the fourth and first quarters, as well as the impact of coronavirus in late March, we are optimistic about our first quarter performance this year. However, we understand that many on this call are focused on the second quarter and beyond, as the first quarter included only about two weeks affected by the pandemic and subsequent shelter-in-place orders. As previously disclosed, we took steps during the first quarter that we are continuing into the second quarter to address these challenges. For example, we are offering discounts on aged inventory at dealers’ lots and company-owned stores. We have lowered down payment requirements for certain manufactured home community operators and have made a small number of layoffs while adjusting pay rates for hourly and salaried employees. We have noticed a negative impact on retail from the coronavirus, and while I cannot provide exact numbers yet, we have some concern based on anecdotal evidence regarding reduced traffic for our independent dealers, likely due to both the virus and the decline in oil prices. Our company-owned stores have also seen a drop in traffic, but we will not fully understand or quantify the impact until the end of the second quarter. Sales in our company-owned stores for the first quarter of 2020 were $3.2 million, a slight decrease from $3.4 million in sales during the same period last year. The pandemic has also caused delays in some of our manufactured home community development projects due to a standstill in construction permitting and zoning during the shelter-in-place. However, we are seeing signs that we can ramp up our development efforts as we approach June and July. On a positive note, our sales to manufactured home communities remain strong, with our commercial loan portfolio increasing by nearly $11 million to a total of $103.3 million, which is approximately a 12% increase since the end of 2019, and up $41 million compared to the first quarter of last year. Both our commercial and consumer loan portfolios have performed well during the pandemic. For our commercial loans, we have granted only a few three-month deferral requests to certain park owners, and we are doing so only when the company receives something in return, like accrued interest, and sometimes requiring cross collateralization to secure our loan. On the consumer loan side, to my surprise, we have not seen any material adverse impact to date. In fact, our delinquency rate for our consumer loan portfolio, which exceeds 3,000 loans, actually decreased in April compared to March. Through April of this year, our delinquency rate has remained below 2%, reflecting well on our internal underwriting and servicing team led by Stuart McDowell, our Director of Retail Finance. We will continue to monitor this situation closely. I do expect to see further reductions in expenses during the second quarter, as the cost-cutting measures we discussed were mainly implemented at the end of the first quarter. Hopefully, we are nearing the end of the impact caused by this coronavirus, although no one can know for certain. Currently, looking at our overall order book, I am optimistic that we can maintain or potentially improve our production levels for the remainder of this year, while remaining prepared to adapt as circumstances dictate. Now, I will hand the call over to Cork to discuss our financial results for the first quarter.
Thanks, Curt. Net revenue for the first quarter of 2020 was $38.3 million, a slight increase over 2019's first quarter net revenue of $38 million. Product sales, the largest component of our revenue, declined approximately 1% in the quarter to $31.2 million. Factory direct sales, the smallest and lowest margin component of product sales contracted 50% to $2.2 million and sales of consigned inventory through our network of independent retailers decreased $1.2 million to $8.8 million. Sales through our company-owned retail stores decreased to $3.2 million, as Curt noted. Partially offsetting these reductions, sales to manufactured home parks increased $3.3 million or 26% to $15.8 million. Product sales gross margin percentage decreased slightly to 29.9% as a result of sales related expenses that are now being recorded in cost of sales partially offset by a more favorable product mix. Interest income in the quarter was $6.4 million, a 16.2% increase over the $5.5 million recorded in the same period last year. Interest generated by our consumer loan portfolio was essentially flat at $4.1 million, while interest from our mobile Home Park loan portfolio increased 62.5% to $2.3 million. SG&A expenses of $5.6 million decreased about $880,000 from the first quarter of 2019. This decrease was primarily the result of $0.5 million of retail store expenses recorded as SG&A in the first quarter of 2019 that were subsequently recorded in the cost of sales later in 2019 as well as a $0.3 million decrease in advertising and promotions, a $0.3 million decrease in consulting and professional fees. And a onetime $0.2 million expense in the first quarter of 2019 for settlement of a lawsuit. These decreases were partially offset by a $0.3 million increase in salaries and incentive costs primarily related to our operations as a public company and a $0.2 million increase in warranty expenses. Pretax earnings increased $2.4 million to $11.6 million in the quarter. As Curt noted, the increase included a onetime item, $1,075,000 from the settlement of a lawsuit with a former vendor. Income tax of $2.6 million increased $6.6 million over the first quarter of 2019 as a result of the higher earnings and the company filing taxes in additional states. Net income was $9 million for the first quarter compared with $7.2 million in a similar period of 2019. Net income per share based on basic and diluted weighted average shares outstanding was $0.37 compared to $0.29 in the prior year quarter. Excluding the onetime item, net of the tax effect, EPS was $0.33. Finally, our equity increased $8.4 million in the quarter to $230.8 million. That completes our financial overview, Curt.
Thanks, Cork. These are certainly interesting, unprecedented times. So far, Legacy has weathered the storm fairly well, and we remain optimistic about our ability to do what's needed to continue to sustain our business and ultimately grow. As we hopefully move into the reopening phase of the pandemic that should drive additional sales and demand. Thanks for your interest and your attention today. We will now take any questions.
First question comes from the line of David Burdick with Oak Ridge.
First, I just wanted to ask about production and where it stands today. I think the last time we spoke, production was down only slightly from 15 floors per day to 13. Just wondering where it stands today?
Yes, this is Curt. Production is slightly up from there. We're not to 14 per day, but we are exceeding the first quarter's production slightly in Georgia, and we're maintaining the levels that I last reported in Texas of 8 per day for the 2 plants in Texas combined. So all in, we're probably around 13.5 per day, and we may be able to increase production based on order flow especially in the Southeast.
That's helpful. Regarding your manufactured home parks, you mentioned those were delayed. Can you just talk a little bit more in detail on those? And maybe when do you expect those to ramp up?
As we develop the properties we own for community projects, our engineering team collaborates with city engineers and staff. However, due to shelter-in-place measures, in-person meetings were not possible, leading to virtual discussions that essentially halted our permitting process. For instance, the significant property we have in Austin had public hearings scheduled for April, which were postponed indefinitely. We recently learned that these hearings will now take place virtually in June, resulting in a 2 to 3-month delay with minimal progress. Overall, we either own or finance around 8 different parcels in our market and are optimistic that they will begin yielding results soon, possibly in 2021. We believe we are well-positioned to enter some of the major markets in the area, likely starting next year.
Lastly, would you guys be able to provide any color on the cadence of the Q2 order flow thus far? And maybe what we should expect on a revenue perspective in Q2 and Q3?
Kenny, he is asking about order flow, and how it will impact revenue for Q2 and Q3. Why don't you tell him how order flow is going to work?
For the retail stores, I guess, is what he's talking about or for everything. I think the orders are starting to come back in. It got pretty slow when the shock of COVID hit, we had a lot of our shows, Tunica, Mississippi. It's one of our big major shows for the year, and they canceled that show. We came out with our own show special and called it our Tunica Show Cancellation Special and to try to drive sales, and we were pretty successful with that. So we've got some pretty good backlogs. And right now with plant levels, and we're starting to see orders come in. We're starting to see off of the retail stores, we're not seeing so much stock orders coming in, but we're seeing a lot of retail stuff come in and so the orders are starting to come in now, and it looks pretty promising for the second and third.
Regarding revenue, I mentioned this in our recent earnings call. I expect second quarter revenue to be similar to last year's figures. Even with a slight decrease in our Texas production, the revenue loss will be offset by increases in other areas. For those who recall our roadshow 1.5 years ago, we emphasized our strategy of both generating and conserving revenue, and we won’t be apologizing for our earnings this year. In the last quarter, we increased our tangible net worth by about 4%, and we anticipate significant growth in tangible net worth throughout each quarter this year. That's the essence of our operations; we generate, save, and reinvest. Therefore, we don’t anticipate any major declines in top or bottom line figures for the second and third quarters. I am somewhat optimistic about third quarter growth, but the situation continues to evolve in different regions, causing uncertainty. I'm unsure if my 18-year-old will attend college in person this fall or participate in virtual classes. It appears that progress is slower than many hope, especially in regions still facing strict restrictions. Recently, I learned that New York has extended its restrictions for another 30 days until mid-June, and Virginia has done the same. I'm concerned that the economic recovery might be slower than we anticipate.
All right. That's helpful. Good luck moving forward.
Our next question comes from the line of Mark Smith with Lake Street Capital Markets.
First off, the cost-cutting certainly looks like it helped during the quarter, Curt, it sounds like we will see more impact in Q2, but can you just talk to how sustainable that is as we look kind of beyond Q2? And then also any pressures or relief that you guys see in commodities and manufacturing costs?
Mark, that's a good question. I was hoping for a softball, but yes. Let's talk about commodities because that's something we all know we can look them up on the Internet. So lumber fell off a cliff in March and April, and we actually locked in lumber prices, probably at least through the second quarter, maybe a little bit beyond that. So we took a pretty bold move on lumber. Steel has gone down 10%, 15%. We're tied to indexes, and how we purchase steel. And that's got to improve in our favor, at least in Q2, and we're going ahead and buy steel a little bit further out than we would otherwise to take advantage of what we think it is maybe the bottom of steel prices. So those are the 2 principal commodities in a mobile home, about 20% lumber and about 10% steel. And the other 70%, much of it we import from China, and we're just happy that we're getting our supplies without interruption from our Chinese vendors. And then the other half is just hard to put our finger on. Most of it doesn't seem to be vary in price no matter what's happening to the economy. So we've already told many of our customers to expect 0 price increases for the remainder of the year. I hope we can honor that forward-looking movement. So they can plan accordingly. And so basically, as we improve our product, which we do every model year, including this one coming up, our customers will get those improvements, probably at no additional cost on the units that they purchased, not that I want to get them to delay their orders, but I think like all models, we improve every time we come up with a new model a year. Now the first part of your question about cost-cutting and whether it's sustainable. We're leaving no stone unturned here. I mean if we can buy coffee cheaper, we're going to buy coffee cheaper. So we're attacking all of our G&A expenses, and I don't want to throw out, but all that means because I'll found somebody on a call that's going to get transcribed, but I think it is sustainable. I think when you have 36 million people unemployed and you have plenty of jobs for people, and when you're buying things in pretty good quantity and other people have cut down their buying. I think it puts us in a pretty powerful position as far as being able to keep these cost-cutting measures in place probably for 3, 6, 9 months. Another way to look at it is, we're able to build a mobile home less expensively, but that doesn't mean we're going to decrease prices. It's probably going to be more feature-packed than the feature than it has been in the past. That's probably the quid pro quo that we're going to see. I'm pretty excited about some of the new things coming down the pipeline in product, European cabinets and energy-efficient houses and 60-inch wide showers and things like that, that elevating the manufactured housing industry to be more competitive with the site-built housing industry. You're going to see more and more of that unveiled, not just by Legacy, but the industry as a whole. And the more that we can compete with other forms of housing, the more market share our industry is going to be able to capture. Although interest rates are down for the site built sector, the ability to get one of those mortgages is tougher, which is good news for our segment. So I don't know if you've seen this or not, but the number of mortgage applications being approved is down significantly after the coronavirus and that's just because of a natural tightening of credit across the board, and that bodes well for our industry because people will come over to our industry. Our credit standards don't really change according to economic swings, and nor do our interest rates or anything like that, we're not constantly changing our offerings on a credit point of view. Our credit criteria to date is exactly the same as it was 6 months ago. Absolutely no change whatsoever. So I don't know if that answered your question, Mark, but kind of sets us up well, I think, for the third and fourth quarter, assuming there's some sort of rebounds in the national economy.
Okay. No, that's great. You brought up kind of the financing. It sounds like you'd said delinquencies. I want to confirm this is right, delinquencies were actually down in April versus March? Can you just confirm that and talk about anything else as you kind of look into your crystal ball for the consumer market?
Any chance that Stuart McDonald's on the call, are you on the call, Stuart? No, I don't believe he's on. Okay. We were just fascinated by the statistics, but we fully expected higher repos and more delinquency rates at the end of April because the pandemic in Texas especially was in full force. Everybody was under a shelter-in-place, and the unemployment rate was going through the roof, and we were absolutely certain that we were going to have to create more reserves in our retail portfolio. That has not come to pass. Our delinquency at the 15-, 30-, 45- and 60-day place, which is the real sensitive part of the curve is actually better at the end of April than it was at the end of March. And who knows, maybe all the government systems, maybe the $3 trillion of our grandkids' money that's no longer our grandkids' money is helping that curve. Who knows? So let's face it. The working class unemployed are really not unemployed. They're just working for the federal government for $1,000 per week. In many cases, they got to pay raise. So maybe the real issue won't fall until the end of those benefits, whenever that is, I think it's currently scheduled for the end of July. But we don't sense any risk in our portfolio that's greater than it was before the pandemic, which is a very unusual statement I realize, but the numbers just can't be argued with. We're having to do a little bit more collection, a little bit more work on the telephone, but the numbers are pretty compelling that we're not going to have a negative effect, at least for the next couple of months on our retail portfolio. It's absolutely incredible, I think.
Okay. The MHP lending has always been a very stable business for you, but it seems that some individuals might be looking to postpone certain payments. Can you provide more details about the risk profile you are observing in the MHP lending sector?
It's a unique situation right now. For example, in Louisiana, the governor has put a halt on all eviction processes statewide. This makes it extremely challenging for mobile home park owners to collect rent since evictions are not permitted for four months. Consequently, the park operators are facing more difficulties than the consumers at this time, as evidenced by their reported revenues. While the loans are solid in terms of security, many park owners lack sufficient working capital for the next couple of months. Due to revenue declines stemming from the pandemic, we are allowing these owners to accrue interest and are enhancing our security by cross-collateralizing it with assets that previously had a high equity to debt ratio. This results in a stronger position for us compared to before, and I am quite confident about it. Interestingly, we see that consumers might prioritize paying us out of concern for their credit ratings or fear of losing their homes, whereas they might not pay their landlords who cannot evict them for the next four months.
Okay. Perfect. And then the last one for me, just as we look at the demand for homes today. Maybe talk about some of the mix shift that you saw in channels from kind of retail and independents and MHP during the quarter. How that is today? And what impact that kind of has on your margins, if we see more maybe single wides rather than double wides and kind of what's happening in the shift of sales?
I believe we are seeing a continued trend away from traditional mobile homes, particularly those that are owner-occupied in rural areas, shifting towards communities in urban settings that are not necessarily owner-occupied. This shift has been happening for years. However, there is a possibility that if people become more concerned about living close together, there could be a resurgence of interest in rural living. If that occurs, our industry is well-positioned to serve rural America where larger homebuilders do not operate. We focus on areas without large supplies of materials and services, which we have perfected over the decades. If demand in rural areas increases, it could positively affect our industry. The current health concerns might prompt people to reconsider whether they prefer to live densely or opt for a home on a larger lot farther from city centers. In recent years, single wide homes have been surpassing double wides in sales; about 80% of what we produce now are single wides, whereas previously it was more balanced. This trend reflects consumer preferences based on their desire to live in rural versus urban environments. If we see a shift towards multi-section homes, it could indicate a broader preference for rural living over urban living. However, if that shift does not materialize, we will likely continue selling many single wides to park owners.
Our last question comes from the line of Chris Colvin with Breach Inlet Capital.
Curt, congrats on a good quarter and strong outlook. I wanted to clarify. So the revenue, the second quarter of this year, you've got pretty strong visibility. I mean we're halfway through the quarter, but also because of the lag production and orders. So you've got strong visibility into that, and you're saying that you expect it to be in line with, call it, $46 million of last year?
I base my outlook on production. Production directly translates into sales since we only build what is sold and don’t create speculative products. I expect production to remain similar to last year. Additionally, we are in the process of acquiring around $4 million in private branded products from Indiana that we did not have last year. While not all of this will be finalized by the end of the second quarter, a significant portion should be completed by that time. A slight decrease in production in Texas, combined with an increase in private branding in Indiana, should lead to relatively flat year-over-year revenue. Regarding the $46 million figure, I assess our revenue based on the plants' activities, which may include revenue streams beyond just product sales, and some of these are increasing. Specifically, while product sales in Texas may be flat or slightly down, product sales in Indiana or the Midwest are expected to rise significantly. Overall, we should see product sales remain flat or slightly increase. Additionally, since other financial sources like interest income are growing, if we earn $20 million a year and reinvest it into interest-bearing assets, we will realize interest income in the following year. However, I can't confirm the $46 million figure.
Yes. I suppose instead of looking at the bigger picture, based on the orders you’re observing and the production you’re achieving, it seems like - although the future is uncertain regarding a second wave and the situation with oil in Texas - considering what you see today, is it reasonable to think your revenue could ultimately be flat compared to last year? Or am I being too optimistic with that comment?
As you mentioned at the beginning of your question, we have clear visibility for the second quarter, so we're not making assumptions. The third quarter is aligning with our expectations, and the outcome for the fourth quarter will largely depend on our performance at the Texas Fort Worth Show in September. Personally, I would be satisfied if our revenue for 2020 is flat compared to 2019. I wouldn't be surprised if it fluctuates by 5% in either direction, but a 10% change in either direction would catch me off guard. Does that address your inquiry?
Yes, that's helpful. I understand you don't provide specific guidance, but could you share your general outlook?Regarding gross margins, it seems to be around 30% for product gross margin. Is this likely to decrease? I realize it may fluctuate from quarter to quarter due to the product mix, but could we expect it to go down a bit due to pricing?
If we find ourselves needing to make significant price concessions to maintain production levels, you will observe a decline in margins. We try to offer alternatives to price reductions, such as easier financing, lower down payments, quicker delivery options, or additional features in a package deal that may not be available to others. We tend to create tailored arrangements for individual customers rather than implementing price decreases across the board. However, we are committed to maintaining our national 4% market share. If necessary, we are prepared to compete aggressively with anyone in the market. We source our materials competitively, our labor quality is excellent, and we will not relinquish our market share.
Yes. It makes sense. It seems there may be some pressure on the gross margin you've experienced, but it could be minimal. Additionally, SG&A is clearly decreasing. Overall, earnings might remain flat year-over-year, which is something most companies are not discussing.
If we can generate revenue and reinvest it into interest-bearing activities, which is our plan, then theoretically, profits could increase even if sales remain unchanged. Currently, we have a tangible net worth of around $231 million. Last quarter, at the end of the year, it was $222 million. As this figure rises and we deploy those earnings into profit-generating opportunities, I believe we should see an increase in profits even with flat revenue. That would be my ideal scenario.
Got you. And then last question, regarding share buybacks, are you open to that in this environment or will it be postponed until there is more clarity on the situation?
Cork, do you want to address that? Do you have the numbers? Yes, I can find that information quickly, Curt. In the queue, Chris, you’ll see that we had some share repurchases during the first quarter, and there were some that occurred afterward. Clearly, Curt and Kenny monitor this very closely. I apologize for not having the exact quantity that was repurchased in the quarter, but I can...
Yes, within the limits that we're allowed.
In the first quarter, we repurchased over 60,000 shares at around $10 each. We have been somewhat active in the second quarter. If we can buy shares at $9 each, we're competing with others who want to buy as well. We aim to make purchases when we believe liquidity issues in our stock are driving prices down. With our low trading volume, if someone attempts to sell 50,000 shares, it can significantly impact the market. We try to leverage these situations. If the price goes up to about 1.3 or 1.4 times the book value, we’re likely to stay out of the market, but if it drops near the book value, we will definitely be interested, as long as we have the authority to proceed.
Yes. Makes sense. Well, I really appreciate it, and great job. Look forward to hearing the next update.
Thank you. And this does conclude today's question-and-answer session. I would now like to turn the call back to Curt Hodgson for closing remarks.
Well, folks, I don't know how many are online, but we appreciate you all listening in. I will say that this has probably been the most interesting time of my business life, and I've been around a lot of interesting times. There's been a lot of moves up and down. I've been up at 3:00 in the morning, checking in on things and then back to sleep at 4. And so it's kind of interesting for somebody that the things that they were born to do this. I think we're managing it very adeptly, and here, I'm proud of the fact that our tangible book value is up 4%, and it's kind of how I measure our success, and I hope that you shareholders stay with us. As I've said, we will probably outperform our peer group during these challenging times and I am hoping the numbers show that in the next quarters as well as this one. Thanks for attending the call, and we look forward to hearing from you next time. See you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.