Transcript
Ladies and gentlemen, thank you for standing by, and welcome to the Legacy Housing Corporation Second Quarter 2020 Earnings Conference Call. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Curt Hodgson, Executive Chairman of the Board. Please go ahead, sir.
Good morning, and thank you for joining the call today. Before we begin, may I remind the 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 report filed with the Securities and Exchange Commission. In addition, any projections as to the company's future performance may represent management's estimates as of today's call. Legacy Housing assumes no obligation to update these projections in the future unless otherwise required by applicable law. Now let me turn to a discussion of our second quarter performance and provide additional corporate updates. I will then turn the call over to our Chief Accounting Officer, Jeff Burt, to discuss the financials in more detail. Overall, we had a very good second quarter, especially within the context of the continuing COVID-19 impact to the broader economy. Net revenue increased to $46 million in the second quarter of this year compared to $45.8 million in the second quarter of last year. Income from operations and net income were substantially unchanged in comparison to the same quarter last year. Income from operations for the second quarter this year was $11.2 million compared to $11.5 million last year. Net income of $8.6 million for the second quarter of this year was approximately the same net income posted for the second quarter last year. Earnings per share were up slightly for the quarter at $0.36 per share versus $0.35 per share for the same quarter last year, predominantly because I think we had a reduction in total outstanding shares. Looking at the 6 months year-to-date results, net income was up $1.8 million for the 6 months or 11% compared to the same 6-month period last year, and earnings per share increased to $0.73 for the 6 months compared to $0.65 per share last year. During both the first quarter and the second quarter of 2020, the company implemented a number of immediate measures to navigate the COVID-19 environment. This included reducing payroll cost in both the office and manufacturing operations, slowing production a bit, reducing inventories and lowering other components of SG&A overhead. For example, compared to the first quarter of 2020, we reduced inventories by $4 million or 9% from $43 million to $39 million. We reduced SG&A by $1.5 million year-over-year from $5.6 million to $4.1 million or a 26% reduction in SG&A expenses. In this environment, the company is focused on gaining flexibility in our manufacturing operations, reducing costs and reducing excess inventories. This also includes the ability to strategically subcontract production when needed. As always, the company remains committed to expanding the top line, and we were able to do that during the second quarter of 2020. The company continued to see growth in sales to manufactured home parks. During the second quarter of 2020, park sales increased $3.5 million or almost 20% compared to the same period last year. The majority of these sales are financed. So they include interest revenue over the longer term. For the first time, commercial loans to manufactured home parks exceeded our retail consumer loan portfolio, increasing to over $120 million of financing products out to mobile home parks. More recently, we have offered manufactured home park operators the ability to lease our homes as well, adding yet another revenue stream derived from these same customers. In conclusion, the second quarter has been challenging for everyone. I am pleased that we have quickly adapted to the reality of the ongoing situation. Still, we've been able to deliver exceptional value to our shareholders and customers. Over the last 6 months, we've increased the tangible book value of our company by approximately 8% for our shareholders despite the headwinds of the current economy. I'll now turn the call over to our Chief Accounting Officer, Jeff Burt, for some additional commentary on the results of operations.
Thank you, Curt. Total product sales were $39.2 million for the second quarter compared to $39.8 million for the same period in 2019. As Curt indicated in his comments, sales to manufactured home parks constitutes a larger part of our product sales during the second quarter, increasing to 53.8% of total product sales versus 44.3% of total product sales for the same period last year. Also, interest revenue has continued to grow as a component of our overall net revenue. Total interest revenue of $6.1 million represents 13.3% of net revenue for 2Q 2020 compared to $5.1 million or 11.1% of net revenue for 2Q 2019. In particular, interest from our manufactured home parks notes increased 58.8% from $1.4 million in 2Q 2019 to over $2.2 million in 2Q 2020. Overall, interest revenue was up 18.7% over the comparable second quarter period. During the same period, interest revenue from the consumer loan portfolio increased 3.3% to $3.8 million in 2Q 2020 from $3.7 million in 2Q 2019. Similarly, the manufactured home park loan portfolio increased by $16.8 million or 16.3% to $120.1 million for the second quarter in 2020 compared to $103.3 million for first quarter 2020. The consumer loan portfolio increased by 1.5% to $107.2 million, inclusive of the allowance for loan loss and other discounts compared to $105.6 million for the first quarter of 2020. When you compare the growth in the manufactured home park loan portfolio for 2Q 2020 with 2Q 2019, the portfolio increased by 66.8% to $120.1 million in the second quarter 2020 from $72 million in the second quarter of 2019. Cost of product sales were up for the second quarter of 2020 compared to the second quarter of 2019, increasing by $2.7 million or 9.6% to $30.6 million from $27.9 million. Some of this increase was attributable to a reclassification of certain costs from retail operations from SG&A overhead to the cost of sales. When this reclassification is taken into account, the increase is 7.2% for the comparable quarters. When you compare product cost of sales as a percentage of product sales for all of 2019 to the 6 months ended June 2020, we have experienced an increase from 73.3% of product sales to 74.5% of product sales. During the first half of 2020, the company had to temporarily reconfigure some of the supply chain away from overseas suppliers to alternative domestic suppliers. Overall, the 2020 year-to-date profit margin of 25.6% is in line with the 2019 profit margin of 26.7%, but we have experienced some margin erosion during the first half of 2020. As Curt previously mentioned, the company has seen significant reductions across the board in SG&A. Selling, general and administrative expense in the second quarter of 2020 was $4.1 million, a 33.9% decrease from the $6.1 million in the second quarter of 2019. This was primarily due to reductions in payroll costs, advertising and dealer show expenses, warranty and service costs as well as professional and accounting fees. Also, operational measures were implemented at the start of COVID-19, resulting in an additional $1.5 million SG&A reduction between the first and the second quarter of 2020. This SG&A reduction will continue to carry throughout the remainder of 2020. And of course, we will continue to assess the environment to evaluate if any additional action needs to be implemented. Finally, net income has increased for the 6 months ended June 2020 compared to the same period last year, increasing to $17.6 million versus $15.8 million last year, an 11.4% increase in net income, while net revenue for the first 6 months has expanded 0.7% from $84.3 million from $83.7 million. These highlight the cost leveraging going on within the company as the year-to-date overall net profit margin has grown to 20.9% versus 18.9% for the comparable period last year. Curt, that completes our financial report.
Oh, I'm sorry, I had my phone on mute. Thanks, Jeff. These are certainly interesting and unprecedented times. We think we've weathered this COVID-19 storm very well. And to shed some light on the future, I thought I would just tell you that our backlog is as healthy as ever. We're having our September and October shows, which we decided not to call off and the pre-registrations are at an all-time high for those shows. So there is extremely good demand for what we do. And I think we'll get through the third quarter and the fourth quarter without a reduction of production. And if we can find the labor, we'll actually be able to increase production in our top line for the third quarter and the fourth quarter, it should be as good as last year or better. So there are some predictions about the future. Those are more optimistic comments than I had in the call 3 months ago, but 3 months ago, we were in different times than we are today. So thank you for your interest in being on the call today. We'll take any questions you have now.
Our first question comes from David Burdick with Oak Ridge.
Great job in the quarter. So first, I just wanted to touch on the labor comment at the end there. I know with COVID and the extra unemployment money given, some of your competitors are seeing some labor constraints. Just curious how the availability of labor has been for you guys and then kind of going off that, is production back to around 15 floors a day? Or where does that stand?
Yes, this is Curt. I'll address that. We've been considering our labor strategy for quite some time, measuring it in various ways: the number of employees we have, the total manhours we spend, and our labor cost per square foot or unit. We are dealing with a limited pool of applicants. There's not really a surplus of unemployed Americans; many have been well compensated to stay unemployed. We're approaching a new phase regarding unemployment benefits. I anticipate that the assistance currently being provided to those 30 million individuals is likely to decrease or possibly end in the next couple of months, which should release more people into the labor market. Therefore, I'm optimistic that by the end of the third quarter, we will have a larger workforce than we did at the start. Currently, we're seeing no more job seekers in our lobby than we had when unemployment was just 2%, which highlights the situation. We've had to increase overtime in one of our factories to boost capacity, aiming for approximately 14 units a day across all three plants, although today we might be slightly under that at about 13.7. By the end of the quarter, we hope to reach 15 units across those plants. We are facing labor challenges, and while we could increase wages to outbid competitors, we don’t view that as a sustainable long-term solution. Another recent concern is the skyrocketing price of lumber, which has doubled or even tripled since the market's low in March. We are attempting to pass these increased lumber costs onto our customers, but we are unsure how that will affect our existing backlog; there is a risk that some orders may be canceled. One of our competitors implemented a significant price increase of $4,000 per floor, which is substantial. We're taking a more measured approach with smaller, more regular increases. Over the last 60 days, we've raised prices by $1,000 per floor twice, but if lumber prices don't stabilize or decrease, we may have to impose additional surcharges, which could negatively impact our backlog since we usually implement price increases immediately. Customers are not given an option to keep their orders at previous prices; they have the option to cancel. We reserve the right to raise prices based on material cost increases. I hope this answers your question, David. Currently, our sales are outpacing our production, which is encouraging, especially as we haven't even held our fall show yet, which traditionally adds 2 to 3 months of production.
No, that's great. That's helpful. I guess next question. I think last call, you mentioned Texas demand was a bit sluggish, but Georgia and some of the Midwest, we're seeing some strength. Just wanted to see how the Texas market demand is as we kind of move through these summer months.
Kenny, are you on? Do you want to take that?
Texas has shown improvement recently. We are receiving a lot of orders, but the challenges we face in production due to labor issues are making it difficult to meet demand. Even if we increase production, we could attract business from dealers who have been trading elsewhere, as many are experiencing similar production challenges. Overall, Texas appears to be recovering. The oil situation seems to be stabilizing, and some oil companies are resuming operations in our region, indicating a positive trend.
That's good to hear. I guess last one for me. Just wanted to ask about the MHPs and the development, how those have come along. I know they may have been delayed with all this COVID stuff. But I guess, specifically just the Austin location and if any unit sales have taken place or when we should maybe expect that?
I'll take that. There has been a delay because cities and counties and government or regulators are not having their normal meetings. You can almost add 2 or 3 times to normal lead time to it. In Austin, we had our public hearing for our water treatment plant. It went exceedingly well. We had it last month. It's usually about 2 more months after that before we get our permit, which is really the final step in that planning stage for that 1,000 unit development outside of Austin. Good news is that, that's essentially in the territory of the new Tesla plant. So we probably have a paper gain in our land value or 400 acres. That's not too far from the new Tesla plant. In Venus, we had a substantial win in the quarter. We went into the city council with the recommendation of the Zoning Committee against us at 5-0. And we won Mobile Home Park zoning on our parcel in Venus, 7-0 at the City Council. And we're working through the city and what that means and what they want us to do there. And in San Antonio, we have a small subdivision that is in the final stage of planning. So all those projects are progressing, albeit at a slower pace than what we'd hoped. And I think I'd just probably make a liar out of myself if I picked a date, but I'd be surprised if we don't see dirt flying somewhere by the end of the year and some sort of movement in our top line by some time until 2021, probably the latter part of 2021. But there's hidden value in all that because we are progressing and once you get mobile home parks approved in these outskirts of these major cities, the land has actually worth double or even triple how much you bought it for just by getting the approvals. They call it, in some states, they call it the entitlements. We feel real good about all those projects. And we have some other irons in that fire from one of those projects. We just haven't taken any land down yet.
Our next question comes from Alex Rygiel with B. Riley.
Curt, as your sales shift more towards parks, I believe you have better visibility on your business and some form of backlog. Can you share what that looks like today compared to maybe 12 months ago or 2 years ago? And correct me if I'm mistaken.
Well, we just have not done much of a job of tracking backlog because it involves little to no consideration when we take an order. We only get real concern when we don't have something to build. But we have customers now that are eager for product that they ordered in May. And I'm just going by memory, I don't think that was the case a year ago. So our backlog, depending on how you measure it, is probably at 12 weeks on paper. And if you had to push them to take their houses, let's say if there was another decline in the economy, it would probably be more like 7 weeks. But on the other hand, there are people that are not ordering from us because they know because they're being told they can't get their product in less than 12 weeks. Kind of like going into a restaurant, they're saying it's going to be a 1.5-hour wait, would you like to wait or do you want to go to a different restaurant? So right now, we're kind of in that mode right now that we could be selling more, but the wait that we're telling the customers that they're going to have has got them looking for other alternatives of supply. So backlog is extremely healthy, healthier than we ever expected. And now we just have to figure out whether or not it's real or not as we try to get through the fall and winter months, which typically have a decline in sales generally. Beginning about the last part of October all the way through February, the seasonal industry that we're in, usually, product demand starts to fall off a bit.
And can you talk a little bit about leasing to parks as well? It sounds like a new product offering. Can you give us a little bit of insight into the economics of this versus alternatives?
Yes. The economics are quite straightforward. They developed a method for capital expenditures through 2022, and considering our status as a taxpaying entity, we opted for capital expenditures. This allows us to lease equipment through non-finance, open-ended leases, enabling immediate tax deductions. Consequently, we are deferring taxes. However, from a GAAP accounting perspective, we must recognize the tax deferral in the first year, even though we won't pay those taxes for the next ten years. While the GAAP financials may not reflect much advantage from this approach initially, over time, we will earn income from fully depreciated assets, for which we have already accounted for taxes. We are leasing these assets at approximately a 1.2% monthly rate. For instance, if something would typically sell for $30,000, the lease payment would be about $360 per month, yielding a significant return. It resembles a savings account that will grow over the years. At this point, Jeff can confirm that we have about $4 million to $5 million worth of this product deployed. Is that accurate, Jeff?
That's a very accurate statement.
Yes. I expect us to potentially issue another $4 million or $5 million over the next 12 months, which would be a significant amount. While it won’t contribute much to our bottom line this year, it will yield benefits in the future. This is primarily due to the tax deferral advantage we have, which we must report as a tax expense on our financial statements today. This is simply one of the peculiarities of GAAP rules.
And lastly, as it relates to impairments, loan reserves, any material notable change there in the quarter?
Do you want to take that, Jeff?
The mobile home park has two components: the mobile home park portfolio, which is valued at $120 million, and the retail portfolio. In the mobile home park portfolio of over 500 loans, only three groups have faced issues, and in the third quarter, two of those were resolved without any financial loss to Legacy Housing. We managed to get everything back on track. There is one issue remaining in Corsicana, but since it is close to our headquarters, we don’t anticipate any financial risk. In a worst-case scenario, we could regain possession because there is strong demand for them. Overall, the mobile home park portfolio is very solid; we have not missed any payments, and all parties are paying as agreed. On the retail side, we have not seen any significant rise in delinquencies, and the situation remains stable without increasing our allowance for loan loss. Currently, we do not see much exposure there.
I find it surprising, as I'm sure others do too, that consumers are actually in a better financial position than many news reports suggest. Our portfolio's delinquency rates are currently better than they were before the pandemic, which is hard to believe but supported by the numbers I've reviewed. In April, we offered half a payment relief to customers facing difficulties, and only about 1% of our 3,300 loans took advantage of that offer. Since then, we haven't had any repossessions, bankruptcies, or serious delinquencies, and we monitor it closely. When I reviewed the end of June report, I was shocked by how positive it was, and the end of July report showed even better results. Many customers are keeping up with their mobile home payments because the value of their homes has increased since before the pandemic, and overall housing costs have risen significantly across the board.
That's good to hear. Congratulations on the nice quarter.
Thanks, Alex.
Our next question comes from Mark Smith with Lake Street Capital.
First off, maybe for Jeff. Your commentary on gross profit margin and some of the SG&A retail expense shifting up to COGS. Can you quantify how much that was?
How much of it was probably 1% from the reclassification due to our new involvement in the retail side of the business, and those costs increased in the cost of goods sold for that segment?
Okay. And that will continue going forward being classified in cost.
Yes. That's correct. Yes, that's correct.
Perfect. And then looking at SG&A, guys, very low. It looks like you've cut quite a bit out. Can you just talk about how sustainable this is going forward, especially with still doing some of your fall shows?
We haven't added any administrative staff and have implemented significant salary reductions at the top. Overtime for administrative staff has been eliminated, which is also significant. We're closely monitoring service expenses, which are part of SG&A. Kenny, the management team, and I have taken a strong interest in these service expenses, and they have been quite significant. Additionally, our travel expenses have decreased considerably because we're utilizing Zoom. I previously mentioned that our SG&A expenses were a bit high, but we've now moved to a position where they're lower. We may be open to adjusting some salaries from the previous year, and it's possible we could return to higher levels in the next 90 days. Regarding margins, they're largely influenced by inventory, particularly raw material inventory. Last year, we had a quarter that seemed like an outlier in terms of margins, which prompted us to conduct a thorough analysis. Despite our efforts, we couldn't fully explain it, but the following quarter showed a better balance. We've attributed some discrepancies to our raw materials inventory management. Unlike our competitors, we maintain larger inventories and import a higher percentage from China. We buy in bulk, which can be beneficial until you realize managing $13 million worth of raw materials across three plants involves a lot of inventory tracking. On inventory days, we have many employees helping identify various types of lumber we have, and it's challenging to keep everything organized. Therefore, our ability to take inventory accurately influences our margins on a quarterly basis. While my accountants are diligent, no system is perfect, and overall, I expect our margins to remain stable over the year. In this quarter, however, margins were compressed, and I don't anticipate this will continue, although lumber prices are significantly impacting us. Everything else remains relatively stable, but the fluctuations in lumber costs are challenging.
Okay. And then back on the SG&A, just last question for me. Any update, some changes in management, any update that you can give on kind of a search for CFO?
Our new CFO is on the line. Do you want to say hi, Tom?
I can say hello. Hi, my name is Tom Kerkaert, and I've just been listening in. I've been on the job for not very long. So I'm just glad to be part of the team.
We have a new CFO. We haven't really announced it yet because his first full day of reporting to work will be this following Wednesday, I guess, we'll do an 8 along those lines. You'll get to see his resume and everything. So CFO search is done, and I don't think we'll have a new general counsel anytime soon.
And I'm not showing any further questions at this time. I would now like to turn the call back over to Curt Hodgson for any further remarks.
Well, guys, I think we had a tremendous quarter. It was one of the most interesting quarters in my business life. And those of you that follow us closely, we took a PPP loan, we gave it back. We decreased production, and then we wish we didn't because we had plenty of demand. And we thought about hedging lumber, but then we didn't do it. There were a lot of business decisions that when I look back, will be some of the most major business decisions that I've ever made in my life. And I think the financial statements are pretty good. We once again increased our tangible net worth by 4% in one of the most difficult quarters of all time. And that's really kind of how I measure my own success. Do we move up tangible net worth? And do we do it in the double digits, which well we did it again. And I think we're going to do it solidly in the next 2 quarters as well. Thanks for being on the call. I appreciate you all, and we look forward to talking to you in another 3 months. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.