Transcript
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 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 third quarter performance and provide additional corporate updates. I will then turn the call over to our Chief Financial Officer, Thomas Kerkaert, to discuss the financials in more detail. Overall, we're pleased with the third quarter results. Net revenue increased to $43.7 million in the third quarter of 2020 compared to $41.9 million in the third quarter of 2019. On a trailing 12-month basis, we have increased net revenue by $11 million or 6.9%. We have also experienced solid improvement in our income from operations for the quarter. Third quarter 2020 income from operations was $10.8 million compared to $8.1 million for the third quarter last year, up 34.5%. Net income of $8.4 million for the quarter was increased 37.6% from last year. Earnings per share increased as well, expanding from $0.25 per share in the last year to $0.35 per share this year. Looking at the trailing 12 months, Net income is up $9.6 million or 38.9%. We have also continuously increased tangible book value per share, as it has grown from $8.85 per share in the third quarter of last year to now $10.27 per share in the third quarter of this year, a $1.42 per share increase over the last 12 months or 16%. Looking at the remainder of 2020, overall market demand is good, orders are good, backlog is good, and our loan portfolio book remains strong and is performing well. Interest revenue on the loan portfolio continues to grow. At the current 12-month run rate interest revenue from loan portfolios will contribute $25.7 million over the next year to our top line. We are dealing effectively with the fallout from COVID, especially as it impacts manufacturing and production levels. We have brought on additional labor to increase production and raise prices to address cost increases in the lumber market during the third quarter. We also have subcontracted Dow Production up north and the Midwest to meet demand as manufacturing adapts to current constraints. With that, I will now turn it over to our CFO, Tom Kerkaert, to provide additional commentary on the quarter.
Thank you, Curt. Total product sales for the third quarter were $36.6 million, an increase from $35.4 million during the same period in 2019. As in previous quarters, sales to manufactured home parks constituted the largest portion of our product sales, totaling $17.7 million, which represents 48.4% of total sales for the quarter, compared to 47.7% for the same quarter last year. Interest revenue has continued to grow as a part of our overall net revenue. The total interest revenue of $6.4 million accounted for 14.7% of net revenue for the third quarter of 2020, up from $5.7 million or 13.6% of net revenue for the third quarter of 2019. Specifically, interest revenue from our manufactured home park notes rose by 48.8% to over $2.4 million in the third quarter of 2020 from $1.6 million in the same quarter of 2019. Overall, interest revenue increased by 13% for the quarter compared to last year. The interest revenue from the consumer loan portfolio remained relatively stable year-over-year. Likewise, the manufactured home park loan portfolio grew by $9.5 million or 7.9% to $129.6 million for the third quarter of 2020, compared to $120.1 million for the second quarter of 2020. Compared to the previous year, the manufactured home park loan portfolio increased by 58% from $82 million at the end of September 2019. The consumer loan portfolio also saw a 1.3% increase to $108.6 million, after accounting for allowances for loan loss and other discounts, compared to $107.2 million for the second quarter of 2020. The gross margin from product sales stood at 23.9% for the third quarter of 2020, up from 22.2% in the same quarter of 2019, indicating that our pricing hikes and cost-reduction measures have effectively countered the unavoidable cost increases stemming from the global health crisis. Year-to-date, the product gross margin was 26.7%, down from 27.6% in 2019, with the decline resulting from health-related disruptions and shifts in our supply chain, which were most markedly felt in the first half of 2020. The company has achieved substantial reductions in SG&A expenses. For the third quarter of 2020, SG&A expenses were $4.5 million, a 28% decrease from $6.3 million in the same quarter of 2019. The savings were widespread, covering salaries and benefits, warranty, and delivery costs. Additionally, our loan losses for the third quarter of 2020 were favorable compared to the previous year, as the quality of our notes receivables has remained resilient during these challenging times. Our other operational measures implemented since the onset of the COVID-19 pandemic have resulted in approximately $2.6 million in savings through the third quarter, with these reductions continuing into the fourth quarter. We are also evaluating potential additional measures as needed. Lastly, net income rose to $27.5 million for the nine months ending September 2020, up from $22 million for the same period last year, reflecting a 25% increase in net income, achieved while net revenue grew by 1.9%. This demonstrates the effectiveness of our cost management strategies. As we look to the fourth quarter, we are optimistic that it will be strong and potentially deliver results similar to or better than the recently reported quarter. Curt, that concludes our financial report.
Thank you, Tom. As I mentioned at the start of the call, we're pleased with the third quarter and year-to-date financials. We believe the long-term fundamentals of the business and the industry remain strong. We have been proactive and disciplined in configuring the business to confront the impact of COVID. These early actions to reduce SG&A and inventory enhance our flexibility and improve our operational position for the remainder of this year. I remain positive when I look to the rest of this year, that we will continue to outperform and deliver the kind of value and returns that our shareholders come to expect. At this point, we'll take any questions you may have.
Curt, you've seen a fairly active hurricane season this year. How did that impact demand in the third quarter? Or how could it impact demand over the coming quarters?
Our demand is very strong, and our main challenge is production capacity. Even an increase in demand due to hurricanes in Louisiana won't significantly boost our business because we are currently limited by our production capabilities. Throughout the third quarter, our issues primarily revolved around labor and lumber. Finding sufficient labor after COVID has been more difficult than anticipated, partly due to government unemployment benefits, which affected our ability to return to pre-COVID production levels during that period. However, as we move into December, we are approaching those pre-COVID production levels again. That said, the industry is facing 10, 12, and 14-week backlogs, so the main issue is not the demand itself but rather fulfilling the existing demand. We had our September and October shows, which I believe other manufacturers did not hold. These shows in Texas and Georgia were our most successful in terms of orders. Additionally, we have a customer in Lake Charles, Louisiana, who is expecting a significant insurance payout and intends to increase their orders with us once the settlement is finalized. While they are currently closed, we anticipate an order for several hundred units from Lake Charles in the near future. I hope that answers your question, Alex.
It does. And to sort of follow up on some of that answer. With demand so high, you obviously had some positive response in raising pricing in the third quarter. Has that continued into the fourth quarter?
The last price increase we had was announced on August 31, kind of at the peak of the lumber run-up. It was effective in early September. We haven't had a price increase since then, but we had a series of price increases in the summertime along with the rest of the industry. We kind of anticipated the parabolic curve on the way up and lumber would eventually taper off, and it did. So we didn't increase our prices as much as some of our competitors did, and we don't intend to have any price decreases. I think overall, our price increases for the year have been in the 10% to 15% range, almost entirely due to the two Ls, labor and lumber, and we intend to be able to hold our current prices through the rest of the year and maybe even into next year. But we couldn't raise prices fast enough because of lumber. It was just incredible. I've never seen anything like it before. Lumber literally tripled in a period of about 40 days, and you just can't implement price increases to reflect those costs. Our margins were just a tad challenged in the third quarter. I look for improved margins in the fourth quarter, probably similar to the margins we had in the second quarter.
And last question, can you give us a little bit of an update on your community development activities?
The current work-from-home situation has made obtaining government approvals nearly impossible. We have held some Zoom public meetings, and we are in the final stages of securing our wastewater treatment permit for Del Valle, which is our largest property. However, we have encountered delays in our San Antonio and South Fort Worth projects, primarily due to regulatory approvals. I wouldn't say we are completely stalled, but we are operating at only 20% to 30% of the usual pace for development. COVID has significantly affected development, not only in mobile home community construction but across all types of development nationwide, as people struggle to operate without in-person meetings.
First question for me is just looking at average selling price, Curt, can you give us any insight into how much of that was mix versus the price increases?
Yes, we're currently selling a significantly higher number of single wides, largely to communities as they become fully occupied across the country. Traditionally, the industry has maintained an even split of 50% double wides and 50% single wides, but our current ratio is approximately 80% single wides and 20% double wides. This marks a notable shift towards more singles than we've ever experienced in our company's history. Consequently, when we consider a unit as a home, our average home price seems to have decreased compared to a few years ago, primarily due to a reduction in multi-section homes. Typically, single wides command a higher price per section than double wides, and at present, our section prices are around $35,000 each at the wholesale level, which is an increase from about $31,500 each over the past two years, mainly due to price hikes during that time. I hope that clarifies your question, Mark.
Yes, absolutely. And then looking at lumber, can you talk about kind of what you're seeing today out there for lumber? And then any other commodities where maybe you've seen some pressure or where you feel like you're starting to see some more pressure or relief?
Lumber reached its highest point in September and has since decreased by about a third. This specifically refers to dimensional lumber like 2x4s. However, products such as roof decking, floor decking, and siding haven't seen much improvement in the last two months. Recently, dimensional lumber prices have increased by about 10% compared to a month ago, though the graph indicates limited movement in that area. For OSB and panel products, I expect to see some price softening, as they typically follow the trends of dimensional lumber. The retail demand for housing is strong but not as robust as some reports suggest. We are experiencing challenges in producing both single-family and manufactured housing to meet a slightly above-average demand, rather than an extraordinary one. Our company owns 12 retail lots, and if there were extraordinary demand, we would likely observe that at the retail level. I would categorize the demand as above average, not extraordinary. Once we address the production issues, I anticipate a better balance between supply and demand, likely within the next six months.
Okay. That's a good transition to my next question. Can you discuss your performance at the retail stores and your thoughts regarding the 12 stores you currently have?
Kenny, are you on the line? My partner, Kenny, typically manages that area, but he has been having trouble getting online from West Texas. Our retail stores have about the same sales volume as they did six months to a year ago. We closed one store in Mobile, Alabama, but have opened another in Tulsa, Oklahoma in the last six months. Our retail performance isn't particularly strong, and that has been a significant challenge for us. We are still figuring out how to effectively manage our multi-lot operation. I wouldn't consider our retail segment to be a meaningful contributor to earnings or significantly impacting our top line.
Okay. And then last one for me. Looking at the SG&A cuts and management that you guys have done there. Do you feel like you're at a sustainable level? Or are there some things that we'll likely see creep back into some SG&A?
Well, it kind of depends on how you measure SG&A. If you measure it on a gross basis, I expect we will see slight increases in SG&A. Our people endured a little bit of salary rollback with COVID that we'll probably gradually put back in place, already put, probably half of it back in place, probably put the other half back in place by the end of the year. In addition to that, I think we have a lot of deserving people for raises and for bonuses, and I think that we'll see a little bit of increase on a gross basis. All other aspects of SG&A, including rent and utilities and sales expenses, warranty expenses are in control, I would say. And as we count these price increases to stick on a percentage basis, SG&A should still behave pretty well, I would guess, maybe, let's say, flat to even down.
Great quarter. I had a question regarding your backlog. On a dollar value basis, how much is that up from the same time last year? If you had to estimate if you don't have the number in front of you?
We don't track it closely because most of our backlog doesn't have a corresponding deposit. During strong times like now, people place placeholder orders that aren't legitimate. They frequently change specifications, customer names, or even delay orders at will. They're essentially testing manufacturers to see who will commit and who won't, placing orders with several manufacturers that I believe aren't entirely serious. However, we are now in mid-November, a period when backlogs typically shrink to a point where sales are necessary to manage the winter months. That isn't true this year, as we are allocating resources and deciding which orders to fulfill. I would estimate that we are about 10 to 14 weeks out, whereas at this time of year, we usually are only 2 to 3 weeks out.
That's remarkable. So when you look at that, how much of it do you think is from sales that were displaced or postponed as a result of COVID? And how much of it is potentially a change in consumer preference for manufactured housing, a change in consumer preferences?
We need to be realistic about the change in preferences. Historically, these changes have not favored us over the last ten years. However, there may have been a shift in where people choose to live, potentially accelerated by COVID. We are seeing some of that. Yet, most of the demand stems from a lack of supply. The industry is not reporting a significant rise in production or manufacturing supply. Trade organizations indicate that we are largely flat compared to a year ago. It is challenging to operate an assembly line when a disease can incapacitate an entire department. If all your electricians are out due to COVID, the assembly line suffers. We are contending with a disease that impacts randomly, affecting our production capabilities. Facilities that usually produce six or eight units a day are now producing four or five, depending on absenteeism. Currently, absenteeism is at record levels, primarily due to the virus. As that situation improves and absenteeism returns to normal, capacity will also recover. I believe as capacity increases, the imbalance between demand and supply will resolve, and the industry will return to producing around 100,000 units per year. If you examine the financials, including ours, and see how many units are being produced, they are not higher than before; if anything, they are slightly down. This is not due to a lack of demand—it’s simply that you can't operate an assembly line effectively with high levels of absenteeism.
There are no further questions at this time. I will now turn the call back to management for closing remarks.
Thank you for joining the call today. We really appreciate our shareholders, and we'll continue to deliver a return on equity that I think will be the best in our peer group. Talk to you in a few months. Bye.
Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.