Transcript
Ladies and gentlemen, thank you for standing by, and welcome to the Legacy Housing Corporation Fourth Quarter 2020 Earnings Call. Please be advised, today's conference may be recorded. I'd now like to hand the conference over to your host today, Mr. Curt Hodgson. Go ahead.
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 risks and uncertainties, and management may take 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 fourth quarter performance and provide additional corporate updates. I will then turn the call over to our Chief Financial Officer, Tom Kerkaert, to discuss the financials in more detail. We continued a track record of delivering strong results this quarter. Net revenue increased to $48.7 million in the fourth quarter, representing a 12.5% improvement over the fourth quarter of last year. We experienced solid improvement in our income from operations for the quarter as well. Income from operations increased to $13.1 million in the fourth quarter, a 46.8% increase over last year. Legacy has been able to maintain our industry-leading margins across the board in 2020 through a combination of systematic price increases and a focus on controlling and reducing costs, both on the production side and the SG&A side. The increase in net revenue and good margins and the decrease in SG&A costs have directly impacted our bottom line. Net income of $10.5 million for the quarter was an impressive 52.9% increase over the fourth quarter from the prior year. The benefit to our shareholders has tracked with our financial performance. Earnings per share grew to $0.43 per share in the fourth quarter, a 54% increase over the fourth quarter of the prior year. Legacy delivered an increase in book value per share of 17.2% year-over-year. Looking to this year, 2021, overall market demand, orders, backlog and loan portfolio performance remain strong. Production has now rebounded back to pre-COVID levels. We saw about a 20% increase in factory output in the fourth quarter compared to the third quarter. Despite the impact of February's dramatic weather event in Texas and the rest of the South, we're back on track and looking for opportunities to increase production at all three of our manufacturing facilities. At this point, I'll turn the call over to Tom.
Thank you, Curt. Following up on Curt's comments regarding revenue, total revenue for 2020 was $176.7 million, a $7.8 million increase over 2019. Product sales accounted for 62% of the revenue increase. Looking back on 2020, we are proud of how our company responded to the wide range of challenges we faced and the obstacles we overcame. Overall revenue from commercial sales to mobile home parks increased by 9% compared to 2019. We saw strong demand during the year, and we're able to translate that into a success story. We expect for that story to continue into 2021. Interest revenue from the company's retail and commercial loan portfolios expanded to $25.4 million for 2020, which represents a 14.3% increase over 2019. Interest revenue from the mobile home park portfolio grew nearly 50% year-over-year. In line with the growth in interest revenue, a key development for 2020 was the growth in our loan portfolios. The commercial loan portfolio increased by 47.6% to $136.3 million, while the retail loan portfolio increased by 6.5% to $112 million net of allowances. In combination, this amounted to a 25.8% increase in the 2020 loan book and is a conduit for the growing future interest revenue. As Curt previously stated, we had significant improvement in income from operations during 2020. We grew our income from operations by 25.8% to $47.6 million. Without detriment to our top line, we were able to reduce SG&A expenses by 25.2% compared to 2019. Reductions in payroll-related costs, service and warranty costs and portfolio loan losses accounted for the lion's share of the expense reduction. Finally, the company improved on its asset utilization with a return on assets of 12.2% in 2020 compared to 11.1% in 2019. Our return on equity grew to 15.8% compared to 14% in the prior year. Also of note is that our inventory turnover improved by 22% in 2020. With that, I'll turn it back over to Curt for final comments and questions.
Thank you, Tom. Now we'll just ask for any questions if there are any.
Our first question comes from the line of Ryan Meyers with Lake Street Capital.
It's great to see production returning to pre-COVID levels. I'm curious about your plans for increasing production in 2021 and what you are observing in terms of demand so far this year.
Sure, Ryan. That's a question on everyone's mind. Demand remains strong, as indicated by our backlog. However, production challenges within the industry have left that demand unmet. We’re uncertain if a production increase of 10% or 20% would be sufficient to reduce the backlog. All 134 operating plants in the U.S. are striving to boost production. In our case, we have extra capacity at two of our plants, but we've faced staffing issues due to COVID. For instance, if seven employees in the electrical department are out, it disrupts our assembly line operations. This challenge isn't unique to our sector; it's affecting various industries, from lumber to steel, complicating production and increasing our backlog. While it feels like demand is extremely high, I remain somewhat skeptical about its sustainability. The rate of new household formation in the U.S. isn't increasing—birth and immigration rates are similar to what they were five years ago. I believe the current backlogs stem from supply constraints more than true demand issues. That said, our backlog is stronger than ever. Typically, around March, we face high demand, and currently, our orders extend to August, September, and October. We offer priority service for an additional fee, and about half our production is now allocated to priority orders. This allows us to generate about $1,000 more per floor in revenue. Therefore, I anticipate better-than-average margins for the year, provided we can manage the rising material costs, as all plants work to increase their capacity. Does that answer your question?
Yes, that does. That's helpful. And then kind of a follow-up to that. Are you guys expecting any price increases in 2021, kind of similar to what you did here in 2020?
Every month we've implemented price increases, starting from January, with another one on February 1 and another on March 1. Our customers, some of whom are listening, can expect another increase on April 1. Many of the commodities we purchase are seeing price hikes, and we've even had to increase wages to attract workers. We now offer an additional dollar per hour for those who come to work consistently, on top of their regular wages. This shortage extends to all areas, including labor, creating an unusual scarcity that we haven't experienced in years. It reminds me of the situation back in 2005 during the hurricanes. We're managing as well as we can, with large inventories of raw materials—likely the largest in the industry—allowing us to cope with delays of four to five months from our suppliers for nearly every component. Our competitors lack the warehouse capacity that we have, and we purchase materials in substantial quantities. This approach has helped us navigate through some tough times, and I believe our numbers this year will reflect that resilience.
That's helpful, and that's good to hear. Can you give us an update on how the retail stores have been performing so far? And if there's been any headwinds with not as many people going out or if that's kind of been improving here?
I can take that question, Curt, if you want me to. This is Kenny Shipley. I've been over the stores. And we still have struggled with these stores. And we see that what we've been doing didn't work, and so we've added a couple of new key people, and we're putting some systems in place and some controls where we can manage these guys a little bit better, so we can get the story up and going. I mean, it's just been a real challenge this year.
To complement that question, Ryan, things are progressing fantastically on the development side. We're now up to over 1,000 acres we own that's targeted for development. We got a very difficult-to-get water treatment permit last week from the regulator here in Texas that will allow us to put 1,200 home sites about nine miles from the new Tesla facility outside of Austin, Texas. We are preliminary-plattered in several markets in Texas. So as far as development is concerned, I think we've made a lot of progress since the last earnings call. I would expect we'll be breaking ground shortly in at least one or maybe two sites.
Our next question comes from Alex Rygiel with B. Riley.
Nice quarter, gentlemen. To continue on that last answer, Curt, can you talk about capital needs with regards to development of some of these properties in 2021 and 2022?
We currently have between $30 million and $40 million available on our credit line, which is quite modest, and it's at a LIBOR plus 2 rate, making the cost of capital relatively low. Additionally, we are generating cash flow of $30 million to $40 million annually, allowing us to meet $60 million to $70 million in capital needs internally without needing to seek external funding. However, we have received assurances from several sources that if a capital raise becomes necessary, we have options available. At the moment, we do not have any specific acquisition targets, although there is one company we are considering, which they are aware of. This situation is similar to what I would have expressed a year ago, as merging with others has proven to be a challenge for us and likely for our competitors as well. We prefer organic growth when possible, and currently, there isn't a particular market where I feel the need to expand capacity despite the existing backlogs. A lot of this decision hinges on whether we are truly seeing increased demand or simply an accumulation of backlog. I believe it will take another six to twelve months after the COVID situation improves for the industry to ascertain this. A backlog does not inherently signal an increase in supply; it reflects that it takes more time to meet rising demand. I've been vocal about this belief, and I stand by it. Year-over-year, retail demand does not seem to have risen significantly, but our backlog is substantial. Unusually, we have secured deposits on a significant portion of our backlog, which is a notable change from our past practices where we had minimal deposits. Overall, our backlog appears to be in solid shape.
And then secondly, Curt, you've been in the business for a long time as Kenny. Can you talk a little bit about how rising interest rates impact your business? And then also address sort of the rebound in the Texas economy, the energy market and what you're seeing with regards to the migrant workforce, and how that could be a tailwind?
At this moment, all the factors you mentioned seem to be favorable for the company. The cost of housing is closely linked to interest rates, and nearly everyone finances their purchase when buying a manufactured home or a traditional house. About 85% of our sales involve financing at the retail level. When interest rates for traditional housing increase, the rates for manufactured housing typically do not rise. Therefore, our monthly cost remains stable at around $550 per home, which is what a single wide costs, while traditional housing can see significant increases even with a small uptick in interest rates. Even in a hypothetical situation with zero interest and borrowing for a thousand years, the monthly payments would be incredibly low, allowing for luxury living. However, recent competition has been challenging with the federal government keeping interest rates for houses below 3%, even for used properties that don't have a 30-year lifespan. We are competing against those benefitting from these subsidized rates in the site-built market. The subdivisions we are constructing are designed to leverage these low interest rates. We plan to sell these properties using FHA financing, which essentially results in around a 4% loan for our products, although it may appear slightly less on paper after considering points. This translates to an affordable option for customers; for example, one could purchase a $100,000 mobile home for just over $500 per month, which is remarkable. Interest rates play a significant role, and I seem to have lost track of your other questions while I was explaining this. What else did you want to know, Alex?
The Texas economy, the rebound in the energy complex and the migrant workforce as tailwinds.
Yes. I think there are so many tailwinds going on right now. The change in Washington, D.C. is a huge positive for affordable housing across the board. One of President Biden's platform was that he was going to subsidize the purchase of a home with a $15,000 refundable tax credit, and I expect that to come to pass. In addition, Texas, in particular, is going to do well relative to the past because of our relationship to Mexico and our oil business at $64 a barrel. Now we're back on track for fracking, and we are getting some orders for man camp type housing, which we hadn't gotten for the last couple of three years. And man camp type housing is probably the best margin business that we have. There isn't anything better than that. So we're hitting on all cylinders. I mean, I cross my fingers and hope that nothing will happen to change that. But I haven't seen times as good in our industry for 15 years now. I had a conference call when COVID hit, predicting that production would be down for the year. And I think it was. But it wasn't so much for demand; we just couldn't run these factories. We couldn't get the people to run the factories. I mean, part of it, we're competing against the U.S. government paying people $1,000 a week to stay at home, which is higher than we pay them to come to work. The part of it was, this thickness just makes it hard to run an assembly line. It's just extremely hard. We don't have enough general utility people to cover a whole electrical department, as an example that I've given. So when we normally could build six or seven a day, we were struggling to get four or five a day out of that same facility without any shortage of materials, without any weather problems or anything. It was just a staffing problem that we're pretty well through now. We've staffed up. We're back to normal production. Georgia is actually higher than - at an all-time high. Commerce is going to be able to increase production. In Fort Worth, we're doing six and seven a day, which is pretty much capacity. So I would expect that we'll be able to eke out some more production out of two or three of our facilities. We still have relationships in the Midwest where we buy their product on a private brand basis, and they're still producing for us. So I think our top line is going to be just fine. It will be up year-over-year fairly significantly. And if we can keep these margins, we should be able to rock and roll for this year.
We're showing no further questions in queue at this time. This will conclude today's conference call. Thank you for participating. You may now disconnect.