Good morning. This is Duncan Bates, Legacy's President and CEO. Thanks for joining our First Quarter 2023 Conference Call. Max Africk, Legacy's General Counsel, will read the Safe Harbor disclosure before getting started.

Thanks, Duncan. 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 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 vary or 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.

Thanks, Max. I'll run through our prepared remarks, then we'll open the call for Q&A. Product revenue decreased to $43.3 million or 16.4% in the first quarter of 2023 compared to the first quarter of 2022. The decrease primarily resulted from a reduction in shipments across all three plants. Also, we did not convert any independent dealer consignment agreements to floor plan financing agreements during this quarter, as we did most quarters last year. The manufactured housing industry has slowed. According to MHI's March 2023 data, March shipments were up over February, but still well below 2022 numbers. We believe that our business has fared better than most. We made a big push on sales this year and have a nice backlog at all plants. Several longtime customers have stepped up with large orders. We have a small manufacturing footprint and continue to run near capacity. We anticipate having orders to feed all three plants. We also believe that there are several major tailwinds for our industry as housing affordability nears record lows. As we discussed on the prior call, we have been working hard on improvements at our Eatonton, Georgia manufacturing plant. We right-sized the workforce, brought in a third-party to retrain and monitor the team, and have significantly improved our product quality. Production during the first quarter of 2023 was still below historical levels in Georgia. However, we recently gained momentum on the manufacturing side and have secured several large orders for the plant. Our team continues to push production volume without sacrificing quality. Consumer and MHP loan interest income increased to $7.7 million or 13.9% during the three months ended March 31, 2023, compared to the same period in 2022. This increase was driven by increased balances in the MHP and consumer loan portfolios. Other revenue primarily consists of dealer financed fees and commercial lease rents, which increased to $1.8 million or 33.3% during the three months ended March 31, 2023, compared to the same period in 2022. Our financing business generates predictable recurring revenue. We now have over $350 million in principal outstanding across our loan portfolios. The portfolios are performing well and defaults remain near record lows. Selling, general, and administrative expenses decreased $2.3 million or 29.3% during the three months ended March 31, 2023, compared to the same period in 2022. This decrease was primarily due to a decrease in salaries and incentive costs and a decrease in legal expense, partially offset by an increase in warranty cost. Net income increased 1.1% to $16.3 million in the first quarter of 2023 compared to the first quarter of 2022. Basic earnings per share grew $0.01 per share in the first quarter of 2023, an increase of 1% from the same period in 2022. Legacy delivered an 18.7% return on equity over the last 12 months. At the end of the first quarter of 2023, Legacy's book value per basic share outstanding was $16.32, an increase of 20.3% from the same period in 2022. We continue to hold pricing and reduce our raw material inventory. Our top focus remains on sales, but we are also looking at ways to reduce SG&A and warranty costs. Legacy's balance sheet is healthy. We ended the quarter with $3.2 million in cash and $7.8 million drawn on our line of credit. We also own $8.5 million of treasuries yielding approximately 4.7%. As the economy slows, investors should start to see the beauty of our integrated business model. Sales were down during the first quarter, but margins and earnings improved. From a strategic standpoint, I recently discussed the opportunities we are seeing in our industry with our founders. They have been waiting years for this. Our foundation is stable, and we are well-positioned for growth. Operator, this concludes our prepared remarks. Please begin the Q&A.

Thank you. Our first question comes from Alex Rygiel with B. Riley. Your line is open.

Hey, Alex.

Hey Duncan, how are you?

I'm good. How are you?

Very good. A couple of quick questions here. First, yes, can you sort of touch upon kind of the macro environment here? Obviously, we got a significant rise of mortgage rates. We had slowing demand for new home construction now that's kind of leaked into your space as well. So maybe talk just a little bit about the macro dynamic here and it kind of feels like single-family home builders have kind of stabilized to kind of a lower level now, but going into sort of maybe normal seasonality. So do you feel like that's the case as well in the mobile industry?

Yes. I think that's right, Alex. We certainly have seen demand slow. That said, we've got three plants. We feel very comfortable keeping them full. I think the most important thing that you pointed out is there are some real tailwinds for this business. You've got mortgage rates that have doubled. You've got underwriting standards for mortgages that have really tightened. You've got home prices near all-time highs. And at the end of the day, you've got over 50% of households in this country that make less than $75,000 a year. And those are our customers, and we tend to serve the lower end of this market. And I think that although there is slowing demand, we should see an uptick as this affordability problem worsens in our country.

That's helpful. And then can you talk a bit about your land development activities? The company's had a number of properties sort of on its books, been making some investments in some water treatment facilities and whatnot through the years. Can you talk about that in conjunction with your comment earlier about being pretty confident that you can keep your plants full?

Yes, sure. The largest headwind this industry faces is, where do you put these things? And we've got seven properties that we own outright that we have been developing into communities over the last few years. Our primary business is building, selling, and financing mobile homes. But at the same time, we have made significant progress. And I'll tell you that based on discussions with other developers in our industry, there is a lot of value here. I think there are certain properties that make sense for us to push forward to full development. There's probably others that could make sense to partner on, where we're allowed to contribute homes in potentially financing and have some type of recurring cash flow stream. And look, there are others that we haven't made much progress on that are primarily entitled raw land that we've bought. As you can imagine, land in Texas around major metropolitan areas has really increased in value. So there may be a couple of those that make sense to either sell or partner with somebody in the near term.

And then lastly, I think given the past, you've mentioned some geographic opportunities ahead. Can you maybe talk about that as it relates to the business plan over the next kind of one to three years?

Yes, absolutely. I believe we're entering a very interesting and exciting phase for our business. Our balance sheet is strong, and we have steady earnings from our financing operations. This is a regional business where we typically don't ship homes much beyond 200 to 300 miles from our production facilities. The COVID pandemic opened up some opportunities, allowing us to ship homes over greater distances, and we are continuing that practice. However, there are still regions where we are not as competitive as we would prefer. If you are a manufacturer operating a single plant without any backlog or a solid balance sheet, I see potential opportunities for us to expand into new geographic markets. That said, we plan to be cautious and won't participate in bidding wars where we might overpay. Nonetheless, we are certainly exploring some possibilities, which is exciting for our team.

One moment for our next question. Our next question comes from Mark Smith with Lake Street. Your line is open.

Hi guys. First question I've got Duncan is really just on kind of average selling price. What kind of price movement did we see here in the quarter?

So Mark, our last price increase was in June of 2022. We have not raised prices since then, but we've also haven't dropped prices. So I'd say it's been in line with the past few quarters.

Okay.

Just one more comment on that. I mean, we primarily sell our park model homes; they are very basic homes. Typically, single-wides without a lot of bells and whistles have lower prices than some of the bigger, more elaborate homes that we're selling to dealers. Recently, we've been building a lot of park model homes. When you see our filings, you'll see that there could be some mixed issues there, but overall, it's pretty much in line.

Okay. Then as we think about the pressure on the industry, any more detail you can give us? Is it really rates that are pressuring consumers? Is it just kind of general consumers being squeezed in today's environment? What is it that's really hurting them? And if so, rates, can you guys use your lending arm as a lever with lower rates to incent more sales?

I'll address this in two parts, Mark. Approximately half of our business involves selling through dealerships to retail customers, and there's been considerable discussion in the industry about that channel being backed up. Both company-owned and independent dealers have a significant amount of inventory available. Overall, we're seeing an increase in foot traffic, but the conversion rates are still lower than expected. I believe this situation is largely due to the current economic climate, which is putting pressure on consumers. Although our product remains affordable and we haven't increased financing rates, many consumers are hesitant to make large purchases at this time. However, this could shift as other housing options, such as rising rents or fluctuating home prices, influence consumer decisions. We are hoping to see an improvement in dealer business and higher conversion rates. On the wholesale side, where we sell homes directly to community owners and developers, we generally cater to regional entrepreneurs who have experience managing market fluctuations. Many of these individuals capitalized when institutional investors drove prices up. Currently, they are deploying capital again, which has positively impacted our orders. Conversely, large institutional players have been consolidating at historically high prices, and if they rely on variable rate debt without the ability to adjust rents significantly, some of their expansion strategies may have been altered. I hope this clarifies the situation.

Okay. Last question for me, just any additional breakdown you can give us on the inventory? What kind of you're sitting on in finished goods versus kind of raw material, and what's your comfort level with the inventory today?

Yes. I don't have the number directly in front of me. I'll tell you, raw material inventory is around $17 million. The rest of the inventory is at our company-owned dealerships. I think we've got more inventory than we would like across the board; that's really an area that we've been focused on, and we're making some progress, especially on the raw material side. But we've got a ways to go there. Company-owned dealerships, I think, are in a similar boat as a lot of the other dealers, where the inventory is not turning as quickly as you'd like, and you've got some excess there.

One moment for our next question. Our next question comes from Tim Moore from EF Hutton. Your line is open.

Hi Tim.

Hi, everybody. It's Leanne Hayden. I'm sorry. This is Leanne Hayden filling in for Tim who's immersed in our annual conference right now, but regardless really appreciate your time.

Hey, Tim, you there?

It's a female one for Tim. She is very low. Can you speak up, ma'am, a little bit?

Can you guys hear me?

Yes, yes, yes, that's much better.

Okay. Sorry about that. This is Leanne Hayden from EF Hutton. I'm filling in for Tim Moore. He is immersed in our annual conference right now, but regardless, thanks for the time. My first question is just a follow-up on pricing. Your pricing is still below your competitors, despite their cuts. Do you plan to offer more promotions and online specials in order to preserve your ASPs? Or what do you plan for that?

Yes. We have been able to hold our pricing. We certainly have seen our competitors start to cut pricing. I think pricing is important to discuss in the context of our integrated model. What we've been able to do recently is offer financing specials. We've held pricing, but we're offering a few months with no payments or other incentives to sell homes and finance them at what we believe are good returns for our business without sacrificing the price increases that we've pushed through over the past couple of years. That will continue to be our strategy. We hit on the call that sales were down this quarter, but at the same time, we have been able to secure a decent amount of large orders. We're going to keep holding price as long as we can, and if we need to use our financing tools to do that, we will.

Okay. Yes, that makes sense. My second question is regarding your more nimble manufacturing footprint with only three plants. If there's a sudden downturn in order volumes, what can you do to keep utilization up at your plants? Can you just reduce shift hours or retain talented workers? How would something like that play out?

Yes. I mean, I think the typical ways are you can slow down production, whether it's not working as many hours in a week or cutting production days. We haven't missed a day of production yet this year, and I feel pretty good about where the backlog is moving forward. So there are some tools, but hopefully, we're not planning to use them at this time and cut production days. We're just trying to really make a push on the sales front and continue to grow the backlog. I think we'll start to see demand picking up.

Okay. All right. That's great. How should we think about gross margin? It could be down this year versus last year when factoring in less of a price boost, but raw materials cost deflation lapping that compared to a year ago from the Georgia plant inefficiencies in the second half of this year. Would that be something that would help?

Yes, I finally feel like we have some momentum in Georgia. It has taken a long time to reach this point, and the team has really stepped up and done a good job. We are still a bit below our target. However, I believe that if we can increase our output by one additional house per day by the end of the quarter, that is a realistic goal. This would also benefit us from a cost efficiency perspective. We are maintaining our prices, and material costs are decreasing. As long as these two factors continue to align and we can keep our production levels up, our margins should remain strong.

Okay. That's great. Thank you so much. My last question is about the conversion of some dealers to a floor financing program that seemed to boost your December 2022 quarter revenues by maybe $17 million. Does that mean that this year's December quarter would face a headwind decline for product sales as you last the year-ago benefit? Or what do you expect for that?

Sure. I'll give everyone just a quick reminder on the consignment to floor plan financing conversion. We have had a consignment program in place for years that I wouldn't say is necessarily market-based. We've moved over to a market floor plan financing program. As we converted these dealers over, we essentially recognized the conversion as sales since there's no take-back on the inventory. This was a project that started well over a year ago, and we were trying to push everybody to the new program. We still have some dealers that have not converted over. We had a big conversion during the first quarter of last year. I would not expect to have the same volume that we had last December. We will have conversions this year; it's just a smaller number and not something we made a push on during the first quarter.

Okay. That's all from me. Thank you so much for those answers.

Yes. Thanks so much. Good luck with the conference.

One moment for our next question. Our next question comes from a private investor. Your line is open.

Hey, thanks for taking the questions. I'll bounce around a little bit. You talked about the rising rate environment, but then also some opportunities you're seeing and some specials on the financing. Generally speaking, on a forward basis, relative to the first quarter, should we expect the interest income dollars to be kind of consistent, or should those be moving directionally higher?

Yes, they will be moving higher. We have observed a pullback in financing within this industry, which presents a good opportunity for us to invest in loan portfolios. We are not borrowing to lend for a profit margin, giving us flexibility regarding our rates and the duration for which those rates are fixed. The promotions we are offering include a payment-free period of two to six months. Although interest revenue may not increase immediately with new loans, by the end of the year, you should begin to see the advantages of the cash we have invested in the loan portfolios.

Okay. Thank you. That's helpful. You did some brief comments on the land portfolio and on the development side, but just a little bit more color there. Is there anything in process, in the sense like you're talking about transacting some of the land? Is that just hypothetical, or have you had negotiations about actually doing something?

Yes. We are continuing to advance our developments in the background. Over the past year, we faced significant challenges that took considerable management time to address. Now, we’re refocused on moving these developments forward. There are definitely individuals interested in building parks in Texas and looking for entitled land. We've created significant value in these projects that has yet to be realized. While we are not actively trying to sell any of these assets, we have received inquiries. We remain open to opportunities, and we will certainly listen if someone expresses interest.

Okay. And I apologize if this was asked and answered, but on the backlog size, did we give any color or commentary there, either on units or dollar amounts, or directionally where that's been moving?

Yes. We don't publish a backlog number. One area of our balance sheet that you can look to is we've got a liability for customer deposits. You'll see that's down a little less than $2 million quarter-over-quarter. That said, it's difficult to transition your sales team after going through two years of order taking to really selling. That's been really our top focus. It's amazing when you get momentum with a management team involved. We've secured some nice orders and we're planning to continue that. We have several months of homes to build.

And then just building on the customer relationships, I've asked about this in the past. Is there still ongoing discussions regarding any long-term supply agreements and/or do we have some in place?

No, none right now. We've talked with some larger players about it. If we get a large order, say if someone wants 200 homes, we'll sell them under our standard agreement and just space them out according to the amount of production they can handle or deliveries they can handle on a monthly basis. We do have customers taking significant volume from all three factories, but they're not under any type of long-term supply agreement right now.

Okay, great. This is kind of a shorter question, but maybe more of a longer answer. Can you help just shareholders? You came public a few years back; we've had some issues on the accounting side. We've remedied those, but during that period of time, you weren't able to really discuss what was happening with shareholders while the financial results were quite good. You talked about the ups and downs of the industry. Can you just give us an update in terms of what's the long-term strategy for this business? You've got three plants, and you have some founders who've been at this for a long time. They own a fair amount of stock. What's the long-term outlook for the business? And is there any desire to sell the entire company, which would probably entail a pretty nice return for everybody?

Yes. No plans for any type of larger transaction at this time. We have worked through some issues on the SEC reporting side caused by internal team issues. We had a large issue with a new or prior auditor. But we have a team now in place that can deliver accurate numbers in a timely manner. That's no longer a concern. I think our founders would love to see this business continue to grow for years. I'm fortunate to have them as coaches and mentors in this business because they've both been in it for over 40 years, combining more experience than anyone else in the country. Our goal is to continue growing the business. We're always focused on the bottom line and committed to investing our profits at high rates of return to grow Legacy's book value. Over the last 12 months, we're making almost 20% year-over-year on that money, which is remarkable. This business was started with less than $10 million, and they've grown that at 10% to 20% a year for 18 years. We're going to continue to operate conservatively with investor cash. We're now set up where we're not afraid to be opportunistic as things arise. We believe we are at a time where opportunities are popping up, and we've got the team to execute. Long story short, we're going to keep growing the business and plan to stay a public company.

Okay, great. That's a very helpful answer. I look forward to the company being more active with investors because I think there's a very good story to tell. Thanks for taking all my questions. I appreciate it.

Yes, absolutely. Thanks for the questions.

One moment for our next question. Our next question comes from Roman, also a Private Investor. Your line is open.

Thank you. Duncan, great presentation. Quick question on the land development side: Is the idea, if you do proceed with the plan for these various sites that you own, to build a business around it? To raise capital from JV partners? What's the long view on this?

Yes, sure. Like I said, we continue to push forward with them. I can't tell you I have the answer for that yet. I think the plan is to monetize them as we see fit. Ultimately, what makes our business special is the stable, recurring revenue side. Looking forward to growing the business, I don't think anyone wants to own a cyclical manufacturing company. They want to own something that generates predictable returns and has high margins. As I think, we'll use that lens to look at the entire business. We think about land development and how we either develop or partner on these, creating a business model we can replicate and grow, generating recurring income from them.

I think that's the right approach. I encourage you to think through it from effectively like a JV fund management route, where you bring capital in and collect fees or JV with somebody to do this so that the capital outlay is not all on the company side. Just a suggestion. But great presentation. Super excited about the business.

Yes, thanks for the questions.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Duncan for any closing remarks.

Perfect. Thank you. Two final comments. One, thank you to our customers. I mentioned during the call and the press release, certain longtime customers have placed large orders. The orders keep our facilities full and keep our workers paid, and we truly appreciate your business. Secondly, I'd like to thank everyone who joined today's earnings call. We appreciate your interest in Legacy Housing. Feel free to reach out to us with any follow-up questions. My contact information is at the bottom of the press release. Operator, this concludes our call.

Well, ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.