Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Legacy Housing Corporation Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Mr. Duncan Bates, President, Chief Executive Officer. Please go ahead, sir.

Good morning. This is Duncan Bates, Legacy's President and CEO. Thanks for joining our second quarter 2023 conference call. Max Africk, Legacy's General Counsel, will read the safe harbor disclosure before getting started. Max?

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 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 will run through our prepared remarks, then open the call for Q&A. Product revenue decreased to $42.3 million or 23.2% in the second quarter of 2023, compared to the second quarter of 2022. The decrease primarily resulted from a 14.6% decrease in products sold and a 10.1% decrease in net revenue per product as customer demand shifted toward the lower end of our product line. Also, we did not convert any independent dealer consignment arrangements to floor plan financing agreements during this quarter as we did in the second quarter of 2022. According to Manufactured Housing Institute data, industry home shipments through May 2023 were down 29% year-to-date. However, housing affordability in the US continues to deteriorate and retail traffic in our industry is accelerating. One of the leading indicators that we track on the retail or dealer side of our business is loan applications. A few recent data points. Loan applications at Heritage Housing, our company-owned retail stores, hit a 12-month high in July 2023. Loan applications at Federal Investors, our consumer lending arm were up 17.6% in the second quarter of 2023, compared to the second quarter of 2022. Also, applications surged 60.8% in July 2023, compared to July of 2022. On the community or park side of our business, sales to existing customers remain stable. Like other manufacturers, we have battled delayed shipments due to setup-related issues. Our quote activity for new projects beginning late 2023 and early 2024 is strong. We rarely discuss Legacy's commercial product portfolio. Legacy has an extensive line of workforce housing solutions. Inquiries for our commercial products from customers in the energy, agriculture, film, and disaster relief industries are the highest I've seen since joining Legacy. Consumer and MHP loan interest income increased $8.5 million or 13.2% during the three months ended June 30, 2023, as compared to the same period in 2022. This increase was driven by increased balances in the MHP and consumer loan portfolios. Our financing businesses generate predictable recurring revenue, and we continue to invest in them. Between June 30, 2023, and June 30, 2022, our MHP note portfolio increased by $43.9 million and our consumer loan portfolio increased by $15.1 million. This is net of principal payments and loan loss allowances. Also, this does not include floor plan financing or development loans. I frequently field questions from investors about loan performance. The accountants' figures are in the filing, but the way that I think about delinquent accounts is over 30 days with no payments. At June 30, 2023, over 99.5% of MHP notes and 98.5% of consumer loans were current. We monitor these numbers closely and are confident in the strength of our loan portfolios. Other revenue, primarily consists of dealer financed fees and commercial lease rents, which increased to $1.8 million or 13.4% in the second quarter of 2023, compared to the second quarter of 2022. Selling, general and administrative expenses decreased 6.3% during the three months ended June 30, 2023, as compared to the same period in 2022. This decrease was primarily due to a decrease in consulting and professional fees and a decrease in warranty costs. Net income decreased 13% to $15 million in the second quarter, compared to the second quarter of 2022. Legacy delivered a 17.3% return on equity over the last 12 months. At the end of the second quarter of 2023, Legacy's book value per basic share outstanding was $16.94, an increase of 18.6% from the same period in 2022. We continue to hold pricing, reduce our raw material inventory and reduce our SG&A. Legacy has not missed one production day at any manufacturing facility in 2023. Legacy's balance sheet is strong. We ended the quarter with $1.5 million in cash and $4.7 million drawn on our line of credit. On July 28, 2023, we closed a new revolving credit facility with Prosperity Bank. The facility is for $50 million, with a $25 million accordion feature. It is secured by our consumer loan portfolio. Our team has been focused this quarter on internal strategic projects. A few examples, we are updating and adding more modern features to our products; we are revamping our sales processes; and hiring additional talented sales professionals. We made a big push on social media and digital advertising of Heritage Housing, and are beginning to see results. We also believe there is significant value to unlock on the land development side of our business. We are committed to these projects and are hiring additional team members to prioritize and accelerate progress. In addition to internal projects, we are consistently evaluating inorganic growth opportunities. The new bank line gives us the flexibility to pursue these opportunities if they hit our return threshold. Operator, this concludes our prepared remarks. Please begin Q&A.

And our first question coming from the line of Alex Rygiel with B. Riley Securities. Your line is open.

Good morning, Duncan. How are you?

I'm good. How are you?

Doing well. A couple of quick questions here. So, do you have any sales remaining to be booked from transitioning from that consignment program?

Yes. We have about 120 or so houses that are still in the old consignment program.

And what does the timeframe or timeline look like for converting those?

I think we'd like to do it by year-end. These are kind of the final holdout of dealers. So, it's taken a little bit of time to work through this.

And then you brought up an interesting point as it relates to inquiries for commercial product being very, very high. Can you remind us when these commercial orders come in? I suspect they're kind of fairly large in size from time-to-time. So, maybe talk about how big some of these could be.

Yes, there are two aspects to consider. We have some dealers in Texas who have connections with larger oilfield services or E&P companies or agricultural businesses. They are handling lower volume sales, just a couple here and there. However, we are noticing some interest in larger products that are more aligned with what we typically sell in the community or park segment of our business. This interest could lead to sales ranging from a few units to potentially hundreds, and we have numerous quotes out currently. We are actively trying to attract customers, and it would be wonderful if we could secure some sales.

And lastly, where's the Georgia plant as it relates to production levels? And is that an opportunity to utilize that facility for these commercial opportunities?

We have built this product in Georgia. I didn't comment on Georgia in our prepared remarks because, frankly, we feel great about where that plant stands today. We've made a tremendous number of changes there. We've got a new Sales Manager, new General Manager; we've shifted people around; and we've hired a lot of people. Right now, we're running three to four a day at Georgia, and our hope is to continue to ramp that up, depending on demand. So, Georgia is in a good spot. And now we've just got to get out and keep selling.

That's great. Thank you.

Thanks, Alex.

Thank you. And our next question coming from the line of Mark Smith with Lake Street Capital. Your line is now open.

Hey, Duncan. First off, can you just walk us through a little bit more in depth of sales mix, both channel and kind of price points, kind of where things changed, where the headwinds are? Maybe where emphasis is to drive maybe better sales in different channels?

Yes, sure. I'll try to take that a couple pieces at a time. I mean, if you look at the quarterly report, the price or the revenue per product sold is down, and that contributes to the decline in sales, in addition to just lower volume. And I think what's happened is, we've built a great park model home; we've got some large customers that continue to take a lot of these. And so, we're selling lower. We're selling park model homes and we're selling fewer option homes to dealers as they start to build inventory again.

And I think you said in your prepared remarks that as we look at kind of a standard consumer home, are you seeing more demand at those lower price points and/or the higher price points?

Yes, absolutely. I think this consumer, with inflation, has been hit pretty hard. And although chattel rates have not gone up as much as traditional mortgages, just with inflation and every other aspect of their lives, they are looking at a little bit lower end or less optioned homes than they were 12 months ago.

Got it. That leads to my next question. As we consider the loan portfolios for both consumers and manufactured home parks, do you have any insights on rates? It seems like they've increased slightly this quarter. Can you take on more, or is there a point where you can't raise rates any further?

Yes. Our strategy for the past little over 12 months has been to hold prices firm and hold rates firm. Now that said, there are some nuances on either side of the business. On the consumer loan portfolios, I mean, we've held our base rates, but the rates are subject to our underwriting process. And so, that really depends on the consumer's credit quality. On the MHP side of the business, our financing program has a base rate and then it flips to variable. We've held the base rates consistent. Over the next, say 24 months, you're going to see a lot of these flip to variable, and you've got community customers that when that flip happens, will be inclined to refinance their projects and pay us off.

Okay. And the last question for me; you said that kind of the park and land development projects are something that you're focused on now. Any update on where these projects stand today? Any goalposts we should be looking for over the next couple of quarters?

Yes, we have experienced a lot over the last year, and I believe we have finally established a stable foundation. We've faced challenges at the Georgia plant due to the market slowdown. Our focus is entirely on the business. Moving forward, we need to speed up these legacy projects. Land development was a major topic for us this quarter, and we are developing a plan for our next steps. Currently, we are in the process of building a team dedicated to these projects. They are ongoing, though we feel they aren’t progressing as fast as they should. Our primary focus is on the key asset in this portfolio, which is Bastrop County, and we are making good progress on Phase 1. I expect that in another month or two, we will have clear objectives laid out, but that is certainly our plan.

Okay. Thank you.

Thanks, Mark.

Thank you. And our next question coming from the line of Tim Moore with EF Hutton. Your line is open.

Thanks. Duncan, a few of my prepared questions already asked, but I actually have four remaining ones. You mentioned that Legacy and it's pretty obvious, the great attribute you've held kind of the base interest rate pretty much the same unlike the steep 3% rise in single-family mortgage rates over the past year and a half or so. You mentioned the green shoots and loan applications in July, and it was terrific. Sounds like walk-in traffic is better at the retail locations and up a lot. My question is, I'm just trying to pinpoint the possible conversion of timing for how many months it might take from loan applications to convert to an order to ship lead time when you can actually book revenues. Is that something like three months? In other words, if there is an inflection point and I'm not putting words in your mouth for July, and maybe that's continuing in August; does that convert something like October and November sales?

Yes, I wish I had a crystal ball and could tell you exactly when that is happening. The dealer channel of our business has been pretty slow for a few quarters, and the consumer backed off. You had dealers that had a lot of inventory, and installed their consignment or floor plan financing arrangements or interest rates go up pretty significantly. But what we're hearing from our customers now and what we're seeing with our own stores is there does seem to be a pickup in that channel. You have dealers that are selling homes, reordering homes, and you've got a lot of foot traffic at the dealer level. Obviously, we're seeing it in the loan applications. I don't think there's going to be an overnight boom on the dealer side of the business, but it does feel like we're getting some momentum. Dealers are clearing out their inventory, they’re starting to reorder, and we've seen an uptick in applications, but we've also seen an uptick in the credit quality of those applications. It seems like there are consumers out there that maybe are dropping down into this category and are able to put up larger down payments than we've seen historically. So, we're monitoring it closely. We hope it continues, and obviously, we'll keep the market updated quarterly as we see things.

Great. Duncan, that's really a good color, and nice to see the credit quality increase on the applications. How are the demand and interest levels from the park operators? I know that's held up pretty good. How's that been doing the last few months?

Yes, it's slower than we'd like. It seems like a lot of these guys are facing pretty serious delays on the setup side. I don't know if it's – it doesn't seem like it's as much setup crews, it’s like getting the utility operators to cooperate, or the counties to cooperate with certificates of occupancy, and things like that. We tend to serve a little bit different customer base than our larger competitors. Most of our customers on the park side are regional entrepreneurs. A lot of these guys sold portions of their portfolios when the prices really went crazy last year. We've got some big customers that are deploying capital now; they're ordering houses fairly consistently. But we are making a sales push for new customers, but it's a little bit slower than we'd like. Based on our quote activity, it feels like end of the year, early next year, this channel will gain traction, like the dealer channel is now.

And that's helpful color, Duncan. So, I have two more questions.

Sure.

How are the labor constraints of the three plants compared to maybe last summer? You mentioned you haven't missed one production day this year so far, which is phenomenal. And you're hiring more with a social media push. Do you think, this just theoretically – I'll throw it out there that maybe if volume starts coming back pretty good in November, December, you'll have enough labor in place and routines?

Yes, labor has been a challenge for a while, all the way back through COVID. For us and for the other manufacturers, the constraint is not how much space you have, or how big your yard is, or how big your plant is; it really is a labor constraint. I mentioned this on another call, but this is a very simple parameter that we use to think about the labor market: At our Fort Worth plant, there's a waiting room on the front. If you talk to Curt and Kenny, they'll tell you that through COVID, they didn't have a single person show up looking for a job, and we're consistently getting three, four, or five people that come in each day and apply. It does feel like the labor market is loosening up a little bit, and I feel much better about ramping up production now or over the next couple of quarters, than I would have during COVID.

Great, that's helpful. It's funny, you mentioned that because I recall seeing three people filling out applications in your Fort Worth lobby when I was there doing a tour last August, so…

Exactly, exactly. If there's nobody out there, that's a problem.

No, no, there was a line. That was a good barometer that made me feel better, although then Georgia happened. But just one last question. Given that $50 million availability that you mentioned, and the possible accordion option feature, if you take that up, should we read into that at all that maybe now that some of the operational pickups are well behind you, Georgia's firing on all cylinders, and the plants are doing well operationally, that there could be an acquisition or a vertical integration target on the near-term horizon?

We're looking hard. The new bank line— we've been working on it for a little while. I don't care what size business you're operating, banks can be difficult to deal with now. It's actually a $50 million line with a $25 million accordion feature, so we can take that up to $75 million. We've got some firepower. What’s interesting is it’s only secured by our consumer loan portfolio, so we’ve got other assets out there unencumbered. We're really looking; I just— we’ve been focused internally, and there’s still a lot of work to do internally. But if the right opportunity comes up, we’re ready to go. We've been looking at all types of things. We're not going to chase something that's expensive or risky; we want to stay patient, continue to invest in our own business at high rates of return. And if something comes up that we really like, we're positioned to be aggressive on it.

Great, that's very helpful color. And I always remember your ROI hurdle. I mean, you've done a great job reinvesting back in the business, and maybe you'll have some other external options. But that's it for my questions. And I hope that you, Curt, Kenny, and the rest of the team have a wonderful summer.

Thank you, Tim. Appreciate it. You too.

Thank you. And I'm not showing any further questions in the queue at this time. I will now turn the call back over to you, Mr. Bates for any closing remarks.

Sure. A couple of final remarks. I want to thank everybody who joined today's earnings call. We appreciate your interest in Legacy Housing. And then next, our annual fall show, which is Legacy's largest sales event, is October 1st through the third in Fort Worth, Texas. It's a great opportunity to see our new products and meet the team, and a link to the RSVP is on our website. Operator, this concludes our call.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.