Good day, and thank you for standing by. Welcome to the Legacy Housing Corporation Third Quarter 2023 Earnings Call. At this time, all participants are on a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised, today's conference is being recorded. I would now like to turn the conference over to your speaker today, Duncan Bates. Please go ahead.

Good morning. This is Duncan Bates, Legacy's President and CEO. Thanks for joining our third quarter 2023 conference call. Max Africk, Legacy's General Counsel, who 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 as contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from management's current expectations. We, therefore, refer you to a more detailed discussion of the risks and uncertainties in the 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'm joined today by Jeff Fiedelman, Legacy's Chief Financial Officer. Jeff will discuss our third quarter performance, then I will provide additional corporate updates and open the call for Q&A. Jeff?

Thanks, Duncan. Product sales decreased $11.7 million or 24% during the three months ended September 30, 2023, as compared to the same period in 2022. This decrease was driven by an industry-wide decrease in unit volumes, a decrease in net revenue per unit and a decrease in the conversion of certain independent dealer consignment arrangements to financing arrangements and other market factors. For the three months ended September 30, 2023, our net revenue per unit sold decreased 1.6% to $63,600. Consumer and MHP loans interest income increased to $8.8 million or 25.7% during the three months ended September 30, 2023, as compared to the same period in 2022. This increase was driven by increased balances in the MHP and consumer loan portfolio. Between September 30, 2023 and September 30, 2022, our MHP note portfolio increased by $47.8 million, and our consumer loan portfolio increased by $16.8 million. This is net of principal payments and loan loss allowances. This does not include floor plan financing or development loans. Other revenue primarily consists of contract deposit forfeitures, dealer finance fees and commercial lease rents, and increased to $4.1 million or 150.8% in the third quarter of 2023 compared to the third quarter of 2022. This increase was primarily due to an increase in forfeited deposits and an increase in floor plan financing fees. The cost of product sales decreased $8.7 million or 25.9% during the three months ended September 30, 2023, as compared to the same period in 2022. The decrease in costs is primarily related to the decrease in units sold. Product gross margin was 32.9% for the third quarter of 2023, up from 31.9% for the third quarter of 2022. Selling, general and administrative expenses decreased 9.2% during the three months ended September 30, 2023, as compared to the same period in 2022. This decrease was primarily due to a decrease in warranty costs and a decrease in other miscellaneous costs, partially offset by increased legal expenses and an increase in loan loss provision. Net income increased 9.2% to $16.1 million in the third quarter of 2023 compared to the third quarter of 2022. Net income margin was 32.2% for the third quarter of 2023, up from 25.7% for the third quarter of 2022. We ended the quarter with $0.5 million in cash and $13.0 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. Legacy delivered an 18.6% return on shareholders' equity over the last 12 months. At the end of the third quarter of 2023, Legacy's book value per basic share outstanding was $17.61, an increase of 18.7% from the same period in 2022.

Thanks, Jeff. We're happy to have you on the team. Let's start with the market, then I'll discuss Legacy's financial performance and provide an update on strategic initiatives. According to Manufactured Housing Institute data, industry home shipments through September of 2023 are down 25.7% year-to-date. However, housing affordability in the U.S. continues to deteriorate and large numbers of potential homebuyers are priced out of the traditional housing market. We held our 2023 Fall Show in Fort Worth in early October. As I mentioned in the press release, the 2023 show was one of the most successful sales events in the company's history. The show orders extend backlogs at our Texas facilities well into the first quarter of 2024 at a higher production rate than the third quarter of 2023. Both dealer and part customers ordered homes at the Fall Show. The retail or dealer side of our business is showing signs of life. Foot traffic is up and dealers are selling homes. Although it varies by geography, we believe that most of the destocking issues from early 2023 are largely behind us. The reorder rate is lower than we would like, but inventory carrying costs are also higher. One important data point on the dealer side. Legacy's consumer finance business closed more loans in October of 2023 than any other month in the company's history. On the community or park side of the business, sales to community owners and developers remain stable. Like other manufacturers, we have battled delayed shipments due to setup-related issues, discriminatory zoning practices and high interest rates are headwinds for new developments. We secured a few large park orders with deliveries extending through mid-2024. I'm proud of our team's performance to date in 2023. Despite a 25.7% decline in industry-wide shipments through September, Legacy's net income is only down 1.5% year-to-date through the third quarter. We are driving sales and managing expenses effectively. Interest income from 12 months of reinvesting our profits back into the loan portfolios drove a meaningful portion of the year-to-date profits as product sales declined in 2023. At September 30, 2023, over 99.3% of MHP notes and 98.5% of our consumer loans are current or less than 30 days without payment. We monitor these numbers closely and are confident in the strength of our loan portfolios. I received positive feedback from the last call about discussing projects that the team is working on. Here's where I'm focused. Hiring. We made a big push to hire young, hungry individuals that are committed to a career at Legacy. Our team is lean, aging and possesses a tremendous amount of industry knowledge. Our goal is to create a path for motivated individuals to harness this information and advance within the company. Number two, working capital. Our working capital is too high. We have too much raw material and finished goods inventory. We are working to reduce inventory and free up capital that can be reinvested back into the business. Third, Georgia sales. The Texas plants are in good shape from a sales standpoint. Our team in Georgia has done a great job with product quality and we are now building the highest quality homes that have come out of the Eatonton plant. Now we need to accelerate sales. Most of the sales team is new and learning. Kenny and I have been heavily involved and we are starting to see results. We need to keep the momentum going. Number four, workforce housing. We have 40-plus floor plans and have not historically made a push in this space. We continue to bid on large projects with well-known disaster relief service providers. Legacy has the balance sheet to hold and lease large amounts of inventory. It's too early to discuss specific projects and numbers, but I continue to believe that workforce housing is a huge opportunity for Legacy. Number five, land development. We hired a dedicated team to prioritize and accelerate land development. Completing Phase 1 of Del Valle or Bastrop County outside of Austin is our top priority. Water and electricity are in, road construction and construction of the water treatment plant began in November. Delaying construction at several properties may have helped us. For example, some properties were in very rural areas when purchased. Now five-plus years later, there are plans to run city sewer and other services that will increase value and provide flexibility. We continue to evaluate ways to maximize the value of these projects for our shareholders. In addition to these internal projects, we are consistently evaluating inorganic growth opportunities. The new bank line gives us the flexibility to pursue these opportunities if they meet our return threshold. One final thought on valuation. We are growing book value or shareholders' equity at about 19% a year. Legacy was started with $700,000, and we have grown that equity to $429.5 million in 18 years, reinvested repeatedly. Our book value primarily consists of finance notes at par with the reserve, inventory at cost and land developments at cost. Our facilities and equipment are mostly depreciated. We believe that our book value is conservatively stated and is near the company's liquidation value. We publish our book value per share each quarter. As of September 30, 2023, our book value per share was $17.61. That number is a month-and-a-half stale and our stock is trading in the $19 range. It's not much of a premium. If the stock trades at or below book value per share, we will utilize the full extent of our balance sheet to repurchase shares. I believe that we can continue to grow shareholders' equity at 18% to 19% a year in this high interest rate environment and that our share price will begin to reflect this. If you do the math, the numbers grow quickly. Any strategic moves are icing on the cake. Operator, this concludes our prepared remarks. Please begin the Q&A.

Thank you. Our first question comes from Mark Smith with Lake Street. Your line is open.

Hi, guys. Duncan, first, I wanted to dig into gross profit margin just a little bit more, really solid execution there. Can you talk about any additional drivers there, maybe what you saw? Have inflationary pressures gone down? What you're looking at for labor? Any insights there would be great.

Yes, sure. Hey, Mark. So, a couple of thoughts for you. Obviously, volume was down pretty significantly in the third quarter. So, managing expenses is extremely important. We've been able to hold price even at lower volumes and material prices have come down. Labor and overhead, on the other hand, have continued to go up. And they're not accelerating at a quick rate, but it certainly has had an impact on gross margin. I would expect as we ramp up production and continue to manage our costs, that we can hold these margins where they are, but obviously, managing inventory as well as labor.

Okay. And then, solid performance on the consumer finance loan business. Did you guys use rates there at all to help drive that? It looks like maybe we saw rates down a little bit. Any discussion around that?

Yes, I believe our rates across the loan portfolios have been quite favorable and have significantly contributed to our sales. We are slightly increasing rates on the consumer loan portfolio, but these adjustments will not be reflected in the third quarter numbers. Therefore, I see an opportunity to raise rates a bit more to align with the market.

Okay. You have done a good job managing charge-offs and any issues within the portfolio. Are there any changes in your underwriting policies? Or has everything stayed the same?

They've stayed the same. I feel pretty good about our underwriting processes. We have added additional collections personnel to the team just in the event that you start to see some cracks in the loan portfolios. But we're keeping an eye on it, and we make a lot of calls. We monitor it closely and have continued to perform with managing those portfolios.

Okay, great. Thank you.

Thanks, Mark.

One moment for our next question. Our next question comes from Alex Rygiel with B. Riley Securities. Your line is open.

Thank you. Nice quarter, Duncan and team.

Hey, Alex.

Nice quarter there. A couple of quick questions here. First, you've been holding your average selling price at a nice level here. Any reason for that to change sort of over the intermediate term?

No. We plan to continue to hold it. I think the one thing that has changed. Remember last quarter, we saw a pretty significant drop in average selling price quarter-over-quarter. I think that's stabilized and it stabilized toward smaller, less optioned homes. But I feel pretty good about where it is now. I don't think we'll see another major drop. But as far as pricing goes, I mean, we're now ramping up production at both of the Texas plants. We've got a nice backlog well into the first quarter. And so, I don't anticipate any price degradation into 2024.

You've mentioned larger commercial customer orders, which is very exciting. Can you explain how this relates to average selling price and margin? Specifically, what is the margin on that product? Also, is there a risk that this could lead to a different margin and create challenges?

Yes, we're still in the early stages of this initiative. The need arose due to slow orders throughout the year, prompting Kenny and me to travel and meet with as many potential clients as possible to promote our products. We have already manufactured this product, which we typically sell to dealers in South Texas and West Texas, who cater primarily to oilfield services companies housing their workers. Historically, these sales have involved small quantities, and we haven't focused on them much. However, upon digging deeper, we've found numerous opportunities. We mainly compete with higher-cost skid-mounted metal products, and I believe our pricing is competitive. The margins on this product are comparable to those of our other offerings. It consists of large single-wide units with studio-type apartments, some with kitchenettes and all featuring bathrooms. We are experienced in building these units, and they don't adhere to any codes that would significantly increase costs. Interestingly, much of this product is leased, and the lease terms appear to be favorable for larger units. It’s still early, and I want to secure contracts before discussing it more, but I believe there is a significant opportunity here, as it could help diversify our business and enhance recurring revenue.

Helpful. And then lastly, as it relates to community development, obviously, Del Valle is your most attractive near term. Can you help us understand when homes might get delivered to that site? And, as it relates to other real estate that you own, any opportunities to sell these land assets and redeploy that capital into a share buyback?

I'm categorizing our properties into three groups. The first group includes those that are sensible to sell. This consists of raw land where we've made little progress, smaller parcels that may not be suitable for development, or properties that are not financially viable. For these, we can sell them when the market conditions are favorable and potentially achieve a good return. The second group includes developments that have been taking a long time, but we are noticing significant growth in the area with city sewer and water services expected soon. For these, we will need to carefully assess the best usage, which could involve manufactured housing or single-family homes, as we aim to maximize value. The third group comprises projects like Del Valle and Horseshoe Bay that are further along in the process. We need to expedite these projects to create value. We now have a dedicated team focused on these initiatives. While I am reluctant to provide a timeline for Del Valle due to previous delays, I anticipate that by year-end, as we start developing roads and the water treatment plant is constructed, I will have a more precise idea regarding when homes will begin to be placed on those lots.

Very helpful. Thank you very much.

Yes, thanks, Alex.

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

Thanks, and congratulations on the continued good operational execution.

Thanks, Tim.

Yes, it's vastly improved since you took over, Duncan. I just want to follow up on a thread that's probably on all investors' minds. Your gross margin has done impressively, if not surprisingly well, the past three quarters despite the downturn in industry volumes and even the minor ASP drop in the spring for the industry. So, just for the September quarter you just reported, can you maybe parse out how much of that gross margin expansion in the quarter came from cost deflation versus any benefit you might have had from some conversion of floor financing?

Yes, there's no floor financing in this quarter. So, I'd say the majority of it is just from better execution on the purchasing side. I think we still have a ways to go. I think that vendors are obviously reluctant to provide price decreases unless you really push for them. And so, most of that margin expansion came from purchasing. Labor has continued to go up. I think the market has softened a little bit, but it's not accelerating like it was during COVID. That's something that we're certainly keeping an eye on is our labor cost per square foot produced, and we track it pretty closely. Overall, I'd say the majority of the margin expansion came from purchasing improvements.

That makes sense. I mean, it really is impressive what you've done with the gross margin. So, Duncan, maybe you mentioned in your prepared remarks that Legacy closed more loans in October than any other month in Legacy's history on the consumer loan front. Can you share the monthly cadence during the September quarter? In other words, was it incrementally better every month with the volume and orders from July through September? I'm trying to get a sense if you're seeing a bottom.

Yes. I feel like internal sentiment from a sales standpoint was the lowest I've seen in the third quarter. I think we're in a much better place now. And I think that the success of the Fall Show was a big step in the right direction. That was something that I was pretty concerned about. We sold a lot of homes, and that's great. How can I better answer your question, sorry, Tim?

No, I'm just trying to think now that if you parse out that amazing show you just had, demand and orders, do you feel like the floor is in for the industry on volume and consumer sentiment?

Yes, we are increasing our volume, and sales in Texas are performing well. Regarding the lending portfolios, there have been no changes. The rise in applications and loan closures indicates a modest improvement on the dealer side. The underwriting process means these loans don't close immediately, so it isn’t always a straight line. However, we did see strong originations this fall with impressive application numbers, and Brandon and his team managed that business effectively in October, and we intend to maintain this momentum.

That's great. I remember meeting Brandon a year ago. My last question is just regarding the CFO role change. Could Jeff comment on what he brings to enhance Legacy Housing? I read about his accounting background and finance experience. Could you elaborate?

Yes, sure. I'll turn it over to Jeff, but I'm happy to have him on board.

Thanks, Tim. Thanks for asking the question. I've got a pretty diverse background, good operational background, especially in manufacturing, and significant experience helping businesses grow from one stage to the next in terms of process and operations and scale. I had the benefit of getting exposure to Legacy a couple of years ago and learned the business a little in a consulting role. So, coming in, I know the business well. It's a good team here, and I feel like I bring solid experience across the board from an operations perspective, corporate finance, and accounting side. I'm looking forward to contributing.

Great. Those are helpful insights. Thanks for sharing, Jeff. And Duncan, thanks for answering my questions.

Yes, thanks, Tim.

One moment for our next question. Our next question comes from Jay McCanless with Wedbush. Your line is open.

Good morning, everyone. Welcome, Jeff. Duncan, could you tell us how the show went? What feedback did you receive from the dealers? Can you highlight a few key points? It seems like they are becoming more optimistic as we approach spring. Were there any notable observations from your discussions with the independents?

Yes. Jay, 2023 was a tough year for the independent dealers. You come off a market that went gangbusters in 2022 up to year-end where backlogs were stretched. When they were selling a lot of homes, they were ordering a lot of homes, but they weren't able to receive them immediately. Then the retail demand dried up, and backlogs led to a lot of forced inventory on these dealers. With the carrying costs also increasing, many of these guys were in tough spots. Surprisingly, the show was optimistic. We were worried about turnout and about orders. While we thought that attendance would be good, we were concerned about order volume. The good news is we're seeing lots of dealers selling homes, and a lot of those homes have been sitting for a while. It’s great to see them start moving. We ran some specials, and I think our sales effort on the dealer side was strong. They just need to focus on executing and moving any aged inventory. It's encouraging to see this piece of our business moving in the right direction because at the start of the year, that certainly wasn't the case.

Great. You addressed my question about pricing, but do you think the mid to low 60% range is a good figure to use for modeling average price over the next couple of quarters?

Yes, I think so. I think all customers are a little squeezed. You've got inflation tightening the retail side, and they likely prefer a bit larger home, but payments may not work. We're selling a lot of single-wides that aren't, I'd say, fully optioned. On the park side, some community owners go for smaller homes to keep the monthly payments down for financing. So, that feels like a good ASP base number to me. If we see a big pickup in double-wides or hit one of these workforce housing deals, there are higher units that could go up. But right now, that looks good for our base case.

Okay. And then just one other question. We've heard about some commercial banks in the U.S. pulling back and exiting floor plan lending for the manufacturing housing space. Is there any opportunity for Legacy to go a little further afield and pick up some business as some of these banks have exited?

Yes, absolutely. I think there's a significant opportunity for us. We've made changes to our floor plan program and the team that executes it. A lot of dealers that we don't floor represent an opportunity to expand and acquire new dealers. There are other dealers that floor with someone else but carry Legacy homes. I think there is a chance to convert those over to us, as well as increase the number of Legacy homes on their lots. I believe there's an opportunity to grow our consumer finance business, too. We've got a lot of dealers that aren't our top financing choice right now, so we can push in that area as well.

That sounds great. Thanks for taking the questions.

Absolutely. Thanks, Jay.

One moment for our next question. Our next question comes from George Melas-Kyriazi with MKH Management. Your line is open.

Hey, thank you. Good morning, gentlemen. I have a question on production and inventory. My understanding is that you were increasing production in the quarter, but sales were soft and finished good inventory, even though it might be high, was flat sequentially. I'm trying to square that and understand if you actually did increase production in the September quarter, or how do you manage to keep finished good inventory flat?

Yes. Production in the quarter was down significantly. The third quarter was about the lowest we were running at all plants. We missed a production day, and we averaged about three homes built at each plant, which was down starkly from mid-2022 or the third quarter of '22. We had an easier comp as production was decreased then due to issues at Georgia. So, production was down in Q3. We are ramping production in Texas now, but still have work to do in Georgia. We've too much finished goods inventory in Georgia to move. By Q1, we'll be back on track there and have a lot of finished goods inventory shipped, and we should be ready to raise production at that time.

Okay. And remind me, Georgia, that's mostly park homes? Or is it also to the retail channel?

Yes, it's both. We have a couple of large park customers there. Legacy also has a dealer presence in the Southeast through Heritage Housing and some independent dealers there. As I add to that sales team, we've hired around seven salespeople in the past few months. We need to get back on track with dealer business. It's a large territory, so you can't efficiently have two people covering the entire Southeast for dealers. I think there's a lot of opportunity there now that we’ve resolved quality and service issues, and we're starting to regain customer trust.

That's great news that quality has improved. Question about cash, your loans and line of credit. Your line of credit was unused at the start of the year, and now you have $13 million. You seem to find good opportunities to increase your portfolio. Do you think that continues, or is there a limit?

Yes. Cash is king right now. If you have the capacity to lend in this industry, there are plenty of opportunities. We are being selective but have had good chances to put money to work at attractive yields even though the cost of any bank line that’s variable is high right now. We'll be selective, but certainly won’t turn down good opportunities to invest in loan portfolios or development loans.

Makes sense. Just a final quick question. It seems like your retail operation is doing better. Have you resolved some of the issues?

Yes, we're working on it. I feel Heritage has a lot of potential. We haven’t added additional locations in a couple of years, and we’re seeing opportunities to do so. The key is getting the management team positioned correctly. We've made a few changes at the senior management level and have more additions to make. I feel good about how Heritage is being managed, and we're selling more production through Heritage than we have historically. I think we have a significant growth opportunity there, as it’s currently below where we would like to be compared to peers.

Great. Thank you very much.

Yes, thank you.

One moment for our next question. Your next question comes from Ramon Numshoff, who is a private investor. Your line is open.

Thank you. Hey, Duncan and Jeff, congrats on a great quarter. I wanted to ask a question related to land development. Can you give us a bit more specificity about who you hired as part of this new team and what the overall vision is for the business?

Yes. We're in the early stages. We segmented the developments into regions, and we have a regional manager with team members below him in each region. The goal right now is to prioritize and accelerate development on these properties. As I discussed earlier, we've got three buckets. Some may make sense to sell. There are others with development opportunities that we want to move quickly on. I continue to assess ways to ensure our actions are aimed at maximizing value for shareholders. While it's not going to happen instantly, I think the easier decisions will be whether to accelerate or sell projects, evaluating any sales for good returns.

Thanks. That's helpful. Do you see this as a vertical of the business? Will this be a full rent type of product held on the balance sheet long-term, or is this something more of a trade?

Yes. Exactly. The biggest challenge in this industry is finding locations for these homes. If you can create a model that is replicable and enables our customers to sell homes into communities, that's a solid approach, but it’s going to take time. You’ve hit the nail on the head; that’s where my current focus lies. I believe we can develop something creative that would make this scalable, but right now, we need to execute to understand how it unfolds.

What do you think is the biggest obstacle to figuring this out? Is it capital, is it time, or something else?

I think we have the capital. We need to understand the public market's perspective on cash flows and how they will be valued. That will determine whether these are long holds or if we can maximize value within a shorter timeframe. If I complete Del Valle with 1,100 spaces and rents flowing, will investors see that at a 7 times or 30 times earnings evaluation? That question remains.

Understood. Thank you.

Yes, thank you.

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.

Sure, thank you. I'd like to thank everybody who joined today's earnings call. We certainly appreciate your interest in Legacy. Operator, this concludes our call.

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