Good day and thank you for standing by. Welcome to the Legacy Housing Corporation Q4 2023 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Duncan Bates, President and CEO. Please go ahead.

Good morning. This is Duncan Bates, Legacy's President and CEO. Thank you for joining our call to discuss Legacy's year-end 2023 results. I apologize for the release late Friday; circumstances outside of our control delayed the release and we will try to avoid Friday releases in the future. Max Africk, Legacy's General Counsel, will read the Safe Harbor disclosure before getting started. Max?

Thanks, Duncan. 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 assumes no obligation to update these projections in the future unless otherwise required by law.

Thanks, Max. I'm joined today by Jeff Fiedelman, Legacy's Chief Financial Officer. Jeff will discuss our 2023 financial performance, then I will provide additional corporate updates and open the call for Q&A. Jeff?

Thanks, Duncan. Product sales decreased to $145.1 million, a decline of 34.7% in 2023 as compared to 2022. This decrease was driven by a decrease in unit volumes and the conversion of certain independent dealer consignment arrangements to inventory finance arrangements in 2022 that did not occur in 2023. The conversion of consignment arrangements to inventory finance arrangements resulted in an increase to product sales of approximately $29.1 million during 2023. Between December 31, 2023 and December 31, 2022, our net revenue per unit sold decreased 10.4% to $59,600. Dealer and community customers purchased smaller, less optioned homes to meet customer demand in 2023. The decrease was not driven by price concessions during the year. Consumer MHP and dealer loans interest income increased to $37.4 million, a rise of 31% from 2023 to 2022. This increase was driven by increased balances in the MHP and consumer loan portfolio. Between December 31, 2023 and December 31, 2022, our consumer loan portfolio increased by $17.5 million and our MHP loan portfolio increased by $39.2 million. These increases are net of principal payments and loan loss reserves. Other revenue primarily consists of contract deposit forfeitures, dealer finance fees, and commercial lease rent and increased to $6.6 million, a gain of 3.5%. The increase was driven by growth in forfeited deposits and servicer fee revenue, offset by a decrease in consignment fees as dealers carried less inventory in 2023. The cost of product sales decreased by $50.4 million or 33.6% in 2023 as compared to 2022. The decrease in cost is primarily related to a reduction in units sold. Product gross margin was 31.3% for the year ended December 31, 2023. Selling, general and administrative expenses decreased by $3.3 million or 11.9% in 2023 as compared to 2022. This decrease was primarily due to a reduction in salaries and benefits costs, warranty costs, consulting and professional fees, partially offset by an increase in loan loss provision, legal expenses, and marketing and advertising expenses. Net income decreased 19.6% to $54.5 million between December 31, 2023 and December 31, 2022. At December 31, 2023, we had approximately $0.7 million in cash and cash equivalents compared to $2.8 million as of December 31, 2022. Legacy's outstanding balance on our credit facility at December 31, 2023, was $23.7 million. During the fourth quarter, we drew on our facility to make significant investments in our land development and to fund multiple financing opportunities that surfaced near year-end. The balance on our credit facility is below $11 million today. Legacy delivered a 13.0% return on shareholders' equity over the last 12 months. At December 31, 2023, Legacy's book value per basic share outstanding was $17.91, an increase of 14.2% from the same period in 2022.

Thank you, Jeff. I appreciate you and your team's hard work on the audit and the 10-K filing. Let's start with Legacy's financial performance, then I will discuss the market and provide other corporate updates. First, I would like to address a few one-time items that affected our reported numbers. In 2022, we transitioned Legacy's dealer financing program from consignment arrangements to inventory financing arrangements, aimed at aligning our dealers with an industry-standard inventory finance program. This conversion led to a one-time increase in product sales of $29.1 million in 2022, with approximately $20 million recognized in the fourth quarter. Please consider this as you assess the quarter and year-end performance. In 2023, changes in the energy tax credit program led to adjustments at Legacy. We began building nearly all of our HUD code units to ENERGY STAR standards, a voluntary program designed to help customers save money. For the year ending December 31, 2023, Legacy could only claim tax credits for homes built and sold within 2023, which reduced the credits recognized this year. Our effective tax rate increased from 17.5% in 2022 to 20.8% in 2023. For 2024, we expect to lower our effective tax rate towards 18% as we claim credits for homes built in 2023 but sold in 2024. In 2023, Legacy implemented CECL, a loan-loss accounting framework mandated by FASB, which requires an entity to estimate all expected credit losses. This adoption resulted in a $900,000 increase in portfolio allowances at transition in the first quarter of 2023. The CECL allowances grew by 158% to $2.2 million at December 31, 2023, up from $840,000 at December 31, 2022. I'm proud of our team's performance in managing expenses during a lower demand environment in 2023. We successfully reduced SG&A expenses by 11.9% and managed overhead costs effectively, achieving a 29% net income margin for the year, without adjustments. Legacy's Board is focused on ensuring our management team prioritizes the bottom line. We have maintained pricing and production levels while continuing to build a backlog across our manufacturing facilities. Shipments were lower in the fourth quarter than we had desired. I underestimated the seasonality on the dealer side, which further delayed shipments from our Texas and Georgia plants to mobile home parks, while northern weather impacted shipments of units from our subcontracting partners. All these factors contributed to lower shipments during the fourth quarter. As Jeff mentioned, consumer, MHP, and dealer loan interest income rose to $37.4 million, an increase of 31% from 2022 to 2023. We will continue to invest in our loan portfolios in 2024, as these notes are performing well, providing stable and recurring revenue. Housing affordability in the U.S. is still declining, with many potential homebuyers unable to enter the traditional housing market. Our products and financing solutions cater to the 50% of U.S. households earning less than $75,000 annually. We believe in our industry and are beginning to see signs of gradual recovery in 2024 as the economy stabilizes and credit conditions ease. Moving to the market, the retail or dealer side of our business is showing improvement. We have just navigated a seasonally slower period, but foot traffic has increased since mid-2023, and dealers are successfully selling homes. We believe that most destocking issues from early 2023 are behind us, although reorder rates continue to lag, and inventory carrying costs have risen. Two key points: interest from new dealers in Legacy's products and financing is at a peak; we have signed up more new dealers this month than any other month since I began. Additionally, our Heritage stores are on track for their best sales month in the past year. On the community or park side of our business, sales to community owners and developers remain stable, although shipments are delayed. Like many manufacturers, we've faced shipment delays due to setup-related challenges and discriminatory zoning practices. New manufactured housing developments have also been affected by high interest rates. In Q4, we began noticing a trend where traditional community developers and investors started taking delivery of small HUD units and tiny homes for RV parks that they have purchased and converted, which affected our average selling price in Q4. A brief update on some projects discussed previously: We continue to grow the team at Legacy. I had previously mentioned our focus on hiring young, ambitious talent, but now my mandate from the Board includes hiring seasoned professionals with industry experience to strengthen key areas such as financing, sales, engineering, and manufacturing. We still have key positions to fill, and I am eager to see the contributions they will make. Working capital remains a priority; from December 31, 2022, to December 31, 2023, we reduced our raw material inventory by 23%. We still need to address finished goods inventory at our Georgia plant. In sales, Kenny and I are actively involved in recruiting and training talented sales professionals and are systemizing our sales process through new tools and technology. As our new sales team becomes more effective, we're beginning to see positive outcomes and are well-positioned as the market recovers. I firmly believe that workforce housing represents a significant opportunity for Legacy. We established a dedicated team to focus on this product line in Q4, and they are successfully quoting and securing small orders. We are closely managing this sector and are optimistic about the potential opportunities. Regarding land development, I mentioned that we've hired a focused team to prioritize land development efforts, with completing Phase 1 of our Del Val Bastrop County project outside of Austin being our top priority. You will observe in our financials that capital allocations for this project are accelerating, and we continue to seek ways to enhance the value of these projects for our shareholders. I want investors to watch two new developments: as the performance of our Heritage stores improves, we see potential to add more stores. Currently, we sell about 10% of our production through company-owned stores, in contrast to nearly 50% for some competitors. Additionally, we are considering opportunities to introduce financing products that better meet our customers' needs. Our senior leadership team is engaging with customers to assess their requirements and is evaluating the feasibility of these programs for our business. In closing, I discussed valuation in our last call. Legacy is a high-quality business with consistent margins, significant insider ownership, low leverage, and a strong capacity to reinvest earnings for high returns. We maintain a long-term perspective, and a single quarter does not define our success. With our foundation stable, important discussions about strategic growth projects are occurring at the Board level, and our management team is eager to explore what we can achieve in the upcoming years. Operator, that concludes our prepared remarks. Please begin the Q&A.

Our first question comes from Alex Rygiel from B. Riley Securities.

Duncan and Jeff, this is Min on for Alex this morning. I have a couple of quick questions. I was wondering if you could tell us about any updates since our November call. You mentioned several positive trends, including improvements in retail and a positive backlog from your October show. Has there been any shift, either in a more positive direction or perhaps negatively, since then?

It's been inconsistent. We were very excited after the show and managed to secure numerous orders, leading to a solid production period. However, in the fourth quarter, various challenges arose that ultimately delayed shipments. Therefore, we've decided to maintain production at current levels while we continue to build up a backlog. After this call, we're heading to Biloxi, where we have appealing show specials, and we're actively pushing sales. The most significant change we're noticing is the effect of rising interest rates on our parts business now. We had a substantial inventory of parts, but the development process is slower than we'd prefer, although it remains stable. We've received some sizable orders and are working on more, but like other manufacturers, we're experiencing similar impacts in the parts sector.

Can you provide an update on Del Val? I understand that a new team has been brought in to focus on land development, with plans to complete the roads and water treatment plants. This might be contributing to the slower development pace. Do you have a clearer idea of the timing for home deliveries in Del Val or Horseshoe Bay at this time?

We have made some progress in Horseshoe Bay, where we own about 300 individual lots that we are developing into homes for sale. We expect to open a sales center there in about 1.5 months, which should help accelerate the home sales. We have already sold a few homes this quarter in Horseshoe Bay, so we are moving forward. In terms of land development, we are also focusing on Del Val. Our recent capital expenditures reflect significant investments made towards the end of the year. We have established water and sewer lines, and power is in place; the team is currently working on drainage and roads and starting the water treatment plant. I don’t think we will have homes ready in 2024, but I anticipate we will see some progress early in 2025. We are making a concerted effort now, and expenditures are increasing as we have the right team working with Curt on this project to get it back on track.

Okay. And then just a final question on your new focus on potentially expanding your Heritage or your in-home sales, I guess. Can you talk a little bit about how much capital is required to open up a new location? What your return horizon timeline looks like, and just what locations you're looking to expand in?

I want you guys to keep an eye on it. I won't say it's perfect, but when Legacy went public, they used the IPO proceeds to build a retail presence. We've had some challenges managing our retail stores, but I finally feel like we're heading in the right direction, which is the first step to ultimately growing that piece of our business. There are a lot of benefits that we pick up by adding company-owned retail stores because you capture the retail margin and you accelerate the financing opportunities to our consumer loan portfolio. The first lot will be in Horseshoe Bay, mainly to serve that development as we put houses on those lots. However, there are several other areas that we're looking at. From a capital contribution standpoint, we're not talking about huge dollars. About half of our lots right now are leased and the others are owned, so we don't have to necessarily go out and buy a piece of land every time we open up a lot. It just seems like an area, as we've gotten better at managing Heritage, and there's certainly some improvement to be made. But I think as we get that business really humming, then it opens up the opportunity to add more stores. If you look at our larger competitors, they're currently selling up to 50% of their production through their stores. So we've got a lot of white space ahead if we can get this right.

Our next question comes from the line of Mark Smith from Lake Street.

First question for me. Duncan, let's stay on the retail stores. Did you guys run any more promotions? Did we see ASP? Where did that kind of move within the retail store segment as the sales there look pretty solid?

Let's discuss all dealer sales, not just the Legacy sales. The dealer aspect of the business is showing improvement. We've been quite impressed; I have my secret sales resource, Kenny, out actively pursuing new dealers. We've brought on a significant number of independent dealers, which is beneficial for us because when the park side cycles, having dealers is crucial, and we appreciate the financing options available through Federal Investors consumer financing. We are noticing positive growth on the dealer side, although it varies. Some regions are outperforming others. Additionally, we are observing a divide between the dealers who have adopted technology and are utilizing social media to attract online customers versus those who haven't. There is potential to assist them in improving as well. We haven't reduced prices universally; instead, we've scaled back production to align with demand, and they are building their backlog, but the dealer side of the business remains relatively strong.

If we keep the sales mix consistent with what it was in Q4, could you discuss the margin outlook? How much of the margin decline in Q4 was actually due to the sales mix compared to other factors?

Yes, we were impacted. I mentioned we had significant orders on the park side, where we shipped smaller HUD code units instead of tiny homes to some customers converting RV parks. This has affected us. However, overall, there has been a continuous shift towards smaller homes on both the dealer and park sides. In the past, we sold many large 16-wide homes, but now people are moving towards 14-wide and 12-wide homes. This change has influenced our performance, but I don't expect that everyone will exclusively purchase smaller homes in the next year or so. It's just a trend we've observed recently.

Okay. And then as we look at the loan business, within consumer loans, are you guys using the rate to drive an increase in that business? It looks like rates maybe come down throughout the year and into Q4. Any commentary on what you guys are charging and how that's impacting the business?

If you look at that loan portfolio in its entirety, we went through a period where rates were stable, then interest rates were super low, and now interest rates are high. Our older loans have higher interest rates than a loan from the last 3 years, but we are pushing our rates higher now. With federal investors, we have very strict underwriting requirements and we have kept our rates low because we're not borrowing to land. However, in certain unique situations where we're financing a specific type of borrower or borrowers with somewhat lower credit quality, we are indeed pushing rates higher. I think we'll get back to a point where the rates on our chattel loans are closer to what they were 4 or 5 years ago than over the last few years.

Okay. And the last one for me, Jeff. Sorry, I think I missed it. Did you talk about where the balance sheet where the debt is today?

Today, we're under $11 million on our line of credit. So it's come down considerably since the end of December.

Okay. And maybe one more follow-up on that. Just as we think about the use of capital going forward, you guys spent a little bit more here recently on some investments. How should we look at CapEx and use of capital going forward here in 2024?

I think on Bastrop County, Q4 is a pretty good indicator of what the next few quarters will look like from a CapEx standpoint for that specific project. I think CapEx at the plant is fairly stable. We've worked through several projects where we've invested in the plants with things like new routes and updated walkways and other things to keep our workers safe. But no meaningful uptick in the plant CapEx. Going back to your question on the credit line, essentially, at year-end, we had some larger checks that we had to write for Bastrop for road work and for the water treatment plant. Credit is tight, and there are a lot of people in our industry who need to borrow money for certain projects. These are secured loans at relatively high interest rates with personal guarantees for assets that we wouldn't mind owning if there's an issue with the credit. We put a lot of money to work at the end of the year and continue to see those opportunities to generate great returns with a secured loan, ultimately helping some customers out with projects where we'll get some orders once they get through the development.

Our next question comes from the line of Jay McCanless from Wedbush.

So if we could start with the decline in product sales for the fourth quarter, maybe could you break out what that decline was for the retail dealers versus your park customers?

I don't have the exact numbers right now, but I can provide those later. Generally speaking, on the dealer side, we came off our show and started shipping many homes, but then we entered a seasonally slower period where dealers requested us to pause shipments. On the park side, the situation has been inconsistent; some projects allow us to deliver a few months' worth of homes, while in many instances, significant delays occur due to utilities, permits, or other issues that arise during these developments or retrofits. We experienced a combination of delays on the park side and seasonal slowdowns on the dealer side. Additionally, we have partnerships with other manufacturers up north that produce our floor plans, which still represent a good opportunity for us. However, due to the weather in that area, we were unable to ship anything. Despite our efforts throughout the year, we faced several shipment delays, which is reflected in our fourth-quarter results.

Got it. Could you give us any color on how product sales are trending thus far in the first quarter?

Yes, they're looking pretty good. I've had some delays shipping houses out of Georgia; it seems to be one thing after another there, but we're pretty close to getting back on track. At the beginning of the quarter, we had homes caught up that we're clearing out now as quickly as we can. In Texas, it's been pretty consistent. We thought that when we spoke last quarter that we looked really good and were planning on increasing production. Now, we decided to keep production where it is and keep building the backlog while continuing to run specials and focus on sales. We've got a lot of new sales reps who are getting up to speed and making sales and commissions. It's fun to watch. For Q1, I think it looks better than Q4 but maybe not as good as some of the prior quarters in early 2023.

And then just thinking about gross margin, 31% and change for fiscal '23, maybe what's your outlook for fiscal '24? Are there any issues we need to be thinking about from a cost side, whether it's rising OSB prices or some other things going on? Maybe walk us through how you're thinking about gross margin for the full year.

Yes. If you go back and look 5 years backwards, our gross margins are typically in the higher 20s versus low 30s. So the margins are pretty strong right now. I don't anticipate a major change between, say, this quarter and next quarter. But I think over the long term, they will revert closer to the high 20s and stay at these levels as material prices start to increase.

And you said on pricing that you guys have been holding pricing, especially on the dealer side. Has that continued into the first quarter? And do you think based on now that Georgia is starting to ship again, you'll be able to hold prices there too?

Yes. Price and volume are related, obviously. Throughout this entire slower period, and I think 2023 is a great example, we could have given homes away and really increased throughput through the plants. However, as mentioned on the call, our Board wants us to be extremely focused on the bottom line. For other manufacturers that are cutting prices, I don't think material costs are going down, and I know labor costs aren't going down. We will right-size our SG&A and our overhead for a slower period and continue to hold prices as the market recovers, even to the detriment of volume.

I was going to ask about SG&A next. It seems like you're planning to increase staffing as you expand various parts of the business. From a total dollar perspective, should we anticipate that to increase by a certain percentage in 2024 as you bring on more personnel?

I think it will be a little bit higher. We've had a lot of turnover at the senior level, which in many cases is a good thing for the business long term. What the Board has said is, look, we want you, in addition to hiring young people, to also add some bench strength in key areas of the business because these areas are significantly larger than when we went public, and you need more senior people. As we find the right people, we'll hire them and pay them well. I think the contribution will be great. We've already made some great new hires at the senior level and they're contributing. I do see SG&A maybe going up slightly, but much of it is just offsetting other senior people that have retired or moved on from the business.

That's good color. And then I appreciate all the commentary on Del Val, but maybe could you talk about some of the other landholdings that Legacy has and what your thinking is on those parcels now?

Yes. I think I mentioned, or I talked a bit about it last call. What we are going through is prioritizing where we want to allocate capital on these developments. In many cases, we've sat on some of these things long enough that if we don't think a project is viable for a community for us to do internally, there may be a better owner for that. I think there's a bucket of properties that we could look to ultimately divest, and we've held them long enough where you can make 2, 3, 4 times your money on the raw land. There’s a second group of properties where, over this time period, the dynamics have changed. Now, you've got city sewer coming to these projects in the next year or so, and we're looking at their feasibility as MH communities, whether it's with us or someone else finalizing the development. We’re just carefully assessing our capital allocations while keeping shareholders’ interests in mind.

That's great. And then the administration announced some changes to the Title 1 program for changes they made for the first time in a long time. Are those changes any beneficial to Legacy? Would it increase Title 1 financing or be something of a challenge for your consumer loan book? Maybe any benefit or help you saw in those recent announcements?

I don't think it's going to have a huge impact on our business. I don't think the changes cannibalize the volume of our consumer loan business. I believe all of these changes were on the FHA financing side; it's a little bit different than what we do here. However, it's a longer and more administratively intense process. So right now, I don't see a big impact. But if something changes, we can talk offline.

Got it. And then the last question I had, we've heard from some of your stick-built competitors that mortgage qualification has been getting more difficult, not just because of higher rates, but now you're seeing credit card debt starting to rise, other types of debt moving up, and that's causing more disqualifications for certain site builders. Are you seeing any of that in your consumer loan book right now? How do you feel the quality of the loan book has been trending through the quarter so far?

Our loan book continues to perform really well. We made a senior hire who has run a financing business in our industry, and he has been working with the team and doing analysis, stating, 'Man, you guys have a good formula here for underwriting, and you're outperforming the competitors.' The key thing with our consumer financing portfolio is that we have a specific customer base that we finance. We don't move on things like down payments and extras like financing storage sheds and septic tanks or other add-ons that you ultimately can't recover. We want to provide a reasonable rate in a high-quality product for a borrower, and they've got to have skin in the game. Because we haven't bent those rules while we've seen a lot of others bend them, we haven't seen large negative changes in the performance of our consumer loan portfolios.

At this time, I would now like to turn the conference back over to Duncan Bates for closing remarks.

Our team is heading to the Biloxi Mobile Home show today through Wednesday. Kenny and I will leave directly after this call. If there are any industry folks on the call who will be attending the show, we would love to see you and spend time with you, showcasing some of the houses we have set up there and discussing the specials we are currently running. Thank you for joining today's earnings call. We appreciate your interest in Legacy Housing. This concludes our call.

This concludes today's conference call. Thank you for participating. You may now disconnect.