LEGH - NASDAQ

Ladies and gentlemen, thank you for standing by. Welcome to Legacy House Corporation Second Quarter 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to Duncan Bates, President and Chief Executive Officer. Please go ahead, sir.

Good morning. This is Duncan Bates, Legacy's President and CEO. Thank you for joining our second quarter 2025 conference call. Max Africk, Legacy's General Counsel, will read the safe harbor disclosure before getting started. Max? .

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

Thanks, Duncan. Product sales primarily consist of direct sales, commercial sales, inventory finance sales and retail store sales. Product sales increased $6.7 million or 21.3% during the 3 months ended June 30, 2025 as compared to the same period in 2024. This increase was driven by an increase in unit volumes shipped primarily in inventory finance sales, retail sales and mobile home park sales categories. For the 3 months ended June 30, 2025, our net revenue per product sold increased by 10.5% as compared to the same period in 2024. The increase is primarily due to an increase in units sold to consumers, which are sold at higher retail prices. Consumer MHP and dealer loans interest income increased $1.0 million or 10.6% during the 3 months ended June 30, 2025, as compared to the same period in 2024. Between June 30, 2025 and June 30, 2024, our consumer loan portfolio increased by $24.6 million. Our MHP loan portfolio increased by $20.3 million and our dealer finance notes decreased by $0.5 million. Other revenue primarily consists of contract deposit forfeitures, consignment fees, commercial lease rents, land sales, service fees and other miscellaneous income and decreased $0.1 million or 10.8% during the 3 months ended June 30, 2025, as compared to the same period in 2024. This decrease was primarily due to a $0.2 million decrease in forfeited deposits, partially offset by a net $0.1 million increase in other miscellaneous revenue. The cost of product sales increased $4.4 million or 20.3% during the 3 months ended June 30, 2025, as compared to the same period in 2024. The increase in cost is primarily related to the increase in units sold. Gross profit margin was 32.4% of product sales during the 3 months ended June 30, 2025 as compared to 31.9% during the 3 months ended June 30, 2024. The cost of other sales was $0.6 million during the 3 months ended June 30, 2025. Selling, general and administrative expenses increased $1.1 million or 19.1% during the 3 months ended June 30, 2025, as compared to the same period in 2024. We had a $1.1 million increase in warranty expense primarily due to an over accrual and warranty costs in the second quarter of 2024 that we reversed. And we also had a $0.5 million increase in repossessed home expense a $0.2 million increase in bad debt expense, a $0.1 million increase in loan loss provision, offset by a $0.6 million decrease in legal expense, a $0.1 million decrease in property tax expense and a net $0.1 million decrease in other miscellaneous expense. Other income decreased $2.8 million or 74.5% during the 3 months ended June 30, 2024, as compared to the same period in 2024. And we had a, one, decrease of $0.5 million in nonoperating interest income, reflecting a lower balance of other notes receivable; two, a $2.5 million decrease in miscellaneous income, primarily due to land sales and a reversal of accrued liabilities during the 3 months ended June 30, 2024, that did not occur during the 3 months ended June 30, 2025, and three, a decrease of $0.2 million in interest expense. Net income decreased 9.2% to $14.7 million in the second quarter of 2025 compared to the second quarter of 2024. The Basic earnings per share decreased 9.0% to $0.61 per share in the second quarter of 2025 compared to the second quarter of 2024. As of June 30, 2025, we had approximately $2.6 million in cash compared to $1.1 million as of December 31, 2024. We drew a small amount on the revolver in the second quarter. The outstanding balance of the revolver was $0.1 million as of June 30, 2025, and was 0 as of December 31, 2024. At the end of the second quarter of 2025, Legacy's book value per basic share outstanding was $21.32, an increase of 11.2% from the same period in 2024. Finally, we repurchased 260,635 shares of common stock for $5.8 million during the 3 months ended June 30, 2025. As of June 30, 2025, we had a remaining authorization of approximately $8.1 million on our share repurchase program.

Thanks, Jeff. I'm pleased with our second quarter results. Our focus has remained on product sales. While there's still uncertainty in the market and weakness in certain geographies and channels, we are seeing positive signs from the changes we've made. Earlier this year, we took a hard look at historical sales data and simplified our product line. That process had its challenges but some of the adjustments are paying off. As Jeff mentioned, product sales increased 21.3% during the second quarter compared to the same period in 2024, that growth was primarily driven by dealer activity. Product sales were up 58% sequentially over the first quarter of 2025. Inventory finance sales or floor plan sales to independent dealers increased $4.9 million or 53.3% compared to the second quarter of 2024. Retail sales or sales from our company-owned retail stores rose $2.9 million or 64.2% over the same period. These gains reflect stronger demand across our dealer channel and our continued traction from our product line simplification efforts. Commercial sales or sales to community owners increased 5.3% during the 3 months ended June 30 compared to the same period in 2024. Our community customers continue to face headwinds, including elevated interest rates, higher operating costs and budget constraints among renters. Despite these challenges, we're encouraged by ongoing discussions with both new and existing community owners regarding large orders, which should support volume growth in this channel. Product gross margins were 32.4% in the second quarter of 2025. I'm proud of our team's strong execution and maintaining healthy margins during a rapidly evolving environment for materials and labor costs. We remain disciplined in our pricing strategy and continue to manage expenses carefully to protect profitability. Our top priority for the remainder of 2025 is continuing to build our backlog, which should support increased production volume in the coming quarters. We expect higher output out of our Texas plants where demand remains stronger while activity in the Southeast is comparatively slower. We continue to actively manage our loan portfolios. Since the second quarter of 2024, our retail loan portfolio has grown by $24.6 million. While our MHP loan portfolio has grown by $20.3 million. Reflecting strong demand in our dealer channel, retail loan fundings were up 49% in the first half of 2025 compared to the same period in 2024. There were no material land sales during the second quarter of 2025, but we will continue to evaluate opportunities to monetize noncore land when pricing reflects underlying value. In the second quarter of 2024, we completed a noncore land sale that generated a meaningful profit, creating a challenging year-over-year comparison for this quarter's earnings. We are focused on completing Phase 1 at Falcon Ranch, our 1,100 lot development in Bastrop County. Phase 1 includes 115 lots, with roads and utilities already complete. The final remaining project, a bridge is currently under construction. At the same time, we're making progress on Phase 2 where utilities are now in place and road work is underway for the first 350 lots. Over the last 18 months, we repurchased over 552,000 shares of common stock in the open market for an aggregate cost of $11.9 million, reducing our outstanding share count by over 2%. These repurchases reflect our continued confidence in the long-term value of the business and our disciplined approach to capital allocation. With no debt and over $10 million in cash on the balance sheet today, we remain well positioned to continue repurchasing shares. We are keeping our eyes on the road to Housing Act, which passed the Senate Banking Committee and is awaiting a full Senate vote. The bill reauthorizes HUD's price program, which provides grants to improve infrastructure like water and sewer systems and manufactured housing communities. It also removes the federal requirement for a permanent chassis, lowering build costs and allowing for more flexible home designs. If past the bill should support growth in both home sales and community development. Operator, this concludes our prepared remarks. Please begin the Q&A.

[Operator Instructions] The first question comes from Rohit Seth with B. Riley Securities.

So good order flow coming in through the second quarter, a good rebound in volumes. Just curious what you're seeing as we enter July, August, have you seen the same momentum continue? And is it coming from the same channels? Just to get a sense of how you see the rest of the year.

Yes, Rohit. We're really -- we're happy with the second quarter performance. Obviously, the dealer side of our business really drove the revenue growth. Continue to see that this quarter. And we're seeing signs of life on the community side. I think the difficult thing has been the prices for mobile home parks have gone up pretty dramatically. You've got increased financing costs, you got -- homes are more expensive, operating costs are higher, and you've got a renter that can only afford so much. And so I think there is a shift to smaller houses, and we're having some success in that. But we really -- we need to land a couple of these large orders to really see an uptick in that side of our business for the rest of the year.

Okay. And then on the backdrop, it looks like you got -- making some progress there. Do you think you'll be selling plots there by the fourth quarter? Is this something happening in '25? Or is this more in 2026? .

That's the goal. I mean the final piece of this thing is we've got to build a bridge. And the bridge is under construction, and it's well underway. But ultimately, roads and utilities are all in Phase I. You got to complete the bridge to connect it to the infrastructure outside of the community. And it's not -- I wouldn't say we're like crossing any waterway, but it's certainly a project. So the goal is to get that done. There's a way to shortcut kind of starting to sell lots. That's something we're looking at where we can go ahead and flat before the bridge is done. But we're just well underway on construction there. So the goal is certainly to sell lots as soon as possible. There's a lot of demand down there. We've got a dealer on site who's been doing really well with sales this year. And what's been interesting for me to watch is like we're really gaining ground on Phase 2 where you've got all the utilities in and we're putting the roads down for the first 350 rental lot. So good progress. We've made a couple of key hires down there. We've got the cash to push this thing forward and we're working as hard as we can to get it open.

Fantastic. If I could squeeze one last one in on the SG&A line. it's running up a little bit higher than as a percentage of sales. Is this like the new normal? Or at least for the year? And just any sense of kind of the trajectory on SG&A.

No. I think SG&A will kind of dip back in line to where it's been. We had some kind of wonky comparison with year-over-year accruals for things like warranty expense and legal expense and others that shifted that upward.

And the next question will come from Alex Rygiel with Texas Capital Securities.

As it relates to being encouraged by discussions with community owners for large orders, what are the primary items that are either sparking these interests or maybe keeping them on hold until an order?

Well, we've got a handful of, I would call them, like large customers that we've worked with for a long period of time. And these guys tend to buy communities that are in disrepair, and they fix them up and they replace all the homes and then they move to the next one. And so especially through like COVID, we had some huge orders as these guys really expanded. And then they took a breather. And so what we're seeing is we've got some large customers that have either purchased or have communities under contract where they'll need a decent amount of homes. And I think on the other side, on the new customers, I mean, we've been, for the past couple of years, we've been growing with some younger guys as we replace the kind of the legacy customer base. And those guys may start by ordering 6 homes and the next year, they order 20 homes. And you just keep -- you keep growing with them as their portfolio builds. I think one change is that it seems like the financing markets have opened up a little bit right? So we're seeing some payoffs on the MHP portfolio as now we've got customers who have parts, newer houses in them and they're stabilized and they're monetizing those and rolling those gains into new properties to do the same thing.

Makes sense. And then can you talk a bit about average selling price. Are you surprised that it's holding up here? And any thoughts that are around that?

Yes. I mean the average selling price for the quarter, we went like on a quarter-over-quarter basis from, say, 61,000 to 68,000. I think the bulk of that was just driven by the increase in sales through our company-owned retail stores. But we I think we were slower to raise prices during COVID. We've raised prices more aggressively with -- as we've figured out kind of the impact of tariffs on our costs. And so I do expect it to stay elevated. But certainly, there's a point where it's at the detriment of -- or to the detriment of volume through the plants.

And then you talked a bit about Georgia being a little bit slower maybe in the second half. Any additional color on that?

Yes, the Southeast market just feels low. I think Cavco commented on that during their call, Florida is slower. We're seeing similar things in the Southeast. I mean we've got customers that are doing things. We've won some new customers over there. We've had some workforce housing builds over there. Dealer base isn't as strong out of that plant. So you're more reliant on or we're more reliant on community customers. And -- but it just seems a little bit slower than what we're seeing in Texas. .

And the next question is going to come from Daniel Moore with CJS Securities.

So obviously, you had a really nice jump in product sales in the quarter, volumes up double digits, year-to-date were relatively flat. I just want to make sure and just kind of remind me, were there any sales that may have slipped from Q1 to Q2? Or is it more demand actually improving as we work through the year?

I think we had some orders on the community side that slipped. I mean first quarter wasn't our strongest performance from a product sales standpoint. But you see the community sales at least quarter-over-quarter, are were relatively flat. They were up 5% or so. So there were some -- like there were certainly some orders that slipped, but they were mainly on the community side. I think what we saw on the dealer side was actually some -- a little bit better strength. But the market is still choppy. I mean it's still like Parkside slower than we'd like it to be, certain geographies even within areas that we serve out of our Georgia plant or out of our Texas plants seem to be slower than others. So we're cautiously optimistic on the year, but we continue to be here every day of working and trying to get houses built and shipped.

Got it. And then specifically for retail, obviously, retail stores had their highest quarter over $7 million in sales. Highest quarter that we've seen in multiple years. Is that a function -- I guess, just talk to the sustainability of that? And any update you can provide on how the investments you've been making in retail sales force are progressing.

Yes. I mean the key to retail systems, processes and people. And you need to get people selling houses and making commissions to retain them. And I think that's something that we've struggled with for a while. We've got a pretty good team on the retail side. They had a great quarter. We've got certain stores that are performing better than others. And the focus right now is on bringing the underperforming stores up to some type of baseline and continuing to perform at the stores that are doing better. So it was a good quarter for the retail team. I think it's a representative of what we can do, and we just got to -- we got to keep pushing forward on that. July was a little bit slower, but not terrible either. So I think some of these changes are helping, but we still have a ways to go. I mean, I really view that as an opportunity for us. And you see what it does. If we can push more volume to that channel, it does help us on the revenue side, and it's reflected in the average selling price.

Helpful. One or two more. Just a little bit -- so on the gross margin side, overall, saw a little bit of pressure year-over-year but then you called out, I think, product sales gross margin improved. So just -- I guess if I look at holistically, we were at 47% for the company. Is that a -- would we expect that to be kind of a new level or improve as we move forward? Just talk about the puts and takes there.

Yes. See, when I talk about gross margin, I'm really just looking at the product gross margin. So product revenue and the cost of goods sold. And so in Q2 of '24, I've got 31.9%, which were jumped up to be 2.4% for the second quarter of 2025. I think if you look at it as a whole, we had a bump in SG&A due to some expenses, but also due to kind of some mismatches of accruals from the second quarter of 2024, that if you look at gross margin in total, it's lower for the second quarter, but I'm discussing just product gross margin. .

Makes sense. Lastly, I think you touched on this, but you bought back $6 million of stock in the quarter, I think, $11 million year- to-date that the stock is sitting here, not too far above book value. Is that likely continued use of capital and cash flow as we move forward?

Yes. I mean we've got to weigh it against other opportunities. And we're seeing a lot right now, especially on the lending side to put money to work at good rates of return. The business is over the last 20 years generated a 15% -- or 10% to 15% after-tax returns pretty consistently. . And so we're like -- we obviously -- we're watching the stock, but we're going to be opportunistic buyers. We're not just going to buy stock just to buy it if we've got opportunities to deploy the capital elsewhere.

The next question comes from Mark Smith with Lake Street.

Duncan, wanted to ask first, just -- you're just talking about product margin a little bit. I would love to hear kind of your outlook as we think about tariffs and some inflationary pressure. If you're seeing any items that are moving higher, kind of your outlook here as we think about second half or even into next year?

Yes. As you can imagine, there's a lot of moving parts. I think from the tariffs and the impact on international goods, we have adjusted our pricing accordingly. But you've got moving like moving commodity prices in other materials. I mean you've seen kind of lumber futures have crept up. OSB has been low. Steel has been relatively flat. And -- but what's -- what I don't think is going lower labor costs. And so that's something that we're keeping an eye on. I think there's a balance between price and volume. And that's like you got to keep the plants running, you got to keep -- you can't be under-absorbed on labor. But certainly, the input prices on most of these products that we buy to assemble houses are going up.

Yes. And back to pricing a little bit in the ASP. It sounds like it was largely a function of the sales mix. But can you quantify or talk to maybe over the last 6 months, any kind of pricing action that you guys have taken?

Yes. I mean we've had a couple of price increases this year. We started in February. We had one that I'd say, it's more material kind of mid- to late June. And it's something that we're -- like we're keeping an eye on, but it's also a difficult time right now. I mean there just seems to be a lot of moving pieces with commodity prices. I think with a little bit higher prices, it does give you some flexibility to run like to put the advertising machine to work and do some sales and other types of incentives especially as we head into our fall show coming up in September.

Okay. And the last one for me. Just curious your thoughts around kind of consumer behavior. And if you're seeing a difference out there between kind of the renter in how they're hold out versus kind of a homeowner, homebuyer any differences there? And if there's some pressure on renters if that's maybe hurting the MHP market a bit.

I think the renters I think the renters are fairly maybe not tapped out, but they shouldn't be price sensitive. And if your mobile home park model has shown that you're going to continue to raise rents and costs of everything else have gone up, all your operating costs, homes are more expensive. Financing is more expensive. I think it does put pressure on the community operators where the spread isn't as great as it was a few years ago, which is shifting a lot of these guys to smaller houses that they can run at similar prices and keep the monthly payments affordable. . I think the second quarter, obviously, dealer business performed a little bit better, but I wouldn't say that demand is off the charts on the dealer business right now. I mean I think it's spotty. Customers are price conscious. And -- but compared to a stick-built home, I mean you're so much more affordable. And that -- although the next few quarters could be choppy, I really don't think that the affordable housing crisis is fixed in this industry -- fixed in this country without this industry. And so the -- some of the work at the legislative level is pretty encouraging, where there's been a lot of talks for years about regulatory reform to the HUD code and you're starting to actually see some traction given how bad the affordability problem is in this country. And so I don't think -- like there's -- we're cautiously optimistic. But I think longer term, our outlook is pretty strong.

I show no more further questions in the queue. I would now like to turn the call back over to Duncan for closing remarks.

Thank you for joining today's earnings call. We appreciate your interest in legacy housing. We're hosting our fall show in Fort Worth on September 27 and 28. Feel free to register on our website. Operator, this concludes our call. Thank you. .