Ladies and gentlemen, thank you for standing by, and welcome to the Legacy Housing Corporation Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Curt Hodgson, Executive Chairman of the Board. Please go ahead, sir. .

Good morning, and thank you for joining the call today. Before we begin, may I remind the 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 may 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. .

Now let me turn to a discussion of our second quarter performance and provide additional corporate updates. I will then turn the call over to our Chief Accounting Officer, Jeff Burt, to discuss the financials in more detail.

Overall, we had a very good second quarter, especially within the context of the continuing COVID-19 impact to the broader economy. Net revenue increased to $46 million in the second quarter of this year compared to $45.8 million in the second quarter of last year.

Income from operations and net income were substantially unchanged in comparison to the same quarter last year. Income from operations for the second quarter this year was $11.2 million compared to $11.5 million last year.

Net income of $8.6 million for the second quarter of this year was approximately the same net income posted for the second quarter last year. Earnings per share were up slightly for the quarter at $0.36 per share versus $0.35 per share for the same quarter last year, predominantly because I think we had a reduction in total outstanding shares. .

Looking at the 6 months year-to-date results, net income was up $1.8 million for the 6 months or 11% compared to the same 6-month period last year, and earnings per share increased to $0.73 for the 6 months compared to $0.65 per share last year.

During both the first quarter and the second quarter of 2020, the company implemented a number of immediate measures to navigate COVID-19 environment. This included reducing payroll cost in both the office and manufacturing operations, slowing production a bit, reducing inventories and lowering other components of SG&A overhead.

For example, compared to the first quarter of 2020, we reduced inventories by $4 million or 9% from $43 million to $39 million. We reduced SG&A by $1.5 million year-over-year from $5.6 million to $4.1 million or a 26% reduction in SG&A expenses.

In this environment, the company is focused on gaining flexibility in our manufacturing operations, reducing costs and reducing excess inventories. This is also includes the ability to strategically subcontract production when needed. .

As always, the company remains committed to expanding the top line, and we were able to do that during the second quarter of 2020. The company continued to see growth in sales to manufactured home parks. During the second quarter of 2020, park sales increased $3.5 million or almost 20% compared to the same period last year.

The majority of these sales are financed. So they include interest revenue over the longer term. For the first time, commercial loans to manufactured home parks exceeded our retail consumer loan portfolio, increasing to over $120 million of financing products out to mobile home parks.

More recently, we have offered manufactured home park operators the ability to lease our homes as well, adding yet another revenue stream derived from these same customers. .

In conclusion, the second quarter has been challenging for everyone. I am pleased that we have quickly adapted to the reality of the ongoing situation. Still, we've been able to deliver exceptional value to our shareholders and customers.

Over the last 6 months, we've increased the tangible book value of our company by approximately 8% for our shareholders despite the headwinds of the current economy. I'll now turn the call over to our Chief Accounting Officer, Jeff Burt, for some additional commentary on the results of operations.

Jeff?.

Thank you, Curt. Total product sales were $39.2 million for the second quarter compared to $39.8 million for the same period in 2019.

As Curt indicated in his comments, sales to manufactured home parks constitutes a larger part of our product sales during the second quarter, increasing to 53.8% of total product sales versus 44.3% of total product sales for the same period last year. Also, interest revenue has continued to grow as a component of our overall net revenue.

Total interest revenue of $6.1 million represents 13.3% of net revenue for 2Q 2020 compared to $5.1 million or 11.1% of net revenue for 2Q 2019. In particular, interest from our manufactured home parks notes increased 58.8% from $1.4 million in 2Q 2019 to over $2.2 million in 2Q 2020.

Overall, interest revenue was up 18.7% over the comparable second quarter period. During the same period, interest revenue from the consumer loan portfolio increased 3.3% to $3.8 million in 2Q 2020 from $3.7 million in 2Q 2019.

Similarly, the manufactured home park loan portfolio increased by $16.8 million or 16.3% to $120.1 million for the second quarter in 2020 compared to $103.3 million for first quarter 2020.

The consumer loan portfolio increased by 1.5% to $107.2 million, inclusive of the allowance for loan loss and other discounts compared to $105.6 million for the first quarter of 2020.

When you compare the growth in the manufactured home park loan portfolio for 2Q 2020 with 2Q 2019, the portfolio increased by 66.8% to $120.1 million in the second quarter 2020 from $72 million in the second quarter of 2019. .

Cost of product sales were up for the second quarter of 2020 compared to the second quarter of 2019, increasing by $2.7 million or 9.6% to $30.6 million from $27.9 million. Some of this increase was attributable to a reclassification of certain costs from retail operations from SG&A overhead to the cost of sales.

When this reclassification is taken into account, the increase is 7.2% for the comparable quarters. When you compare product cost of sales as a percentage of product sales for all of 2019 to the 6 months ended June 2020, we have experienced an increase from 73.3% of product sales to 74.5% of product sales. .

During the first half of 2020, the company had to temporarily reconfigure some of the supply chain away from overseas suppliers to alternative domestic suppliers.

Overall, the 2020 year-to-date profit margin of 25.6% is in line with the 2019 product (sic) [profit] margin of 26.7%, but we have experienced some margin erosion during the first half of 2020. .

As Curt previously mentioned, the company has seen significant reductions across the board in SG&A. Selling, general and administrative expense in the second quarter of 2020 was $4.1 million, a 33.9% decrease from the $6.1 million in the second quarter of 2019.

This was primarily due to reductions in payroll costs, advertising and dealer show expenses, warranty and service costs as well as professional and accounting fees. Also, operational measures were implemented at the start of the COVID-19, resulting in an additional $1.5 million SG&A reduction between the first and the second quarter of 2020.

This SG&A reduction will continue to carry throughout the major -- through the remainder of 2020. And of course, we will continue to assess the environment to evaluate if any additional action needs to be implemented. .

Finally, net income has increased for the 6 months ended June 2020 compared to the same period last year, increasing to $17.6 million versus $15.8 million last year, an 11.4% increase in net income, while net revenue for the first 6 months has expanded 0.7% from $84.3 million to -- from $83.7 million.

These highlight the cost leveraging going on within the company as the year-to-date overall net profit margin has grown to 20.9% versus 18.9% for the comparable period last year. Curt, that completes our financial report. .

Did we lose Curt?.

Oh, I'm sorry, I had my phone on mute. Thanks, Jeff. These are certainly interesting and unprecedented times. We think we've weathered this COVID-19 storm very well. And to shed some light on the future, I thought I would just tell you that our backlog is as healthy as ever.

We're having our September and October shows, which we decided not to call off and the pre-registrations are at an all-time high for those shows. So there is extremely good demand for what we do. And I think we'll get through the third quarter and the fourth quarter without a reduction of production.

And if we can find the labor, we'll actually be able to increase production in our top line for the third quarter and the fourth quarter, it should be as good as last year or better. So there are some predictions about the future.

Those are more optimistic comments than I had in the call 3 months ago, but 3 months ago, we were in different times than we are today. So thank you for your interest in being on the call today. We'll take any questions you have now. .

[Operator Instructions] Our first question comes from David Burdick with Oak Ridge. .

Great job in the quarter. So first, I just wanted to touch on the labor comment at the end there. I know with COVID and the extra unemployment money given, some of your competitors are seeing some labor constraints.

Just curious how the availability of labor has been for you guys and then kind of going off that, is production back to around 15 floors a day? Or where does that stand?.

how many people do we have, how many manhours are we spending to do what we do and what is our total cost per square foot or per unit on labor. We are saddled with a very shallow pond of applicants. As you probably know, we don't really have 30 million unemployed Americans. For the most part, they've been paid quite handsomely to be unemployed.

We're now getting to this next era. Is there new unemployment benefits? Or isn't there? And exactly how does that work? I think that the unemployment benefits being paid to those 30 million is likely to go down and maybe even go away over the next 2 or 3 months, releasing them to the labor market.

So I'm hopeful that we indeed will have a much deeper pond of labor by the end of the third quarter than we had, say, at the beginning of the third quarter. We don't have any more people asking for a job in our lobby today than we did when unemployment was only at 2%. So that kind of puts it in perspective.

We've had to -- we're moving to overtime in one of our factories, trying to use our existing labor to increase capacity in that facility, where we expect that we're probably at around 14 a day across all 3 plants. Today, maybe a tad under that, maybe 13.7. And by the end of the quarter, we hope to be back at 15 across those 3 plants.

We have the labor concerns. Of course, you can always just throw more money at it and keep outbidding your competition. But that -- we don't think that's a good long-term program. Our other concern, which is coming up recently is the price of lumber, which has doubled and even tripled in some cases since the bottom of the market in March.

Can we pass on those increased lumber cost to our customers? Of course, we're all trying to do that. We don't know yet why we try to do that, whether those orders in the backlog will be canceled or not. One of our competitors had a $4,000 increase per floor.

That's humongous, and we're trying to take it in a more measured approach, smaller, smaller steps, but more regular steps.

We've had 2 steps in the last 60 days, which amounts to $1,000 per floor, but I anticipate that unless this lumber graph starts to peak and come back down, we're going to be having more and more lumber -- more and more material surcharges due to lumber prices.

And that may have a negative effect on our backlog because we generally pass them immediately. We don't give them an option. They either want the product or they not -- they don't -- they have the right to cancel their order. But we don't say that the order you placed in May when lumber was 400 is valued today in August when lumber is 800.

We basically reserve the right to increase prices if our material prices increases. I don't know if that answers your call -- your question, David. Right now, we're still selling at a pace greater than we're producing.

It feels pretty good, and we haven't even had our fall show yet, which we usually get 2 or 3 months of production just from the fall show. .

No, that's great. That's helpful. I guess next question. I think last call, you mentioned Texas demand was a bit sluggish, but Georgia and some of the Midwest, we're seeing some strength. Just wanted to see how the Texas market demand is as we kind of move through these summer months. .

Kenny, are on? Do you want to take that?.

Yes. Texas has seemed to pick up. We're getting plenty of orders. And the lack of the production part where our labor has been so rough on us. I mean it's -- we're having a hard time keeping up with the demand.

I think even if we went up in production, I think that the -- we would probably pick up some business from dealers that hadn't -- that's been traded at other places because I think everybody's got the same production problems that we have. So yes. I think Texas is picking back up. The oil catastrophe seems to be going away.

And some of the oil companies are going back to work out in my part of the country. And so it seems to be picking back up. .

That's good to hear. I guess last one for me. Just wanted to ask about the MHPs and the development, how those have come along. I know they may have been delayed with all this COVID stuff.

But I guess, specifically just the Austin location and if any unit sales have taken place or when we should maybe expect that?.

I'll take that. There has been a delay because cities and counties and government or regulators are not having their normal meetings. You can almost add 2 or 3x to normal lead time to it. In Austin, we had our public hearing for our water treatment plant. It went exceedingly well. We had it last month.

It's usually about 2 more months after that before we get our permit, which is really the final step in that planning stage for that 1,000 unit development outside of Austin. Good news is that, that's essentially in the territory of the new Tesla plant. So we probably have a paper gain in our land value or 400 acres.

That's not too far from the new Tesla plant. In Venus, we had a substantial win in the quarter. We went into the city council with the recommendation of the Zoning Committee against us at 5-0. And we won Mobile Home Park zoning on our parcel in Venus, 7-0 at the City Council.

And we're working through the city and what that means and what they want us to do there. And in San Antonio, we have a small subdivision that is in the final stage of planning. So all those projects are progressing, albeit at a slower pace than what we'd hoped.

And I think I'd just probably make a liar out of myself if I picked a date, but I'd be surprised if we don't see dirt flying somewhere by the end of the year and some sort of movement in our top line by some time until 2021, probably the latter part of 2021.

But there's hidden value in all that because we are progressing and once you get mobile home parks approved in these outskirts of these major cities, the land has actually worth double or even triple how much you bought it for just by getting the approvals. They call it, in some states, they call it the entitlements.

We feel real good about all those projects. And we have some other irons in that fire from one of those projects. We just haven't taken any land down yet. .

Our next question comes from Alex Rygiel with B. Riley. .

Curt, as your sales shift more towards parks, I got to believe that you have increasing visibility on your business in some sort of backlog in hand. Can you enlighten us on kind of what that looks like today versus maybe 12 months ago or 2 years ago? And correct me if I'm -- if that's not the case. .

Well, we just have not done much of a job of trusting backlog because it involves little to no consideration when we take an order. We only get real concern when we don't have something to build. But we have customers now that are squealing for product that they ordered in May.

And I'm just going by memory, I don't think it was -- that was the case a year ago. So we're not -- our backlog, depending on how you measure it, is probably at 12 weeks on paper. And if you had to push them to take their houses, let's say if there was another decline in the economy, it would probably be more like 7 weeks.

But on the other hand, there's people that are not ordering from us because they know because they're being told they can't get their product in less than 12 weeks. Kind of like going into a restaurant, they're saying it's going to be a 1.5-hour wait, would you like to wait or do you want to go to a different restaurant.

So right now, we're kind of in that mode right now that we could be selling more, but the wait that we're telling the customers that they're going to have has got them looking for other alternatives of supply. So backlog is extremely healthy, healthier than we ever expected.

And now we just have to figure out whether or not it's real or not as we try to get through the fall and winter months, which typically have a decline in sales generally. Beginning about the last part of October all the way through February, the seasonal industry that we're in, usually, product demand starts to fall off a bit. .

And can you talk a little bit about leasing to parks as well? It sounds like a new product offering.

Can you give us a little bit of insight into the economics of this versus alternatives?.

Yes. The economics of it are really pretty simple. So they came out with a way to CapEx things all the way through 2022. And the tax code, you may remember that a couple of years ago. So we decided since we're a taxpaying entity, we kind of wanted a CapEx.

And so we could lease it to people on a non-finance lease that is not close-ended, and we get deducted immediately. And then -- so we're deferring taxes on that.

The only problem from that from a GAAP accounting point of view, and you all have access to high-level accounts, is even though we don't really have to pay those taxes for -- for the next 10 years, that tax deferral that we get out of that has to be recognized on the financials, all in year 1.

So GAAP -- while the GAAP financials don't show much benefit to that plan, over time, we will be getting income for fully depreciated assets and that we've taken the hit on the taxes for in our financials as well. We're leasing those out at real rough numbers, about 1.2% per month rate.

So if they would normally buy it for 30,000, they're paying $360 a month which is a quite a return on our money. And it's kind of like just a savings account that will blossom through time. And I think at this time, Jeff, you can chip in here, we have about $4 million or $5 million of that product out.

Is that a fair statement, Jeff?.

That's a very accurate statement. .

Yes. So -- and I look for us to maybe get another $4 million or $5 million out in the next 12 months, that would be a healthy number. It doesn't do much for our bottom line this year, but it will pay dividends in the future.

And it's only because all of the tax deferral benefit that we get, we have to recognize on our financial statements as a tax expense today. That's just one of the quirks of the GAAP rules. .

And lastly, as it relates to impairments, loan reserves, any material notable change there in the quarter?.

Do you want to take that, Jeff?.

I'm sorry, what was the question?.

Impairments and... .

Has your loan book gotten any riskier? And have you had to take any additional impairments or reserves?.

The mobile home park -- I mean there's 2 components. You've got the mobile home park portfolio, which is $120 million, and you have the retail portfolio.

The mobile home park portfolio of the 500-some odd loans, we've only had 3 groups that became problematic, of those 3 in the third quarter, 2 of them were resolved without any financial loss to Legacy Housing. We got everything back to par. Then we have one left in Corsicana, but it's so close to our home headquarters here.

We don't see any financial exposure with it. Worst-case scenario, we can go pick them up because we've got the tremendous demand for them. So the mobile home park portfolio is very solid. Haven't missed any payments. Everybody is paying as agreed. The -- and on the retail side, we have not experienced any significant increases in delinquencies.

It seems to be status quo without increasing our allowance for loan loss. So right now, we don't see a lot of exposure there. .

Alex, I attribute the observation on the latter, which I'm sure surprising, it was to me as well. I attribute that to the consumers are much more flushed than the average person thinks if they watch some of the new stations. And our delinquency for our portfolio today is better than a -- or lower.

It's more -- it is a better portfolio today than it was pre-pandemic. I know that's extremely hard to believe, but I've been through the numbers myself. We offered half a payment to people that were in trouble in April. And out of our 3,300 loans, I believe 40 people took us up on that offer.

And then I don't think -- we might have done another smattering of them again. So we're looking at about 1% of the -- of our consumers got half a payment relief for 1 or 2 months. And that was the entire move we made. No more repossessions, no more bankruptcies, no more over 90 days, we track it every which way.

And when I saw the end of June report, I about fainted because I said, how can it possibly be this good. And in the end of July report is even better. But I don't know why, but they're paying for their mobile homes in part because they're not upside down. The value of their homes are higher today than they were pre-pandemic.

Housing is on a tariff, up 6%, up 7% year-over-year in cost and across all sectors, including manufactured housing. .

That's good to hear. Congratulations on the nice quarter. .

Thanks, Alex. .

Our next question comes from Mark Smith with Lake Street Capital. .

First off, maybe for Jeff. Your commentary on gross profit margin and some of the SG&A retail expense shifting up to COGS.

Can you quantify how much that was?.

How much of it, probably 1% was from the reclassification from -- because we were new to the retail aspect of the business, the -- those types of costs went up in the cost of goods sold for that side?.

Okay. And that will continue going forward being classified in cost. .

Yes. That's correct. Yes, that's correct. .

Perfect. And then looking at SG&A, guys, very low. It looks like you've cut quite a bit out.

Can you just talk about how sustainable this is going forward, especially with still doing some of your fall shows?.

Yes. I'll take that one. We have not added anybody administratively, and we've had some salary reductions at the top, that's significant. We eliminated overtime among the administrative staff, that was significant. We are keeping a very careful eye on service expense, which is part of SG&A.

And when Kenny and I, and the highest level of management have taken a keen interest in service expenses, and that's been fairly significant. Of course, our travel expense is down markedly because we're not traveling, we're zooming everywhere. And I think we were a little high, I think you heard me say that before on calls, in SG&A expense.

We've actually flipped flat now to we're lower. So we may be generous with some of the people that we're willing to take a little clip and they pay this last year, we may be generous and I would guess the next 90 days. We may return to levels. But back to your margin deal, too, margin is controlled in large part by inventory, raw material inventory.

And you remember last year, we had a quarter, it was -- that looked like an outlier on margins. And we thought, well, we'll just analyze this completely. And we spend a lot of time analyzing it. I mean a lot of time, at every level, my level, the CFO level, account level and so forth. And we really never did explain it.

But the next quarter, things balanced out pretty well. So we kind of just wrote it off to maybe a more precise inventory being taken at the raw materials level. Unlike our competitors, we maintain very large levels of raw materials. We import a higher percentage than they do from China.

We maintain higher levels of lumber, depending on how well we're buying it. We buy everything by the truckload and by the railcar, taking advantage of price differences. Which sounds great, until you realize you've got $13 million worth of raw materials for 3 plants. And then you have to go around and count it all and value it all every quarter.

And it's not as easy to do as you think because we don't keep any of it in the same place. One load of lumber will come in, and we'll put it one place, 3 months later, another level come in, we'll put another place.

And so we literally have on inventory days, 70, 80, 90 people that work for us, going around finding all the different 2x4x7 lumber that we own. And I don't think we're precise enough on that so that, that margin on any given 3-month basis can be cast in stone. So I think that's a big part of it is our inventory-taking ability.

Now my accountants read this call. I apologize for confessing, they are not perfect or something, but it is what it is. And so I think you'll see our margin over a period of a year being quite stable, well into the 20s. So you can read into that what you want, Alex.

But in this particular quarter, the margin was compressed, and I doubt it will be the same in the future with the possible caveat that lumber prices are eating our lunch. Everything else is pretty stable. The lumber's eating our lunch. .

Okay. And then back on the SG&A, just last question for me.

Any update, some changes in management, any update that you can give on kind of a search for CFO?.

Our new CFO is on the line.

Do you want to say hi, Tom?.

I can say hello. Hi, my name is Tom Kerkaert, and I've just been listening in. I've been on the job for not very long. So I'm just glad to be part of the team. .

We have a new CFO. We haven't really announced it yet because his first full day of reporting to work will be this following Wednesday, I guess, we'll do an 8 along those lines. You'll get to see his resume and everything. So CFO search is done, and I don't think we'll have a new general counsel anytime soon. .

And I'm not showing any further questions at this time. I would now like to turn the call back over to Curt Hodgson for any further remarks. .

Well, guys, I think we had a tremendous quarter. It was one of the most interesting quarters in my business life. And those of you that follow us closely, we took a PPP loan, we gave it back. We decreased production, and then we wish we didn't because we had plenty of demand. And we thought about hedging lumber, but then we didn't do it.

There was a lot of business decisions that when I look back, will be some of the most major business decisions that I've ever made in my life. And I think the financial statements are pretty good. We once again increased our tangible net worth by 4% in one of the most difficult quarters of all time.

And that's really kind of how I measure my own success. Do we move up tangible net worth? And do we do it in the double digits, which well we did it again. And I think we're going to do it solidly in the next 2 quarters as well. Thanks for being on the call. I appreciate you all, and we look forward to talking to you in another 3 months. Thank you. .

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..