Legacy Housing Corporation (NASDAQ:LEGH) Q4 2022 Earnings Call Transcript

Legacy Housing Corporation (NASDAQ:LEGH) Q4 2022 Earnings Call Transcript March 16, 2023

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Legacy Housing Corporation Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please note that today’s conference is being recorded. I will now hand the conference over to your speaker host, Mr. Duncan Bates, President, Chief Executive Officer. Please go ahead, sir.

Duncan Bates: Good morning, everyone. This is Duncan Bates, Legacy’s President and CEO. Thanks for joining our call today. Max Africk, Legacy’s new General Counsel will read the safe harbor disclosure before getting started. Max?

Max Africk: Thanks, Duncan. Before we begin, may I remind our listeners that management’s prepared remarks today will contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the safe harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from management’s current expectations, and therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company’s annual report filed with the Securities and Exchange Commission. In addition, any projections as to the company’s future performance represent management’s estimates as of today’s call. Legacy Housing assumes no obligation to update these projections in the future, unless otherwise required by applicable law.

Duncan Bates: Thanks, Max. We’re happy to have you on the team. I’ll run through our prepared remarks on Legacy’s 2022 financial performance and provide additional corporate updates. We will then open the call for Q&A. 2022 was a record year for Legacy Housing. Net revenue increased to $257 million in 2022, representing a 30.1% improvement over 2021. The increase resulted from several price increases implemented from 2021 to 2022, the conversion of certain independent dealer consignment arrangements to financing arrangements, offset by a decrease in shipments from our Eatonton, Georgia facility. As we discussed on the third quarter call, we delayed shipments and slowed production to improve the quality and consistency of homes manufactured at our plant in Eatonton, Georgia.

During the fourth quarter, we rightsized the workforce, brought in a third party to retrain the team in certain manufacturing stations and significantly improved quality. Production is still below historical levels, but we are making progress without sacrificing quality. Interest revenue from the company’s retail and commercial loan portfolios was $28.6 million for 2022, up 5% from 2021. The increase resulted from higher retail loan balances, offset by lower commercial or MHP balances. Both the commercial and retail loan portfolios continue to perform well. Income from operations for 2022 was $78 million, an increase of 32.4% from 2021. This increase was primarily driven by price increases, the conversion of independent dealers from consignment to financing arrangements and an increase in other revenue, offset by lower volume from Georgia, higher material and labor costs and higher SG&A.

We continue to hold pricing and reduce our raw material inventory. We are also looking at ways to reduce SG&A, up this year due to salaries and incentive compensation, warranty costs and professional fees. Net income of $67.8 million for 2022 was a 35.9% increase over 2021. Basic earnings per share grew to $2.78 in 2022, an increase of 35% from 2021. Legacy delivered a 19.6% return on equity over the last 12 months. For this calculation, I’m using the average 2022 shareholders’ equity value. At the end of 2022, Legacy’s book value per basic share outstanding was $15.69, an increase of 22.7% from 2021. We ended the year in a cash-neutral position with $2.8 million in cash and $22.5 million drawn on our credit line. During the fourth quarter, we put $8.4 million of excess cash to work in treasuries, yielding approximately 4.7%.

Our backlog is healthy across all manufacturing facilities. We have a small manufacturing footprint and continue to run near capacity. As the market slows, we anticipate having orders to fill our three plants. I’m really excited for the next 18 to 24 months at Legacy. We’ve moved past the financial reporting issues and the foundation is stable. Looking at the 2022 balance sheet, we have essentially no debt and over $330 million of principal outstanding across our loan portfolios. These loan portfolios generate a tremendous amount of predictable cash flow that we can reinvest at high rates of return to grow our book value. As the economy slows, we’re seeing more and more opportunities to deploy capital. We are constantly evaluating these opportunities and will remain disciplined in our approach.

Overall, we’re focused on long-term capital appreciation and think that over the next 6 to 18 months is a pretty opportunistic time to put money to work. Operator, this concludes our prepared remarks. Please begin the Q&A.

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Q&A Session

Operator: Thank you. And our first question coming from the line of Min Cho with B. Riley. Your line is open.

Min Cho: Hi, Duncan. Congratulations on a really strong quarter here and strong year.

Duncan Bates: Hey, good morning. Thank you very much.

Min Cho: Sure. A couple of questions. Regarding your Georgia facility improvement, it sounds like the shipments have definitely improved in the fourth quarter. Can you talk a little bit about what the utilization rate was as you exited the year? And can you remind us what the historical kind of annual revenue is from that facility?

Duncan Bates: Yes, sure. A couple of thoughts. First, as far as where we are with production, that plant historically has produced, say, 5 to 6 homes a day. We’re still below where we’d like to be, but we’re very cautious around ramping up production until we’re 100% positive that we’re not going to have any quality issues going forward. So right now, we’re building 3 to 4 at that plant. So it’s not significantly below the long-term average, but it has been a work in progress to get up to the historical production level. We don’t publish revenue by manufacturing facility, but you could take production volume and just kind of use an average home price there.

Min Cho: Okay. Definitely do that. Also, it looks like the number of home sections that were produced and shipped were either at a record or near record highs for the fourth quarter and for the full year. I was wondering if you could talk a little bit about that with respect to kind of labor availability. And given the current labor situation, do you expect that number to increase through 2023?

Duncan Bates: Yes. Labor continues to be a problem for us. And I think a lot of other companies in the U.S. manufacturing space. That said, it’s not as tight as it was. We use just a very simple barometer of – the labor market is when we walk into our Fort Worth plant in the morning or their people who are waiting in the lobby for jobs. And I think through COVID we really – we didn’t have anybody in the lobby, and we’re starting to see people who are ready to work. So labor does continue to be our constraint from a manufacturing standpoint. But I think it is loosening up, and we’d like to continue to push production at all of these plants, but that really is the constraint.

Min Cho: Okay. And then my final question has to do with your mobile home parks. Just any update on the development in Texas? I know you were pretty close to kind of starting construction on the Del Valle units. Any updates there?

Duncan Bates: Yes. The developments continue to move forward. Frankly, they’re slower than we would like. I mean, we’ve just been – we’ve been tied up and bogged down with so much work on the administrative front. That said, we’re getting towards a point where at least for Phase 1, we can start to think about getting homes into that first phase. But we’re still – we’re months out there. And that’s the first one that will have come online, but we’ve got several others behind it. So it’s unfortunately slower than we would like. I think a lot of the other industry peers will talk about some of the just regulatory hoops that you have to jump through to actually get one of these turnkey and it’s significant. So making progress slower. But I think now that we’re through some of the financial reporting issues, we’re really – we’re going to make a push there.

Min Cho: All right. Understandable. Great. Good luck to you in 2023.

Duncan Bates: Thank you very much.

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