Ladies and gentlemen, thank you for standing by, and welcome to the Legacy Housing Corporation Third Quarter 2019 Earnings Call. [Operator Instructions] Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Curt Hodgson, Executive Chairman of the Board. Please go ahead, sir.

Thank you for joining the call today. 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 represents 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. With those preliminary remarks out of the way, let me turn to our third quarter results and our view of the rest of the year. Our third quarter was not as robust as we would have liked. We were still very profitable this quarter, making over $8 million in income before tax expense and over $6 million in net income. Our total revenue was approximately $41.9 million, a 3.4% increase over our performance in the third quarter of last year, but we were slightly under our own revenue and our own income expectations for the quarter. This was caused by a few factors, notably, among them, we simply had production issues at our Commerce, Texas plant resulting in a 31% decrease and a 36% decrease in quarter-over-quarter and year-over-year production at that facility in Commerce, Texas. About a month ago, we brought in a new general manager for this facility, and we are now back to running at/or near capacity. We also…

Thank you, Curt. Net revenue for the third quarter of 2019 was $41.9 million, an increase of $1.4 million over 2018's third quarter net revenue of $40.5 million. Product sales, the largest component of our revenue, grew 1.3% in the quarter to $35.4 million. Sales to manufactured home parks, which increased $9.1 million to $16.9 million, were partially offset by decreased sales of consigned inventory through our network of independent retailers and reduced factory direct sales. Also as Curt noted, sales through our company-owned retail stores declined to $3 million from $3.6 million in the prior year quarter. Product sales gross margin percentage decreased 2.3 points to 22.2% as a result of reduced cost absorption from lower production volumes, increased costs related to import tariffs and reduced sales through our retail stores, which typically carry the highest margins. Interest income in the quarter was $5.7 million, a 20% increase over the $4.8 million recorded last year. Our manufactured home park loan portfolio increased $24.1 million or 42% from the end of 2018 to $82 million, and the consumer loan portfolio principal balance increased $5.9 million to $103 million, net of the allowance for loan loss and other discounts. SG&A expenses of $6.1 million increased $1.2 million from the third quarter of 2018, reflecting higher personnel expenses related to public company compliance and staffing of our company-owned retail stores along with increased delivery costs. These increases were partially offset by reduced audit fees. Pretax earnings decreased $700,000 to $8 million in the quarter. Income tax of $1.9 million decreased $300,000 over the third quarter of 2018. Income was $6.1 million for the third quarter compared to $6.5 million in the similar period of 2018. Net income per share based on basic and diluted weighted average shares outstanding was $0.25 in the quarter compared to $0.32 in the prior year quarter. And finally, equity has increased $26.1 million from year-end 2018 to $215.4 million. That completes our financial overview, Curt.

Thanks, Cork. The fundamentals of Legacy's business remains strong, and we are very bullish on how well positioned Legacy is for fourth quarter performance. Thank you for your interest and attention today. We'll now take your questions.

[Operator Instructions] And our first question comes from Alex, B. Riley FBR.

A couple of quick questions there. A couple of quick questions. Orders are up, production is up, backlog is healthy, improving performance at company-owned stores. Those comments that you made in your opening remarks, are those relative to the third quarter of this year? Or the fourth quarter of last year as you think about -- as we move into this fourth quarter here? So are you talking about sequential improvement? Or year-over-year improvement that you expect in Q4 of '19?

I think both -- this is Curt. I think both. The fourth quarter is typically a down quarter in the order production. Just last week, for instance, we put on 200 or 300 orders that we weren't expecting from our park customers predominantly. We don't usually get that kind of lift in the fourth quarter, but that was true both last year and this year. Last year, we're on the tail end of the 2 hurricane boom that we had that began nearly 2 years ago. And we are already seeing a decline in order volume by the fourth quarter of last year. The fourth quarter is typically a down quarter in orders. This quarter is an anomaly. So I would guess the business is probably good, not just for us, but probably for the industry.

Sales in the state of Oklahoma increased significantly in the third quarter as well as Alabama. Sales in Texas and Georgia were down significantly. Can you talk a little bit about the shift in mix of demand by state?

Well, as you know, and as I've indicated for some time, we have a place to put them -- challenge in our industry, particularly in large metropolitan areas like Dallas, Houston, San Antonio, Atlanta, Denver. And that difficulty is not being remedied, at least not currently. There's some space development on the drawing boards. So where the opportunities for shipments have been, and again, this is an industry-wide issue, are the empty mobile home parks in rural America. And there's more of those in Oklahoma and Kansas and Nebraska than there are in the more urban parts of this world like Texas and Georgia. So I don't really expect that those markets to improve until we see space creation around the second or third circles in the big cities. We're working on it ourselves, and there's also some big players that are working on that. With our customers being so much in the community development business, these guys tend to buy an existing park. And that existing park could be in the Wichita, Kansas, and then all of a sudden becomes our market because it's their market. On the other hand, our retailers that are near cities like Fort Worth and Dallas and Houston are struggling. They spend more time trying to find a place to put it than they do trying to sell the house. So that's a systemic problem that the industry is going to have to work through, and I expect it will take 2 to 10 years before we get balances in between the demand for space and the supply of space.

And I suspect that also explains the decline in independent retail locations from 111 to 87 sequentially. Any other reason for that decline?

America's cultivating entrepreneurs who want to own their own stores. Other than that, I think you're right.

I would say -- I'd like to add to that if I may, Curt. In that one of the side effects of having such a large percentage of our production moving to manufactured home park owners, they are taking a priority in our production schedule along with our larger independent dealers. And I would say that I think there is some effect of having less production available for the smaller onesie-twosie type independent dealers. I suspect those are probably the ones that are dropping off.

And last question, Curt. A few quarters ago, inventory had spiked quite a bit. I think it was the end of the first quarter. Inventory now has declined nicely, sequentially for a couple of quarters. How do you think about inventory today as you enter the winter months? And how should we think about it changing in the next 3 to 6 months?

Our financial is a little bit unique in that inventory as a category includes a significant amount of finished goods inventory. Raw materials, we're still operating, and we are operating a little over $2 million per plant in raw material and then a warehouse on top of that. That puts us at the high end of the manufactured housing companies as far as how much raw material we have. As you know, we buy so much of our material on a bulk basis by the truckload, by the train car load, by the container out of China that we tend to have a lot more inventory than our competitors at the raw material. But our management has done a pretty good job of bringing that down, so we don't have a 12-month supply of hardly anything anymore like we did a year or 2 ago. On the finished goods side, we have inventory 2 ways. In our company-owned stores, which is pretty stable right now. We're not adding any stores, and that the inventory we have at the stores is being managed pretty well. And then the other way we have it is the inventory at our independent retailers is really our inventory because we consigned it. And that's -- you note a decline in independent retailers. And with that, comes a corresponding decline in consigned inventory. So I would guess that the trend in finished good inventory will be flat to down, and the trend in raw material will be flat to down just because we're getting it better -- we're getting to manage that a little bit better.

And our next question comes from David Burdick with Oak Ridge.

So I just wanted to ask about MHPs and how your Austin community is coming along. And then you also mentioned you were near closing on a few more locations on the last call. Could you provide maybe some more color on where you guys stand in lots of land currently? And then where those potential new lots stand?

Yes. I'll answer that. Let's take it from big to small. We're currently invested in essentially 3 markets that we think are pretty good: Austin, Texas; Fort Worth, Texas; and San Antonio, Texas. We see opportunities in other markets, but we've made substantial investments in those areas. In Austin, we are active in 2 different places that are actually about 70 miles apart but they're both in the Austin market. The one you're referring to, we paid $4 million per piece of land, South of Austin, is not served by sewer. It's going to take its own water treatment facility. We are on the brink of getting that permit and expect to be breaking ground at that facility within the next 4 to 6 months. It will be a major facility with over 1,000 space and probably over 1,400 floors for that facility. In the opposite part of Austin, we own approximately 30 -- excuse me, 300 lots that are zoned for mobile homes in Horseshoe Bay. It is a very regulated city that we're working through the regulations, and we already have release for production. The first 6 models to go into that area and test the waters in Horseshoe Bay. In Fort Worth, we have 2 properties that will total around 400 lots in total, both in South Fort Worth in a suburb named Venus. It is actually accessible to both Dallas and Fort Worth. We're quite optimistic about that. And our basis in that land, to put it in perspective, is somewhere around $6,000 per acre. And it's very difficult to find $6,000 acre in metropolitan areas now. And lastly, we're lightly active in San Antonio. We currently own about 100 acres that's being subdivided into like 1-acre lots, so it isn't a major play. But we have a loan interest in some other land in San Antonio that we're lending money to a developer that's making a big play in San Antonio. And we're in negotiations all the time with people that develop all the home parks to broad financing and guidance for them in exchange for some tie-in where our product goes into the facility. We think it's a big part of the industry going forward.

And then you guys mentioned you might see some contributions from MHPs on the top and bottom line in 2020. Is this more of a later 2020 contribution? Or when should we expect to see some sales start to trickle in?

Land development is real difficult from a GAAP accounting point of view and for our industry -- for an industrial company like ourselves. You really only see it, the revenue and profits, when you sell the property, but we will see increased sales of our products through those facilities. And we should see that probably beginning mid-2020. And those product sales are likely to have higher margin than any other thing that we're involved in.

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

First up for me. Can you talk about the sales mix a little bit? And the impact on average selling price of homes for instance as you sell into these mobile home parks? Are you doing more single wides? Or are there better deals that maybe these guys get? Maybe walk us through the quarter on average selling price, and why we saw the, I think, it was a 10.5% decline year-over-year?

Certainly. You're right. You're spot on the manufactured home communities have basically purchased single wides. These are -- if you want to put it in terms of a new car that you're buying off of a lot versus something that you're going to run at national, the goal of the manufactured home communities is to provide a good, solid home at a reasonable cost. And so they're not exactly specced out to an optimum level that one might choose if you were purchasing a home for yourself. Their competition, obviously, is the multifamily communities, and they're trying to beat those costs and provide a better product at a lower price. So there are no double wides that are being purchased by the mobile manufactured home communities. At the same time -- and just to kind of give you a sense here, year-over-year, the double wide sales in the quarter dropped about 31%, actually a little over that. At the same time, we've actually increased our sales of our tiny houses. I apologize, I don't have that exact number with me in my mind right now. But as you know, the average selling price on a tiny house is significantly less than a double wide or a single wide.

Okay. And then can you talk about kind of with ASP down, how much impact that had on margin? And then I think you guys also called out, within gross margins, labor as well as some cost of materials, sounds like some tariff impact, and any other insight and then kind of outlook, especially as we look at kind of labor and cost of materials?

Well, again, year-over-year, I think -- and I'll take the first part of this, Curt. Year-over-year, our production, the number of floors that we manufacture, it was down over 5%. And again, we have a higher percentage of tiny houses. So the actual square footage is down even more, largely because of what Curt was pointing out in the issues with Commerce. So as you know, when you're producing less, your fixed costs and even some of your variable costs don't necessarily go down at the same rate. Curt, do you have any additional color you'd like to add?

Yes. I guess...

I was going to say, Curt, the main thing that I'd be looking for is just kind of your outlook on labor, but also on cost of materials. Any pressure that you're continuing to see?

And pardon me, it looks like Curt is no longer connected.

I think Curt dropped off the line, hold on a sec. Let's ask for the next question, and perhaps we can get Curt back on and circle back. Sorry, Mark.

And our next question comes from [ David Mercer ].

This is not really a question about the business. Is William Shipley there?

You mean, Kenny Shipley?

Kenny. Kenny. Sorry about that.

Yes. I'm on here.

Yes. I'd just like to know if -- I'd like to send you an e-mail, if I can get your direct e-mail address, maybe from -- call the business. What I'd like to do is this. Once a quarter, just send you an e-mail. I won't bother you because I know you're a busy person. Just once a quarter, it would be like a paragraph or less, just some fits that for you guys' company that may help you out. And like I said, I'm not going to bother you the -- this will be once a quarter. It will take you like maybe 1 minute to read. You don't have to respond so -- if like, maybe I could get your e-mail address from somebody else.

Mr. Mercer, if you could send that to investors@legacyhousingcorp.com that will get to Kenny and the senior management team.

I don't think -- okay. But like I said, I won't bother you the whole time or anything like that. And I may have said this before, but I'll keep on saying it every quarter, guys. Just make sure you make good decisions. When I invest in companies, I say it to myself that I have to make good decisions. And actually, it's helped me out. So just every now and then to just say to yourself that you have to make good decisions, it'll help you with your decision process. Also remember, you guys may know this, but just remember this. Focus on the long term. I know a lot of people may want you to hit numbers, hit the numbers in the short term, but don't focus on that. Focus on the long term. What's long term best for the company. And then in the end, the company will do better. So try not to focus on the short term, focus on the long term. You're probably doing that already. And just one more thing. Remember, customer focus. I'm sure you guys are already doing that. But I just want to remind you, keep on focusing on how you can meet the customer needs, how you can make the product better. Constantly, constantly, constantly focus on how you can do that. So -- yes.

Sure. Thank you.

Sure. That's all good advice. I appreciate that.

And Curt, while you were off, sir, we had a follow-up question related to where you see raw material costs going forward.

Yes. Raw materials are behaving rather well other than the Chinese import issues which was like a $0.20 or $0.25 out of the blue increase. But if you look at the lumber chart or a steel chart or a copper chart, these are materials that we use, the industries -- those industries are continuing to be very competitive. We're seeing an uptick in appliances right now. And that may be partly due to Chinese import steep. They tend to make appliances using Chinese imports, but by 8% or 9% increase proposed for appliances. But the big part of our components, lumber, steel, building materials in general that are made in America are flat. The challenge, as everybody knows, not just our industry but the world, is labor. I mean labor continues to gradually move up as we pay less experienced people more money to build what we did last year. Just the labor shortage is going to be stubborn for quite a while. And we're all struggling. We're trying to be more efficient in labor. As far as overhead is concerned, which is an eligible deal, it's -- our G&A is up. Our executives tend to want to make more money every year. And correspondingly, we need to have more sales, more profits to justify them. So I mean accounting has been a challenge this last year that we think we have under control. So G&A, I think, we have to really take that. The last question, I think his name is Bruce (sic) [ David ], makes some really valid points. I don't know anybody in the industry that has their eye more on the consumer's value proposition than me and our company. I think we lead the nation in the value proposition when it comes to what does a customer get out of a deal. So anything else?

I think we can conclude the call.

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

Thanks.