Good day and thank you for standing by. Welcome to the Legacy Housing Corporation Q4 2023 Earnings Call. [Operator Instructions] 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 or 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 purchase smaller, less option 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 or 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 or 3.5%. The increase was driven by growth in forfeited deposits and servicer fee revenue, offset by a decrease in consignment fees as dealers carry less inventory in 2023. The cost of product sales decreased $50.4 million or 33.6% in 2023 as compared to 2022. The decrease in cost is primarily related to a decrease in units sold. Product gross margin was 31.3% for the year ended December 31, 2023. Selling, general and administrative expenses decreased $3.3 million or 11.9% in 2023 as compared to 2022. This decrease was primarily due to a decrease in salaries and benefits costs, warranty costs, consulting and professional fees, partially offset by an increase in low 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 surface 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.

Thanks, 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 give other corporate updates. First, I would like to address a few onetime items that impacted our numbers for the reported period. In 2022, we converted Legacy's dealer financing program from consignment arrangements to inventory financing arrangements. The goal of this conversion was to move our dealers to an industry standard inventory finance program. The conversion resulted in a onetime increase in product sales of $29.1 million in 2022. Approximately $20 million of the $29 million was recognized in the fourth quarter of 2022. Please keep this in mind as you evaluate the quarter and year-end performance. In 2023, the energy tax credit program changed and legacy adjusted accordingly. In 2023, we started building nearly all of our HUD code units to ENERGY STAR standards, a voluntary program that will save our customers' money. For the year ended December 31, 2023, Legacy could only claim tax credits for homes built and sold in 2023, lowering the tax credits recognized during the year. Our effective tax rate jumped from 17.5% in 2022 to 20.8% in 2023. For 2024, we anticipate reducing our effective tax rate back towards 18% as we claim credit for homes built in 2023 but sold in 2024. For the year ended 2023, Legacy implemented CECL, a loan-loss accounting framework required by FASB. The standard requires an entity to reflect its current estimate of all expected credit losses. The adoption resulted in an increase in portfolio allowances of $900,000 at transition in the first quarter of 2023. The allowance -- the CECL allowances have increased 158% to $2.2 million at December 31, 2023, from $840,000 at December 31,…

[Operator Instructions] Our first question comes from the line of Alex Rygiel from B. Riley Securities.

Duncan and Jeff, this is Min [ph] on for Alex this morning. A couple of quick questions. So just wondering if you could -- well, on our November call, you obviously talked about a lot of positive trends that you're seeing, retail improvement. You had some positive backlog from your October show. Has anything shifted like more positively? Or maybe just in a negative direction since then?

Min [ph], it's been spotty. We were really excited coming out of the show and we're able to secure a lot of orders and we had a pretty good run building those orders. But during the fourth quarter, we just had a lot of things that worked against us and ultimately slowed down shipments. And so what we decided was let's hold production at current levels and let's continue to build a backlog. And we've got -- we're all heading to Biloxi after this call. We've got great show specials. And so we've been continuing to push on the sales side. I think the biggest change is that we are seeing the impact of higher interest rates on the parts side of our business now. And that's something that -- we had a lot of parts that we were filling up. I think that new development is slower than we like but it's still stable. And we've had some nice sized orders. We're working on some more but it hasn't -- we're impacted just like the other manufacturers on the parts side of the business.

Also, just talking more about Del Val. I know that you had hired a new team to kind of focus on your land development. you're supposed to finish kind of like the roads and water treatment plants and maybe that's part of some of the slower development. But do you have any sense -- any better sense for timing of some of the home deliveries into Del Val or even Horseshoe Bay at this point?

So we have made some progress in Horseshoe Bay. Horseshoe Bay are individual lots and we own about 300 of them that we're putting homes on and selling. And we're probably, I'd say, 1.5 months away from opening a sales center there which should accelerate the sales of those homes. And we've already sold a few homes this quarter in Horseshoe Bay; so there is -- we are making progress in Horseshoe. And the other area where we're really focused on the land development side is Del Val. You'll see, if you look at our CapEx, I mean, we wrote some really big checks at the end of the year, the -- we've got the water lines and we've got the sewer lines in. We've got the power. They're working on the drainage and roads now and starting the water treatment plant. And so our goal -- I really -- I don't think we'll have houses on it in 2024 but I think it's pretty early in 2023 -- sorry, 2025 and we're pushing hard on it now. Dollars are starting to really accelerate. And we've got the right team working with Curt on that project. to get 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? Kind of what your -- kind of return horizon time line 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. And we've had some challenges managing our retail stores. But I finally feel like we're heading in the right direction there which is the first step to ultimately growing that piece of our business. And there's 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 and that's mainly to serve that development as we put houses on those lots. But there are several other areas that we're looking at. And from a from a capital contribution standpoint, I mean, 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. But it just seems like an area as we -- as we've gotten better at managing Heritage and there's still some -- there's certainly some improvement or a ways to go. But I think as we get that business really humming, then it opens up the opportunity to add more stores. And if you look at our larger competitors, right now, I mean, they're 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?

The -- I'd say let's talk about all dealer sales, not just the Legacy sales. But I'd say the dealer side of the business is improving. And we continue -- we've been really impressed, I've got my secret sales weapon, Kenny out there, running down new dealers. And we've added a lot of new independent dealers which is great for us because when the park side cycles, we do really need the dealers and we like the financing opportunities on the consignment -- on the Federal Investors consumer financing side. So we're seeing some good improvement on the dealer side. It is patchy though. There are certain geographies where people seem to be doing better than others. I think that there's also -- we're seeing this divergence between the dealers that have embraced technology and we're using social media and finding customers on the Internet versus others that haven't. And so I think that there is some room to help them improve as well. But we haven't dropped prices across the board. We've taken production down to meet the demand and they're building the backlog but the dealer side of the business is fairly strong.

And then, if we had -- if we maintain the sales mix similar to where it was here in Q4, can you just talk about margin outlook? And how much of the decline here in margins in Q4 was really due to sales mix versus anything else happening?

Yes. I mean we were impacted. I mentioned we had these big orders where on the park side, where we shipped smaller HUD code units than tiny homes to -- we've got a few customers who are converting RV parks. So I think that, that has impacted us. But across the board, both on the dealer side and the park side, the shift has been -- has continued to be toward smaller homes. I mean, where we used to sell a lot of large 16 wides to parts, people are moving to 14 wides and 12 wides. So I think that, that has had an impact but I don't anticipate that everyone is only going to be buying smaller homes for the next year or so. I mean it's just something that we've seen here in the very near future or very near history.

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

Yes. I mean if you look at that loan portfolio in its entirety, we went through a period where I'd say rates were stable and then interest rates were super low and now interest rates are high. And our -- the older loans have higher interest rates than a loan, say, from the last 3 years but we are pushing rate higher now. We -- with federal investors, we have very strict underwriting requirements -- we have used -- we have kept our rates low because we're not borrowing to land. But in certain unique situations where we're financing a certain type of borrower or certain types of borrowers that -- where the credit quality is a little bit lower. I mean, we're certainly pushing rates higher. So 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 use of capital going forward, you guys spent a little bit more here recently on some investments. How should we look at kind of 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. And I think CapEx at the plant is fairly stable. We've had -- 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. And -- but back to your question on the credit line, what essentially happened at year-end, we had some larger checks that we had to write for Bastrop for road work and for the water treatment plant. But credit is tight. And there's a lot of people in our industry that need to borrow money for certain projects. And these are secured loans at relatively high interest rates with personal guarantees, for assets that we wouldn't mind owning if there's a problem with the credit. And so we put a lot of money to work at the end of the year. And we continue to see those opportunities to generate great returns with a secured loan and ultimately help some of our customers out with projects that 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?

Yes. I mean a big -- well, I don't have the exact split in front of me but I can follow up with you with an exact number. But at a high level, on the dealer side, we came off our show. We started shipping a lot of houses. And then we hit a seasonably slower period where dealers wanted us to hold off on shipping homes. And the park side, like I mentioned, has been spotty, where a project will go and you'll be able to deliver a few months of houses or in many cases, there's significant delays with utilities or permitting or other things that happen for these developments or retrofits. And so we kind of just had a little bit of a perfect storm and delays on the park side and just some seasonality on the dealer side. We've also got -- I think you know, Jay, we've got some partnerships up north with some other manufacturers that build our floor plans. And I think that, that continues to be a good opportunity for us. But with the weather up there, we just couldn't ship anything. And it's just -- we've been pushing, we've been pushing hard all year and we just -- we kind of hit a point where there was a lot of delays in shipments. And you see that 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 which it just seems to be one thing after another there but we're pretty close, I think, to getting back on track. So we had -- the beginning of the quarter, we had homes caught up in the yard there that we're clearing out now as quickly as we can. But in Texas, it's been it's been pretty consistent. We thought that when we spoke last quarter, that we were -- we looked really good and we were planning on taking up production. And what we're doing now is we're -- we decided, hey, let's keep production where it is and keep building the backlog, keep running specials, keep focusing on sales. We've got a lot of new sales reps that are getting up to speed and they're making sales and they're making commissions. And it's fun to watch. But for Q1, I think it looks better than Q4 but maybe not as good as the 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 anything -- 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. I mean, look, I think if you go back and you look 5 years backwards and kind of our gross margins they tend to be in the higher 20s versus low 30s. So the margins look 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 in the high -- 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. I mean, look, there's -- price and volume is related, obviously. And throughout this entire slower period and I think 2023 is a great example. Could we have given homes away and really increase the throughput through the plants? I'm sure we could have. But like I mentioned on the call, our Board wants us to be extremely bottom line focused. And I don't -- I think for other manufacturers that are cutting price, I mean I don't think material costs are going down. And frankly, I know labor costs aren't going down. And so we're going to rightsize our SG&A and rightsize our overhead for a slower period and continue to hold price as the market recovers even to the detriment of volume.

And that actually was going to be my next question on SG&A. It sounds like you're going to be doing staffing higher, income staffing as you build out some of the different portions of the business. I guess, how -- from a total dollar standpoint, should we expect that to ramp up by some percentage in '24 as you're adding more personnel?

I think it will be a little bit higher. But we've had -- I mean, you guys have seen the press releases and with some of the NEOs, I mean we've had a lot of turnover at the senior level which I think in many cases, is a good thing for the business long term. But what the Board has said is, look, we want you in addition to hiring young people like let's add some bench strength in key areas of our business because some of these areas are significantly larger than when we went public and you need more senior people. And so I think as we find the right people, we'll hire them and we'll pay them well. And I think the contributions will be great. We've already made some great new hires at the senior level and they're contributing. So, I do see SG&A maybe going up slightly but a lot 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. And I think I mentioned -- or I talked a little bit about it, Jay, last call. I mean, really, what we're going through is we're prioritizing where we want to allocate capital on these developments. And in many cases, we've sat on some of these things so long that you could -- if we don't think a project is viable for a community for us to do internally, there may be a better owner of that. So I think that there is a bucket of properties that we could look to ultimately divest and we've held them for long enough where you make 2, 3, 4x your money on the raw land. There's a second group of properties where over this time period, the dynamics have changed. And so you've got city sewer now coming to the project in the next year or so. And we're looking at those and the feasibility of those projects as MH communities, whether it's with us or someone else finalizing the development? Or is this piece of land, does it have a better and higher use that we can return -- that we can generate returns for our shareholders by having somebody selling it and having somebody build stick-built homes on it? But our focus for all of these projects is we want to sell more manufactured homes. We want to finance more manufactured homes. And so we're really -- we're viewing all these from the lens of MH. That is a big headwind. I mean it's the biggest headwind is where do you put them? But we're fighting the same battles with the regulators that all of our customers are -- and -- but we're trying to pick our battles and we know we've got a few that make sense to go ahead and take the full way and that's where we're allocating capital as we prioritize the other projects.

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

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

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 move up, other types of debt moving up and that's causing more disqualifications for certain site builders. I guess, are you guys seeing any of that in your consumer loan book right now? And how do you feel like the quality of the loan book has been trending through the quarter so far?

Yes. Our loan book continues to perform really well. We made a senior hire who would run a financing business in our industry and he has been working with the team and doing his analysis and he's like, "Man, this -- like you guys have a good formula here for underwriting and you are outperforming the competitors". And I think the key thing with our consumer financing portfolio is, we have a very specific customer that we finance. And we don't move on things like down payment and extras like financing, storage sheds and septic tanks and 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 -- but they've got to have skin in the game. And I think because we haven't bent on those and we've seen a lot of others bent on those, we haven't seen large changes to the downside and the performance of our consumer loan portfolios.

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

Our team -- one other thing, our team is heading to the Biloxi Mobile Home show today through Wednesday. Kenny and I leave directly after this call. So if there are any industry folks on the call who will be attending the show, we'd love to see you and spend time with you and show you some of the houses we have set up there and discuss some of the specials that we're running right now. Thank you for joining today's earnings call. We appreciate your interest in legacy housing. Operator, this concludes our call.

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