Legacy Housing - Q3 2024

Executive Summary

• Q3 2024 was operationally mixed: revenue declined 11.4% YoY to $44.3M while net income dipped just 1.8% to $15.8M, with EPS of $0.65; book value per share rose 12.7% YoY to $19.84. Orders at the late-September Fall Show extended backlog into Q1’25, and management increased production at Texas plants into Q4.
• Product gross margin compressed to 29.2% (vs. 32.9% YoY; 31.9% in Q2), driven by under-absorbed labor on lower production; management expects normalization back to ~low-30% in Q4 as production ramps.
• Mix shift continued: product shipments were softer (product sales –18.3% YoY), but financing income rose +17.3% on larger MHP and consumer loan balances; “other revenue” was aided by $2.7M land sales but offset by lower deposit forfeitures and dealer finance fees.
• Near-term catalysts: order momentum (Oct product sales +27% m/m), backlog visibility into Q1’25, and monetization of two deeded parks from a settlement (275 spaces, ~35% occupancy) and non-core land (e.g., Horseshoe Bay, Bastrop). No formal quantitative guidance given; management commentary implies improving sales and margin recovery in Q4.

What Went Well and What Went Wrong

• What Went Well

  • Backlog and demand: “record” attendance at the Fall Show; orders written pushed backlog into Q1’25; production increased at Texas plants; Oct product sales +27% m/m.
  • Financing strength: consumer/MHP/dealer interest income +17.3% YoY on portfolio growth; 12‑month interest revenue across MHP/retail/floorplan up 33.9%.
  • Asset monetization and balance sheet: $2.7M land sale in Q3; revolver balance reduced to $2.1M from $23.7M YE’23; book value per share up 12.7% YoY to $19.84.

• What Went Wrong

  • Volume/mix headwinds: product sales –18.3% YoY; shipments shifted into show orders (timing), with customers waiting to see updated finishes; under-absorption pressured margins to 29.2%.
  • Reduced ancillary revenues: “other revenue” fell 8.7% YoY on lower forfeited deposits (–$2.4M) and dealer finance fees (–$1.0M), partly offset by land sales.
  • Community (MHP) market still slow: high rates suppress transactions and new development; recovery expected into 2025; management continues to hold price, slowing recovery vs peers.

Transcript

Operator (participant)

Thank you for standing by, and welcome to the Legacy Housing Corporation's Q3 2024 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue,

simply press star 11 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Duncan Bates, Legacy Housing President and Chief Executive Officer. Please go ahead, sir.

Duncan Bates (CEO)

Good morning. This is Duncan Bates, Legacy's President and CEO. Thanks for joining our Q3 2024 conference call. Max Africk, Legacy's General Counsel, will read the Safe Harbor disclosure before getting started.

Max Africk (General Counsel)

Thanks, Duncan. Before we begin, I want to 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 from forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from

management's current expectations. Any projections as to the company's future performance represent management's best estimates as of today, and Legacy assumes no obligation to update these projections in the future unless otherwise required by applicable law.

Duncan Bates (CEO)

Thanks, Max. I'm joined today by Jeff Fiedelman, Legacy's Chief Financial Officer. Jeff will discuss our Q3 financial performance, then I will provide additional corporate updates and open the call for Q&A. Jeff.

Jeff Fiedelman (CFO)

Thanks, Duncan. Product sales primarily consist of direct sales, commercial sales, inventory finance sales, and retail store sales. Product sales decreased $6.8 million, or 18.8%, during the three months ended September 30, 2024, as compared to the same period in 2023. The decrease was driven by a decrease in unit volume shipped, primarily in direct sales, mobile home park sales, and inventory finance

sales categories. The decrease was partially offset by increased sales at our company-owned retail stores. For the three months ended September 30, 2024, our net revenue per product sold did not change significantly as compared to the three months ended September 30, 2023. Consumer MHP and dealer loans interest income increased $1.5 million, or 17.3%, during the three months ended September 30, 2024, as compared to the same period in 2023 due to growth in our loan portfolios.

This increase was driven primarily by increased balances in the MHP and consumer loan portfolios. Between September 30, 2024, and September 30, 2023, our MHP loan portfolio increased by $22.0 million, and our consumer loan portfolio increased by $15.6 million. Other revenue primarily consists of contract deposit forfeitures, consignment fees, commercial lease rents, land sales, service fees, and other miscellaneous income, and decreased $0.4 million, or 8.7%, during the three months ended

September 30, 2024, as compared to the same period in 2023. This decrease was primarily due to a $2.4 million decrease in forfeited deposits and a $1.0 million decrease in dealer finance fees, partially offset by a $2.7 million increase in land sales and a $0.3 million increase in other miscellaneous revenue. The cost of product sales decreased $3.5 million, or 13.9%, during the three months ended September 30, 2024, as compared to the same period in 2023.

The decrease in costs is primarily related to the decrease in units sold. Gross profit margin was 29.2% of product sales during the three months ended September 30, 2024, as compared to 32.9% during the three months ended September 30, 2023. The cost of other sales increased $2.0 million during the three months ended September 30, 2024, as compared to the same period in 2023. The increase in costs is due to the sale of land. Selling, general and administrative expenses during the three months ended September 30, 2024, remained flat compared to the same period in 2023.

We had a $0.6 million increase in payroll and healthcare expense, a $0.2 million increase in marketing expense, a $0.1 million increase in other miscellaneous expense, offset by a $0.3 million decrease in warranty expense, a $0.2 million decrease in loan loss provision, a $0.2 million decrease in bad debt expense, and a $0.2 million decrease in professional fees. Other income expense increased $3.5 million, or 781%, during the three months ended September 30, 2024, as compared to the same period in 2023.

We had a decrease of $0.8 million in non-operating interest income, primarily as a result of the settlement agreement that we executed in the Q3. An increase of $3.9 million in income in miscellaneous net, also primarily as a result of the settlement agreement. An increase of $0.4 million in income in miscellaneous net due to a gain on conversion of inventory finance loans.

A decrease of $0.1 million in interest expense, and an increase of $0.1 million in expense in miscellaneous net related to other expenses. Net income decreased 1.8% to $15.8 million in the Q3 of 2024 compared to the Q3 of 2023. Basic earnings per share decreased $0.01 per share, or 1.5%, in the Q3 of 2024 compared to the Q3 of 2023. As of September 30, 2024, we had

approximately $0.6 million in cash compared to $0.7 million as of December 31, 2023. The outstanding balance of the revolver as of September 30, 2024, and December 31, 2023, was $2.1 million and $23.7 million, respectively. At the end of the Q3 of 2024, Legacy's book value per basic share outstanding was $19.84, an increase of 12.7% from the same period in 2023.

Duncan Bates (CEO)

Thanks, Jeff. Legacy's 2024 fall show in late September was a huge success. We hosted a record number of customers and wrote orders that extended the backlog into the Q1 of 2025. During the Q4, we increased production at both Texas plants. At the fall show, we showcased significant updates to interior and exterior home finishes to appeal to younger home buyers. The

changes were very well received by both dealer and community customers. We are building and shipping these orders now. Q3 shipments came in lower than we would have liked. Given the marketing around the product updates, many of our customers elected to see the changes in person and order at the show. We continue to build the team, including onboarding a senior sales manager for the Texas plants in late September.

Despite slower sales in the Q3, we are moving in the right direction. Product sales for October 2024 were up 27% over September of 2024. We continue to hold pricing, which has contributed to a slower recovery than our peers. Our dealer business across most of the network is good. We are pushing the team to add new independent dealers across the manufacturing footprint. South Texas, Florida, and the Carolinas are top areas of focus. We view retail finance as a leading indicator on the

dealer side. A couple of recent data points: applications were up 16% for the Q3 of 2024 compared to the Q3 of 2023. October 2024 retail finance fundings were the highest recorded since December 2020. Our community business is improving slowly. High interest rates continue to depress transaction volumes.

We are receiving more inbound requests and think the community business will continue to improve in 2025. During the quarter, we secured several meaningful orders on the community side. We continue to have success selling HUD tiny homes to RV park investors, transitioning these assets from seasonal to year-round occupancy. I view this as a growth opportunity and highly encourage any of the community

customers listening to explore the economics of this strategy. Our lending portfolios continue to grow. Over the last 12 months, interest revenue from MHP, retail finance, and floor plan financing is up 33.9%. Our delinquencies remain low, and recovery rates are strong. Product gross margins were 29.2% for the Q3 of 2024. Underabsorbed labor, given the lower production levels, drove the decline. We continue to watch labor closely and expect margins to normalize with production improving.

We are also keeping an eye on material price fluctuations. We sold excess land in Horseshoe Bay during the Q3 for $2.7 million. As I mentioned on the last call, investors will continue to see land sales as we shift our focus to the core properties. Legacy is now operating two mobile home parks that were deeded to us under the settlement agreement. The parks combined have 275 spaces and occupancy

rates of approximately 35%. Brand new homes were already on site. We hired a manager in the corporate office to oversee these projects. We are renting homes now to increase occupancy before monetizing. As Jeff mentioned, the settlement agreement resulted in a one-time gain during the Q3. We believe there is still meaningful upside to realize when we sell the properties over the next couple of quarters. A few updates on land development.

In Bastrop County, our 1,100 pad development near Austin, the roads and utilities are nearly complete for phase one. We anticipate selling lots during the first half of 2025. We are starting the roads in phase two now and will provide additional updates next quarter. In Horseshoe Bay, we own 300 developed mobile home lots. A market study estimated that the lots are worth approximately three times the value on our

balance sheet. This quarter, we are opening our first new company-owned dealership since the post-IPO buildout. The sales lot is near the Horseshoe Bay land, and we will begin selling land and homes in the first half of 2025. We are making progress on our retail business and view our independent dealer network as a path to expand our company-owned footprint as some business owners approach retirement age. I continue to believe in the long-term fundamentals of this business.

We are seeing more coverage of factory-built housing in the media and hear talks of regulatory reform. The affordable housing crisis is not solved without our industry. Operator, this concludes our prepared remarks. Please begin the Q&A.

Operator (participant)

Certainly. And our first question for today comes from the line of Daniel Moore from CJS Securities. Your question, please.

Thank you, Duncan. Thanks, Jeff, for all the color and taking questions. Let's start with good morning. Appreciate the color on October. Maybe just talk about your expectations for production rates across your three plants for the December quarter in light of relative to Q3, in light of the strength in orders that you've seen during the fall show, and it sounds like you intend to ramp production rather than let backlogs build, but any detail or color there would be really helpful.

Duncan Bates (CEO)

Yeah, absolutely. Dan, we were looking for a catalyst to ramp production up, and we've been trying to build our backlog. Q3 was lighter than we would have liked, but we created a lot of excitement around the fall show, which was at the end of September, and I think as our sales team started seeing the

new colors and features in the houses and sharing those with customers ahead of the show, we had some customers that decided to wait and order at the show for delivery in the Q4, even in the Q1 of next year, and so that delayed some shipments for us. I think the other thing, we continue to build the team here, and we've made over the last couple of years several key senior hires.

What wasn't working for the two Texas plants is me overseeing the sales department and all my spare time. And so we've hired a senior sales manager there, and he's managing the team daily. And I think pricing's had an impact. I mean, we haven't taken pricing down. I think some of our larger competitors have. So ultimately, we're building these show orders now. We had a little bit of a delay getting some of the new materials in, but I certainly expect the Q4 from a product sales standpoint to be up over the Q3.

Operator (participant)

Very helpful. And maybe just talk about how orders obviously give good detail around the show, and we can kind of see how things are trending in October. But just how have orders trended thus far into Q4? The momentum you've experienced in Q3 kind of carried over so far this quarter?

Duncan Bates (CEO)

Yeah. I think even since the show and writing all the orders at the show, we've had pretty steady sales for the last couple of weeks that continue to take the backlog out, which is good. Production's still below where we'd like it to be, but better than Q3. And I think the encouraging thing is we're starting to see the park customers come back. That's been a space that kind of through COVID, right, the two founders

really built the business on the park side. We had a good dealer network, and we've been struggling on the community side and are starting to see more inquiries and sign some meaningful deals. Not huge deals where you're selling hundreds of houses, but deals where we're selling 20-60, and that helps us out a little bit. So it's still slower than we'd like, but it's certainly improving.

Operator (participant)

Really helpful. And it doesn't sound like it, but just checking to see if there was any impact from the hurricanes on the Georgia and Carolinas. And if not, as we look forward, do you see potential opportunity either in terms of rebuild or FEMA replacement or both?

Duncan Bates (CEO)

Yeah, absolutely. We were fortunate where we had some delayed shipments just going to customers in certain areas in the Southeast from the storm. But as far as the plant and the inventory and our team there, we luckily came out of it unscathed. I think the hurricane rebuild work has been confusing. There's been conversations with HUD and with other providers of, say, temporary or workforce housing. It

doesn't seem like there's been any meaningful money that started to flow yet, but we certainly expect that going forward, there will be rebuild work. And we're getting a lot of inquiries on our workforce housing products that we primarily build in Texas, but we can build in Georgia for temporary housing applications over in the Carolinas.

Operator (participant)

Great. Last one, I'll jump back in queue, but gross margins, as you pointed out, tick lower sequentially. Sounds like you'll get better absorption starting in Q4. So any more specificity in terms of what normalization looks like for margins as we think about Q4 and into the first half of next year? Thanks again.

Duncan Bates (CEO)

Yeah, absolutely, Dan. I think we'll get back to in the 30s and low 30s in Q1 or I'm sorry, in the Q4. Labor's obviously the market's not as tight as it was through COVID, but it's still pretty tight, and you want to hang on to your people. And so this was a quarter where just our production was down until we got through the show and really started building those orders. And I think we'll normalize heading into the end of the year as we ramp production up to, and I think, right-size the team from a production standpoint.

Operator (participant)

Perfect. Appreciate the color.

Duncan Bates (CEO)

Thanks, Dan.

Operator (participant)

Thank you. And our next question comes from the line of Mark Smith from Lake Street. Your question, please.

Mark Smith (Senior Research Analyst)

Hey, Duncan. Just wanted to check in first on the settlement agreement, if we've now kind of worked through everything there, if there's any kind of ongoing impact as we look at Q4.

Duncan Bates (CEO)

No, we've worked through it. This was the last quarter of the moving pieces around getting the settlement agreement onto the books. We did realize a pretty meaningful gain during the quarter. And ultimately, the borrower's current, and we're now operating two parks that we've got our arms around, and we've got a team hired at the corporate level and then new park managers on site. And so there's

some cleanup work to do. There's opportunities to take occupancy higher. And then I think we'll ultimately look to monetize these assets in the fairly near future. But as far as the moving pieces of getting the settlement agreement on the books, we are complete.

Mark Smith (Senior Research Analyst)

Perfect. And then I did just want to ask about the big ramp in the MHP financing portfolio that came up in size quite a bit. If you can just speak to kind of what all happened there?

Duncan Bates (CEO)

Yeah. And it was really from as part of the settlement agreement, the borrower had MHP notes that were secured by homes, and then there were also development loans as well. So we shifted with the settlement, we shifted some of the balances from the development loan portfolio over to MHP.

Mark Smith (Senior Research Analyst)

Perfect. Thank you.

Operator (participant)

Thank you. And our next question comes from the line of Alex Rygiel from B. Riley Securities. Your question, please.

Alex Rygie (Analyst)

Thanks. Good morning, Duncan. A couple of quick questions. First, can you give us a clarification? Did you say earlier that product sales, gross margin would get back above 30% in the Q4?

Duncan Bates (CEO)

I think we'd like to get to 30%. We slid from 31% to 29% with the lower production in the Q4, and so we'd like to get closer to where we were in the Q2. I think the improving production helps, but there's also we're keeping an eye on the lumber and wood products, which I think have been impacted after the hurricane, so that's the goal, but the margin really slipped because of labor under absorption in the Q3.

Alex Rygie (Analyst)

Helpful. And then, how long might it take to increase the occupancy at the two owned parks to a level that's attractive to sell?

Duncan Bates (CEO)

I think we can get there in a quarter, Alex. In this, both of these parks had a lot of brand new homes that we had shipped, some of which had been set up and not rented, others that were on pads and utilities weren't connected. So we've been really focused on Beaumont, Texas. I think that's where the most upside is. We've done a pretty good job so far with the new park manager leasing those homes up. So I'd like to get us somewhere between 50% and 70% occupancy before we ultimately monetize these. We'll just see how it goes.

Alex Rygie (Analyst)

That's helpful. And then as it relates to the fall show, it sounds like coming out of the fall show, you've got good visibility for backlog into 1Q25. You've increased production in your Texas plants. Does that all suggest that the show was better than you had expected or about the same?

Duncan Bates (CEO)

No, the show really was a big success. I mean, that's our big sales event every year. And I think the difference this year is we made more updates to the houses this year than we probably had in the last 10 years combined. So I think new flooring options, wallboard, cabinet colors, countertops, walk-in showers. The team really did a nice job on the interior and exterior finishes to modernize the product.

And I think what was we really pushed that. We got a lot of customers there. Weather was great. And ultimately, we wrote a lot of orders, but I'd say 95% of the orders were for the updated finishes. And so it took us a little bit of time, a couple of weeks, to get all the new colors in, and then we started building them.

So I think in the long term, our customers were looking for us to update the product. We did. The feedback was great. And we're starting to get these homes out on dealer lots where they're selling them really quickly. And I think that there may have been a little pain kind of getting through the show and production in the Q3, but for the long term, it really sets us up nicely.

Alex Rygie (Analyst)

That's great. Congratulations. Thanks.

Duncan Bates (CEO)

Thank you.

Operator (participant)

Thank you. This does conclude the question and answer session of today's program. I'd now like to hand the program back to Duncan Bates for any further remarks.

Duncan Bates (CEO)

Sure. Thank you for joining today's earnings call. We appreciate your interest in Legacy Housing. Operator, this concludes our call.

Operator (participant)

Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.