In the third paragraph of the 2.5 page memo from Legacy Housing co-founders Kenny Shipley and Curt Hodgson to their employees, the pair use this phrase. “We have always been world class “shuckers-and-jivers,” and we intend to shuck and jive right through this unprecedented crisis.”
Wikipedia says that “In African-American culture, Shuckin’ and jivin’ (or shucking and jiving) is joking and acting evasively in the presence of an authoritative figure. Shuckin’ and jivin’ usually involves clever lies and impromptu storytelling, used to one-up an opponent or avoid punishment.”
For new readers or those who missed part one of this two part article, it would be useful to read that initial report at the link below. It includes the response by Legacy’s management to the notification of the leak to MHProNews and their request with respect to the document which they admit is authentic. Additional insights are also in that first report.
This report will provide the entire leaked memo. This report will also include a press release from Legacy, as well as a copy of the transcript from the most recent Legacy investor relations call. Those two corporate items will be followed with additional insights from one of the Legacy employee-tipsters. Finally, there will be an MHProNews Analysis and Commentary.
Against that backdrop is the entire leaked memo, which one of multiple tipsters inside Legacy Housing – a publicly traded firm (NASDAQ:LEGH) – that whistleblowers demonstrated exclusively to MHProNews came from the company’s human resources (HR) department.
There was no letterhead used on the original document. The all-caps header below was in the original. The document was delivered via email to company employees. That email was date and time stamped on “Monday, Mar 23, 2020, 11:53 AM.”
JOB RETENTION AND JOB SAVING MEASURES
Dear Valued Employees,
As we write this, our government(s) may be putting us on a lock down. If that should occur, this plan may change. Please regularly monitor your email for the latest Company announcements concerning the crisis.
What a difference a few weeks can make! Four weeks ago, we were preparing for the biggest mobile home show in the country and looking forward to showing off our new products. Then SLAM-BAM, the whole country started shutting down, school by school, church by church, city by city. And then, after we had already taken our new homes to the show, they cancelled it too.
During this turmoil, Kenny and I have not slept hardly at all. Our concern is for our families, our own health, your health, and for the health of our company. We have always been world class “shuckers-and-jivers,” and we intend to shuck and jive right through this unprecedented crisis.
Considering the recent economic turmoil, we have already initiated the following sales and austerity moves.
Production in Fort Worth has been reduced approximately 15%.
Production in Commerce has been reduced approximately 25%.
We laid off approximately 52 production workers.
All overtime has been suspended.
We implemented company-wide restrictions to mitigate the risk of COVID-19 exposure amongst our workforce, which has increased absences.
Wages for new hires have been reduced at all levels by $1 per hour.
Deals are being offered to our retailers for ordering new stock units. We are financing our dealers’ freight for the first time in our company’s history.
We are accepting “short pays” of between $1400 and $5100 per home on over half of our display inventory.
We are financing units for mobile home parks without requiring a down payment, which increases our risk.
All 13 of our retail stores have been authorized to heavily discount their inventory.
We are developing monthly “specials” at drastically reduced prices.
COMPENSATION ROLLBACK
We are confident that these bold moves will be enough to continue to operate (except in the event of a total government shutdown). We expect a steep decline in revenue, an increase in repossessions, and that profits will suffer, especially in the third and fourth quarters.
Accordingly, and to avoid massive layoffs, we are announcing an eight percent rollback of all compensation, company-wide, effective with the pay-period that begins on March 26th. This rollback applies to every employee, officer, and director and to all forms of compensation (hitch pay, commission, pay by the mile, bonuses, etc.).
The regular hourly wage for production workers is exempt from this rollback.
How long will the rollback last?
There is one key number we are looking at in our financials that will tell the story. Our SG&A expense, as a percentage of sales, must be within an acceptable range. SG&A is an abbreviation for sales, general, and administrative expenses.
In 2018 our ratio was 15.1%. By late 2019 this ratio grew to 18.1%. With reduced sales, we expect the ratio would go over 20% in the coming quarters if not for this rollback and other cuts in expenses. To put this in perspective, Skyline-Champion and Cavco have SGA-to-sales ratios of 13.2% and 13.4% respectively. We cannot be competitive unless our SG&A expenses are below 17.5%. At our size, we do not expect to get our SG&A ratio down to the levels of our larger competitors, but we simply cannot let SG&A expenses continue to climb. Department heads of SG&A functions must reduce their expenses. With a little attrition and increased sales in the fourth quarter, we are expecting to “rollback the rollback” sometime this year.
We expect merit bonuses and merit raises will happen, as usual, between Thanksgiving and Christmas.
If any one of you absolutely can’t make ends meet due to this rollback, please feel free to privately contact one of us. We value you, and we will use our personal resources if need be.
WORK-FROM-HOME OPTION
We understand that many of you are facing childcare challenges due to school and/or daycare closures. Some of you are concerned about the potential complications of COVID-19 due to your age or underlying health conditions. Those who work in our Accounting, Finance, and/or Legal Department(s) can work remotely with little to no extraordinary effort. In response, we have developed the following work-from-home option:
With permission from your supervisor and the executive team (Kenny, Neal, Cork or Curt), you may work from home. You must have a computer that can access our network and be accessible by phone. You must also be available to occasionally come to the office if your supervisor needs you in person (up to 8 hours per week). Compensation for hourly employees will be based on 40 hours per week. Paid holidays and vacation accruals will be kept the same. Work-from-home employees will see an additional 12% reduction in pay for a total compensation rollback of 20%.
Work-from-home status may not be optional for some employees. If that applies to you, your immediate supervisor will notify you.
Sales Coordinators, General Managers, purchasing employees, production, and sales staff with less than one year of service are not eligible to work from home.
The work-from-home option shall terminate when schools resume or whenever professional sports open back up, whichever occurs first.
To elect this option, first obtain your supervisor’s approval and then submit your request to the
HR Department (hr@legacyhousingcorp.com) no later than the end of business on Tuesday, March 24th or Tuesday, March 31st. The HR Department will notify you of your change in status once your request has been approved by the appropriate executive.
PAID SICK LEAVE FOR COVID-19 DIAGNOSIS
Any active employee who tests positive for COVID-19 will receive up to three weeks of paid sick leave during a medically required absence and/or quarantine. In the unfortunate event this applies to you, please contact the HR Department.
LAYOFFS & NEW HIRES & SPECIAL CASES
Even though we expect to be able to continue to operate with this plan and do not envision a mass lay off, it may become necessary for us to selectively eliminate some positions and consolidate others. As our staffing needs change, we may selectively hire some folks, too. If your position is selected for elimination, you may be eligible for state unemployment and other disaster-related benefits. Please contact the HR Department for assistance.
This turmoil will pass, we will survive, and there will good that comes out of these difficult times.
Thank you and please be safe,
Kenny & Curt”
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Part II. Legacy Housing Corporation Announces New Credit Facility
April 01, 2020 13:19 ET | Source: Legacy Housing Corporation
BEDFORD, Texas, April 01, 2020 (GLOBE NEWSWIRE) — Legacy Housing Corporation (the “Company”) (NASDAQ: LEGH), a leader in the manufactured housing industry, today announced the closing of a new four-year credit agreement with Capital One, N.A. (“Capital One”) that replaces the current agreement with Capital One that was due to expire on May 11 of this year. The new credit agreement closed on March 30, 2020 and increased the Company’s borrowing base with Capital One from $45,000,000 to $70,000,000. In addition, the new credit facility allows the Company to borrow at the lower interest rate of one-month LIBOR plus 2.00%.
Cornelius “Cork” Van Den Handel, Chief Financial Officer, commented on the new credit facility, saying, “We are delighted to continue our strong relationship with Capital One. The new agreement will provide the Company with operational liquidity at extremely competitive rates, and provides room for the continued growth of our business and financial flexibility.”
About Legacy Housing Corporation
Legacy Housing Corporation builds, sells and finances manufactured homes and “tiny houses” that are distributed through a network of independent retailers and company-owned stores and are sold directly to manufactured housing communities. We are the fourth largest producer of manufactured homes in the United States as ranked by number of homes manufactured based on the information available from the Manufactured Housing Institute. With current operations focused primarily in the southern United States, we offer our customers an array of quality homes ranging in size from approximately 390 to 2,667 square feet consisting of 1 to 5 bedrooms, with 1 to 3 1/2 bathrooms. Our homes range in price, at retail, from approximately $22,000 to $140,000.
Forward-Looking Statements
This press release contains forward-looking statements within the meaning of the Securities Act of 1933, the Securities and Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. As a result, our actual results or performance may differ materially from anticipated results or performance. Legacy Housing undertakes no obligation to update any such forward-looking statements after the date hereof, except as required by law. Investors should not place any reliance on any such forward-looking statements…”
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Part III. The Legacy Housing Investor Conference Call
Note that what follows broadly confirms the leaked document, but also sheds additional light on the concerns of the company whistleblowers. For those in manufactured housing who are wondering how the COVID19 pandemic is impacting competitors, this transcript will shed light on that issue.
Further, in some respects, this adds to the insights found in our report from Marcus and Millichap’s recent ‘deep dive’ for investors and commercial real estate focused firms on what they see economically during and after the Wuhan Virus contagion.
One of the pull quotes from the transcript below, which MHProNews may revisit in another upcoming report, is this one. After a misstatement on the total number of manufactured home industry shipments for 2019 Hodgson said “…and I wouldn’t be surprised if we have a 20% decrease in those shipments over the next 12 months as we work through COVID-19. Hopefully, Legacy won’t feel as much of a decline, if a decline at all.”
Indeed, several statements below strike near the heart of the concerns of those who leaked the employee memo, shown above.
From industry competitors perspective, the claim by Hodgson about Skyline Champion below is a significant one that will be part of upcoming MHProNews reporting.
Per Yahoo Finance, the following is an “Edited Transcript of LEGH.OQ earnings conference call or presentation 30-Mar-20 3:00pm GMT.” The term “edited” may refer to an apparent typo in an earlier version where “moat” was misspelled as “mote,” as well. Additionally, MHProNews corrected a typo below of the word “crisis” and some other items but may include other edits (e.g.: removing some of the ================) that don’t change the meaning or sense of the original transcript, which can be found at this link here. Curtis is “Curt” and Kenneth is “Kenny.”
Q4 2019 Legacy Housing Corp Earnings Call
Apr 1, 2020 (Thomson StreetEvents) — Edited Transcript of Legacy Housing Corp earnings conference call or presentation Monday, March 30, 2020 at 3:00:00pm GMT
Ladies and gentlemen, thank you for standing by, and welcome to the Legacy Housing Corporation Q4 2019 Earnings Call. (Operator Instructions). I would now like to introduce your host for this conference call, Mr. Curt Hodgson, Chairman of the Board. You may begin.
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [2]
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Good morning. 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.
Now before we turn to what is a lot of encouraging news about Legacy’s performance in Q4 and in 2019, I think it’s appropriate, first, to address the ongoing pandemic that has impacted the world and, obviously, caused a great deal of anxiety and turmoil across the globe. Our thoughts go out to all those impacted by the current crisis, and we certainly encourage everyone to take the necessary precautions to minimize any risk to your health and the health of those around you.
We also want to thank you for joining the call in this current environment. I’ll address in more detail the potential impact of the pandemic on Legacy later in my remarks.
Now then, on a happy note, let’s turn to an overview of our 2019 results. 2019 was quite simply the best year in Legacy’s 15-year history, and obviously, the first year that Legacy was a publicly traded company. We achieved a record revenue of $169 million, a 4.4% increase over our results for the 2018 fiscal year. We did this largely by improving our product sales to manufactured home communities, growing those sales from $31 million to $64 million over — year-over-year, a massive 106% increase for 2019.
We spent a lot of time in the last few years cultivating relationships and expertise with the respected manufactured home communities. And this was the year those efforts reaped dramatic dividends. We believe we’re in the middle of an upcycle for restocking, refurbishing and expanding existing parks, and we believe this trend to generally continue for the next 24 to 36 months. We are also pleased that we improved our company-owned store sales by $3 million to $16.1 million in 2019. As you know, our company-owned stores carry higher margins and higher finance capture rates, and this helps us — this helps explain how we improved our revenue in 2019, even though the volume of homes sold remained relatively flat as compared to 2018.
Legacy also had a tremendous year in growing our consumer and manufactured home community loan portfolios. In 2019, our interest income grew by $3.4 million, an 18.3% increase over 2018. Even more impressive, our manufactured home community portfolio expanded by $34.4 million to now $92.3 million, reflective of the tremendous year we had with respect to orders for communities and the financing of those orders.
We also expanded our consumer book by approximately $8 million to $105 million, net of deferred financing fees and allowance for loan losses. We think our books provide a tremendous moat, a Warren Buffett type moat, even in challenging times, due to the great work of our in-house team in originating and servicing these loans.
Our first year as a public company certainly presented some challenges and required some adaptation and expenditure of resources to meet our public company obligations.
This is most reflected in our SG&A increase to approximately $25.5 million in 2019, a 21% increase from the prior year. But overall, 2019 was a great year for Legacy. Our product sales margins were 27% compared to 23% in 2018. Our income before tax rose to a very healthy $37.6 million, an increase of approximately $7 million from the prior year.
Likewise, our net income increased to approximately $28.8 million, a more than 34% increase over the preceding year. For the year, our earnings per share was $1.18, an 11% improvement over 2018.
I’m very proud of what we accomplished in 2019. We ended the year on a strong note with healthy demand levels of production and a very strong balance sheet. While the current COVID-19 situation presents definite challenges, we think it also presents, or will present opportunities. Legacy has always managed to perform well relative to its peers when times get tough, and we anticipate this to be the case during the COVID-19 era.
We think this is, at least, in part, due to centralized and vertical nature of our operations that allows us flexibility to adapt quickly as this is particularly beneficial when conditions stabilize and improve as it will enable us to take advantage of some growth or acquisition opportunities and much more appealing dollar figures or valuations than we have seen in the last few years.
Let me briefly provide some more detail on our view of where Legacy is situated in light of the global health and economic crisis we face. Legacy is more fortunate than some in that the manufactured home industry is not borne to direct an immediate brunt of this pandemic, like some companies, say, in the hotel or airline industry. But Legacy, like all businesses, is certainly going to be impacted. For example, at least in a period for — though Legacy, like all businesses, will be impacted. For example, for at least a period of 2020, we anticipate some negative impact on our operations earnings, as there is a likelihood of increased loan losses or deferred payments as loan advisers suffer cash flow issues resulting from reduced employment, reduced sales volume, as potential customers are unable to shop for new homes or cannot qualify for a home purchase and delays of some of our real estate development projects as zoning regulatory and permitting decisions are likely to be postponed.
However, this situation will ultimately present opportunities, such as: with the cost of some of our raw materials, which are already coming down; or like our recent negotiation and more favorable borrowing terms for our credit facilities; or perhaps more long term as we anticipate easing of our labor cost.
We are being proactive so that Legacy is positioned to come out of these difficult times with positive momentum. Kenny and I have navigated some of the most difficult times ever over the last 30, 40 years. That experience taught us some value lessons, we’ve seen oil prices decline like they have recently in 2 episodes previously in Texas. This isn’t our first rodeo.
We’re applying these lessons to the current situation by using some of the tactics we know can help us endure and prosper during these trying times. For example, we’ve already begun offering discounts for the sale of aged inventory sitting on dealer and company-owned stores, offering discounts on orders for new units and reducing down payment requirements for certain manufactured home communities. Additionally, the company has modified rates of pay for nonproduction workers and adjusted our overtime policies company-wide to preserve our strong financial position, even when facing the current financial turmoil.
With our order book, our balance sheet and available liquidity, we anticipate being able to maintain profitable production for the next few months, even in the current climate, and we will continue to execute our business objectives and strategy. This is, obviously, an evolving situation, and we will update you if anything changes.
Now I’d like to turn the call over to Cork in order to discuss our quarter-over-quarter comparison. Cork?
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Cornelius Van Den Handel, Legacy Housing Corporation – CFO & Corporate Treasurer [3]
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Thanks, Curt. Net revenue for the fourth quarter of 2019 was $43.3 million, an increase of $8.3 million over 2018’s fourth quarter net revenue of $35 million. Product sales, the largest component of our revenue, grew 25.7% in the quarter to $36.5 million. Sales to manufactured home parks increased $8.3 million or 91% to $17.4 million, while sales through our company-owned retail stores increased 87% in the quarter to $4.9 million, and sales of consigned inventory through our network of independent retailers increased $1.1 million to $10.7 million. These increases were partially offset by reduced factory direct sales compared to the fourth quarter of 2018.
Product sales gross margin percentage increased to 24.3% driven by the increasing sales through our retail stores, which typically carry the highest gross margins. Interest income in the quarter was $5.9 million, a 14.7% increase over the $5.1 million recorded last year.
Interest generated by our consumer loan portfolio increased 9.3% to $4 million, and interest from our manufactured home park loan portfolio increased 28.8% to $1.8 million compared to the fourth quarter of 2018.
SG&A expenses of $6.6 million increased $300,000 from the fourth quarter of 2018, reflecting higher personnel expenses related to public company compliance and staffing of our company-owned retail stores, partially offset by reduced delivery and insurance expenses and reduced losses on sales of repossessed homes.
Pretax earnings increased $5.2 million to $8.9 million in the quarter. Income tax of $2.1 million increased $1.2 million over the fourth quarter on — of 2018 on the higher earnings recorded. Net income was $6.9 million for the fourth quarter compared to $2.8 million in the similar period of 2018.
Income per share based on basic and diluted weighted average shares outstanding was $0.28 compared to $0.13 in the prior year quarter.
And finally, equity has increased $33.1 million from year-end 2018 to $222.4 million. That completes our financial overview, Curt.
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [4]
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Thanks, Cork. I know on our last earnings call, we discussed on our third quarter earnings I expect optimism about the direction we were headed going into fourth quarter. I’m grateful that, that optimism was justified as we performed well in the fourth quarter. As I sit here today, I know we’re facing an unprecedented global health and economic crisis. And obviously, it makes it difficult to predict with any precision what the next few months will bring. But I remain optimistic about the future of Legacy and continue to believe we will return significant value to our shareholders over the next 12 or 18 months.
Let me paint a picture anticipating the questions about what the next 3 or 6 months looks like.
We have decreased our Texas production, and our production overall in the company from 15 to 13 floors per day, it’s a pretty modest decrease, but we have supplemented that with increasing our distribution from private branding up in the State of Indiana where we buy houses from other manufacturers and sell them to our park customers. So I’m kind of anticipating that the third — that the second quarter sales will be about the same as before.
Going into the third quarter, I can’t really tell because I don’t know where COVID-19 is going to take us. But our order backlog continues to be strong, we’re selling even in this crisis. In Georgia, we sold production every week through this crisis. In Texas, we should know within the next couple of days whether or not that production will continue because we have some promotions going on which expire April 1. I’m confident about the second quarter, I’m optimistic about the third quarter. We’ve decreased SG&A cost by approximately 10% with some of the moves we just made. So our profitability and our revenues should be strong.
All 3 plants are working. They’re working at a standard 40-hour work week or producing like we always have before. Thank you for your interest and attention today, and I will now take any questions that you all have.
Our first question comes from David Burdick with Oak Ridge.
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David Richard Burdick, Oak Ridge Financial Services Group Inc., Research Division – Research Analyst [2]
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So you ended the year strong. And it’s tough, the virus came at a time when the business was seeing some great momentum. But just wanted to get a little more color on that Q4 strength and where that was coming from.
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [3]
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Well, this is Curt. I think it came from a lot of different places. The Q4 normally is kind of a down quarter in production or in our industry, but we were producing at the same rate as we were in Q3. So we were able to have a higher top line than we would have expected normal Q4 to be. It’s also a period where we tend to pay bonuses and incur a lot of SG&A expenses. But our Q4 actually, our SG&A expenses held fairly steady as a percentage of sales.
So I think that was — those were 2 pleasant surprises. Our volume was a little higher than we would have expected and our SG&A held steady even in the fourth quarter where it’s usually a little higher. We continue to build our book of business and our portfolio. Our interest income moves up ever so gradually every month, every week, every quarter as we put on — as we take our winnings and redeploy them in our own industry. I hope that answers your question.
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David Richard Burdick, Oak Ridge Financial Services Group Inc., Research Division – Research Analyst [4]
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Yes, that was helpful. So you talked about your order book being strong. Can you just provide a little more color on that? Are you referring to sales in the last couple of weeks? Would you be able to maybe provide a little more details on March trends? And then you also mentioned you are offering some discounts in down payment assistance. Can you talk about that a little more in some detail?
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [5]
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Yes, I’ll answer that one, too. Sales in Texas have declined to about 50% or 60% of production during COVID-19. Sales in Georgia have surprisingly been strong. I think they even exceeded production. The — and we missed our big show of the year, Tunica, which is the big annual show for the industry, happens at the end of March, Tunica, Mississippi. And they canceled that show, which we typically get 300, 400, 500 units of orders at that show.
In lieu of that, we unveiled the plan that was essentially the same types of promotions we do at Tunica. And that doesn’t end until Wednesday. So I don’t have the numbers. The anticipated numbers for that are almost as good as Tunica would be with essentially the same type of promotions like 6 months free interest to our dealers that participate. This isn’t the first time that we’ve offered a low down payment financing for communities. We’ve done it regularly. We just combine that with the typical Tunica sales to try to lock in these communities to production. We’re kind of anticipating softening of prices and cost throughout our entire industry. We just want to be ahead of it and make sure that we do it before the competition does. I haven’t — I don’t think any of our competition has followed suit yet, but lumber is down maybe 1/3, steel is down a little bit, labor is down a little bit, and we may have an opportunity in the next 6 months to offer more promotions and maybe even have some super-duper sales along the way. That’s what we intend to do is to fight for market share as the pie likely will get a little bit smaller across the entire nation and shipments of manufactured housing. We had a 110,000 shipments in the last 12 months nationwide, manufactured housing, and I wouldn’t be surprised if we have a 20% decrease in those shipments over the next 12 months as we work through COVID-19. Hopefully, Legacy won’t feel as much of a decline, if a decline at all.
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Operator [6]
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Our next question comes from Mark Smith with Lake Street Capital.
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Mark Eric Smith, Lake Street Capital Markets, LLC, Research Division – Senior Research Analyst [7]
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Curt, can you talk a little bit about mix of sales during the quarter, what you saw as far as singles versus double wides? And then as you’ve been through some down cycles before, how you maybe see that mix shifting here over the next few months.
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [8]
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I’m going to have somebody else address the mix question because it’s not really a statistics — a statistic that I keep up with very much. But the down cycles, I’m 66 years old this year, and I’ve been in the mobile home business in Texas since 1980. I’m more concerned about the decrease in oil prices than I am with COVID-19. So we’ve had oil go from $60 a barrel to, today, $20 a barrel and Texas, Oklahoma and Louisiana are oil states, and the jobs there, they’re associated with the price of oil. In that case, we don’t have much exposure to the direct oil sale. We don’t have much West Texas or Permian Basin exposure. In fact, I’d say it’s probably no more than 3% or 4% of our consumer portfolio.
But the Texas, as a whole, and our immediate states — Houston has a lot of oil-related jobs that are having layoffs at those companies. So we don’t know for sure what will happen to our retail book. We anticipate a slight increase in repossessions and a slight increase in the difficulty of collections. But people keep moving to Texas, we keep having positive demographics. They’re coming from everywhere, from the Midwest and from California, everywhere. As long as we have positive demographics in this state, we will be just fine. And that said, the Southeast had been amazingly resilient through this. In fact, we may have to increase production in Georgia because our sales keep on outperforming our production. So on balance, I think that we’re going to get through this from an experience point of view.
I have a saying that I developed many years ago, you can’t get small fast enough when oil goes from $60 to $20. So within 5 days, we implemented 12 different steps to work on SG&A, pricing, to do more promotions. And I think we’re already ahead of our competition. One major company, Skyline Champion, I think, has already shut down 13 plants. And while all 3 of our [plants are] pretty much close to capacity. So that’s it.
So Kenny, do you have a feel for product mix?
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Kenneth E. Shipley, Legacy Housing Corporation – Co-Founder, President, CEO & Director [9]
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I think before oil have dropped and everything, I think, we used to be about a 50-50 doubles to singles, but as the park sales have gotten stronger and most of what they buy is single wides, I would probably say that the singles are getting to be about 65% of the market. We’re still about 35%, doubles, 65%. I would think that’s about what the mix is.
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Mark Eric Smith, Lake Street Capital Markets, LLC, Research Division – Senior Research Analyst [10]
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Okay. Perfect. And then I know that mobile home parks, that this is kind of a growing business for you guys. But maybe as you look backwards, if we’ve seen recessions in downturns? Have you seen people, primarily, in that Texas market, downsize homes and move more into manufactured housing outside of kind of site-built homes?
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Kenneth E. Shipley, Legacy Housing Corporation – Co-Founder, President, CEO & Director [11]
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I think that’s going to — yes, I think that’s going to happen more and more with — especially with this COVID-19. I think people are going to want to try to get back out of the cities, where they’re all crammed together. And you know, we build affordable housing. I think you’re going to see a lot of people start to downsize and probably learned their lessons. We look for some growth there.
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Mark Eric Smith, Lake Street Capital Markets, LLC, Research Division – Senior Research Analyst [12]
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Okay. Perfect. And then last question for me, just as we look at the loan business, both consumer and manufactured home parks. Can you talk at all about kind of the spread that you’re seeing as your borrowing costs have maybe come down? And do you see or foresee these rates that you land at coming down in — kind of in sync with that? Or is there an opportunity to get — maybe get a little more spread?
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Kenneth E. Shipley, Legacy Housing Corporation – Co-Founder, President, CEO & Director [13]
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Curt, you want that?
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [14]
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Yes. Over the last years, we’ve had a gradual decline in rates just because we want to be less of a sticker shock. So our consumers were paying 14% interest and now we have programs all the way down to 11% or 12%. And our park, we’re paying 8.9%, and now we offer 7.9%. But that doesn’t really affect our profitability because we’ve had a corresponding increase in gross margin, which I think Cork talked about a little bit on this. We think we’ll have a — we don’t have any price reductions in mind, but we know that we have material labor cost coming down. So our gross margin during this crisis, the COVID-19 crisis, will actually go up. So we’re really just a matter of how we’re going to maintain our difficult loans, if they’re any. Our consumer portfolio hasn’t felt one bit of hiccup yet. Our most recent data shows that our over 60 rate has not increased at all during this crisis yet. We’ve had a few parks that have indicated concern of their ability to pay, should their consumers don’t pay their community rent. But we haven’t had anybody go into a nonpayment situation since the COVID-19 crisis began. In full disclosure, we’ve had 2 or 3 before the COVID-19 that were slow pay, which is a little bit deterioration in our park portfolio. It’s a matter of whether or not the portfolios perform or not and what happens when they don’t perform. Do we repossess the inventory? Do we work with the — our borrowers? And those policies are a little bit proprietary [2021] discussions on our earnings calls. But we’ve been through this before. We know what we’re doing. And I think our earnings and our sales will reflect far superior performance to our peer group.
I don’t even think — those of you that knew me, Kenny and Neal on the roadshow, we were lamenting how well we did in difficult times. And now it’s time for us to prove that out during this health crisis. And we will prove it out. We’ll do just fine in 2020 and probably 2021 as well.
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Operator [15]
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(Operator Instructions)
Our next question comes from Chris Colvin with BICM.
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Chris Colvin, Breach Inlet Capital Management, LLC – Founder & Portfolio Manager [16]
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Curt, I had a question, just a couple of questions, clarifying. So did you say that the second quarter revenue, you’re anticipating, will be roughly in line with the first quarter, which presumably hasn’t — wasn’t too impacted? Or can you repeat your commentary there?
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [17]
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Well, I just tie revenue to production, although, there’s a lag because we don’t count as a sale until it ships and everything else is in place. So assuming that production or that sales revenue is reflected in production, then we — while we had a, I don’t know, about a 10% decrease in production, or we’re having for the second quarter, we’re adding to top line an approximate same amount because of the deal we made with one of our principal competitors to buy a bunch of houses from them in Indiana and sell them to our best customers there. It’s something we’ve done for years, lately with another affiliated company, but we just made a big deal. So I think that assuming we get those built and shipped, which their plant currently isn’t running, then I think the second quarter will be approximately the same as first quarter in sales, could even be a little bit better, just a little bit better, like 1% or 2% better. I don’t see any deterioration in the second quarter whatsoever. And I’m trying to form an opinion on third quarter, but every time I wake up, there’s a new thing on the news. So I don’t really — it’s really more of the oil prices in Texas. So I think the health thing will be over sometime in the summer. But the oil prices in Texas could cause us to make even more cuts in production in Texas if things get real soft here.
So it’s more of a function of oil prices in the third quarter than it is the COVID-19 crisis.
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Chris Colvin, Breach Inlet Capital Management, LLC – Founder & Portfolio Manager [18]
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Right. That’s helpful. And then as far as production in Texas, you’ve said a couple of times that Georgia is doing great, but it was unclear in Texas. So you said production had dropped to 50% to 60%. And then you ran this promotion since you didn’t have the Tunica show. So what is production today? Because you said something about plants operating at full capacity. So I guess, it’s unclear how much kind of production is down in Texas?
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [19]
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And I think maybe I was getting a couple of different concepts infused. This time of year, we typically sell less than production and then we do promotions like Tunica to stimulate production. It’s kind of a seasonal business that the winter in the early part of the year is not as good as the summer and the fall. So we’ve been experiencing, since COVID, an order book of around 50% of production in Texas, which isn’t that much less than we normally would without promotions. While we just had a substitute for Tunica promotion, our sales staff seems to think that they’re going to be delivering this week, 300 to 400 orders from that sales promotion. I’d be happy with 200, just to be quite honest. So the decreases in production we’ve had and the ding to top line are all Texas-based. Each plant in Texas, we have 2 plants in Texas, decreased production by 1 per day. Georgia remain the same, and I think actually it went up a little bit and the Indiana boost or the Midwest boost will help top line. So then when I said 50%, I mean that we’re ordering on the order book through this crisis is approximately half of production in Texas. And as far as our — the actual level of production, as I said earlier, we just decreased it nationwide from 15 to 13 per day, which is — I’d have to do the math on that, but I guess it’s around 14%. And I don’t look for further cuts in production for quite a while. We have enough order book now than we could coast to the second quarter. It’s only the third quarter that would be effective. We probably wouldn’t decrease production in Texas in the second quarter, really, no matter what happened to the order book. Here, it’s the third quarter that we might have to work on if the order book doesn’t come back in Texas, I would say, within the next 6 weeks.
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Chris Colvin, Breach Inlet Capital Management, LLC – Founder & Portfolio Manager [20]
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Okay, that’s helpful. Yes. That’s clarifying that the 50% to 60% of production, if there’s a huge seasonal aspect, it’s not the recent events. So that’s helpful. And then on the SG&A, you said you cut roughly 10% with the actions already taken. And I think you just mentioned, if necessary, there could be more cost cuts. So assuming, because there’s some pretty pessimistic kind of forecast out there just on the economy and COVID’s impact and of course, oil as well, so let’s assume this kind of drags on a little bit or it’s not recovering, how much opportunity is there to cut SG&A further? And from a gross margin perspective, do you think you can remain profitable production-wise, so your gross profit remain positive?
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [21]
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Well, we may profit in several different ways, but a good part of it is the interest we make on our book. That’s not going to go away. We don’t have much fear of that suffering. So we’re really just talking about profits from wholesale production of mobile homes, which is a kind of the other half of the equation. And right now, we feel really comfortable. Our parks are all ordering pretty heavy during these special — that’s going on as we speak. I feel pretty good that we’ll be able to retain our park business through this crisis. Deals volume is off. I mean anybody who owns a retail store is suffering decreased ups even if they’re there and sometimes decreased ups by 50%. And people’s willingness to post deposit to buy a mobile home during these times has been off significantly. So that’s where we’re at. But we’re in an industry that is allowed to operate in all the states that have — sales are in place or orders, the housing business and commercial construction usually are edged out and still allowed to operate. So I guess we’re blessed that we’re not being totally must stay home. So we get some business, I know, no matter what. I don’t know if that answered your question, I got a little distracted. So if there’s something I left out, just let me know.
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Chris Colvin, Breach Inlet Capital Management, LLC – Founder & Portfolio Manager [22]
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Yes, on the SG&A side, if profit revenue levels are lower, is there opportunity to cut more SG&A? Or that 10% you cut is pretty barebones at this point?
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [23]
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So the SG&A, really kind of a couple of categories, you got about half of it which is absolutely fixed. And then you have the other half which is variable. To the extent that the half that’s variable is there, I think we’re in a pretty good shape. It’s somewhat linear, it will go up and down with volume. On the fixed side, that’s where we took some really big cuts. We took an across-the-board payroll cut. And we eliminated over time and we are working on revamping service policies. So that we’ll get to save a bunch there. When I said about 10%, that was overall decrease in SG&A. I would guess that if things get tough, we have possibly another 10% that we could do without a lot of disruption. But that’s about it. SG&A is so fixed. It’s rent, it’s salaries, it’s utilities, it’s things that we can’t really eliminate and still stay in business. In the 1980s, for instance, for those of you that are younger than 66 years old and the number of plants in Texas went from 31 to 3 during an oil crisis. So one way you can decrease SG&A expenses is to markedly get smaller. We don’t think it’s going to come to that, but we’re prepared, if it comes to that. I lay awake at night [imagining] what’s the best case and what’s the worst-case scenario. We don’t have any factory workers that have tested positive for COVID-19. And sometimes, I think, well, what if 4 did in one plant? What would we do? What would our response be? And I don’t really want to go there. But if we had a breakout at 1 of our plants, it would significantly impact our production, even if we — even if it wasn’t our choice, which it probably would be in that case to tell you the truth. So we’re not going to sit there and expose workers to this serious virus that’s going around.
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Chris Colvin, Breach Inlet Capital Management, LLC – Founder & Portfolio Manager [24]
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That’s helpful. And then last one for me is maybe reminding other listeners, on your loan portfolio, your consumer loans that you’d lend through dealers, the JV structure — so basically there’s almost like a first loss, if I’m thinking about it right, a 10% or so. Can you just explain it? And this scenario of defaults really start to peak up, how you’re insulated because of the JV structure with dealers.
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [25]
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Yes, I’ll take that one, too. It’s very — sounds slick, so I’ll just try to simplify it. So almost all of our consumer book was generated by independent retailers who signed a JV agreement with us that says that they will cover any losses from repos out of their share of the winnings that exceed 10%. And so basically, we’re unhooked or that portfolio’s unhooked for the first 10%. And the independent retailer is unhooked for anything greater than that. And many of them have so much equity built in their portfolios. If you read our financials carefully, you’ll see that we maintain a liability on our balance sheet of what we owe the dealers out of the portfolios. So that amount is essentially a cushion on our retail portfolio.
As far as our — and I want to speak a little bit about our wholesale portfolio to you, the $92 million we have there. When we sell a mobile home to a park and finance reform and get 5%, 10%, 20% down, he takes possession of that unit. And he goes ahead and ties it down and installs and connects it to utilities and builds a deck and puts security on it. Some of the dealers — some of the parks have $6,000, $8,000, $10,000 of their own money in this rental unit that they’re creating. So they do have equity in that and would be very fearful that we would be picking it up and repossessing it. So we have strong bargaining position with a mobile home park in the case of nonperformance. And thus far, I don’t think we’ve ever suffered a loss in the entire history of the company on a mobile home park loan. So I don’t look at that as significant exposure. Some of these relationships are dear to us. And if they really are having cash flow issues, we may be helping them out a little bit through these difficult times. But that said, they do have substantial investments in this rental unit. So between the 2 sides, our retail book of business was created with real down payments averaging around 15% or 20%. And the margins were very tame relative to some other portfolios. I strongly believe that we have the most conservative book of business in the entire industry on the retail side. We’ve been led by a guy named Stuart McDonald. He’s a — just a guy that doesn’t make loans unless he really believes in them, and we don’t overrule them, hardly ever do we overrule them.
So our retailer, $100 million book of business is solid, solid, solid. And I feel the same way about our mobile home park portfolio. So roughly $200 million we have out in finance products to consumers and parks is the moat, that’s the moat, and that will be a significant difference. And we can parlay that and enhance that during these difficult times to keep the factories running. Long answer, but I’m hoping that I made it simple enough for you to appreciate why Legacy will outperform our peer group. And that’s basically it. We will outperform this year. It won’t even be close.
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Operator [26]
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Our next question comes from Alex Rygiel with B. Riley FBR.
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Alexander John Rygiel, B. Riley FBR, Inc., Research Division – Analyst [27]
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A couple of quick questions. First, you had planned to open 2 to 4 new retail stores, I suspect that’s probably delayed at the moment, but please confirm that. And then if you could go into a little bit more detail on your community development efforts, understanding they’ve probably been slowed here a little bit, but just update us on that activity.
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [28]
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Kenny, why don’t you take the retail store? And I will take community build.
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Kenneth E. Shipley, Legacy Housing Corporation – Co-Founder, President, CEO & Director [29]
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Yes, we’ve got — we did open up 1 right at the end of the year of ’19, and we’ve got an offer around and going. It’s in the Atlanta market, and this has kind of slowed things up a little bit. We’ve got our eye on 1 or 2 stores that we’re struggling with right now that we may look at either shut down or downsize in one of the stores or something, but been growing a couple of more stores in some other markets, but that’s still on the drawing board. We just — we’ve got to get through this COVID-19 deal first.
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [30]
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On the community development, we haven’t really added much to that since the last call. We made a loan to a guy who’s in the community development business, that’s well secured that he personally guaranteed as well. And I haven’t talked to him recently about his plans to proceed with those 3 developments that we loaned on.
In our own real estate that’s on our books, we’ve talked about these before. We had a setback in Austin in one of our developments and that they decided they need a public hearing on the water treatment plant, which they’ve set for the first week of April, which they’ve now postponed indefinitely. So that’s a delay. And in our other areas, we’re just having trouble getting staff and engineering work approved in front of city councils and things like this has been very difficult in the last month. So we think that all those projections of when those spaces will be coming online, either that be pushed back several months. I’m still hopeful that we’ll have spaces coming online this year, but I’m not positive that, that’s going to happen, depending on when we can get these cities to give us the building permits that they’re supposed to be giving us at this point. But I’m still — I still like all our projects. It’s never that I’ve lost any confidence. And we’re in 2 places in Austin, 1 place in San Antonio, a couple of places in Fort Worth. And we’ve made advances in loans to people that are in the business and in other places around the country.
And from a strength point of view, we have 2 loans in place, none of — neither of which is secured by our real estate. So we have roughly $50 million of dry powder as of today. And not a single bit of our real estate is placed on any loan. But with all these developments we have going on, I don’t know exactly what our real estate is. But I wouldn’t be surprised, it was kind of on our books for $25 million, $30 million or more. So our balance sheet is extremely solid, and we intend to use that if the opportunity presents itself. Kind of a 2-way source. I want it to get better, but I’m really not sure I don’t want it to get worse first. So you know what I’m saying?
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Alexander John Rygiel, B. Riley FBR, Inc., Research Division – Analyst [31]
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That’s very helpful. And then last question. As it relates to inventory, inventory has been volatile a couple of different times over the last 1.5 years or so. Inventory levels look very reasonable and manageable here at year-end 2019. Where did they stand at sort of as of today, since it’s almost the end of the first quarter, going into COVID-19?
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Cornelius Van Den Handel, Legacy Housing Corporation – CFO & Corporate Treasurer [32]
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That’s something that…
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [33]
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Cork, do you know what our margin inventory levels are over cash?
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Cornelius Van Den Handel, Legacy Housing Corporation – CFO & Corporate Treasurer [34]
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Actually, I don’t think that’s something that we’re prepared to release at this time, Curt.
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [35]
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Right. I think that we’re still — and we just took inventory over the weekend and from a raw materials point of view, it was our bottom line where it usually is. And just counting the number of mobile homes on our retail lots that we can sign to other people, I don’t sense any marked change one way or the other in those numbers. And for all I know they could be up 10% or down 10%, but I’d be surprised if that moved 20% quarter-over-quarter, either direction. That’s something that we have had concern about an aged inventory. We’re always concerned about aged inventory. We don’t want a bunch of old products sitting on retail locations. So we do keep track of that. We’ve got some dealers that have 8 old ones on their lot. And then we have a bunch of dealers that have no old ones on their lot. So I haven’t seen a lot of change in that Heritage, which is our company-owned stores, as having challenges with aged inventory that we’re trying to come to produce with. But I think, Kenny, you’ve sold a bunch of all ones just recently, right?
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Kenneth E. Shipley, Legacy Housing Corporation – Co-Founder, President, CEO & Director [36]
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Yes. Yes, we’ve done a year-end reduction sale. And we’re blowing some of that stuff out.
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [37]
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We have some extremely exciting product changes going on and that will be launched at Tunica. And from a product point of view, and we invite anybody to come down to our September show, which is still on at Fort Worth. I mean we absolutely lead the industry in product development. And what we’re doing now is so exciting that, in different times, I would be — I’d be a lot more optimistic, but we’re coming up with some new products that are really going to make a big difference in the industry.
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Operator [38]
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And I’m not showing any further questions at this time, I’d like to turn the call back over to our host.
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Curtis Drew Hodgson, Legacy Housing Corporation – Co-Founder & Executive Chairman of the Board [39]
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Well, thanks, you all, for being on the call. And I’m sure many of you are working from home as you should be and as I am this morning. We appreciate you staying with us. And I’m looking forward to having a more optimistic call at the next juncture, hopefully we’ll be on the other side of this crisis, and we’ll be back to normal. Thanks for calling in and feel free to get a hold of anybody on the executive team if you have any further questions. Bye.
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Operator [40]
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Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect. And have a wonderful day.
###
MHProNews Additional Details, Analysis and Commentary
Among the messages to MHProNews from tipsters inside of Legacy Housing was this one on Tuesday, April 7, following our initial report on Monday, April 6th. As longtime MHProNews readers know, some quotes are turned bold and brown to make them pop, but otherwise, the words are as in the original message. Typos and spacing are as in the original. The tipster said the following.
Good morning Tony,
As we discussed earlier, I would like to share a few thoughts on how Legacy has handled the Covid-19 situation. I would like to remain anonymous at this point, as one of my retailers told me to stay unknown because Curt and Kenny are so vindictive they would come after me somehow if they found out.
As the document stated we all took a pay reduction without any options. It was “here is what is happening, end of discussion.” The basis of the pay reduction is this, 8% cut in pay across the board (including any commissions owed) if you want to work from home due to Covid-19 you might be able to do so with a supervisor’s permission but at another 12% pay reduction totaling a 20% pay cut for those that have/need to work from home. There was no discussion, no exceptions and no mercy. Most of the people affected were families with children that had to stay home. These are clerical staff, accounting, sales, purchasing, HR, etc…all on salary and can do their jobs from home easily. The other crazy, micro-managing thing they do is make every employee, including those on salary, to clock in every day with a fingerprint scan. You have to clock in, clock out for lunch, back in for lunch and clock out. These are SALARIED employees! They have an on-premise report every month showing every employee’s hours for the pay period and month. They even rank them by hours worked! We are all told when we start that this is not just a 40 hour a week job, that it is expected for us to work more than 40 hours per week.
One last thing to consider, in the sales department there are Park sales, Oilfield sales, and Retail sales. Retail sales deals with dealers and each sales rep are supposed to be licensed for each state they represent. The same goes for the Oilfield and Parks department but I think MAYBE only one of the parks/oilfield reps is licensed. Management is aware of this but yet they continue to allow sales reps to sell homes when they are not licensed. I can assure you that if something goes south, Legacy will put the blame on the sales reps and not take responsibility even though they are well aware of the situation.
I hope this helps. Again, let’s keep things anonymous at this time.
Thank you,”
One Legacy management member privately expressed displeasure with our original report, linked here. But prior to our report, a more senior team member indicated that we had always been fair and accurate in our coverage of their firm.
Legacy made no formal statement to the initial report, but offered some informal comments which were included. No additional comments have been offered by Legacy’s senior management to MHProNews at this time.
This report has already broken the 10,000 word length, and on MS Word is some 23 pages long. So we’ll briefly note that there are numerous insights in the above, which will be further examined and unpacked in an upcoming report.
As was indicated in the report linked below, the pattern of news tips, document leaks and whistleblowing in manufactured housing to MHProNews appears to be accelerating. It is rare that this publication gets so many comments and tips from a single company of this size employees in such a short period of time.
That increase in the tempo and depth from the tips and whistleblower insights may be of significance to a range of companies, public officials and organzations in the manufactured home space, perhaps particularly to those associated with the Manufactured Housing Institute (MHI).
Let’s draw to a close by repeating this from the Legacy employee quoted above, “Most of the people affected were families with children that had to stay home. These are clerical staff, accounting, sales, purchasing, HR, etc…all on salary and can do their jobs from home easily.” Ouch.
We recommend that news tips NOT use company, nonprofit or organizational emails or cell phones. To report a news tip, click the image above or send an email to iReportMHNewsTips@mhmsm.com – To help us spot your message in our volume of email, please put the words NEWS TIP or COMMENTS in the subject line.
The case can be made that the best possible reporting of manufactured housing industry issues involves the insights that whistleblowers provide. Why? Because the industry has long been underperforming. There are reasons that statement reflects reality. Additionally, the most transparent organizations are the ones that deal straight up with questions and concerns.
All on Capitol Hill were welcoming and interested with the discussion of manufactured housing related issues on our 12.3.2019 meetings. But Texas Congressman Al Green’s office was tremendous in their hospitality. Our son’s hand is on a package that included the Constitution of the United States and other goodies. MHProNews has worked with people and politicos across the left-right divide.
Tony earned a journalism scholarship and earned numerous awards in history and in manufactured housing. For example, he earned the prestigious Lottinville Award in history from the University of Oklahoma, where he studied history and business management. He’s a managing member and co-founder of LifeStyle Factory Homes, LLC, the parent company to MHProNews, and MHLivingNews.com. This article reflects the LLC’s and/or the writer’s position, and may or may not reflect the views of sponsors or supporters.
