Good day, ladies and gentlemen and welcome to the Legacy Housing Corporation Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator instructions] As a reminder, this conference is being recorded.I would now like to introduce your host for today's conference, Mr. Curt Hodgson, Executive Chairman of the Board. Sir, you may begin.

Thank you for joining the call today. Before we begin may I remind our listeners that management's prepared remarks today will contain forward-looking statements which are subject to risk 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 risk and uncertainties in the company's annual report filed with the Securities and Exchange Commission.In addition any projections as to the company's future performance represents management's estimates as of today's call. Legacy Housing assumes no obligation to update these projections in the future unless otherwise required by applicable law.With those preliminary remarks out of the way, the first thing I want to do on the call today as welcome Cork Van Den Handel, our new CFO to his inaugural earnings call with Legacy. As part of our growth initiatives as a public company, we wanted to bring in a CFO with great analytical abilities, public company experience and a background that includes strategic and operational expertise. We found all those qualities and more in Cork and I am excited about the value he has for Legacy and our shareholders.I also want to take a moment to thank Jeff Burt who has transitioned into the role of Chief accounting officer. Jeff has been a critical part of Legacy's success over the last decade. And now with Cork's and Jeff's leadership, we have a dynamic team assembled to lead Legacy's accounting and financial reporting team into the next phase of Legacy's future.Now, let me turn to the discussion of our view of the industry,…

Thanks, Curt. First, let me say that I'm delighted to be a part of the Legacy team. This is an excellent company with an exceptional management team and is an innovator in its industry. My prior career spans a wide range of industries from aerospace manufacturing, distribution and engine overhaul to business services, solar energy and automotive retail. I've had CFO responsibilities in public, private equity owned and entrepreneurial businesses. And I look forward to contributing to the continued success of Legacy Housing.Moving to the Financial Review, net revenue for the second quarter of 2019 was 45.8 million, a 4% increase compared to net revenue of 44 million recorded in 2018s second quarter. As Curt noted product sales are our largest component of revenue and we again experience exceptional growth and our sales to manufactured home communities, which increased 8.5 million or 93% to 17.6 million.Sales through our company owned retail stores increased 11% to 4.9 million. And these increases were partially offset as Curt noted by decreased sales of consigned inventory through our network of independent retailers and reduced factory direct sales.Product sales gross margin percentage increase 6.7 points to 29.9%, resulting in $3 million increasing gross margin. The shift in product sales to manufactured home parks and sales through our retail stores combined with annual price increases drove the margin improvement.Interest income in the quarter was 5.1 million, a 13% increase over the 4.5 million recorded last year. Our manufacturer manufactured home park loan portfolio increased 14.1 million or 24%. From the end of 2018 to 72 million reflecting the significant growth Legacy is experiencing in sales to this market segment.The consumer loan portfolio principal balance increased 3.8 million net to 101 million inclusive of allowance for loan loss and other discounts. SG&A expenses grew 19% to 6.1 million, primarily the result of increased expenses for our company owned retail stores and an increase in our warranty reserves.Pre-tax earnings, as Curt noted grew 2.5 million, a 28% increase to 11.4 million in the quarter. Income tax of 2.8 million increased 700,000 over the second quarter of 2018. Net income was 8.6 million for the second quarter of '19, compared to 6.9 million in the prior year period, an increase of 25%.Earnings per share based on basic and diluted weighted average shares outstanding was $0.35 compared to $0.34 in the prior year quarter. Finally, equity increased almost 20 million from year end 2018 to 209.2 million on our strong earnings performance in 2019.That completes our financial overview. Curt?

Thanks Cork. The second quarter results reflected strong fundamentals of our company. And I think it's safe to say we're in a time of some transition. Yet, I view that as good for the long-term prospects for Legacy. We need to continue to execute our plan and the results will speak for themselves. As we emphasized during our road show, our priority is to steadily increase book value over the long haul. Thank you for your interest and attention today.And now we'll take any questions.

Thank you. [Operator Instructions] First question comes from Alex Rygiel with B. Riley FBR. Your line is now open.

Curt and Kenny nice quarter and Cork, welcome aboard.

Thank you.

Curt, can you talk a little bit about sort of the outlook for the second half of the year this year? Understanding the first half of the year had some strange demand characteristics with regards to whether in inventory adjustments. So how should we think about third quarter and fourth quarter as it relates to maybe the run rate that you printed for net sales in the second quarter here?

I think the industry as a whole since the last six months they kind of decreased inventories. If you look at our financials, we're not going to set for that our inventory both in used good and raw material went down, so some of the contraction that you saw was a selloff of the inventory that was already in place. Anecdotally, we've got enough orders to run well through our sale or follow sale and our follow sale usually gives us enough orders to run through the fourth quarter. So I think it's – I think we have the third and fourth quarter pretty well spoken for. Overall, I think there's still an issue with the way we distribute homes through independent retailers, not just us, but our competitors as well. And we're all kind of shucking and jiving trying to figure out how to satisfy the demand for affordable housing through other distribution systems and the traditional independent retailer. As for us, as you know we are emphasizing community development near urban markets, we think yeah, that's where as a place where we're going to be. So essentially, we're getting more vertical and it's probably going to keep our plans running and definitely in the future because we'll be supplying properties that we have a financial connection to. I hope that answers your question Alex.

Sure it does. Second question as it relates to making progress on the land. It sounds like you own for or lots. You have loans out to three others and you've got two loans in process, looks like that's about nine in total. How many properties or projects do you think you can sort of manage at one time and does nine go to 12 in the next six months or does nine go to 20 in the next six, 12 months?

Well, I'll take that one, too. I think as long as the projects are in our core market area of the southeast and southwest, we could probably go all the way to 20 projects of reasonable size that we had a financial involvement and without stretching the limits. The projects we currently have, represent over 2000 home sites and probably closer to 3000 section sites, if you will, because many of the sites are designed for double lives. And we expect that those projects will contribute an ever increasing role in our production, maybe only 10%, next year, maybe 15%. But within the next two or three years, I wouldn't be surprised at 30%, 40% of our production is going to development projects in our market areas. We think there's actually more profit opportunities doing that than there is expanding geographically. So that's why our focus is there, so getting $500, $600 and sometimes even $1,000 a month for a place to park our product. But we're only charging $500, $600, $700 when you buy our product. It's an imbalance between the ratio between the cost of the place to put it and the product itself that we intend to get in there and help change the ratio.

As you look at the broader landscape, other than the shifting dynamics of the independent retailers. Are you seeing any other shifts in the macro, either from Fannie and Freddie getting involved or interest rates or competitors opening up new production facilities?

I think I know the answer to this, but I wasn't prepared for that question. There's about three or four new factories year-over-year around the United States while shipments around the United States are down maybe 5% or 10%. I think the reason we're down was some of that reason we say in the call. But we're also running into place to put in problem and the major metropolitan areas in our market. So that's why we're attacking that. I think we're all going to be faced with a place to put a problem and those people that are aligned with developers or doing their own developments will be able to keep the damp line up and those that are going to suffer. So that's basically – I know that's kind of a repeat of what I've said. But we're seeing that it's not the $600 a month mobile home payment that is causing a reduction in demand. It's simply a place to put in metropolitan areas. That issue just has to be remedy. As far as new financing coming on board, even if they decrease their payments by $100 or $200, because the interest rate went down, it wouldn't solve the fundamental problem of the place to put it. The GSEs are coming in to the – excuse me GMOs are coming into the market very lightly with a very specialized product. And they're going to have the same interest rates for manufactured housing that they do for site build housing, but the product that will qualify for that is going to be kind of difficult to do for most manufactured housing plans. We're all kind of moving that direction. We like the new level of mesh bags housing that is anticipated by these programs, but let's see how it approves that before we get too excited about it.

One last question for cork so he doesn't get off too easy on this call, I heard a reference to an increase in warranty reserves and an increase in loan loss reserves. Can you comment on those two items?

Well, actually, I talked about warranty reserves. And they were up, I think about $200,000. I think it's simply a matter of the fact that we've got a good deal of product out there. And as a result we have greater exposure.

Fair enough. Thank you very much, nice quarter.

Thanks.

Thank you. And the next question comes from David Berdych with Oak Ridge [ph]. Your line is now open.

Hey guys, thanks for taking my questions and congrats on the nice quarter.

Thank you.

First, I guess, I just wanted to talk about the strong margins which I believe were up about 600 bps versus the prior year. You guys call out a few things in here, but is there anything really specific driving this and then in the 30% range something we should expect moving forward?

Well, I'll not comment on going forward right now, as a relatively new player here, but I will say that we – in our sales through to the mobile home communities and through our company owned stores, those sale prices are significantly higher than through the dealers. And the margins that we get from them are significantly better. And so what we're seeing is a shift in the mix of business to the higher margin sales. Anything you'd like to add Curt.

I'll try to give you the crystal ball going forward, I think all companies will see higher gross margin, but also higher SG&A facing than higher gross margins. I think the model of selling wholesale meant for getting embedded is over I think we'll all be more involved with the end user than we have been in the past. And in doing so will have company owned store, we'll be involved in communities, we'll offer more high margin things like maybe community [ph] for instance which was recently okayed by the sets. And I think you're going to see more high margin product facing consumers. There's also a shift towards a medium end product and away from a low end product. Our homes are much more option today than they were a few years ago. So there's a trend towards that. And as interest rates come down for our products and they are even with what we do the must stay the same and the people get more products and usually they get it with the higher margin. The home itself is a very low margin and then we start adding options and put insist to it the margin gets higher and I think that basically, if we sold wholesale for 60,000, se sold retail for 90,000. That's basically, I know, it seems higher margin than what most people would think. But there's about a 50% markup between wholesale and retail for our product.

That's helpful. And then can you guys just talk a little bit more about your strategy in the community development and why you think that's so important to go in this direction? And then also, could you maybe help explain how the whole process works when it comes to timelines around breaking ground and first units coming online. I know the Austin development is pretty big. And you guys mentioned those sales coming online in 2020, early 2020, but just trying to get a timeline our expectations around some of those other smaller lots as well.

Our industry hasn't had a lot of community development for really since the 80s. So when the two downturns in the industry happened in the 80s and then again at the turn of the century when Green Tree file bankruptcy. The response to those downturns was to remove from the mobile home parks, the mobile homes that were repossessed creating all sorts of vacancy around the entire country. So no one was contemplating where we are today that mobile home parks that people and be would be renting spaces for $600 or more per month.The response to that has been very slow for the industry. If there were a lot of projects in development on the drawing boards, I think I would know about it because I'm kind of in the front seat. So we think that that is fundamental to the industry. There are plenty of spaces out in the country and in small towns, but near big cities in Denver or in Dallas, or Fort Worth, or San Antonio or Atlanta or Jacksonville. These are basically full markets. And until development occurs, more places to put them were all kinds of time we didn't try to sell product into those full markets.Now, how does it work? Well, if we buy the land, and we engineer ourselves, and we put in roads and we put in water systems, it's a 24 to 36 month process. So that's the lead time on it and so when I said we have four of those properties, those four properties, I think the – we're probably a year and a half and then into the big one in Del Valle, which will be well over 1000 mobile homes. And we're much younger than the other. So basically, I don't really see a significant…

No, that's helpful and sounds like a significant opportunity. So yeah, thanks for taking my questions, guys and good luck in the second half.

Thank you.Thank you. [Operator Instructions] Our final question comes from David Meister, an Investor. Your line is now open.

Hey, good job guys, it looks like you guys are doing a good job. This is for Cork. How is it like in your past track record that you've done and has successful and make us believe you could be an asset for Legacy? Like if you work for companies that you brought earnings from this and this in so many years or have you had your own copy? What track record have you had that shows that your success will help Legacy grow its company?

That's a good question, David. And I appreciate you asking that. I'm not going to go through my entire career because I think people have better things to do then fall asleep listening to me talk. But I will point out that after we took over the roles at – the new management team took over the roles at Aviall we managed to grow the company in about six years from about $300 million in revenue to about well over $1 billion. We did that by changing the way the aviation distribution business has performed in much the same manner that Curt is talking about changing the way this businesses performed and manufactured housing. I think that having a background that has been in a variety of industries enables me to bring some different viewpoints and different perspectives to this company and it's gratifying to see the leadership that Curt and Kenny have brought to this company thus far and where we can take it going forward.

Okay, that sounds great.

Dave, this is Curt. Cork went to US Aeronautical Engineering School, which is one of the better programs in the United States and you did that, because the scholarship opportunities that were available to him because of how well he did in high school. His analytical skills are probably better than maybe better than mine. And I think that when we're looking for the 10,000 foot view in the simplification project perspective. Cork is going to bring something to our party that that we can take advantage of. Jeff Burt's done a stellar job as CFO and he's going to remain in almost as identical position for the indefinite future, but as far as simplifying, figuring it out, moving into new frontiers, I think Cork's background is pretty incredible. And I'm looking forward to working with him to implement these visions that we had earlier on the call.

Okay, great. And two more things I just want to say for Curt. What's the number one thing that Legacy's homes are better than the competitors? You could name one thing that make them better, is it different styles or is it the price? What's the number one thing that makes your guys homes better than the competitors?

We think we've done a heck of a good job on the colors. We think we have the prettiest ones there are. No, just kidding.

Curt our four plants – this is Kenny; our four plants are just over the top. They're just – when you walk in the house there's – our houses are so user friendly. I mean the furniture friendly. We've got places to put everything, everything's been done. Curt's done an extremely great job of developing this product and it's just over the top.

Okay, yeah, you guys seem like a really – because I read about you guys, you guys seem like a fantastic combination. Kenny, you're fantastic in the sales department. And then Curt, I guess, things like engineering, so you guys and years together and I just want to let you say some of this and one more thing here. You guys are in your 60s, so you guys know how to make important decisions. But remember, it's all about decision making, okay. Read up on it. I know you guys are smart and you guys been to it for years, but keep saying to yourself, I got to make good decisions. We got to make good decisions and you may want to look up, people like Sam Walton. I know you guys are experts in your field. But you may want to read up a little bit about him, he may give you a couple of hints, or even Jeff Bezos from Amazon, okay. I'll just –throw that out there. I know you guys are experts in your field, but there may be one or two things that those guys are doing that you may say, hey, they help our company. Okay, so I just wanted to say that you guys do a fantastic job. Thank you.

We appreciate the input. Thank you very much. Take care.

I believe there's no more questions Curt. So should we turn this over to the operator?

Sure.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may disconnect. Everyone have a wonderful day.