Q3 2019 Earnings Call
Greetings and welcome to the New home company third quarter 2019 results conference call.
Hi, I'm, all participants are not listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone Keypad. As reminder, this conference is being recorded it is now my pleasure to introduce your host Mr. drew Mackintosh Investor Relations. Thank you Sir you may begin.
Good morning.
Welcome to the Doom Company's earnings conference call earlier today, the company released its financial results for the third quarter 2019.
Documents detailing these results are available in Investor Relations section of the company's website mwh him dotcom.
Before the call begins I'd like to remind everyone that certain statements made in the course of this call which are not historical facts.
Our forward looking statements involve risks and uncertainties discussions such risks and uncertainties.
Other important factors that could cause actual operating results to differ materially from those in the forward looking statement.
Or detailing the company's filings made with the FCC.
Including his most recent annual report on Form 10-K , you didn't have quarterly reports on Form 10-Q .
The company undertakes no duty to update these forward looking statements that are made during the course of this call.
Additionally, non-GAAP financial measures may be discussed in this conference call.
Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with gap can be accessed through the new home company's website in its filings with the FCC.
Well during the call David Larry Webb Executive Chairman, Leonard Miller, President and Chief Executive Officer, John Stephens, Chief Financial Officer.
With that I'll now turn the call Liberty Larry.
Thanks, Trevor and good morning, everyone joining us on the call today.
I'd like to start out by giving some high level commentary about the company in the housing market. Leonard will then give some additional color about current trends in each of our markets and John will provide more detail on the numbers.
The new accompanied get a solid job executing on its core objectives in the third quarter.
Generating cash, while reducing our net leverage and lowering our SGN a expense ratio.
We completed two of the three Heartland sales scheduled for this year in the quarter, bringing in roughly 25 million in that proceeds.
The third land sale closed earlier this week, giving us an additional 16 million, which will be booked in the fourth quarter.
The execution of these land sales was an important part of our strategy that resulted in the repayment of 48 million in that.
And at 280 basis point sequential reduction in our net debt to capital ratio.
To 54.9%.
Furthermore, we lowered our net leverage ratio by 520 basis points from the high 60.1% at the end of 2019 first quarter.
As we've stated previously our goal was to end the year with our net leverage in the low 50% range and stay in that range moving forward.
With respect to cost.
We were able to reduce our DNA expense ratio by 170 basis points versus last year on a similar revenue base. Thanks to cost cutting initiatives, we've undertaken since the beginning of the year.
As our company has evolved we have discovered ways to do more with class.
Stretch, our existing resources to generate more operational leverage.
This discipline will carry forward into the future.
In terms of current market dynamics, we continue to see a consistent trend playing out in our markets.
Hi, or start gravitating to the more affordable segments of the market.
Well the move up in luxury segments continue to be more challenging.
We have been repositioning our company to address this ongoing trend.
And we think our new communities will resonate well with buyers who are looking for a great places to live at an affordable price.
In summary, I think we have a great opportunity to capitalize on housing market. There continues to show signs of improvement.
Consumer confidence continues to be high well, the unemployment rate and mortgage financing costs remain well.
In addition, new and existing home inventories in short supply, creating a new need for more housing.
This positive macro economic backdrop, coupled with our improved balance sheet and our product repositioning have me excited about the future or the new home company.
With that I'd like to turn the call over to wondered who will provide more color on our operations this quarter.
Thanks, Larry and good morning to everyone on the call.
As Larry mentioned, our focus this quarter was to generate cash flow improve our leverage ratios and lower s. DNA expenses and weak succeeded on all fronts.
We have emphasized pace overpriced, leading to compress margins, particularly or at some of our higher price point legacy communities in order to generate cash flow lower leverage and reinvest in more attainable, we price communities.
Our more affordable projects continue to perform well relative to our move up and luxury communities from both a sales pace and margin perspective.
This was evident in the sales activity, we experience that are more affordable communities in the quarter.
Which came in at 3.3 orders per community per month versus 2.0 for the company average we expect this trend to continue and have been focusing on our land acquisition efforts on more affordable projects over the last several quarters.
In fact 13 of our next 18 community openings over the next 24 months are expected to have base prices within at BJ loan limits.
Similar to our existing communities. These new projects will be a well located core areas of the market, but will feature smaller four plants and higher densities.
This is encouraging development given that we have made significant investments do move our company down the price spectrum. The last few years.
Our monthly sales absorption rate was 2.0 for the 2019 third quarter as compared to 2.2 for the prior year period.
Our California absorption rate was flat for the quarter as compared to the prior year, while our Arizona absorption rate was down largely due to a lack of inventory at our nearly sold out move up community and Gilbert.
Demand trends in the higher price coastal areas of both northern and southern California were a bit softer while the housing market inland in both regions performed better characterized by healthy order paces and normalized incentive activity.
As part of our strategic shift to more affordable product. We have one remaining project in the Bay area and have limited exposure in coastal southern California. At this time on a cost front the price of building materials in California appear to have stabilized and most builders are staying disciplined and underwrite.
<unk> of new land deals, which has put a cap on lot prices.
Phoenix continues to be one of the best housing markets in the country and builders are taking advantage of the strong fundamentals with improving order rates and periodic price increases.
We currently only have two wholly own projects in the market, but our presence in Arizona will scale dramatically over the next year and a half.
As we have eight new communities scheduled to open all price between 275 and 425000.
In summary, I shared larry's enthusiasm for the new home company's future given our solid execution, this quarter, which improved our financial position and furthered our efforts to better position our company from a product standpoint.
Now I'd like to turn it over to John for more detail our financial results this quarter.
Thank you Leonard and good morning.
For the 2019 third quarter, we generated a 4.8 million dollar pre tax loss as compared to pretax income of 3.4 million in the year ago period.
The current quarter pre tax loss included a 1.5 million dollar loss on land sales and 3.6 million in inventory impairments.
1.9 million of which related to Atlanta sell in Northern California, and 1.7 million related to one housing program in southern California.
Including these impairments and loss on land sales.
We generated a net loss of $4.6 million or 23 cents per diluted share count.
Compared to net income of 2.5 million.
Or 12 cents per diluted share in the prior year period.
Adjusted net income for the 2019 third quarter after excluding the inventory impairments and loss on land sales.
$242000 or one cents per diluted share.
Our home sales revenue for the third quarter was towards the high end of our quarterly guidance and was essentially flat with the prior year at $119 million.
Deliveries were down 5%, while our average selling price was up 4%.
Coming in at $958000 per delivery for the quarter.
Based on the homes in backlog.
The spec homes available for fourth quarter delivery.
We're estimating fourth quarter home sales revenue of between 140 $160 million.
Which equates to between 500 and $520 million of home sales revenue for the full year 2019.
We estimate that our average selling price for the fourth quarter will be approximately $875000.
Our backlog conversion rate for the quarter was 60% as compared to 42% in the prior year period as a result of our strategy to move down price point, and our success and converting spec homes into deliveries more quickly.
As a result at the higher third quarter backlog conversion rate and the lower beginning backlog to start the quarter. The number of homes in our backlog was down 33% from the prior year and represented a backlog dollar value of 186 million.
Net new orders for the 2019 third quarter were down 6% year over year. However, the 19% sequential decline from the second quarter was more in line with expected seasonality.
Compared to the 32% sequential decline experienced in the prior year period.
Our gross margin for the 2019 third quarter, including impairments was 9.5%.
Versus 14.8% in their prior year period.
The 2019 third quarter included a 1.7 million dollar inventory impairment charge.
Related to one higher price community in southern California that has required more incentives.
Then originally anticipated.
Excluding impairments an interesting cost of sales our gross margin from home sales for the 2019 third quarter was 16.2%.
As compared to 18.4% and a year ago period.
The 220 basis point reduction in gross margins before interesting cost sales and impairments was primarily related to higher incentives and a product mix shift.
Moving forward, we are projecting home sales gross margins, including interest for the fourth quarter of between 12% and 12.3%.
We are projecting our full year 2019 gross margins to be between 11.5% and 11.7%.
Including impairments taken to date.
Our S DNA rate as a percentage of home sales revenue for the third quarter was 11.1% versus 12.8% in the prior year.
170 basis point improvement in our S. DNA rate was primarily due to lower co broker commissions.
More efficient marketing and advertising spend and lower personnel expenses.
For the 2019 fourth quarter, we expect our SDMA rate to be in the high 10% to low 11% range.
And for the full year 2019, we expect to be in the mid to high 11% range, excluding Q1 severance charges.
Our sure of joint venture activity for the 2019 third quarter result in any pre tax loss of $63000 as compared to $34000 of income in the prior year period.
For the 2019 fourth quarter, we expect to break even from our joint venture participation.
Our fee building revenue for the third quarter was $22 million as compared to 39 million in a year ago period.
The lower fee revenue and margin for the quarter.
It was due primarily to two last construction activity at her Irvine fee building communities.
For the fourth quarter, we are estimating fee building revenue of between 20 and $30 million and between 85 and 95 million for the full year.
Our effective tax rate for the third quarter was a 3.6% benefit.
As compared to a 27.8% provision in a year ago period.
The lower effective tax rate for the third quarter was primarily due to the impact of deduction limitation for certain severance payments and lower stock based compensation expense actually realized upon vesting.
We estimate an effective income tax rate, including discreet items.
Of between three and 6% for the fourth quarter.
Our ending community count was slightly above our prior quarter guidance.
Due to the opening of two new communities in Northern California at the end of September that were previously scheduled to open in October .
We expect our year end community count to be flat on a sequential basis.
We ended the quarter with $41 million in cash 506 million in real estate inventories and $327 million a debt.
We generated approximately $40 million and operating cash flow during the quarter and approximately $59 million for the nine months ended September thirtyth.
We are targeting strong operating cash flow for the fourth quarter and are estimating a full year operating cash flow figure of approximately $80 million to $90 million.
In addition, we right sized our revolving credit facility during the quarter, which better aligns our commitment with our lower expected leverage and also extended the maturity date as of the facility to March 2021.
As of the into the third quarter, we had $18 million and borrowings outstanding under our $130 million facility.
We spent $26 million a land during the third quarter and $66 million year to date, we expect to spend approximately $100 billion in land for the full year 2019.
And expect to increase our land spend in 2020 to about $150 million.
I'll now turn the call back to Larry for his concluding remarks.
Thanks, John .
In conclusion, I'm pleased with that direction, our company's head leased.
For the business reduced our debt levels and made further progress in repositioning our company to address the fastest growing segment of the market.
We recognize that our current gross margins are in unsustainably low levels, but some of that can be attributed to our decision to emphasize pace overpriced this quarter.
Turning to our legacy communities more quickly.
Moving forward I expect our margins will improve as our community profile better reflects a shift to more affordable product.
We've had a play defense for most of this year in an effort to shore up our balance sheet and rightsizing our cost structure.
Now that we've made progress on both fronts I'm looking forward to reaping the benefits of the investments we've made over the last few years and improving our profitability.
We have a clear plan in place for future success, and a seasoned experienced management team on hand execute that plan.
And as a result, I'm as excited as ever for the future than you have company.
Finally, my transition from CEO to executive Chairman has gone very smoothly and I have full confidence in liner and the rest of the senior management team.
I'd like to thank them and how our team members for their efforts.
That concludes our prepared remarks, and now we'll be happy to take your questions.
Thank you we will now be conducting a question and answer session and the interest of time, we ask that you. Please limit yourself to one question and one follow up and welcome you to rejoin the queue for any additional questions.
If he would like to ask a question. Please press star one on your telephone keypad. It confirmation tone will indicate your line is in the question Q. You May proceed start to if you'd like to your question from the Q.
Participants using speaker equipment, maybe necessary to pick up your hands out before passing the Sarkies one moment. Please poll for questions.
Our first question comes from the line of Thomas Maguire with Zelman and Associates. Please proceed with your question.
Hey, guys, good morning, and a nice job on leveraging cashflow progress in the quarter.
Just staying with that part of what drove it was working through some of the higher price product getting cash back in the door and focusing on the better performing lower price communities.
And appreciate your quantifying the pay side, but can you talk about the margin differential on the higher priced product you're working through now and new communities more towards the lower end and more broadly once you get to normalized product standpoint, how do you think about the longer term margin profile.
Uh huh.
Sure that excuse me this is Leonard all take that one.
We sold about 26% of our sales in the third quarter respects that we sold and close.
And those margins again were older higher price closeout communities that had margins.
We're half of what we reported in the third quarter.
Encouraging thing as we move down in price point, which really will only represent approximately about.
13% of our revenues for the year.
Again, our absorption was higher was three plus per month, and our margins for four to 500 basis points higher than the company average so I think that bodes really well for the future. As you know 13 of the next 18 communities that we opened will be price over the next 24 months at or below Epay Jay.
Got it that's really helpful and then just.
Total leverage side can you just talked about more broadly the capital strategy I understand that we have the goal to get so a 50% range here is that something we'd be a sustainable and could grow enter a longer term you know how do we think about the debt level and the necessary sizes. The revolver and then just the senior notes coming due understanding it's a few years out.
Well I like John take the heart of this Thomas but.
I think everyone is aware we've been talking about it every quarter that this we understand the importance of getting our leverage down to the low fiftys and really rough way around 50 moving forward after that.
I would say John inch primary focus this year is doing that and I'll, let him tell you kind of where it's going and how he feels about it.
Yeah, I mean, we've made we continue to make progress as you saw by the results and that was despite having some impairments to move out some of the land that we thought it made sense to you know.
Liquidate some of those positions and pertain to bring down the leverage.
I think as we move into next year, we would like to sort of manage the company run a 50% on a net basis.
Longer term is there an opportunity for us to come go lower we'll see but I'd like to see that in the future, but I think for the near term.
50% as a good goal for us.
And you saw we did we didn't do an extension on our revolver. It's not an overly long term that puts us out to March of 21 and then.
Our bonds our March of 22, the following year. So those would be things that will be continue to be focused on as we continue to bring down our leverage increased our cash flow.
And look at extending both of those in the future.
I would say you know nextera that'll continue to be a focus for us as well as opening law. These new more affordable products that have had better margins and absorption paces what are sort of outlined.
Perfect sounds like a great set up thanks, yes.
Thank you. Our next question comes from the line of Sam Mcgovern with Credit Suisse. Please proceed with your question.
Mr. Mcgovern can you check if your line is I'm you.
Sorry about that.
I was hoping you could discuss a little bit about the decision to pay down the revolver versus continuing with bond buybacks. He was that driven by covenants or the lower dollar discount in the bonds or what was what sort of drove the decision to pay down revolver.
It was primarily due to the current limitations, we had during last quarter.
In connection with the extension that we did.
Our leverages below 55% on a net debt to cap basis were.
Authorized a purchase bonds there is a limitation as to how much we can purchase per quarter.
But that was a limiting factor during the quarter I think moving forward that is open back up and we will continue to focus on paying the line down and looking at opportunities.
For bonds, if they're available and they make sense.
But again our goal is to continue to generate cash flow and paid on the leverage whether its revolver debt or senior notes.
Got it so with regard to any cash generated in the fourth quarter, we should expect it to be deployed for debt pay down one way or it could be or could it could we could we could continue to just build cash reserves as well depending on not just sort of what the circumstances are.
Okay got it thanks, so much I'll pass on.
Sure.
Thank you. Our next question comes from the line of Alex Barron with housing Research Center. Please proceed with your question.
Yes, Thanks, Hey, guys.
I wanted to ask a little bit about the.
Community that you mentioned you impaired it is there anything else you can share about that maybe was it just a high priced location wasn't just a kind of a close out you know at any other color around that.
Sure. Alex This is Leonard I'll take that one and it was a community in krona and the inland Empire that was in kind of the second time move up price segment and I'm sure. You guys are really well aware of this it anything above 500000, and this was purely so.
Typically above that that's kind of the breaking the break point I would say in the inland Empire anything price below that absorb is absorbing very well you get above that and the air gets a little bit thinner. So we owned 40 lots. There we had to go to find the market. We were negotiating deals and basically got to a margin were.
Thought it was you know we needed to impair right, but to give you some perspective on that in the same master planned community. We have one of these lower price point.
Yep AJ eligible projects and that is absorbed it for a better a month than we have some of the highest margins in the company. So I think it's just a reflection already is a reflection of the difference though.
Entry first time move up versus some of those higher price points.
Got it.
And then can you.
Elaborate a little bit on the rollout of the new communities and Phoenix as far as.
Turning to get a sense of how to model the orders next year.
Sure we have eight new communities that are supposed to come onboard in Arizona over the next 18 months.
The first of which is scheduled to open early next year or in the first quarter next year.
It will be really at the tail end of the first quarter going beyond that let me just grab and make sure that I have this pro reflected correctly, but it's about 18 months.
Between all of those communities.
To give you some perspective, so again, so really we start seeing in I apologize Q2.
We have three communities that were projecting that come on in Arizona than Q3, we see an additional three communities than we have a couple rolling in after that.
You're not really going to see significant any significant closings, you'll see some sales activity in 2020 on as eight new could be from Arizona, but it's really 2021 before you really start seeing any closings of any substance flowing through.
Yeah, understood, but I mean the.
Order pickup is going to be more noticeable in that segment next year for sure.
I don't have yes, Alex this is Larry.
We feel like we the groundwork is weighed for Phoenix to really do well and hit the harder to the market.
And and you're going to see it but it won't be till the second half for the year, Okay, that's where you'll start seeing the sales.
And as far as a price points and locations of those eight communities can you give us any color on that.
Sure.
Yeah and communities are priced anywhere from 275 to 425000.
They are well located in places like Gilbert Chandler for the most part.
There are higher density projects, so will our strategy really is to stay.
In strong schools close proximity to the job so with that you have some attach town home cluster type product, but it's higher density.
I am very competitively priced.
Okay, great nothing could ask one last one.
Your tax rate I guess, that's moved around every quarter this year.
Any sense of how we can model that for next year.
Yeah, it's a little bit sorry about that it's a little difficult with.
We see these.
Quarters, fluctuating and profitability versus loss.
As well as just a lower sort of overall.
Sort of pre tax projected for the year couple of that end with some of these discrete items. It's just a little bumpy this quarter and I apologize for that but I think as we move into next year it'll be probably more like I'd say in 2020 were projecting probably in the.
28% to 30% range next year, but this year is a little bit.
Dicey on that front.
Got it okay. Thanks, a lot goodbye.
Welcome.
Thank you once again as a reminder, if you would like to ask a question. Please press star one on your telephone keypad confirmation tonal indicate your line is and the question Q for participants you think speaker equipment, maybe necessary to pick up your hands that before passing the Starkey is one moment. Please we pull from more questions.
No no further questions at this time I'd like to turn the floor back over to Mr., what for any closing remarks.
Thank you.
As.
Most of you know who've been listening to our calls.
The company set some pretty specific goals that were on a path to meet.
And we feel very positively about returning cash flow.
Lowering our leverage.
Reducing our net.
SGN a and.
For all intents and purposes, making our company stronger and positioning it better for the future.
That transition from from my role has has been seamless.
And we are very optimistic about.
Our future about where we're going and about how we're going to achieve that and with that I'd like to thank all of you.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
[noise].