Q4 2019 Earnings Call
Good afternoon, My name is Devon and that will be a conference operator today I.
I would like to welcome everyone to the Kb home 2019 fourth quarter earnings Conference call. At this time all participants are in a listen only mode. Following the company's opening remarks, we will open the lines for questions. Today's conference call is being recorded and will be available for replay of the company's website Kb home dotcom due February nine.
No I would like to turn the call over to Joe Peters Senior Vice President Investor Relations, Joe You may begin.
Thank you Doug good afternoon, everyone and thank you for joining us today to review our results for the fourth quarter fiscal 2019.
With me are Jeff Mezger, Chairman, President and Chief Executive Officer, MATLAB, Dino Executive Vice President and Chief operating Officer.
Jeff Kaminski Executive Vice President and Chief Financial Officer.
Still Hollander senior Vice President and Chief Accounting Officer, and Bad Johnson Senior Vice President Treasurer.
Before we begin let me note that during this call items will be discussed that are considered forward looking statements.
In the meaning of the private Securities Litigation Reform Act of 1995.
These statements are not guarantees of future results and the company does not undertake any obligation to update them.
Due to factors outside of the company's control, including those detailed in today's press release and in filings with Securities Exchange Commission actual results could be materially different from those stated or implied in the forward looking statements.
In addition, a reconciliation of the non-GAAP measures reference during today's discussion to their most directly comparable GAAP measures can be found in today's press release and or on the Investor Relations page of our web site at Kb home Dot com and with that I will turn the call over to Jeff Mezger.
Thank you Joe.
Good afternoon, everyone and happy new year.
We finished 2019 strong with fourth quarter results, the reflecting solid demand for our product as homebuyers continued to prioritize choice and personalization in their own buying decisions.
In addition, our performance under our returns focused growth plan produce measurable results, most notably in the year over year expansion of our housing gross profit margin.
With the conclusion of the third year of this plan there are several achievements to highlight.
First at roughly 270 million our net income in 2019 is up by over 150% relative to 2016, when we watch the plan.
This helped drive our return on equity to 12.2%.
Nearly doubling of 2016 level to a point that was solidly within the plans target range.
No.
The significant cash from operations that we generated in the past three years.
Enabled us to invest over 5 billion Atlanta acquisition and development.
As well as returned 73 million in capital to shareholders through dividends and share repurchases.
While also repaid about 850 million in debt.
As a result, we worked our debt to capital ratio down considerably 42.3% from 60.5%.
Also achieving our Titan target goal.
And reduced our interest incurred meaningfully benefiting our gross margin.
What's the success of our plan, we are a larger higher margin more profitable and less leveraged company.
Going forward, our strategy will remain consistent with a continued focus on profitability profitably expanding our scale.
While increasing returns.
Specific to the quarter, we proves total revenues of 1.6 billion and diluted earnings per share of $1.31.
How's the revenues were up 15% year over year.
Despite falling a bit short of our anticipated range as some of our deliveries in the bay area were delayed due to the fires empowered shutdown, which impacted our ability to get utilities installed.
Nonetheless, we leverage the higher revenue base to meaningfully expand our operating income margin, which was up a full percentage point year over year to 10.7% excluding inventory related charges.
This translated to an increase in profitability per unit of approximately 10%.
To over 42000 and operating income per home.
The key driver of our operating margin growth was our robust gross margin, which we expanded 120 basis points as compared to the prior year. So just shy of 20%.
We opened 23, new communities during the quarter contributing to 9% growth in our average community count.
In 2020, we continue to anticipate another step up in our average community count.
With nearly all of the openings coming from higher margin core communities.
The composition of our portfolio continues to strengthen with core community is expected to represent more than 90% of our average account this year.
From a macro perspective mortgage interest rates remain low.
Continuing to support favorable market conditions.
Characterized by steady economic expansion solid job growth high consumer confidence and positive demographic trends.
While these factors fueled strong demand supply continued to be insufficient to meet homebuyers needs.
With resale inventory declined to 3.7 months supply in November .
And even lower the affordable price points, where we operate.
In the quarter, our absorption pace accelerated to 3.7 monthly net orders per community.
This was our highest fourth quarter pace in more than a decade.
In spite of increasing prices in about 65% of our communities during the quarter.
Seasonally significant level of pricing power.
Taken together, our community count growth and increased absorption pace as was the soft comparison in last year's fourth quarter.
All contributed to producing a 38% gain in our net orders.
[noise] net order value expanded by 43% in the fourth quarter to 1.1 billion.
Attributing to a 26% rise in our year and backlog value to 1.8 billion.
In terms of units our backlog grew to over 5000 homes, our highest fourth quarter level at a number of years.
We continue to strategically invest in land and position our product offerings to be attainable for the median household income.
Sub market.
As a result, we cater primarily to first time as well as first move up buyers.
In the fourth quarter, our deliveries the first time buyers rose to 56% of our total.
The highest share of this segment that we have generated in many years.
Our ability to increase our profitability at the lower first time buyer price points.
As both a core competency and competitive strength that has been the foundation of our more than six decades in homebuilding.
We've been consistent in our approach.
And as housing markets continue their measured recovery.
The old by first time buyer demand.
We believe we're solidly positioned in the sweet spot of the market.
While we continue to capitalize on this demand.
Underlying the progression in our financial metrics is a stronger and more efficient business.
Our Bill times were down 12 days year over year in the fourth quarter and 8% improvement to 131 days.
Our implementation of our built to order model is highly efficient.
As working from a large backlog them homes enables cost synergies and uneven 12 production process.
We also like to flexibility the build to order provides.
A year ago as interest rates and home prices were rising challenging affordability.
We rotated lower in square footage in most cases using standard plans from our product series.
We enhanced our product line up.
Thereby expanding the choices available to buyers by offering smaller homes with similar livability in room count.
And reposition our model parts to reflect these changes where possible.
While the subsequent falling interest rates moderated affordability pressures.
We believe we are well positioned for the future.
Cardless of the rate environment.
Moreover, we found that the steps we took we're aligned with consumers preferences.
As our square footage on build to order homes was down about 100 feet year over year in the fourth quarter.
At the same time, our studio revenue per home was higher as buyers opted for less square footage.
I'll compromising the features they value.
Our initiative was successful and widening our demand pool without sacrificing gross margin.
In addition to the efficiency in our homebuilding operations, our mortgage banking joint venture Kb Hs continues to mature.
With the capture rate growing sequentially throughout each quarter of 2019.
Ending at 74% in the fourth quarter.
Hs originated 70% of our homebuyers mortgages for the full year.
As a result, our deliveries are more predictable with higher customer satisfaction and the JV produced a 67% increase in income versus the prior year.
We expect to capture rate to improve further in 2020.
Which should result in greater customer satisfaction and an increase in our JV income.
With respect to the market updates I will now highlight a couple of regions beginning with the West coast.
This region continue to demonstrate momentum in the fourth quarter.
Reducing a 54% increase in net orders.
The positive comparison in every California Division.
Growth in both community count and absorption pace contributed to the regions results.
As market conditions were generally favorable across the state.
Our Bay area communities delivered a particularly robust comparison, reflecting in part the softness in the prior years quarter as well as our ongoing and intentional shift to more affordable price point.
Looking ahead, we expect our west coast region to further expand its community count in 2020.
Our central region produces highest fourth quarter net orders in more than a decade at over 1000, a year over year increase of 41%.
Market conditions in Austin were especially strong fueled by a significant in migration.
In response to job growth and home price affordability.
We opened five new communities in the second half of 2019, and our Austin Division.
Premier locations.
Yes, we will the key employers transportation routes and lifestyle amenities in the area.
These openings contributed to the divisions near doubling of its net orders year over year.
One community in particular, well trace produced outstanding net order results that well above company average margins.
The success of this community rests in providing an appealing products in the prime nor thoughts in tech corridor that of affordably priced with respect to the areas median household income.
In alignment with our company strategy.
Of note many of our buyers already rented in the area and the opening of this community allowed them to remain in their preferred location, while now becoming homeowners.
With an ASP in Austin of 295000, we're competitively well positioned relative to the $315000 medium price of a resale home.
Strong market conditions have continued in December and early January sustaining solid demand for our products.
While we typically provide an update on quarter to date net orders on this call. The comparison is skewed during this period due to the softer market conditions across our industry. During the same period a year ago.
As a result, we will instead provide our net order outlook for our first quarter of 2020.
We believe a reasonable range is net order growth between 15 and 25%.
On community count growth roughly 5%.
In closing we ended 2019 strong and are off to a productive start in this new year.
With a $1.8 billion backlog and an improving community mix, we're poised for double digit growth in our revenue this year.
Also in anticipating higher profitability.
We see further opportunity for expansion of our return on equity, which we expect to grow meaningfully in 2020.
Given our favorable positioning and healthy market conditions, we are anticipating a solid year ahead, and we look forward to updating you as the year unfolds.
With that I'll now turn the call over to Jeff for the financial review Jeff.
Thank you, Jeff and good afternoon, everyone I will now cover highlights of our financial and operational performance for the 2019 fourth quarter as well as provide our outlook for the 2021st quarter and full year.
We're very pleased with our strong fourth quarter performance, we generated improvements in virtually all of our key profitability measures and achieved solid absorptions in community count growth, which contributed to a significant year over year increase in backlog value.
During the quarter, we also increased borrowing capacity of our unsecured revolving credit facility.
Successfully refinanced our March 2020 senior note maturity.
In the fourth quarter, our housing revenues were up 15% from year ago to $1.5 billion due to a 16% increase in homes delivered that was partially offset by a slight decline in their overall average selling price.
Looking to the 2021st quarter, we expect to generate housing revenues in a range of $910 million to $970 million up 18% at the midpoint over the same period of 2019.
For the 2020 full year, we still anticipate housing revenues in a range of $4.9 billion to $5.3 billion.
Having ended our 2019 fiscal year with the backlog value of approximately $1.8 billion up 26% from year ago. We believe we are well positioned to achieve these expectations.
In the fourth quarter, our overall average selling price of homes delivered declined slightly to 392500, primarily due to a shift in mix in our west coast region towards lower price communities within our Bay area operations.
For the 2021st quarter, we are projecting an overall average selling price of approximately $375000.
We believe our overall average selling price for the 2020 full year, we'll be in a range of 382 $400000.
Homebuilding operating income for the fourth quarter increased 33% to $162.5 million compared to $121.9 million for the year earlier quarter, including total inventory related charges of $4.1 million in the night 2019 quarter and nine.
Point 1 million a year ago.
Our homebuilding operating income margin was 10.5% up 140 basis points from the 2018 fourth quarter.
Excluding inventory related charges from both periods, our operating margin was 10.7% for the current quarter and 9.7% for the year earlier quarter.
For the 2021st quarter, we anticipate our homebuilding operating income margin, excluding the impact of any inventory related charges will be in a range of 4.9% to 5.3% up 80 basis points at the midpoint over the same period of the prior year.
For the 2020 full year, we expect this metric to be in the range of 7.928, 0.5% and improvement of 50 basis points at the midpoint over the prior year.
Our 2019 fourth quarter housing gross profit margin improved 150 basis points to 19.6%, including inventory related charges.
Excluding the impact of these charges, our gross margin for the quarter increased by 120 basis points to 19.9% compared to 18.7% for the prior year quarter.
This improvement reflected the continued reduction in our outstanding debt along with growth in our unit deliveries, enabling us to further lower our incurred interest per delivery in the fourth quarter, two under 3% of housing revenues.
With the lower levels of prior period incurred interest and the widening value spread between our active inventory in total debt, we have measurably reduced our amortization of previously capitalized interest, which favorably impacted our housing gross profit margin by 90 basis points for the 2019 fourth quarter.
In addition to the year over year improvement generated from the lower amortization of interest our housing gross margin was favorably impacted by both our adoption of ASV six so six and the reduced headwind of deliveries from reactivated communities.
Partially offset by a mix shift of homes delivered from certain west coast region communities with relatively high average selling prices in gross margins.
Assuming no inventory related charges, we are forecasting a housing gross profit margin for the 2021st quarter in a range of 17.8% to 18.2%.
40 basis points at the midpoint over the same period in the prior year.
Compared to our fourth quarter results. This range reflects the anticipated seasonal first quarter decrease in operating leverage from lower revenues.
We expect our 2020 full year gross margin, excluding inventory related charges to be in a range of 18.7% to 19.3% and improvement of 30 basis points at the midpoint over the prior year.
Selling general administrative expense ratio of 9.1% for the fourth quarter was up 10 basis points from last year's fourth quarter ratio, mainly as a result of the unfavorable impact of the adoption of FC six so six partly offset by improved operating leverage from higher housing revenues.
We are forecasting our 2021st quarter SGN, a expense ratio to be in a range of 12.7% to 13.1% as we continued to prioritize containment of overhead costs and expect to realize favorable leverage impacts from higher housing revenues in the current year period.
We also anticipate that are 2020 full year SGN a expense ratio will be in a range of 10.5% to 11.1%.
Our income tax expense of 41.8 million for the fourth quarter was essentially a noncash expense due to our deferred tax assets and represented an effective tax rate of approximately 25%.
Our deferred tax asset balance of $364 million at year end was down more than $77 million from the prior year.
We currently expect your effective tax rate for the 2021st quarter to be approximately 20% and for the full year to be approximately 23%.
Due to our remaining deferred tax assets, we anticipate that for both periods. This will continue to represent a noncash expense.
In December federal legislation was enacted which among other things extended the availability of energy tax credits.
Building energy efficient homes through December 31, 2020.
Reflective of our industry leadership in sustainable homebuilding and energy efficiency. The extension of the tax credits will favorably impact or 2020 effective tax rate.
The estimated favorable impacts from this recently enacted legislation is included in the first quarter and full year tax rate estimates.
Including a charge for the earliest Englishman have debt our net income for the quarter was up 27% year over year to $123 million and diluted earnings per share increased to $1.31 up 36% as compared to the year earlier quarter.
This strong level of fourth quarter net income contributed to a 12.2% return on equity for the full year.
We expect to realize an improvement in excess of 100 basis points in this metric in 2020.
We ended the year with stockholders' equity of $2.38 billion as compared to 2.09 billion at the end of the prior year and our book value per share increased by 11% to $26 in 60 cents.
Turning now to community count our fourth quarter average of 253 was up 9% from 232, and a corresponding 2018 quarter, primarily reflecting a 28% increase in our west Coast region.
We ended the year with 251 communities up 5% from a year ago.
The 251 communities 25 communities or 10% were previously classified as land held for future development compared to 34 or 14% at the end of 2018.
On a year over year basis, we anticipate our 2021st quarter average community count will be up into mid single digit range for the 2020 full year, we expect growth and our average community count in the low to mid single digit range.
More importantly in addition to this positive trajectory, we anticipate continued improvement in the quality of our community perform portfolio in 2020.
We expect growth in our core community count to drive a lower percentage mix entities previously classified as land held for future development, which we believe will provide a tailwind for future gross margin improvement.
During the fourth quarter to drive future community openings, we invested $399 million in land and land development with $147 million were 37% of the total representing land acquisitions.
Moving onto our balance sheet. There are several areas of continued improvement that clearly reflect the successful implementation of our returns focused growth plan in achieving our capital allocation and efficiency objectives.
These include measurably growing our total inventory investment, while reducing our inactive inventory.
Stance really de leveraging our capital structure and meaningfully expanding the borrowing capacity under our revolving credit facility.
I will now cover these achievements in more detail.
In 2019, we invested $1.6 billion in land acquisitions in development and generated $251 million of net operating cash flow.
We also reduce or inactive inventory to $150 million at year end, we're just 4% of our total inventory.
Starting this quarter, we have elected to include lots under contract with refundable deposits in our total lot count.
As of yearend, 59% for the approximately 65000 lots in our pipeline were owned and 41% were under contract, including about 9200 lots under contract with refundable deposits.
Our own lots at the ended the year represented about a 3.2 year supply based on homes delivered in 2019.
During the quarter, we raised approximately $300 million from a public offering of 4.8% senior notes maturing in 2029 and use the net proceeds along with available cash to retire all $350 million of or 8% senior notes that were scheduled to mature on March 15 2000.
20.
This early extinguishment of debt resulted in a fourth quarter charge of $6.8 million.
Due to the impacts of the lower interest rates and decrease the amount of debt outstanding the successful fourth quarter completion of these transactions will lower interest incurred in 2020 by nearly $14 million.
In addition, these transactions extended the weighted average life of our senior notes from 2.2 to 4.9 years.
Earlier in the year, we repaid all $230 million of convertible senior notes at the maturity in February resulting in an 8.4 million reduction in our diluted share count and contributing to a reduction of more than $300 million and our total outstanding debt at year end as compared to the prior year.
Our de leveraging activities over the past 12 months combined with the increase in our equity from strong 2019 earnings drove a 740 basis point improvement in our year end debt to capital ratio to 42.3%.
We expect further improvement, resulting from stockholders' equity accretion in 2020 and forecast our debt to capital ratio to be below 40% by the end of the year.
During the quarter as part of our efforts to improve our capital efficiency and enhance liquidity, we completed an amendment to our unsecured revolving credit facility, increasing as Brian capacity to $800 million from 500 million.
And extending its maturity by more than two years October 2023.
We ended the year with $454 million of cash and total liquidity of over $1.2 billion, including availability under our unsecured revolving credit facility.
We had no outstanding borrowings under our revolver at the end of the year.
In 2020, we plan to further execute on the principles of our returns focused growth strategy.
Our priorities remain expanding our revenues within our served markets improving our operating margin monetizing our deferred tax assets.
Do thing, our leverage increasing returns and enhancing long term stockholder value.
We will now take your questions. Please open the lines.
Thank you at this time, we will be conducting a question and answer session. If you would like to next question. Please press star one on your telephone keypad a confirmation till indicate your line is in the question Q.
My first start to fuel led to remove your question from the Q4 participants using speaker equipment and may be listen to think apprehensive before person. This sorties as a reminder, when asking the question. Please limit yourself to one main question and one follow up.
Our first question comes on line of Alan Ratner with Zelman and Associates. Please proceed with your question.
Hey, guys. Good afternoon, congrats on another very strong quarter.
Into the year.
I think obviously the order number very impressive we've been seeing some some big numbers recently at of the the other builders as well and Im just curious as we head here into the spring selling season.
Hi.
How does the supply side of the business seem right now just thinking about all the various things that have been constraints at various points in the cycle labor or land.
It doesn't seem like there's too much concern out there as far as an ability to get these homes built and delivered and kind of maintain.
Strong absorption pace for 2020, but I'm just curious what you guys are seeing on the ground related to all of those various inputs.
And a few things.
We already own and control all the lots for 2020 and were very deep and a 21 and working on that as Jeff has guided we expect revenue growth. This year, so we own the lives.
Support a nice growth trajectory in 20 and work.
We're working on 21.
In terms of input costs the land is.
Hi, guys out there, but it's rational.
And were able to invest just like we did in the fourth quarter.
To support our goals on the direct side, it's pretty flat right now for us lumber came way down.
Labors fairly rational we're working on growing our scale.
In our markets to retain of all the great relationships, we have with our trade partners on the ground. So.
Direct costs flat.
Lands tight, but we're finding that and we're pretty comfortable with being able to support our growth goals.
Great that's really good to hear and helpful.
Second thank you for providing the order guide for one Q, obviously that helps with the modeling off of.
Tough comp period from a year ago, yes, as you move past.
The first quarter and just thinking about the the interplay between community count and absorption right now right now it seems like everything is kind of clicking on all cylinders, you've got margin lift you've got absorption growth but.
How how much from here is a reasonable to expect your ability to drive absorption higher I mean right. Now you guys are probably the highest in the industry from an absolute standpoint. So is there an expectation that maybe absorptions flatline, a little bit once you get past easy comps and maybe more of the the upside might be on price and margin or.
Or should I think about that more even in terms of where that upside might come from.
The market stays strong.
Good question and it's one we spend time on every week Pinior Alan.
As as we shared in our comments our fourth quarter pace was the highest we've seen for fourth quarter and over a decade. So.
So pace was strong and demand is strong we continue to toggle. It in every community every week, where we're optimizing the pace versus price to get the the highest return on the asset it wouldn't surprise me of sales ticked up incrementally because of the strong market conditions, but.
Our our focus is going to be more on getting margin as opposed to push higher sales pace in the short run so we get to our margin goals forget to our margin goals and you'd see US go back for more pace, but for now would be hold rate maybe go up a little and focus more on lift in our margins.
Our next question comes from the line of Truman Patterson with Wells Fargo.
Your question.
Hi, Good evening guys nice results.
First just wanted to talk about your capital structure and the potential tailwinds of the lower interest expense you. Your net debt to total capitals declined nicely. The past couple of years, it's in that kind of 35%. How do you think about you're correct capital structure going into kind of 22000 2021.
Any chance you actually worked that down kind of below 30%.
Well, we have a target out there relating to our gross.
Debt to capital of 30, 545% and I would say that target remains relevant for us and something we're focused on we were.
Had forecast at the end of third quarter that we'd be down within that range by the end of this year, which we have accomplished we do believe that we'll be able to be below 40%.
By the end of 2020 and comfortably within that range and I'd say, our capital priorities remain the same as they have them.
With the only slight differences in 2020, we believe more of that improvement on the leverage ratio will come from equity accretion as opposed to debt reduction.
We're really focused on growing the business and reinvesting in the business as a primary capital.
And you to maintain our now higher level of dividend and.
Opportunistically at work that leverage ratios we have.
Chances to do so.
Okay. Okay, and then a couple of questions on California, you know very strong demand, but have you actually seeing the higher price point coastal areas really start to heal or improve at all and then.
California is 2020 solar mandate.
Could you give us an update on that whether you'll you'll eat some of the costing.
Possibly impacts margins.
Do you see this possibly stalling the construction cycle given potential installation labor constraints.
Anything you can really discuss about the solar initiative.
Sure term and first on the markets we're seeing.
Minor improvement offset the higher price points, along the coast the lower price points or are shown strong demand higher up to get in price. The the softer gets embedded better than it was in the fall, but it's it's still not back if you go to to the owes the houses.
Half million 3 million are are they still have sought out there, but the overall more affordable price points. The demand is very strong right now in the state.
With which is in part why we rotated down again in our product positioning to cater to where the demand is relative to solar. It's a good question. It's still planned out in industries trying to get it it's arms around it.
As a company not sure if this group's aware of it but we're we've been the largest provider of solar homes in the state. We've now delivered over 10000 solar homes. So we get it and we know how to do it.
And there is a different story and every community in some communities. We are grandfathered other communities we have permits we've already.
I have in place to avoid the solar mandate, where you get past the those types of nuances, though the the consumer has a choice you can either leased the system or weaken included in the price.
Order of magnitude if they lease at the payments around 50 Bucks a month was not a.
Not a crazy number.
You can say with certainty if not going to affect demand in some way because it is 50 Bucks you could otherwise put toward a house payment but.
As we get our arms around or we should we think it's more of an incremental thing than than some significant shift.
In demand or supply out there.
No concerns right now on our ability to install the slower because we've been doing it for so long and we have great partners out there.
Our next question comes on line of Stephen Kim with Evercore ISI. Please proceed with your question.
Yes, thanks, very much guys and again, let me add my congratulations to the corner.
I wanted to ask you about the land.
Spend in the quarter, if I could.
This quarter your land spend was.
Pretty modest and you're a yearly spend declined I believe on a year over year basis.
And so I was curious is too given the growth outlook that you've laid out for 2020.
What kind of land spend do you think we should expect in 2020 do you think you could see yet another decline or do you think that you're going to see.
I wanted to sort of.
Maintain the growth that youve outlined here, you're going to see your land spend pickup in dollars.
Saving the good news as we have the dry powder to do whatever we want to pursue our growth.
We were down a little bit in 19 versus 18.
If you get into the numbers the down can be one or two deals in California, it's not it's not a broad base decline in land spend and some of the timing some of its structure we're working toward.
Controlling more owning less that that influenced the number a little bit but our plan right now in our hope is that for.
20, we'd spend more than we did in 19, because we want to fuel the growth trajectory.
And that's where our plans laid out right now.
Got it Okay. That's helpful and last quarter I believe you said two things and I wanted to sort of see whether or not your thoughts have changed or things have changed at all in the last three months last quarter. I believe you said you raise prices and 90% engines communities.
How did that book this quarter and then I think you also mentioned that you really weren't interested in the build to rent model and that's a that's one of those themes that seems to be continuing to attract a lot of folks. So curious to see whether you're on your thoughts of evolve there.
Stephen I shared in the.
Prepared comments that we raise price and about 65% of our communities, which for a fourth quarters.
Yes.
Does that was the power in the quarter six five.
Okay.
Yeah.
And then on the for rent were but our view right. Now is were homebuilders anytime we've analyzed as we get a better return on the asset as a homebuilder than we would as a landlord.
And until we.
Yet to a growth trajectory that we're struggling with I think we'll stay focused on what we do well Doesnt mean, we don't look at it and there there could be an opportunity if we have a.
Multi product asked that we want to acquire where a portion of it could be for rent and we we figured out but it's not a primary initiative for us this time.
Our next question comes on line of Mike Dahl with RBC capital markets. Please proceed with your question.
Hi, Thanks for taking my questions.
I had a two part question related to gross margins first and the said Jeff just on.
The.
Amortized interest and also the percentage of deliveries expected from reactivated communities in 20 versus 19 could you provide us an update on on how you're looking at those two.
Metrics with respect to the 2020 numbers.
Sure Mike We believe both of those will remain tailwinds to our gross margin next year, perhaps at a slightly reduced level I mean in 2019, we had 90 basis points of improvement coming from interest amortization I do believe it'd be less than that.
Next June same thing with the reactivated headwind that that should reduce.
But probably not by as much as what we've been seeing and for example in the fourth quarter were down 50 basis points year over year, new reactivated, but they were kind of getting to the end of the story on that I think we still have some upside coming from continuing to sell out and close out of those communities.
There's a there's probably less opportunity, but still both nice.
Tailwinds for Us and gross margin next year. Both are included in our and our guidance metrics. In addition, all the change in mix et cetera, and our community portfolio for next year and I think more good news to come from both those areas.
Okay. That's that's helpful. Thank you and then the second question is.
Is that related as well, which is those seem to be tailwinds and your margin guidance mid points up 30 basis points with those as tailwinds in the market conditions that you're speaking to.
Seems like that's kind of conservative number to be up 30 basis points. It at the midpoint on gross margin. So maybe you could give us some of the other puts and takes that you're thinking about whether its mix related or labor inflation or darex any any additional color would be helpful. Thanks to your largest.
Impacting the largest factor for us in 2020 would just be this community mix change we close over 100 communities out in 2019, it was over 40% of our beginning community count So the community portfolios quite a bit different as we go into next year, we're trying to forecast gross margins coming off those communities.
Many of which have not been opened yet.
So we have a lot of openings to occur still in the first half of 2020 that will generate revenues and margins in the back half of the year. So we're trying to do the this job we can anticipating in forecasting where those margins will be.
At this point, we have pretty good visibility is I think most people are aware with our large backlog to the first half of the year and very critical spring selling season is coming up where we'll be refining your estimates and expectations for the full year.
Speaking of the spring I mean, we're pretty excited about it we think we're really well positioned as a company probably best positioning we've had in quite some time relative to the market.
And combined with very strong market conditions right now, we're really optimistic about the spring and we'll be updating those gross margin metrics and expectations as we goes for the year like we always every quarter, but right now right at the midpoint worried about a 19% for the year.
Okay and other operating margins were up about 50 basis points.
Year over year and at the midpoint of our operating margin guidance. So.
Pretty nice improvement on on a basis.
Right around $5 billion, a topline revenues so.
We're excited about without due to the bottom line.
Our next question comes on line of Matthew Bouley with Barclays. Please proceed with your question.
Hi, This is actually Christina Q on for Matt.
First question is just on your community count growth expectations for 2020, specifically.
Graphically are there any markets or price points that you're specifically focused on in 2000 Tony.
What we try to do with community Count is we try to grow the business throughout we don't constrain our divisions, we know constraint or regions at all with budgets in saying you can only spend so much on land, if they're hitting or hurdles and they're bringing good land deals to the table Thats. How we go forward with what we saw in two.
2019, which will impact 2020 revenues as we saw a an outsize increasing our west coast region with our community count growth as well as our southwest region, which has been a very strong market for us and little more modest improvement flattish actually in central in a little more modest improvement in southeast So those factors will impact.
2000.
20 topline a lot more than what we do with the 2020 count but.
As always we're trying to focus on opening as many communities as we can that that are hitting our hurdle rates for same very disciplined on her rate side.
We will continue with the company strategy of focus on first time at first move up buyers that also happened really quite quite a bit of the strength and mark is in that area right now so brightness sweet spot.
And intend may continue to manage business and have fashion.
Okay got it and then can you quantify or maybe give a timing update how you're expecting question a leveraged 20, Tony on in light of accelerating revenue growth, coupled with moderating community count growth.
Right.
Basically the on the CNH side, I mean, we always hit kind of a high point that is has a negative hi, SGN a ratio in the first quarter as our revenues are typically loss in the first quarter and progress as we go through the year using hitting out a low point in the fourth quarter, we expect pretty much the same trend.
That we've seen in prior years in 2020.
Great. Thank you.
Our next question comes from the line of Michael Rehaut.
With JP Morgan.
A question.
Yes, hi, thanks, Thanks very much.
I wanted to.
Spend the first question just on the.
The gross margin just trying to dig in a little better and maybe kind of rephrase or ask around some mikes earlier questions in terms of fiscal 2000 guidance.
The Hot as you said 90 Bips of interest expense amortization improvement in 19, you expect further improvement 20, although at a lesser rate.
So even if it's at a half of that amount.
You could still be looking at.
Sure.
Core gross margins, excluding interest flat to down a little bit.
So just want to understand why you would think that if you know I think you kind of pointed earlier towards.
Actually in continued improvement of mix of your communities from a gross margin standpoint.
We are coming off of and easier.
At least in the first half from perhaps higher incentives in the marketplace.
From the back half of 2018.
And by contrast, also I mean, you've you've.
You have.
I think what people are just trying to understand is.
Is there just a basic level of cushion or conservatism that you're baking in the given.
Your.
Our quarters now averaging.
50, 60, 70, Bips higher gross margin than at least our estimates and I'm sure.
Many on the street in terms of what you've been able to beat.
So just trying to we're just trying to also.
Reconcile and connect the dots are the drivers for next year.
The basis of our guidance is really a roll up right from the community level to the division level from the division load in the region region in the company. So it's very much.
A detailed forecast.
The mix impact is huge like I mentioned earlier over 40% of our communities are changing on a year over year basis.
I have the same communities that you're selling out of you're dealing with things like land cost inflation and trying to offset that with some of the new land parcels and basically forecast based on what we know today. So we base our forecasts on our backlog gross margins.
As well as our selling gross margins and anticipating with a slight gross margins will be later in the year as I mentioned earlier, we're not even to this critical spring selling season, yet. So we don't have anything on the books really for the third and fourth quarter. So it's all on paper write down at say, our best estimate as we see it and I think what's under appreciated.
Generally by folks outside of the industry or try and do folks like you guys trying to.
Come up with you on guidance or your own estimates for companies is the impact that mix can have and how much.
Community changeover.
Can impact the numbers is that just simple math of.
Price up costs down in this setting the others different store count its different stores, it's different markets and to mix has a big piece of it. So at this point in time, we're on.
That midpoint guidance number of 19% is kind of what we're seeing.
We do believe.
With the with the right market conditions in the spring that that we could potentially do better than that Thats why we have a range around it and right now we'll stick to the guidance numbers and update you as we go through the year.
Thanks, Jeff I appreciate that and obviously as you said to your point mix can be a pretty big.
A driver in terms of variation.
Maybe just flipping to this past fourth quarter.
In an effort maybe to better understand.
Guidance versus actual results.
Your gross margin for the fourth quarter team in.
40, bips above the high end of your guidance range.
70, bips above the midpoint so.
Just curious if you had a sense.
What drove that difference relative to your expectations are relative to the guidance range.
The two largest items are really we did a little bit better on the amortization than we thought we were.
Expecting something more similar to the third quarter. We are about 20 basis points ahead of the third quarter amortization really at one of the largest drivers was a reactivated headwind was much lower than it's been.
Pretty much in for years, I think we picked up 50 basis points relative to the third quarter and reduced headwind from our reactivated communities and that was a function of two things one revenues were lower percentage of the total but also I think importantly.
The reactivated communities actually at a pretty strong gross margin performance in a quarter and lifted the gross margins as Jeff had mentioned we increased prices in about two thirds of our communities during the quarter and the other thing that usually outside of our guidance is we have a certain percentage of spec sales and deliveries within the quarter.
Her which obviously don't start off in our bat backlog and we had a forecasting goes in to the extent you could take price in the quarter and you have to take less of a discount on the spec sales that was also positive. So those those three factors are probably the main things on a.
Margin B.
Our next question comes on line of Susan Mcclary with Goldman Sachs. Please proceed with your question.
Hi, Thank you good afternoon.
My first question is just on you noted in your commentary that you've seen it buyers increase their spend in the design centers, even as the size of the home has has come down modestly I guess can you just give us a little more color on what you're seeing Marin and maybe how you're thinking about that coming through and especially maybe in the March.
And in some of that mix as we think about 2020.
So I didn't understand the adapt to look at what each buyer is picking one buyer will pick up.
Our level of upgrade cabinet of different viral pick some more.
Cabin adoption or that option or a structural option of.
It really when you look at the data are really reinforces personalized.
The homes are that we produce because there are no two that are the same what's interesting for me.
As the.
Video spend goes up while the home goes down and a lot of the costs than the studio our title to size. The home. So that tells you the.
Even the buyer that was buying a larger homes.
And the ability to put things in their house.
And chose not to and with a little bit smaller home apparently they're choosing the.
To put more in the studio so we and we priced in the studio.
It's accretive to margin.
To a degree it's not a big lift the margin is just more revenue at our normalized margin for most part so as we model.
We have a.
Margin analysis per community that includes video revenue based on our experience at that community or with that price point in that maybe.
So it's all baked into our guidance, we don't we will look to the studio right now is another upside for the year. It's just part of the as per unit revenue that we guide.
Yes, no sure I was just trying to get a sense of are you seeing.
More of a lift Steve you know as the size of the house has shrunk in should is that something that generally could kind of continue as as you get this moves can more smaller homes.
It could it could I have it literally and you've been to our studios every buyer is different than someone a big home with nothing imminent others want to a smaller home and load everything in it and everything in between and Thats part of why we sell so well because we can cater to everybody.
Our next question comes on line of Jade Rahmani with KBW. Please proceed with your question.
Okay.
Our next question comes from the line of Jay Mccanless and he will be our final question from Wedbush. Please proceed with your question.
Hey, good afternoon. Thank you for fitting me in.
First question I had a small decline in orders in the southeast this quarter could you talk about what was going on there does that part of the World has had a pretty good run the past few quarters in terms of order growth.
Hello.
No no we're up we're looking at the most Jay one of things that happened last year.
In the fourth quarter, we had acquired that builder in Jacksonville Landon.
And had a bunch of inventory that we sold through so there was a spike in sales.
In Jacksonville that didnt replicate because as getting out of old.
Product that we weren't going forward with so that.
Probably.
Some of it that the numbers on it that big our our business in up.
The major cities is very good there Orlando Jack's temp and Raleigh, we're seeing good demand.
All of it so I think it was just the timing of that acquisition.
On the other question I had.
Could you or quantify how many closings were pushed because of the fire them. Some sort of here. They got were affected by the fire but.
Many closings were pushed in.
It was pushed closings, having any impact on your assumptions for the one Q2 0 gross margin.
No as a pretty modest impact it was well under 100 units, but there are high ASP. So ahead.
That more of an impact on revenues.
But it wasn't terribly significant and it held our full year.
Revenues in about the same ranges we were at at the end of last quarters for that matter huge.
Ladies and gentlemen, this concludes the question and this session as well as today's call. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.