Q4 2019 Earnings Call
Welcome to winners fourth quarter earnings Conference call. At this time, all participants are in listen only mode. After the presentation. We will conduct a question and answer session. Today's conference is being recorded if you have any objections you may disconnect. At this time I will now turn the call over to Alexander Lumpkin.
For the reading of the forward looking statement.
Thank you and good morning, Today's conference call May include forward looking statements, including statements regarding rice business financial condition results of operation cash flows strategies and prospects forward looking statements represent only when I estimate on the data. This conference call and are not intended to give any sovran's actual future results.
Because forward looking statements relate to not as I have not yet occurred eaton's are inherently subject to risks and uncertainties. Many factors could affect future results and may cause actual activity as a result to differ materially connectivity. The result entity and forward looking statement.
These factors include described in this mornings press release interacting filings, including those under the caption risk factors contained and Menards annual report on Form 10-K , most recently filed with the FCC.
Please note that when our assumes no obligation to update any forward looking statements.
I would like to introduce your host Mr. Stuart Miller Executive Chairman, Sir you may begin.
Great. Good morning, everyone and thank you Bob This warning of your loyalty with Rick Beckwitt, Our Chief Executive Officer, Jon Jaffe, Our President Diane Bessette, Chief Financial Officer they'd call and.
Our controller of course, you just heard from Oh it.
I'm going to start as they always do with a brief overview drawn and recur going to give some additional operational remarks, and Diane will deliver further detail on our fourth quarter and your run numbers as well as some guidance for first quarter and our full year 2020 as always when we get to our Q1 day, we'd like to ask that you limit your core.
So just one question and one follow up so that we can't accommodate as many participants as possible.
So let me go ahead and begin by saying that this is another excellent quarter and year end for the company as we continue to focus on performance cash flow and total shareholder returns.
We're very pleased report record quarterly performance together with a record strong finish to 2019.
Started off pause and sluggish and ended the year with the rather robust housing market.
Our results reflect both the continued strength in the housing market as well as our continued focus on leveraging size and scale to drive greater cash flow is higher returns on equity and on capital.
On the macro flood the housing market continued to strengthen throughout the fourth quarter confirming the continuing a trend that we reported in our left to quarterly earnings calls.
The market for new homes has continued its steady improvement from last year's pause as lower interest rates have stimulated demand while the overall fundamentals of the economy have remained strong.
We clearly saw traffic in sales continue to strengthen in the fourth quarter as a combination of lower interest rates and lower price appreciation have positively impacted affordability.
Greater affordability together with low unemployment wage growth consumer confidence and economic growth drove home purchases, especially at the entry level to return to a more affordable housing market.
Even with the constant noise from the current election cycle and from the ebb and flow of global tensions, which we're seeing play out in real time.
The indicators that we see in gear from our customers reflects confidence in the stability of the economy and in the job market.
As of now went through today the housing market is strong.
On the company from Lenore achieved record results as we posted net earnings of over $674 million with $2 in 13 cents a share for the quarter and approximately $1.850 billion $5.74 per share for the year. These results derived.
Narrowly from solid operating results from both homebuilding and financial services as our ancillary businesses have become less of a factor.
In homebuilding improvement in new orders and deliveries produced gross margin of 21.5% for the quarter, which was at the high end of our guidance last quarter.
While deliveries jumped 16% over last year, and new orders improved 23% over last years, rather tepid fourth quarter, our size and scale and most of the best markets in the country enables us to offset rising land costs with production cost savings while overhead leverage has.
Driven our SGN a to an all time fourth quarter low of 7.6% and a full year low of 8.3%, which has enabled a net margin of 13.9% in 12.3% respectively were confident that these trends are going to continue into 2020.
Our financial services performance also continued to contribute to our earnings veto I want to focus on this segment for a minute as I did last quarter, our financial services performance and improvement continues to be a proxy for many of the important initiatives driving our company into next year and God.
For the year financial our financial services Division earned 244 million versus 200 million last year up 22%.
Performance improved though through the year end in the current quarter, our financial services segment generated a record quarterly profit of $81.2 million compared to 57.6 million last year for a 41% improvement.
This record profit comes after selling substantially all of the company's retail operations in both mortgage and title in the first quarter earlier this year.
These sales enables our team to focus on the core home buying business and to implement technology initiatives that are streamlining the remaining business.
This focus on the core business drove significant operational improvement in the second half the year.
First we increased the company's combined mortgage capture rate from 78 to 78 from 74% by focusing on simplifying our customers engagement and providing excellent customer service.
Second we reduced the cost to originate a loan by 11% from $6300 per loan last year to $6000 per loan in the third quarter 250 $600 per loan this quarter.
Steady improvement and this is down by one third from $8400 per loan in 2017.
These cost reductions were driven by management's focused on technology initiatives, which include our blend run and technology for loan application along with robotic processes that automate repetitive processes to reduce paper flow and streamline the closing process.
These improvements all lead to not only lower costs to the company, but to what friendlier and frictionless customer experience with the company.
Finally, we have reduced total financial services headcount by about 50% at the same time.
Technology together with management focus has enabled deficiency, a better customer experience and a much better bottom line.
In our financial services Division, our management team and the entire group have made technology initiatives of core mission and are showing leadership.
For the entire company in that regard.
Accordingly, we're gaining ever more confidence that we will continue to improve our entire end to end process to get to wave one tap closing and create a customer satisfaction process that is simple frictionless and has never been seen before.
And as were building. These improvements were also seeing the fruits of our focus and investment at the bottom line. These improvements specifically and these types of improvements generally are sustainable and they will continue to drive bottom line improvement in our financial services segment and across our entire come.
Funny in the future.
Over the next two years, we expect to see some of the same technology based improvements affecting our core homebuilding operations, specifically in areas of customer acquisition costs, and even flow production and inventory management.
They tune.
Moving on.
While our strong operating results drove the bottom line, we are simultaneously focused on any and all ways to improve total shareholder returns by reducing our asset base, our fourth quarter results reflect our overall focus on land spend and inventory control that isn't how.
And our strong and improving cash flow picture as well.
We've maintained a relentless focus on our pivot to a land lighter strategy.
From the timing of land purchases to the duration of each land assets that we buy to the percentage of option versus owned land. We are and will continue migrating towards a significantly smaller land owned inventory driving our business and our cash flow forward.
Well, we're also driving our asset base lower by continuing to focus on monetizing non core assets and business segments are most immediately impactful focus remains on our land spend and our inventory.
With that said strong operating results and our focus on asset base has increased cash flow for this year to $1.6 billion and projected annual cash flow expectations for 2020 are continuing to head towards the 2 billion dollar Mark.
In the fourth quarter, we used to excess cash to repay an additional $600 million of debt. While we also repurchased another 1.7 million shares of stock at an average price of just under $59 to share.
For the year, we retired $1.1 billion of senior debt, while repurchasing almost 10 million shares of stock. While we ended the year with $1.2 billion of cash and our revolver paid to zero.
We improved our balance sheet with a debt to total cap ratio of approximately 33%, which is a 410 basis point improvement over last year.
As we looked at 2020, we expect to continue to generate strong cash flow and we'll use cash to pay down debt and to return capital to shareholders.
While improving our balance sheet as we continue to improve.
Our total shareholder returns.
In conclusion, let me end.
Let me end, where I began we had another excellent quarter and year end. Our management team is laser focused on driving returns with excellent operational execution and careful land and inventory management. This focus is not just demonstrated by our words.
But also by last year's results.
While 2019 as in the books 2020 seems even brighter to US we remain encouraged by both market conditions for the remainder of the year and lennartz position in it.
Our size and scale continues to facilitate the management of cost and the production in a land and labor constrained market.
In addition to carrying forward the successes of last year, we have the additional opportunities of our growing single family for rent initiative and our technology based improvements to the way our customers customers purchased a home and the way our customers live in the home.
These strategies, along with our quote unquote sustainable when our subsea, we'll continue to drive operational innovation and excellent and enhance total shareholder return.
With that let me turn over to the rest of the team Reg.
Thanks, Stuart we had a strong quarter in each of our business segments, driven by a solid execution of our operating strategies.
Homebuilding revenues for the fourth quarter totaled 6.5 billion, representing an 8% increase from 2018.
This was driven by a 16% increase in deliveries to 16420 homes, partially offset by a 7% decrease in average sales price.
Deliveries for the quarter exceeded the high end of our guidance as we carefully matched available inventory with strong buyer demand.
The decline in average sales price was driven by our continued strategic focus on a very robust entry level market as our percentage of first time buyers increased year over year.
Our gross margin for the quarter totaled 21.5%, which was the top side of our guidance and up 110 basis points sequentially from the third quarter.
The sequential improvement benefited from the direct cost savings that John will discuss as well as a higher number of deliveries, which allowed us to leverage our field expense.
Our SGN and the quarter was 7.6%. This marks an all time fourth quarter low and highlights the power of our increased market scale and operating leverage.
Homebuilding operating earnings totaled 893 million up 11% from the prior year. We're proud of the fact that our homebuilding earnings are growing at a faster rate than revenues once again, demonstrating our operating leverage.
Net earnings for the quarter totaled 674 million up 11% from 2018, excluding the gain on sale of Rio Alto and nonrecurring expenses in the prior year.
The order through the quarter increased 23% to 13089 homes exceeding the high end of our guidance from a dollar value perspective, new orders totaled 5.2 billion in the fourth quarter, which was up 23% from the prior year as well.
New orders increased significantly in each of our operating in our homebuilding segments with extremely strong performance from our Texas region, and our West region, where new orders were up 48% and 34% respectively year over year, our Texas, Our Texas segment is perfectly position.
And continues to benefit from our strategic focus on the strong entry level market.
During the fourth quarter, we saw increased demand, which benefited from favorable housing market fundamentals low unemployment higher wages and competitive mortgage rates low inventory levels and a much more confident homebuyer all contributed.
To a 26% increase in our sales pace per community year over year.
We ended the fourth quarter with the sales backlog of 15577 homes, where the dollar value of 6.8 billion.
Backlog combined with our current housing inventory puts us in a great position to close between 54050 5000 homes in fiscal 2020.
As Stuart said in fiscal 2019, we were layered laser focused on improving our returns on capital and generating increased cash flow with this in mine, increasing our percentage of option home sites and reducing our year supply of own home sites work top priorities at the big.
Any of the year, we set a two year goal of having 40% of our home sites control via options in similar arrangements. We made great progress on this front throughout the year as we ended the first quarter with a 24% mix ended the third quarter at 30% and finished the year.
At 33%.
Based on our progress our new two year goal is to have 50% of our land needs controlled versus owned by the end of fiscal 2021.
During the fourth quarter, we also made to get significant progress and reducing our years only supply of home sites from 4.4 years at the end of the third quarter to 4.1 years at the end of the fourth quarter based on this progress. We believe we can reduce our years owned supply of home sites.
To three years by the end of fiscal 2021 as well.
If we're successful.
This would reduce our on balance sheet land position by approximately $3 billion.
The combined impact that properly executing on our land lighter business.
And reaching our stated owned and controlled goals will drive meaningfully higher cash flow returns on capital and total shareholder returns.
Consistent with our landslide strategy and focus on increased returns, we're continuing to develop a program to develop and address the single family rental market Theres. No question that there's a shortage of affordable and workforce housing and new single family rentals can solve this problem.
Given the shortage, there's intense investor interest in professionally managed new single family rental communities or the owner can leverage the overhead costs of managing the rentals because they are in the same community with identical features come home to home last quarter, We daily edited our single family rental program, where our homebuilding.
Operation will be building and selling homes in bulk and communities where the land is owned by third parties with no lease up risk still in our since then we've expanded this program to include building and selling incremental single family rentals in bulk in separate sections of some of our larger existing communities while.
We're at the beginning stages of growing this business. We are excited about its growth prospects.
Given the lead time and developing new communities and getting home production started single family rentals will only represent about a 1% of our closings in 2020. However, this program will have a much more meaningful impact in 2021, and we will provide an update accordingly.
Single family rental is an expansion of our core business as it allows us to leverage our existing machine.
And overhead.
Additionally, this program provides an interesting unique hedge to our for sale business.
Before I turn it over to John I would like to thank our associates and our trade partners for an excellent year.
Through your hard work and collaboration we accomplished many great things in 2019 and more importantly, we're excellently positioned to execute on our strategies in 2020.
I'd like to turn it over to John now Thanks, Rick.
As we look back on the quarter in our fiscal year, we can clearly see the benefits we are receiving from our significant size and scale across the platform.
For both the fourth quarter and for the year, we delivered the most homes and when ours history.
We continue to see the benefits in our direct construction costs and in our as today that are not only result of this size and scale, but also of our focus on process, particularly the simplification of processes to maximize efficiencies.
Turning first to direct construction cost I noted last quarter, we have visibility that our direct costs are going down sequentially and will contribute positively to our gross margins going forward.
And our fourth quarter 70 basis points of our 110 basis points of sequential margin improvement came from our direct construction costs.
In the fourth quarter, our direct costs as a percentage of our average sales price was 45.5%.
Throughout 2019, this cost to price ratio has trended downward each quarter. We expect this trend to continue throughout 2020, even though we are projecting lower sales prices in 2020 due to a higher mix of entry level homes.
Looking at cost per square foot year over year or direct costs were up less than 1%, while average square footage was down by 4%.
This is an improvement from the third quarters, 3% year over year increase the marks the lowest rate of year over year direct cost increase in 12 quarters.
Going forward as we deliver more entry level homes, and our average selling price and square footage will both continued to be lower.
While this is occurring the ability to both lower our direct construction costs as a percentage of average sales price and to keep our cost per square foot relatively flat demonstrate the value of the size scale and efficiency of our platform.
Across the country, our builder of choice focus allows when our to minimize the impacts of the labor shortage, while maximizing supply chain efficiencies.
Throughout 2019, we were disciplined with our even flow production model, which combined with our everything's included platform gives predictability to our trade partners suppliers and manufacturers.
Turning now to overhead as noted our fourth quarter and full year SDMA of 7.6% and 8.3% respectively were both all time company lows are focused on simplicity and technology combined with our size and scale continue to give us SGN a leverage.
As we improve our systems and simplify our processes are associates increasingly become more efficient.
In the fourth quarter, our year over year personnel spend in homebuilding us gionee was down 1% or volume increased by 16%, giving us significant DNA leverage.
We achieved sales and marketing leverage through through the use of technology to reduce our sales and marketing spend as I mentioned last quarter. We are focused on higher quality internet leads to our internet sales team.
In the fourth quarter, we had over 90000 Internet leads meaning we had that many customers requesting specific information about our home will community.
Our team of Internet sales consultants, they communicate with the customer online via text messaging or by phone call to learn more about the customer's needs and the Mets their specific needs with our homes in the range of visit to one of our communities. The result is high quality very well and foreign customers with set times visiting our communities.
In summary, we are executing our game plan with the following unified Playbooks one simplification.
Summarizing the efficiency of every process to asset light optioning land and buying land were shorter durations.
Three even flow production operating our everything's included platform with a step production start pace will matching sale to this page using our dynamic pricing model.
For lower direct construction costs developing strategic builder of choice partnerships throughout the supply chain, along with value Engineering workshops Division by Division and five technology, providing better systems and information for happier more productive associates, a better customer experience and lower costs now I'll turn it over to Diane.
Thank you John and good morning to everyone. So first let me start with three emphasizing a few points from our fourth quarter, starting with home building. So as we've mentioned deliveries increased 16% from the prior year and exceeded the upper range as our guidance by 3% as we benefited from eastern housing market.
And a continued focus on returns.
Our fourth quarter gross margin was 21.5%, which was at the higher end of our guidance in the prior years gross margin was 22.1% excluding counseling purchase accounting.
Our fourth quarter as DNA was 7.6%, which is the lowest quarter SGN, 8%. We has ever achieved in was below our guidance this compared to 7.9% in the prior year.
New orders increased 23% from the prior year and exceeded the upper range of our guidance by 6%.
Absorption for the fourth quarter was 3.4 versus 2.7 in the prior year as we benefited from increased demand and focused on accelerating the close out slower paced communities to enhance returns.
Our ending community count was 1283.
And finally for homebuilding joint ventures land sales and other categories. We had a combined loss of $2 million compared to $4 million of earnings and the train a year.
And then turning to financial services.
As Stuart mentioned operating earnings were 81 million compared to 58 million in the prior year use the detail of the components.
Mortgage operating earnings increased to 57 million from 44 million in the prior year mortgage earnings improved due to an increase in captain volume as a result of higher homebuilding deliveries and a higher capture rate and reduction in loan origination cost, primarily driven by technology initiatives, which now.
Hold us to reduce headcount as Stuart mentioned.
Total operating earnings were 22 million net of current non controlling interest compared to 18 million in the prior year. The increase was due to an increase in captive volume and focused on cost reductions to rightsize the business.
Also mortgage finance operating earnings were $3 million compared to a loss of 1 million in the prior year. This was driven by an increase in securitization dollar volume, partially offset by a decrease in securitization margins.
And then turning to multifamily our multifamily segment and operating earnings of $5 million net of non controlling interest compared to 33 million in the prior year. There were no building sales this quarter as compared to three transactions in the prior year.
Finally, other this is the category of the legacy realtime assets outside of free also mortgage finance in our strategic technology investment earnings were $11 million this quarter compared to losses of 49 million in the prior year.
This quarter earnings were largely driven by earnings related to our we Alto fund investments while prior year losses were primarily due to non recurring expenses.
And then turning to our balance sheet.
We ended the year within extremely well positioned to balance sheet.
In fiscal 2019, we generated approximately 1.6 billion of homebuilding cash rent and ended the year with 1.2 billion of cash on the balance sheet.
We continue to make progress with our strategy to reduce years of land owned and increase our lands control position at the end as the year, our home sites owned and controlled totaled 313000 of which 209000 were owned and 104000 were controlled as Rick mentioned our years of.
The land supply owned decreased to 4.1 at the end of Q4 from 4.4 at the end of Q3.
Our controlled home sites increased to 33% at the end of Q4 from 30% at the end of Q3.
At the end of the year, we had no outstanding borrowings on our revolving credit facility, thereby providing 2.5 billion of available capacity.
During the quarter. We retired 600 million key notes that were due in November . This brings our senior note repayment to 1.1 billion for the year and 2.2 billion since the acquisition of Count Atlantic.
During the quarter, we repurchased 1.7 million shares for a total of approximately 98 million. This brings our total fit for the year to 9.8 million shares totaling 493 million.
We ended the year our debt to total cap was 32.8 410 basis point improvement from the end of 18.
So now turning to guidance I'd like to provide some high level guidance for fiscal 2020, and then I will provide more detailed guidance for the first quarter.
So for the full year 2020, we expect to deliver between 54050 5000 homes with an average sales price for the year of approximately 385000. This average sales price reflects our focus on a higher percentage of entry level product.
Our fiscal 2020 gross margin is expected to remain consistent with fiscal 2019, and we'll be in the range of 20.5% to 21%.
Although entry level margins tend to be slightly lower we believe our margins for the year will benefit from our continued focus on reducing construction spend.
Leveraging field expenses over more deliveries and reduced interest expense as we've continued to pay down our senior note maturities.
Our fiscal 2020 as DNA should be in the range of 8.2% to 8.3%.
And as we continue to add higher volume higher absorption entry level communities. While also accelerating the closed out slower paced communities to enhance returns we expect our community count to grow 1% to 2% by the end of the year.
Financial services earnings should be in the range of 250 to 255 million and we expect our tax rate to be approximately 23.25% primarily due to the recent extensions icon Congress of energy efficient home credits.
Now, let me give you more detailed guidance for Q1 only.
Starting with homebuilding, we expect Q1, new orders to be in the range of 11300 to 11500, and our Q1 deliveries to be in the range of 9802 10000 homes, our Q on average sales price should be between 390000.
395000.
We expect our Q1 gross margin to be in the range of 19.7% to 19.8%, noting that this will be our lowest margin quota for the year and margins will increase throughout the year to be in the range previously stated.
We expect our Q1 SGN eight to be in the range of 9.4% to 9.5% and for the combined homebuilding joint venture land sale and other categories. We expect the Q1 loss of approximately 10 million.
We believe our financial Services' earnings for Q1 will be in the range at $25 million to $27 million on multifamily operations will be at about breakeven and for the other category related to the legacy routes, so assets and our strategic investments that they expect Q1 earnings of approximately eight to 10.
$9 expect our Q1 corporate DNA to be about 2% of total revenue.
And as previously stated we expect our tax rate to be approximately 23.25%.
The weighted average share count for the quarter should be approximately 313 million shares and so when you roll. All this together this guidance should produce an EPS range of 80 to 85 cents for the quarter.
So in summary, we believe we're well positioned to continue to have strong profitability and increasing cash flow generation in 2020, and now let me turn it over to the operator for questions.
Thank you we will now begin the question and answer session. If he would like to ask a question. Please press star one on mute your phone and record your name clearly if you need to withdraw your question Prestart Q, we ask that you limit yourself to one question and one follow up question until everyone has had the opportunity to have their quest.
Unanswered.
Our first question comes from Truman Patterson with Wells Fargo. Your line is open.
Hi, good morning, everybody and nice quarter, Thanks for taking my questions.
First just wanted to start off kind of a multipart question on on entry level, you know multiple industry participants are moving to the entry level do you all seen upcoming supply imbalance or are you seeing robust enough demand thats really no, allowing the entry level communities to generate.
Greater than historical absorption paces.
And so on the prior call you all suggested that maybe you could get a 44% entry level in 2020, do you think theres, possibly upside to that level.
Given the demand that you've been seeing and finally.
Could you just give an update on kind of the gross margin profile versus your other segments, how much of a drag it might be on your margin profile.
Tumor let me start.
At a macro level and say it's important for.
Everyone remember that the entry level part of the market has remained impaired for the longest period of time.
Since the downturn.
And really had a very difficult time getting started so that part of the market is probably the most supply constrained. We note that a number of participants are migrating towards that market.
Got it has.
Most recently more recently become accessible demand is very strong in that part of the market.
I think it's going be sometime before debt saturated.
John as you'd like to talk about margin, yes. So from the from an overall mix standpoint, and our position I think we really have benefited from the fact that this has been something that we've strategically target for the last several years, we've been very methodical on lining up communities repositioning product.
Net working with our.
Our developer partners to really secure excellent positions that are sizable.
When you're dealing with a a.
A single family or entry level product.
You need some larger communities because your absorption pace in these communities is much faster. So we're really well positioned from mix standpoint.
Do we get up to 44% I think it's too soon to tell we're probably in the low 40% right now.
And we're just going to see how the years evolve.
From a margin standpoint, as Diane said the margins tend to be slightly lower than our our first time move up and move up product, but they come with higher velocity and as a result, the IR ours associated with the build out of those communities is much much higher and Thats why weve focused on that.
John anything else recovered.
Okay. Okay. Thanks for that.
Your rotation towards option lots its.
Your traction has been a little bit faster than than what we've expected with past couple of quarters.
Could you just discuss the health of the option land market whether.
These lots are becoming more available across the industry or whether this is surely the result of your we end developer partners.
In kind of part to that question could you just give an update on the strategy to expand your developer partner relationships. I believe you are you rich three previously what you're kind of thinking throughout 2020.
So.
I think what really reflects is as a management team. When we was on Stewart, John I sit down and we make a plan we execute on the plan and we really decided that we were going kipp convert and increase the amount of our option physician.
We worked with our regional trade partners, and our and our regional developers and has significantly expanded that program, we haven't necessarily entered into new a range elements with different developers.
Rather what we've done is expand the footprint of those relationships to other markets and Thats, what youre seeing in the increase in addition to that our teams out there are really leveraging that relationship. They have in all of their markets to increase that percentage.
Okay. Thanks, guys.
Thank you.
Our next question comes from Alan Ratner with Zelman and Associates. Your line is open.
Hey, guys. Good morning, Congrats on the very strong performance.
So I was hoping in drilling a little bit just in terms of your thinking right now on the capital allocation you mentioned the focus on returns several times and this year was a huge here for cash flow as you were expecting so great to see that that come to fruition.
If I look at how you spend your cash this year debt on the balance sheet came down by about 800 million buybacks were about 500 million.
No a lot of builder say, the first and mean use of cash is for growing the business, but it certainly seems like you're in a pretty enviable position, where you can do that and throw off lot of cash flow. So should we think about the.
Generally the use of cash this year towards debt reduction of buyback is kind of how you're thinking about prioritizing that or or has that shifted at all given the fact that your your debt to cap is now down to that that 30% type level.
So as we noted in our comments, we expect to continue to.
Pay down debt certainly as that comes due I think we noted that.
Over the next year over 2020.
We have about $600 million of.
Longer term debt coming due.
You can expect that we will pay that down out of cash flow.
But additionally.
Returns to shareholders.
Focused on returning capital to shareholders is something that will be continued and properly balanced.
As we've looked at our business and looked at our growth.
Expectations.
Normal operations today, our cash flow positive.
As we noted last year, we produced a billion six and we expect to continue that trend in more.
And that excess capital is going to be balanced exactly as noted we're very focused on our balance sheet very focused on total shareholder return.
Thank you for that Stuart.
And second question, if I could on the SFR the expansion there.
First off I guess, just more housekeeping.
Were there any orders this quarter that that slowed for the order line network geared towards SFR and I guess more high level.
Yes, as you start to build these homes and existing communities can you talk a little bit about the product that you are building for rental is is a comparable to your for sale product and if so.
There any concern about cannibalizing that piece of the business source or is it being priced differently that that.
It should compete.
So let me just start off by saying is that right. Now this business is very small in the Grand scheme of things and what we've really done its focus on positioning to grow or something that substantive so from an order perspective for the last quarter. The orders associated with this were de Minimis.
What we've really been focusing on is identifying markets.
That we can build a good business as that is focused on providing product that the market needs within our existing communities. What we what we've really done is looked at sectioning off.
Different phases are sections of the community that will be priced completely differently than our other set out for sale product, so smaller footprint lower specification levels.
Not a lot of change from home to home pretty identical features write down history.
But.
Let me back up for second say this.
SFR has been apart.
Of the sales program.
For the past years at both in our company and others.
It's basically been on a one off basis, it's more mom and pop oriented.
What we have been innovating over the past years and we day later this in Reno.
The continuation of that is a more structured program.
And we've been focusing on looking at single family for rent communities.
Which is where we have innovated and are kind of branding going forward, a new way of thinking about single family for rent. We are at the early stages of this it has been an evolutionary track for the company you're going to see others follow suit capital is starting to understand this busy.
Yes.
And this will be an emergent story as we go forward, but the single family for rent that we're talking about.
Is single family communities for rent.
We will be.
There will be a circle around that community, while there will be similarities with other single family product it won't be directly competitive but instead. This product is going to enable with consumer that want single family, but might not quite be able to get into a for sale program very enthusiastic about this.
And it's a uniquely lenore branded programs.
Two points. One is we don't think it will cannibalize our existing product at all it's that's.
It is the same product, it's really filling the need as Stuart just mentioned at the consumer that can't afford to buy and doesn't make sense for them to buy the other point is.
Focused on this for US will further enhance our builder of choice position with the trades.
We have more volume.
And this is even more consistent and higher volume so we see that as being very complementary to our construction platform.
Great. Thanks, a lot guys. Good luck.
Thank you.
Our next question comes from Michael Rehaut with Jpmorgan. Your line is open.
Thanks.
Good morning, everyone and congrats on the results.
My My first question at this is focusing just on some of your comments around.
Inventory and driving returns and the resulting cash flow.
I don't know if I heard.
Maybe.
I really don't give but I was just trying to get a sense when you talked about.
Having inventory your balance of inventory down 3 billion over the next two years I was wondering if you could give us what that what that number is.
Or at the end of this year just to get a sense of of.
Where that number could go.
And.
With that amount of inventory balance reduction.
Should we be expecting potentially an acceleration of share repurchase with ease of use of that has that cash frees up I mean, obviously you have a billion to of debt due next year, but given youre still declining.
Thats a cap.
I would assume you'd want some debt on the balance sheet. If you could kind of push that maturity out. So just trying to get a sense again of of of the finer numbers around that that inventory reduction and how we should think about that use that cash.
So let me start off by just generally county of how we look at the dollar value difference yes.
Told you that what we want to do is take our own supply from 4.1 years to three years.
By 2021, and if you step back and you look at it will calculate that two different ways.
We which it's about one year of land purchase so we by about $3 billion Atlanta year.
So $3 billion sort of sums up to that number look it added a different way based on our guidance of 50 54 to 55000 homes for next year.
If we don't have to buy the home sites associated with that our average.
Lot finished homesite or or underdeveloped in some cases finished.
Homesite is about 54, 55000, which gets you to the same 3 billion dollar number.
And so.
Look if it's a pretty straight math calculation to look at the 3 billion dollar number.
You're correct in highlighting that this is additive to cash flow as we migrate in this direction.
We do expect that cash flow will continue to benefit.
Our inventory and land strategy.
And I think that your question is does that means that we accelerate.
Things like.
Debt and.
Shareholder of return of capital to shareholders.
The answer to that is decidedly yes.
Great. Thank you.
I guess second question, just a little bit finer tuning granularity around order growth and how to think about that for the upcoming year. Obviously, you gave first quarter guidance and as well as community count growth is expected to be one or 1% to 2% I believe.
For the year I assume thats year end over a year end.
If you could clarify that but how should we think about the sales pace a component of that given that you've kind of mentioned that you continue to expect to shift a little bit more towards entry level, which is.
Higher.
Higher sales pace versus other segments other buyer segments as well as the fact that you'd expect the broader market to continue to improve a little bit given where we are with rates into affordability et cetera.
So just trying to kind of break out the pieces of that I think expectations, perhaps or in a low to mid single digit type of range for sales pace growth, but any thoughts around.
How youre thinking about that for the first quarter and the full year would be very helpful.
Unlike it's John first of all that is correct. It's your year end of year end comparison.
As we think about pace it really goes back to my commentary about very disciplined.
Production approach and matching sales pace to that so to the extent that the market.
Stronger or not we'll we'll adjust pricing accordingly, so we expect our or pace to be a consistent one and to the extent the market stronger we would hope that we'll see improvement in margins over what we're projecting to extent that the the market were to soften.
We expect to pace to be consistent and we would see some reflection of that in our margins.
Additionally that.
As part of our land and inventory management program looking internally, we have we have clearly focused on.
On.
Moreover, higher paced communities and focusing on those communities with later absorptions and.
And we clearly and decide as we've been pruning some of the slower paced communities.
Might have come from account Landeck legacy.
That.
That are more of a drag on some of our returns. So this is all part of our inventory management program and we've been looking community by community to to enhance that the absorption rate therefore enhancing returns.
Okay. So just to be clear then given that shifts that you are describing stewart it wouldn't be unreasonable to expect an order growth rate for the year that would exceed the community count growth that you're looking for.
I think thats definitely I mean, if you just look at the guidance, we gave with regard to deliveries.
The delivery growth is higher than than the.
Then.
The increase in communities, so you'll get a natural increase in overall sales that are that are greater than the 1% to 2% growth and community count and that's a that's a more efficient more effective business model that's right.
We've we've strategically focused on getting higher velocity at each community as opposed to growing communities at a higher rate.
Great. Thank you.
Thank you. Our next question comes from Carl Reichardt with BTI G. Your line is open thanks happy new year everybody.
John I wanted to ask a little bit about subcontractor trade cost and obviously starts for the flat. This year, we still be reporting some really significant order growth and move to the entry level, which increases number units started sort of did for two reasons on the velocity and also just businesses better.
How are you thinking about the trade you didnt seem like they had a lot of overcapacity or are not enough work last year or are they going to look even with your scale at trying to get more aggressive on their pricing to you and how do you combat that is it just scale just product simplicity in and focus on.
Everything's included in even flow.
I'm just curious what your perspective is maybe not just this year, but also maybe for meaning a year or two.
Sure as you look backward and as you look forward there is a severe shortage of labor in the industry, particularly skilled labor and we really don't see that improving because a lot of the labor out there is actually aging out.
From the workforce.
So we expect the pressure to continue.
And as we've.
Started several years ago, we really thought about the fact that as volume grows there'll be more pressure on the system and that's why we really reinvented ourselves with this focus of being the builder of choice. So it's.
It's much more than just.
Volume and and scale that has a big part goods.
Strategically positions us to be most desirable but it has.
Everything to do with this even flow production in the predictability that gives trades.
Our everything's included platform is really critical because one of the big obstacles for trade is that they go out to a job site and it's not ready for them that inefficient use of the.
Lot of labor, that's already in short supply backed up on itself in creates real issues and because of that the trades find us more favorable to work for because the jobs one smoother the more predictable. They don't have the starts and stops of options and upgrades and so we're continuing to focus on how do we get even better.
Hi, good even more disciplined about even flow so that as we move forward. The trades are actually able to make more money on our business because it's efficient not because we're paying the more.
That makes sense.
And then steward for Rick just on pricing again, the mix it to the entry level more price sensitive customer we've seen builders in the past.
Use price to control pace.
So that production can actually catch up but you're running even flow and your mix is changing how do you look at your pricing power as you head into this year with such robust demand but.
What's likely to be more price sensitive consumer.
And obviously using dynamic pricing I'm sure is helping manage pace, but again is this different than what we've seen in the past where were builders were shoving price to try to hold to hold pays off.
I don't think it's different its.
For us, it's going to because as we've said to be it on a very consistent pace and the market is stronger as it currently is showing signs of now as Stuart said strong rooms, and we see that across our markets.
That we will have pricing power greater than we had in the last year or two.
That will unfold.
The months go by and we'll see exactly what the market is like what as we look at it right now it is strong and we would expect to be able to benefit from that.
Yeah, and I think the thing to focus on.
We will solve to price, whether that's a higher price or lower price, but we're very focused on net operating margin for each community.
Thanks, Rick Thanks ill.
Thank you. Our next question comes from Stephen Kim with Evercore ISI. Your line is open.
Hi, Thanks, very much guys good quarter. Thanks for the information regarding your outlook for the year in the quarter.
A question about the interplay of the margins and the order cadence you suggested Q1 and I guess in general.
My question is your margin assumptions for the quarter versus the year.
Since you said that you expected the first quarter to be the low in the year and you gave a pretty healthy guide for the full year can you give us a sense for win in the year, you're expecting to see that that fairly meaningful step up in the margin is that going to be like kind of to Q3, Q event or is that something that you're sort of envisioned.
We will happen later in the year and if it is like as soon as the second quarter is that a reflection of the current environment, allowing you to get better price.
Dan.
The order comment you made of about 8% would suggest.
As Steve.
As an overview remember that our first quarter as always our lowest from a volume perspective, and therefore, our field is spread out has a bigger impact on the margins in the first quarter and you always see that trend with us so.
What we'll see it sequentially throughout the year margins will improve as we get greater field leverage.
Purely based on volume.
The improvement is.
Healthier though.
Based on what we expect to see was this more efficient.
Both gross margin that operating margin out of the efficiencies, we're gaining in our systems in our costs in our SGN a that should flow through all of our numbers. So through the combination of those two things progressing throughout the year.
Yes, Stephen maybe is the only thing I'd I'd add is I think if you look at the growth of gross margin in 2019 that would give you a really good proxy for what we're expecting 2020.
With the back half of the year, having the highest increasing margins.
Got it.
Alright Thats helpful.
Secondly, I was really in shriek by this comment Stuart you made about how you saw.
The improvement in the financial services business and I guess, specifically you cited the mortgage origination business and some of the tech initiatives that you've got going on there.
I believe you use the word proxy.
For.
What we might see from many of your other tech initiatives across the can across the company and I.
I was curious if you could give us a little bit of a preview.
As to what you meant by that.
I think you had said homebuilding customer acquisition costs and even flowing construction management.
As I think about some of the initiatives you've got obviously you have the I buyer investment in open door, which could.
Lead to customer acquisition costs could but im, particularly and treat but even flowing construction management.
How in what way could be improvement we saw in your mortgage origination business.
Be a proxy for that.
So.
Thanks for listening to the to the call carefully Steve.
Yes, that's exactly what I said and it starts with the fact that.
But in our financial services group.
Which is where we really initiated many of our technology initiatives.
We had a management team.
Start to dip a total than a flip than a leg into the technology stream.
And as they became more entrenched there was kind of a feedback loop that began.
That said Wow. This really does have import this really can have impact.
And the more we did the more we explored the more we sound we could change the way that our business operates if you think about the migration.
From I think it was 86 $8700.
Per loan in 2017 towards a 6000 or 5600 dollar per loan cost of originations. That's a that's a sizable step over a fairly short period of time and it comes from management focus and integration of new technologies.
New ways of doing business that hasn't been done or tried before and the feedback loop that comes from early successes feeding the adventure of deep of drilling deeper and trying more.
We are starting to see many of those things happen in and around our dynamic pricing program.
Talked about it before.
Early adoption starts to breed. Some early successes. It takes some time for those earlier successes distorted accelerate start to accelerate and start to translate into real cost reductions, but we're starting to see real efficiencies in the way that our inventory turns if we look back.
From.
This years at year end back to last year's year end, the efficiency with which we are driving closing through the year is having real bottom line impact in the way that our business is configured and we think that that will accelerate as it relates to customer acquisition, we've talked about a number of our initial.
Lives.
Open door being one of them, but other others of them are more internally focused about customer acquisition, and then lead scoring developing into a driven focus.
Internet sales consultant approach to the way that we handle our customers, we think that as it starts to drive as we start to drive adoption will drive costs down and efficiencies up.
So there are a lot of initiatives going on behind the scenes if you'd asked me. This question at the beginning of the.
Innovation cycle in financial services, it would've been hard to demonstrate the specific areas where costs would come from but its management focus early successes and adoption and that cycle that drives the cost structure down and I think that the financial services group in that regard as a proxy.
For the way that we're seeing things starting to happen on the homebuilding side as well does that help.
Yes, no that's very interesting I guess, just the one little clarification on my part would be the numbers you gave around the mortgage cap mortgage origination cost declining.
I assume you're implying from that that Youre improvement that you you traced out for US has been better than what you believe the industry. Overall has been so that's not just an industry issue thats when our issue and similar to what you expect that in these other avenues as well is that correct.
The.
Listen I can't really look at what the rest of the industry is doing at a micro level, but from what we understand at a macro level the costs within the industry have been migrating higher and we are an outlier in that regard.
Great. Thanks very much.
You're welcome how about one more question.
Thank you. Our next question will come from Susan Mcclary with Goldman Sachs. Your line is open.
Good morning, this is actually Charles Grom filling in for Susan. Thanks for taking my question then congratulation on the storm results.
Thank you.
I was just wondering if you can provide an update on some of your key markets, such as Florida, Texas, and California, and also specifically for Texas. If you think your success in this region is reflective of your recent initiative and in this market.
Now, let's start with Texas I can tell you that we had strong performance in each one of our Texas markets, San Antonio Austin, Dallas and Houston.
All up high double digits and region was up 48% year over year in orders.
And a really is driven by the fact that we completely repositioned to a much higher percentage of entry level product.
Right now or about 50% of our sales and communities are below 250000 dollar price point.
70% of our communities are below 300000.
Strength of that reposition thats really fueling the market there with regard to Florida in Florida are very strong, particularly on the lower price points and that first time move up and that really is across the board.
South to north and east to West Johnny will talk about California, California is clearly seen a recovery. If you look at it from a year over year perspective, the prior year.
California really fallen off of the pause effective, California, perhaps more than any other parts of the country. What we saw in the fourth quarter was.
Much healthier market to clear recovery back to normal sales paces.
Even in the Bay area, which was perhaps the most impaired by.
Market slowdown in fourth quarter of 2018.
We've seen that market come back to life I wouldn't describe that as robust yet.
But certainly a lot healthier.
Okay. Thank you very timing.
Very good.
Thank everybody for joining us on our call we look forward to reporting in 2020.
As you can hear were pretty enthusiastic about the year to come and look forward keeping you apprised. Thank you all for joining.
That concludes today's conference. Thank you for participating you may disconnect at this time.