Q4 2019 Earnings Call

Ladies and gentlemen, please continue to hold your conference call will begin momentarily.

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Welcome to the L.G.I. homes fourth quarter 2019 conference call.

Today's call is being recorded replay will be available on the company's website later today.

Www Dot LG I homes dotcom.

We have allocated an hour for prepared remarks, and couponing if anyone should require operator systems. During the conference call. Please press Star zero.

This time I like to turn the call over to Rachel Eaton, Chief Marketing officer at LG I homes Misquoting you may begin.

Thank you welcome to the LG <unk> conference call discussing our results for the fourth quarter full year 2019.

This conference call will contain forward looking statements that include among other things.

Now regarding algae I Didnt strategy outlet plan objectives in guidance for 2020.

Such statements reflect current expectation however, they do involve assumptions.

<unk> and other risks and uncertainties that could cause our expectations should prove to be incorrect you should review our filings with the FTC, including our risk factors and cautionary statement about forward looking statements section for discussion of their risks uncertainties and other factors that could cause <unk> actual results to differ materially.

That was anticipated any forward looking statements.

These forward looking statements are not guarantees of future performance you should consider these forward looking statements in light of their related risks and you should not place undue reliance on these forward looking statements, which speak only as of the date of this conference call.

Additionally, certain non-GAAP financial measures will be discussed.

In case, you know this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with gas.

Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP are included any earnings press release that we issued this morning and in our annual report on form 10-K for the fiscal year ended December 31st 2019 that we expect to file with the FCC later today.

Bilingual be accessible on the Fccs website, and any investor section of our website at <unk> Dot com.

Joining me today or Eric LIBOR, Oh, Gee I Hope this chief Executive Officer, and Charles Merdian, The company's Chief Financial Officer with that I'll now turn the call over to Eric. Thank you Rachel and welcome to everyone. On this call. We appreciate your continued interest in L. James.

During today's call I'll share some highlights about our outstanding performance in 20, Nike and Charles will follow up to discuss our financial results in more detail. After he has done we will conclude with comments and what were seeing this quarter and our expectations were 2020 before we open the call for questions.

Let me start by saying this has been an excellent quarter and year end for LG I homes at the start of 2019, we provided guidance announcing our expectations to deliver between 60 970 800 homes for the year.

We also forecasted further growth in community count achieving 105 to one or 115 active communities by the ended the year and to deliver basic earnings per share to our investors in the range of $7 to $8, all while maintaining our gross margin at or near industry leading.

Levels between 23, and a Hal and 25.5% and adjusted gross margin between 25.5% and 27%.

Today I am pleased to announce that for 2019, we met or exceeded our guidance in all areas.

As a result this not only marks are six full year as a public company, but highlights our sixth consecutive year of delivering strong results to the market, reaching or exceeding our annual guidance in every metric.

Our fourth quarter provide you an impressive finish to 2019 with a record breaking 2515 homes closed highlighted by our best month, and LG history with 1052 closings in the month of December.

Bringing us to a record breaking total of 7690 closings for the year and making 2019, our 10th consecutive year of closings growth.

With 106 active communities at year end, we met our community count forecast, increasing community count for the year by 20% with the addition of 18 new communities continuing our national expansion of the LG I footprints and broadening our reach to 31 markets and 2090.

Oh 18 of the new communities were from outside the state of Texas further contributing to our geographic diversification of our business.

For the year, we achieved significant growth in home sales revenue generating just over $1.8 billion, which represented a 22% increase in revenue over 2018.

This was driven by an 18% increase in home closings combined with a 3.5% increase in average sales price for the year.

These strong results enabled us to deliver basic earnings per share of $7. A 70 cents, which is at the high end of our market guidance of $7 to $8 per share.

Over the last six years since our IPO, we have grown substantially by expanding our operations from nine markets across four states to 31 markets across 18 states. As we have continued to grow we have maintained DLJ culture, demonstrating that our unique operating model is sustainable.

We believe our employees are most vital assets and continue to make the difference this through the dedication and outstanding performance of our employees that we are able to leverage our systems and processes to deliver exceptional customer service to more than 35000 homebuyers over the last 16 year.

Yes.

And we appreciate and thank you your commitments loyalty and hard work, which have produced another year of record setting results.

The share a few highlights from 2019, Houston, where a company was founded well there are number one market in 2019 with 1246 clothing.

This established a new record for the most closings we have ever had in the Houston market and set a company record for the most closings in any market in a single year.

We also have strong growth in closings and our Dallas Fort worth and Central Texas markets.

We ended the year with 10 active communities and close a total of 990 homes at DFW, and 2019 and 8% increase over 2018.

Central Texas, which consists of the San Antonio and Austin markets also experienced strong results ending the year with 955 homes closed a 15% increase over 2018.

A few highlights from outside the state of Texas, where that our Western Division increased closings from 627 to 1056, resulting in revenues of over $271 million compared to $151 million in the prior year.

Also in the West our first community in California generated or $55 million in its first full year of operations, making it our number one community in terms of total home sales revenues.

For the quarter, we averaged eight closings per community per month, companywide, a new quarterly record.

On a closings per community per month basis, we saw strong performance across the nation.

Topped three markets for the quarter, we're all outside of Texas.

Great job to our Arizona team with Tucson, and Phoenix, finishing as our top two markets and closings per community for the quarter and also great performance in Charlotte, averaging more than 12 closings per community per month for the quarter.

One of the greatest accomplishments of the year, which I was averaging 6.7 closings per community per month companywide.

This matches the 6.7 closings per month from 27 team in 2018.

That is three consecutive years, a maintaining our absorptions at this industry, leading level, while increasing our community count.

Expanding into a number of new markets growing our employee base and increasing our average sales price, which is quite an accomplishment.

For the full year, our top three markets were DFW with 9.8 closings per community per month, Houston, with 9.4, and San Antonio with 8.8.

For more detailed financial results I will now I'll turn it over to our Chief Financial Officer Charles Merdian.

Thanks, Eric.

Home sales revenues for the quarter were $605.6 million based on 2515 homes closed which represents a 42.5% increase over the fourth quarter of 2018.

Home sales revenues for the year totaled $1.8 billion, a 22.2% increase over 2018.

Our average sales price was $240815 for the fourth quarter, a 4.9% year over year increase and our average sales price for the year was $239032, a 3.5% increase and inline with our annual guidance.

The increase in average sales price year over year is primarily related to our geographic mix with the addition of California, and Nevada, and our West Division and increases within existing communities as a result of our complete home initiative.

Gross margin was 23.5% this quarter compared to 24.1% in the third quarter down 60 basis points, primarily related to our increase in wholesale activity.

During the fourth quarter wholesale closed 344 homes are approximately 14% of overall closings impacting margins by 120 basis points.

As a comparison in the third quarter wholesale closed 127 homes were approximately 6% of overall closings with a 60 basis point impact to gross margin.

Excluding wholesale gross margins were consistent sequentially at 24.7%.

Gross margin as a percentage of home sales revenue for the fourth quarter of 2019 was lower by 90 basis points from 24.4% for the fourth quarter of 2080. This decrease in gross margin on a year over year basis as a percentage of home sales revenue is primarily due to higher law.

Cost and higher capitalized interest costs recognized for the fourth quarter of 2019 as compared to the fourth quarter of 2018.

Gross margin as a percentage of home sales revenue for the full year was 23.7% as compared to 25.3% for the prior year.

The impact of wholesale closings on gross margin were similar on a year over year basis, we closed 583 homes during 2019 or 7.6% compared to 466 or 7.2% during 2018.

Our expectation is that wholesale closings will be similar as a percentage of our overall business in 2020 as compared to 2090.

Combined selling general and administrative expenses for the fourth quarter were 9.6% of revenues.

The increase percentage of wholesale closings had a favorable impact on operating expenses as a percentage of revenue.

For the full year, our combined selling general and administrative expenses were 11.4% compared to 12% in the prior year 60 basis point improvement and the lowest we have reported as a public company.

As a percentage of revenues, we believe that the full year 2020, we will continue to achieve operating leverage in our existing markets offset by initial operating costs in new communities.

Overall, we expect SGN as a percentage of revenue to be generally similar in 2020 compared to 2019 with up to 40 basis points of leverage improvement based on revenues.

We typically expect the first quarter to have the highest SGN a ratio as our first quarter generally results in the lowest closings on a per community basis during the year.

Pre tax income for the quarter was $84.9 million were 14% of home sales revenue an increase of 80 basis points over the same quarter in 2018.

For the year, we generated $231.8 million in pretax income or 12.7% of home sales revenue.

Our annual effective tax rate for the year was 23% and we believe our effective tax rate for 2020 will range between 23.5% and 24.5% for the full year.

We generated net income of $64.9 million or 10.7% of home sales revenue for the fourth quarter of 2019, which represents earnings per share of $2.69 per basic share and $2, a 52 cents per diluted share.

In the fourth quarter of 2019, our convertible notes matured.

We issued approximately 2.4 million shares on November 15, and for purposes of calculating basic earnings per share for the quarter. The average shares outstanding were impacted by approximately 1.2 million shares representing 24.2 million weighted shares outstanding for the quarter and we ended the year with twice.

5.3 million shares outstanding.

For the year, we generated net income of $178.6 million or $7 in 70 cents basic earnings per share and $7.02 diluted earnings per share.

Fourth quarter gross orders for 2717, and net orders were 2113 and ending backlog for the year was 1233 homes and the cancellation rate for the fourth quarter was 22.2% and for the year our cancellation.

Run rate was 20.6%.

Of our 48000 owned and controlled lots approximately 20600 of our 31900 owned lots were either raw or under development and we ended the year with 3715 homes in inventory in various stages of construction.

As of December 31st we had approximately $38 million of cash 1.5 billion of real estate inventory and total assets of $1.7 billion.

Also at December 31st we had $699.6 million outstanding under our revolving credit facility and senior notes and our borrowing capacity was approximately $228 million.

Our gross debt to capitalization was approximately 45% and net debt to capitalization was 43.6%.

At this point I would like to turn it back over there.

Thanks, Charles in summary, we had another impressive quarter and a phenomenal 2019.

This past year marked another year of outstanding financial performance, continuing DLJ legacy.

Since commencing operations in 2003, we have constructed and sold over 35000 homes have been profitable every year. Despite the downturn at have never taken an inventory impairment.

A year ago as interest rates were rising challenging affordability for our target first time homebuyers, we took the opportunity to evaluate and enhance our product offering with the introduction of our complete home and complete homeplus packages.

This new added value and streamlined approach to our interior finish in offering was twice a success contributing to our ability to maintain industry, leading absorptions and we believe we are well positioned for the future.

Now, let me provide some guidance and thoughts on what we are seeing for the upcoming year.

The first quarter of 2020 is off to a great start with 434 closings in January representing a year over year increase of 61.3%.

February will also be a strong month of closings for us we expect to close between 506 hundred homes. This month, representing significant year over year growth compared to last year's February total of 393 closings.

Based on our strong performance to date and assuming a continuation of today's housing market conditions for the remainder of this year, we offer the following guidance.

As we previously announced we expect another strong year closings growth ending the year within the range of 8400 9400 homes closed.

We believe throughout 2020, we will continue to grow our community count.

Primarily by going deeper in our existing markets and end the year with between 120 and 130 active selling communities.

We believe our average sales price in 2020 will be similar to 2019, ending the year with an overall average sales price between 235 and $245000.

Items for gross margin will be between 22, and a half percents and 24.5%.

We expect adjusted gross margin, which excludes the effects of interest and purchase accounting will continue to be strong ending the year between 24, and a half and 26.5%.

In summary, we are very pleased with our results for the fourth quarter and the full year of 2019.

We are poised to take advantage of continued growth opportunities in existing and new markets and believe we are well position to continue to grow our revenues community count and earnings, allowing LG I homes to continue on our journey to achieve our long term goal of becoming a top five builder and CRE.

Creating market leading returns for our shareholders.

Now, we'll be happy to take your questions.

Thank you Sir.

As a reminder to ask your questions you would need to press star one on your telephone.

So your question press the pound key.

Please standby, while we compile the Q when a roster.

Our first question comes from Michael Rehaut from JP Morgan. Please go ahead.

Hi, This is a lot helmet on for Mike.

First I just wanted to ask kind of the absorption pace in the west because up almost 64%.

It's a corridor and I was wondering what were some of the drivers of the stronger performance in a way which markets in the last did you see the most improvement and family how sustainable.

Thats right.

Yes, Great question, Yes, we do see the Wassa sustainable on a per community basis, we had a really good year, there really good quarter highlighted by our first community in California getting off to a great start.

For the full year, and California, we averaged 8.7 closings per community per month, so that the above the company average at obviously, a very strong average sales price.

Also had a great start in Las Vegas, we averaged 8.4 closings per month per community in Las Vegas as well.

So real real strong year in the West we talk about how much it was up year over year and we do believe the strengthen absorptions well continue like we talked about overall as a company 6.7 for three straight years and then we also already released our January closings number up 61%. So we're off to a great.

Our 2020 as well.

Okay perfect at least my next question because I look at.

20 closings in community count growth guidance range, and they seem to imply a roughly flat, maybe even a little bit down absorption rate year on year for full year.

Wondering what were some of the drivers that guidance.

Okay, so flattish absorption rates.

Yes, I think I think it looks that where we are in our guidance. We think between 80 490 400 closings is in that six to 6.7 closings per community depending on how quickly the new communities come online.

And 6.7 for three straight years has obviously been very strong community performance add we expect our existing communities too.

Have similar closings per community, but cautious a little bit on our new communities coming online and then also most of our growth is going to be.

Outside of the state of Texas, especially in Florida in the southeast that overall average less closings per community as well.

Okay, great. Thank you.

You're welcome.

Thank you. My next question comes from Carl Reichardt from BTI Ji. Please go ahead, thanks, Hi, guys.

I wanted to ask Eric maybe talk a little bit about the or Charles that community count cadence as you look through the quarters is it pretty equivalent quarter to quarter or is there a load in the front or back half of the year.

Yes, great question Carl.

We already recorded our January community Count of one I'll fives were down one over 2019.

We expect February also to be at 105, or maybe one one up or down off of January so very similar community count for the end of February and that our guidance is 120 to 130. So we think from March on through the ended the year it'd be pretty consistent community count growth leading to our guidance. Okay. Thanks and then.

Just a curiosity more than anything you have in the past at this point in the year, given and earnings per share guide.

And I'm just kind of curious why you didnt do it this year.

Yeah, I think it's just a matter of we're focused on the things that we can control that relate to the earnings per share and we thought as important over the last couple of years, when we have the convertible debt instrument and the share count was.

Pretty confusing to lot of people in this year, we're just going to focus on the the components that make up the earnings per share and that is really just the math question math equation forever to figure out where we got to be in our guidance a world real comfortable were going to be in the range of all the components that make up earnings per share.

In the range gets really wide if you take the low end and high end of every component of that so that's really a okay that makes sense. Thanks, a lot fellas.

Yes. Thank you.

Thank you at this time I'm not showing any further questions I'd like to turn the call over to Eric Sleeper LG at home CEO for closing remarks.

Thanks, everyone for participating on the call in Europe and for your interest in L. Guy homes. We are anticipating another solid year ahead, and look forward to updating you and sharing our achievements of the year unfolds have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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