Q4 2019 Earnings Call
Greetings and welcome to the New home company fourth quarter 2019 results conference call.
At this time, all participants Arnie listen only mode.
<unk> answer session will follow the formal presentation.
When should require operators. This in turn the conference. Please press star zero in the telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host drew Mackintosh Investor Relations Mr. Mackintosh, you may begin.
Good afternoon, welcome to the New home Companys earnings Conference call earlier today. The company released its financial results for the fourth quarter of 2019 documents detailing. These results are available in the Investor Relations section of the company's website in W.H.M. Dot com.
For the call begins I'd like to remind everyone that certain statements made in of course this call which are not historical facts are forward looking statements that involve risks and uncertainties.
A discussion of such risks and uncertainties and other important factors that could cause actual operating results to differ materially from those in the forward looking statements are detailed in the company's filings made with the FCC, including its most recent annual report on form 10-K, its quarterly reports on form 10-Q.
The company undertakes no duty to update these forward looking statements that are made during the course of this call.
Additionally, non-GAAP financial measures may be discussed on this conference call reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with gap can be accessed the new home company's website and it is filings with the FCC.
Hosting the call today as Larry Webb Executive Chairman, Dr., Miller, President and Chief Executive Officer, John Stephens, Chief Financial Officer with that I'll now turn the call over to Larry.
Thanks true and good afternoon, everyone joining us on the call today as we go over our results for the fourth quarter and full year 2019.
Discuss current homebuilding market trends.
And provide some color on the future of the new home company.
The fourth quarter of 2019, CAFTA Europe retrenchment for our company, which was marked by strong cash flow generation in cost curtailment.
As we made further stride strides toward our goal of lowering our leverage ratios.
Streamlined cost structure.
Oh, well moving our product offerings to the more affordable segment other market.
We generated 63 million of cash flow from operations in the fourth quarter through a combination of accelerated backlog conversion.
TJ claim sales and prudent reinvestment in our business.
This brought our total cash flow from operations for the year to 121 million.
A considerable some given the size of our company.
It also well work.
Our net debt to capital ratio of 49.2%, a 980 basis point reduction as compared to the end of 2018.
And a 1090 basis point improvement from the first quarter 2019.
On the cost front, we kept our ASP DNA expense below 10% for the fourth quarter.
Thanks to our efforts to reduce the personnel expenses and employee more efficient marketing and advertising message.
Our restaurant a ratio excluding severance charges for the full year came in at 11.3%.
Oh hundred basis points lower than it was in 2018.
The success, we had in 2019, reducing our leverage and improving our cost structure relative to 2018, just put our company on a much more solid foundation as we begin 2020.
We also entered the new year as a company rapid we transforming itself into a more diverse and affordably priced homebuilder.
Average selling prices in the fourth quarter 2019 declined 13% year over year.
A downward trend that should continue into 2020 and beyond as we close out.
Oh, I'm more higher price legacy communities and open more affordably priced watch.
In fact 15 of our next 18 community openings over the next 24 months, we'll be priced below conforming loan limits.
And 13, well have based pricing below FHLB limits.
These communities will shift our company away from the coastal areas of California.
Into the more in one prior to the state.
Well, it's a very strong Phoenix market.
Based upon our current projections entry level deliveries will jump from 25% of closings in 2019.
Just under half in 2020.
Dan move closer to three quarters of our closings by 2021.
Based on our view of the long term housing dynamics in our markets and the sales trends, we witnessed at the more affordably priced communities.
We've already rolled out.
We believe this product repositioning will lead to better order activity and higher profit margins over time.
Supplementing the encouraging outlook of our company is the continued favorable fundamental backdrop of our industry.
Which is characterized by low levels of new and existing home inventory.
Consumer confidence near historical highs.
And then encouraging interest rate environment.
Last month, the National Association of Realtors indicated that existing home inventory hit the lowest level since they began tracking to figure in 1999.
This is especially crew in California.
We need to replenish the housing stock of our nation is real and will not be resolved anytime soon.
He's macro tailwinds give us great momentum as we enter the spring selling season and have created a sense of urgency on behalf of home buyers typically bodes well for our industry.
We have a lot to be excited about both from an industry and company specific standpoint, and I'm optimistic for what the future holds.
Additionally, I'd like to note that our recent leadership transition has gone extremely smoothly.
With that I'd like to turn the call over to Leonard Who'll provide more color on her operations this quarter.
Thanks, Larry and good afternoon to everyone on the call.
As Larry mentioned, we continue to execute on our goals of cash flow generation cost containment and product repositioning in the fourth quarter, putting us in a much better position today than we were one year ago.
Our team members did an excellent job adjusting their operational focus to meet these goals.
This meant more being more aggressive on the sales fraud.
Turning through slower selling communities to converting cash and making tough decisions with respect to our headcount in our land portfolio.
In some cases these efforts came at the expense of profitability as evidenced by our weaker gross margin performance in 2019.
However, now that we are in a better place strategically financially and structurally we believed that we can start to make improvements to our gross margins as we move through higher priced legacy assets and selectively raise prices where demand has improved.
We've increased prices across a number of our communities to start 2020.
And continue to see year over year order growth for the month of January.
In terms of the overall industry dynamics, I concur with Larry that the market feels considerably better today than it was last year.
We finished 2019 with five consecutive months of year over year order improvement and have experienced solid traffic quality to start the year a great signed at home buyers are looking to get a head start on purchasing a home ahead of this spring.
With respect to our input costs land and labor continue to move higher in most markets while material costs are flat.
In terms of the local market color stronger order activity up more affordable price points, it's been a consistent theme and all of our markets. However, we did see some stabilization and improvement at higher price points during the fourth quarter.
The coastal areas of northern and southern California have shown signs of life recently, but it came at the expense of pricing across the market.
We continue to believe that these markets will be impacted by affordability.
And in the case, a southern California, the decline of the foreign buyer segment.
Demand trends are much more stable in the inland parts of the state where higher order rates have led to a reduction in incentive activity and moderate price increases.
Phoenix continues to be one of the best housing markets in the country and we will finally start to be a material contributor to our resorts with seven new communities coming online this year.
Life with base prices within at BJ loan limits.
We're excited about these community rollouts as well as our other affordable community slated to open over the coming quarters.
We believe that we have found a compelling match for our company at lower price points in each of our markets with a continued emphasis on unique design and desirable locations that set ourselves apart from the competition.
Now I'd like to turn it over to John for more detail on our financial results for this quarter.
Thank you letter and good afternoon.
For the 2019 fourth quarter, we generated a 7 million dollar pre tax loss, that's compared to a 22.4 million dollar pretax loss in the year ago period.
The current quarter pretax loss included a 6.6 million dollar inventory impairment charge related to one luxury condominium community in Phoenix, and a $3.5 million impairment charge related to a land development joint venture in Southern California.
Including these impairments we generated a net after tax loss of $3 million or 15 cents per diluted share for the quarter compared to a net after tax loss.
So of 16.2 million or 80 cents per diluted share in the prior year fourth quarter.
In addition, the 2019 fourth quarter included a net 1.2 million dollar tax benefit related to the extension of the federal energy tax credit for 2018 in 2019 deliveries.
Excluding impairments.
Adjusted net income for the 2019 fourth quarter was $3.1 million or 15 cents per diluted share.
Our home sales revenue for the fourth quarter exceeded the high end of our quarterly guidance by 9% or $14 million coming in at a $174 million due to the increase sales demand experienced during the quarter and our ability to sell in close more spec homes.
29% of our Q4 deliveries were homes sold during the quarter.
The deliveries were up 7% year over year, while our average selling price was down 13% coming in at $870000 per delivery for the quarter.
The decrease in or average selling price was consistent with our continued transition to more affordable product.
Including more deliveries from our Sacramento operations and in the inland Empire Southern California.
Based on the homes in backlog and spec homes available for first quarter delivery. We are estimating first quarter home sales revenue of between 75, a $90 million.
And our average selling price for the first quarter to be approximately $875000.
Our backlog conversion rate for the quarter was 97% as compared to 61% in the year ago period.
The improvement in our fourth quarter backlog conversion rate was the result of a higher population of specs that completed during the quarter that we were able to sell and deliver.
For the first quarter, we estimate our backlog conversion rate will return to the mid 60% range.
Our net new orders for the 2019 fourth quarter were up 106% over the prior year end up 15% sequentially from the 2019 third quarter.
The year over year and sequential order improvement was largely driven by an 83% increase in our fourth quarter monthly sales absorption rate due to stronger homebuyer demand in California.
As a result of the higher fourth quarter backlog conversion rate and lower beginning backlog to start fourth quarter. The number of homes in our backlog was down 22% from the prior year.
But was an improvement from the 33% decline in backlog units at the end of the 2019 third quarter due to stronger fourth quarter order activity.
The dollar value of our backlog stood at $126 million as of the ended the year.
Our gross margin for the 2019 fourth quarter, including impairments.
Was 7.8% versus 8.1% in the prior year period.
The 2019 fourth quarter included a $6.6 million inventory impairment charge related to one luxury condominium community in Scottsdale that had a slower absorption and required more incentives than originally anticipated.
While the 2018 fourth quarter included 10 million and inventory impairments.
Excluding impairments our gross margins from home sales was 11.6% for the quarter versus 13.5% in the prior year period.
The 190 basis point reduction in gross margin before impairments was primarily related to higher incentives and interest costs.
The lower gross margins relative to our quarterly guidance was largely due to a mix shift in delivering more homes.
One higher priced legacy community in Southern California.
Or higher incentives were needed to sell nearly completed spec homes.
Excluding impairments an interesting cost of sales our gross margin from home sales for the 2019 fourth quarter was 16.8%.
As compared to 17.7% in a year ago period.
For the 2021st quarter, we are projecting home sales gross margin of between 11.8% and 12.1%.
Our S DNA rate as a percentage of home sales revenue for the fourth quarter was 9.9%.
With the prior year, despite a 7% decrease in home sales revenue.
And was approximately 100 basis points lower than the our quarterly guidance.
Our overall genie spend for the fourth quarter was approximately $650000 less than the prior year period due largely to lower personnel expenses and that was after allocating about $700000 less in gene a cost to the fee business during the 2019 fourth quarter as compared to the prior year period.
For the 2021st quarter, we're projecting or SGN a rate to be in the low 16% range.
The higher anticipated first quarter SGN a rate is the result of lower anticipated Q1 revenues due to seasonality and timing of deliveries.
As is typical we expect our S DNA rate to drop sequentially as we move through the balance of the year and increase our revenues.
Our share of joint venture activity for the 2019 fourth quarter resulted in a pre tax loss of $3.8 million and included a $3.5 million impairment at our southern California land development joint venture and Corona.
The balance of the loss allocated to US was largely due to the write off of certain capitalized selling and marketing expenses at two homebuilding joint ventures in connection with the adoption of the new revenue recognition accounting standard at the joint ventures.
For the 2021st quarter, we are anticipating about a breakeven to a slight loss from our joint ventures.
Our fee building revenue for the fourth quarter was $31 million as compared to 42 million in the year ago period.
The lower fee revenue for the quarter was due primarily to less cost construction activity at our Irvine fee building communities.
For the 2021st quarter, we are estimating fee building revenue of between 20 and $30 million.
Our effective tax rate for the fourth quarter was a 56.9% benefit as compared to a 27.8% benefit in the year ago period.
The higher benefit rate for the 2019 fourth quarter was primarily due to the extension of the federal energy credits during December 2019 for homes that closed during 2018 and 2019.
We estimate an effective income tax rate, including discreet items of approximately 15% for the first quarter.
We ended the year were 21 active communities up slightly from the 2018 fourth quarter.
We expect our first quarter 2020, ending community count to be up one community on a sequential basis.
And for the full year, we plan to open approximately 12, new communities seven of which are located in Phoenix.
However on a net basis, we expect our year end community count to remain relatively flat from where we ended 2019.
As a result of the strong strong operating cash flow that we generated during the quarter. We ended the year was $79 million in cash after paying down the balance outstanding under our revolving credit facility.
And repurchasing $5 million of our senior notes due 2022.
For the full year 2019, we reduced our total debt by approximately $83 million and we ended the year with a debt balance of $305 million.
We spent $25 million on land during the fourth quarter.
91 million for the full year.
For 2020, we're budgeting land spend up between 100 million to $125 million.
Ill now turn the call back to Larry for his concluding remarks.
Thanks, John in conclusion, we made great strides in the fourth quarter to improve our balance sheet rightsize, our cost structure and reposition our company to take greater advantage of healthy demand trends, we've witnessed at more affordable price point in our markets.
2019 was a year of retrenchment for our company and we look forward to reaping the benefits of these efforts in the years to come.
Finally, I'd like to thank all of our team members for their hard work in 2019 to get us where we needed to be from a strategic and financial standpoint.
Your ability to execute on a number of fronts and continually adjusts to the ever changing landscape of our industry gives me great confidence in the future of the new home company.
I'm also proud of our recent recognition as professional builder magazines 2019 build or the year.
Great honor for our entire team.
That concludes our prepared remarks, and now we'll be happy to take your questions.
At this time, we will become ducting a question answer session. If you would look to ask your question. Please press star one and your telephone keypad confirmation total wouldn't get your line is in the question Q you May press star to if you'd like to remove request from the Q4 participants using speaker equipment and maybe necessary to pick up your handset before presence turkeys one moment. Please.
We pull for questions.
Our first question is from Alan Ratner of Zelman and Associates. Please proceed with your question.
Hey, guys good afternoon.
[noise] Ella.
So first off congrats on the progress in the quarter I know, a obviously, it's a little bit up push and pull there between the focus on cash generation debt reduction and obviously trying to drive that margin higher but I agree with you certainly much stronger starting point heading into 2020, then then it's tiny Eric.
My first question on the gross margin I'm totally understand kind of the moving pieces, there and as you try to move through some of this legacy projects that the drag that's having was curious if you might be able to frame for US you know the more recent community openings that you've had a targeted.
More at the entry level price point, how did the margins look on knows versus kind of that the car company reported averages.
Hey, Alan its Leonard Thanks for the question and good to talk to you.
All those new communities that we've opened up and really targeting lower price points, what I would say is that both the absorption rate and the gross margin is well above the company's average on the gross margin standpoint, specifically to your question, it's about three to 400 basis points higher.
Got it that's helped that's very helpful. Second question I think theres a lot of.
Signals coming out of California, right now definitely the data has has improved quite a bit we were even starting to hear a little bit of kind of anecdotal commentary that that perhaps the foreign buyer was starting to come back a little bit you know as some of that the Chinese trade talk rhetoric toned down a little bit on the other hand, I know, there's a lot of concerns over it.
The the Corona virus now going on even here in some people talking about that having a potential impact on the spring. So I was curious if you could just talk a little bit about what you're seeing I note that the foreign buyers that small piece of the market in general and I know, you're kind of moving away from those coastal projects, but can you give us any insight into what the current climates like.
Alan This is Larry it's interesting because I anticipated.
You'd you'd ask Corona virus and question and I feel like on the only person who qualified to answer that is not in will run right now.
I can tell you anecdotally, we made it strategic plan to exit.
Seem particularly the upper end of the Orange County market, a couple of years ago, and so as we sit here today.
Are the the.
Majority of our communities are in South Orange County that was never very influenced by the Asian market to begin with.
But on an anecdotal basis I've been pretty close contact with.
With the lead the three large way in holders in southern California and.
They've all said that they're seeing an uptick in the Asian buyer.
And.
Yes, so far at least we havent seen.
Any negative impact outside of.
On the Corona virus it just.
Hasn't impacted us because we weren't really selling to the Chinese buyer in a very significant way anyways.
But I haven't heard any stories or any comments from.
Any other builder or any masterplan developer that they've seen.
Any hit it all at this point.
Great. That's a very encouraging to hear thank you Larry and good luck guys.
Thanks, a lot on.
Our next question is from Sean Morgan.
Since they asset management. Please proceed with your question.
Hey, guys. Thanks for taking the question I'm sure you know.
Obviously, you've seen a lot of refinancing some of the homebuilding space.
Month month, a half I was just wondering if you guys could kinda give.
He update on what do you guys thinking about.
Your debt levels.
Potential refinancings down the road that's it.
Yeah, I mean, obviously the bond high yield market, it's been very strong of late since the beginning of the year and.
Clearly many homebuilders have gone to market, which which has been very very positive. We've also seen our bonds sort of trade up here in the last.
Couple of months, we've got a little more than just not just over two years left till maturity. Obviously, it's something that we will continue to evaluate and at some point, we will look to refinance those but.
We'll continue to evaluate sort of what is the price to do that relative to where.
What were per trading that now and again. This is something that we have our eye on but theres a lot of considerations that go into that.
Sean This is Larry I think it's it's safe to say that a year ago, we were in.
A much more difficult position financially and we work and we are today, but.
It was our primary goal to lower our leverage and.
And John in Leonard and their teams has done a really great job getting under 50% in one year.
Really less than one year and it's our goal to keep improving the financial position or the company. So that when the right opportunity occurs we're going to be able to take advantage of that but as as we sit here today, we're primarily focused on maintaining our leverage.
At 50% or so and improving our margins.
There are no further questions at this time and I would now like to pass the call back over to Larry Webb for closing remarks.
Thanks, a lot.
Big picture the last year has not been easy we said some pretty specific goals of reducing costs, both building materials as well as GSK. We also wanted to lower our leverage significantly we want we were in the middle of a pivot to.
It's more affordable housing and we wanted to continue that.
And along the way we wanted to never compromise on the quality of our homes, our customer service or how we treat our staff.
We have gone through the last year, and basically been pretty darn successful and all those areas.
And we are.
We really feel like Weve laid the foundation for the company now to take that extra cash that we brought in to.
To look for opportunities and over the next two or four years be improving everything that we do.
And you know along the way, we transitioned leonard into being CEO, Leonard and John have done a fantastic job and I would say without a doubt the company has been significantly better shape than it was 12 months ago and we appreciate everything that both the bond and the equity holders have done for.
For us with their confidence and we look forward to continuing to improve thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.