Q1 2020 Earnings Call
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First quarter 2020 conference call todays call is being recorded an a replay will be available on the company's website later today.
W.W. Dot allergy I home dotcom, we've allocated an hour her prepared remarks and QNX if anyone should require operate persistence. During the conference call. Please press star zero at this time I will turn the call a richer ways <unk> Chief marketing officer at allergy I home.
And then you may begin.
Thank you welcome to the L.C.I. homes conference call discussing our results for the first quarter of 2020 today's conference call.
Well contained forward looking statements that include among other things statements regarding LG I Didnt strategy outlook plans and objectives.
All such statements reflect current expectations. However, they do involve assumptions estimate and other risks and uncertainties that could cause our expectations should prove to be incorrect.
Should review our filings with the FTC, including our risk factors and cautionary statement about forward looking statement section for discussion of the risks uncertainties and other factors that could cause our actual results could differ materially on both anticipated in these forward looking statements.
These forward looking statements are not guarantees of future performance you should consider these forward looking statements in light of the 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, non-GAAP financial measures will be discussed on this conference call.
The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with cat.
Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP are included in the earnings press release now we issued this morning and in our quarterly reports on form 10-Q for the quarter ended March 31st 2020 that we expect to filed with the FCC later today.
This filing will be accessible on the Fccs website, and any investor section of our website at <unk> Dot com.
Joining me today or Eric Leisure, Algea, Hunky, 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 everyone to school, we appreciate your joining us where first quarter earnings call and thank you for your continued interest in L. James.
Before I begin I like to express my best wishes to everyone on the call.
So I really hope you and your families are safe healthy and successfully navigating the challenges confronting all of us during this unprecedented.
So our dedicated healthcare workers and others on the front lines of this pandemic all of us that LG I would like to express or heartfelt gratitude for your dedication bravery and self sacrificing efforts on behalf of our nation and we thank you for providing for citizens needs. During this challenging time.
Well, John Holmes employees, your dedication grid and commitment to our El Jive values and to our customers there's an inspiration.
We know that many if not most of you have taken on expanded responsibilities. In addition to your day to day roles here at LG Guy.
Many of you are now working in your homes as teachers.
Counselors entertainers and in many cases caretakers.
Despite these challenges you have performed above and beyond our expectations.
You continue to help our customers realize their dreams of home ownership at a time Warner idea of shelter has taken on a new and more profound meaning.
During today's call I will share highlights from the first quarter 2020, and then Charles will follow up to discuss our financial results in more detail.
I will then conclude with comments on what we're seeing in the market since the beginning of April.
Our performance during this period in our near term expectations.
Finally, we will open the call for questions.
Coming into the first quarter. We saw continued strong demand for LG I homes supported by an attractive interest rate environment in a limited supply of affordable new homes in the markets, where we operate.
We delivered record breaking closings in January and February and had significant momentum going into March.
However efforts to control the spread of Colvin 19 resulted in a global economic slowdown motivating us to take proactive measures to position our business for the coming uncertainty.
The combined impact of social distancing stay at home orders and other colder 19 related dynamics slowed our pace of sales.
Despite these headwinds our pipeline remains strong and the efforts of our dedicated employees enabled us to close 795 homes in the month of March and deliver a record breaking 1800 35 closings in the first quarter.
In the first quarter, we averaged 5.6 closings per community per month companywide.
Compared to 4.9 in the same period last year.
We saw strong absorptions for the quarter across the nation.
Highlighted by outstanding performances, and our San Antonio Seattle, and Houston markets.
Our top market, what San Antonio, averaging 8.7, clothing, and close behind where Seattle in Houston, each with 8.1 closings per community per month.
In addition, we ended the first quarter with 113 active communities approximately 30% over the same period last year.
With that I'll turn the call over to Charles Merdian, Our Chief Financial Officer.
Thanks, Eric.
Home sales revenues for the quarter were $454.7 million based on 1800 35 homes closed it 58.1% increase over the first quarter of 2090.
Sales prices realized from homes closed during the first quarter averaged $247808, a 5.8% year over year increase.
This increase in the average sales price per home was primarily due to changes in geographic mix highlighted by our strong performance in our North West Division, which includes the states of Washington, Oregon and Colorado.
In these states, we closed 273 homes in the first quarter compared to 99 in the prior year.
This quarter represented 15% of our overall closings compared to 8% in the first quarter of 2019, and our average sales price was approximately $375000.
Gross margin as a percentage of sales was 23.4% this quarter compared to 23.1% for the same quarter last year, an increase of 30 basis points.
We closed a 109 nine homes in our wholesale business in the first quarter of 2020 or 10.8% of total closings compared to 30 homes for 2.4% in the first quarter of 2019.
Gross margins excluding wholesale closings.
Up 90 basis points year over year.
Our adjusted gross margin was 25.5% this quarter compared to 25.1% for the first quarter of 2019, a 40 basis point increase.
Adjusted gross margin excludes approximately $9 million of capitalized interest charged to cost to sales during the quarter, representing 200 basis points and consistent with expectations.
Combined selling general and administrative expenses for the first quarter were 11.6% of home sales revenue compared to 15.7% in the prior year, primarily reflecting operating leverage from weren't homes closed and higher average sales prices.
Selling expenses for the quarter were $32.8 million or 7.2% of home sales revenues compared to $26.8 million were 9.3% of home sales revenues for the first quarter of 2019, a 210 basis point decrease.
In addition to operating leverage we reduced our advertising spend by approximately 30% in the first quarter this year compared to the first quarter 2019.
The reduction in spend was due to optimize performance an advertising campaigns increased demand and our ability to respond to a rapidly changing environment.
General and administrative expenses were $19.9 million or 4.4% of home sales revenues compared to 6.4% for the first quarter of 29 gene.
200 basis point decrease.
Pre tax income for the quarter increased 153% to $54.9 million or 12.1% of home sales revenue compared to $21.7 million were 7.5% of home sales revenue in the prior year.
For the first quarter, our effective tax rate of 22% is slightly lower than our annual expense expected effective tax rate, primarily as a result of deductions in excess of compensation costs are windfalls.
We expect that our effective tax rate for the remainder of the year will range between 23.5% and 24.5%.
We generated net income in the quarter of $42.8 million or 9.4% of home sales revenue, which represents earnings per share of $1.69 per basic share in a dollarssixty seven per diluted share.
During the quarter, we purchased approximately 567000 shares at an average price of $55 per share for a total of $31.3 million under our previously authorized share repurchase program.
The initial purchases were made at the end of February and Opportunistically continued do the latter part of March we ended the quarter with 25.1 million shares outstanding.
First quarter gross orders were 3036 and net orders for 2481, a 27.4% increase over the prior year first quarter.
Ending backlog for the first quarter was 1800 79 homes compared to 1300 44 last year and the cancellation rate for the first quarter of 2020 was 18.3%.
Our ending backlog average sales price was approximately $238000.
We ended the first quarter with a portfolio of 50273 owned and controlled lots.
And as of March 30, Onest, 62% of these lots were owned.
No. This amount approximately 7800 were finished vacant lots 20000, where either raw or under development.
3600 were either completed homes information centers are homes in process.
Throughout our history, we have maintained a disciplined approach to our capital structure. We believe our conservative balance sheet is a strength going into this uncertain time and along with our ample liquidity enables us to withstand periods of economic uncertainty.
Has the potential magnitude of the pandemic along with the effects of the government's reaction to contain it became clear we proactively took steps to shore up our balance sheet and prioritize our cash position.
These steps included but we're not limited to prioritizing closing our existing pipeline.
Limiting the release of new starts reducing our marketing spend suspending new land acquisitions and working with land sellers to postpone the vast majority of land acquisitions in the future months.
As of March 31st we had approximately $118 million in cash up from $38 million in December approximately $1.5 billion of real estate inventory and total assets of $1.7 billion.
Our focus on cash management has resulted in positive cash flow.
During the month of April we paid down $50 million on our credit facility and currently have over $120 million in cash.
We expect we will have approximately 3100 completed homes information centers are homes and process.
Down from 3600 in March.
We also canceled extended or deferred land acquisitions, resulting in owned and controlled lots of approximately 45000 at the end of April down from over 50000 at the end of March.
Also at the end of March we had $753 million in total debt outstanding under our revolving credit facility and senior notes are available borrowing capacity was approximately $137 million, resulting in combined liquidity of $255 million.
Our net debt to capitalization was 42.1% down from 43.6% were 150 basis points from December and down 650 basis points from March 2019.
During April we successfully completed the annual amendment to our existing credit agreement.
This amendment continues to provide for a $650 million revolving credit facility at more favorable terms primarily related to our interest coverage ratio.
And extends the existing maturity for $520 million by one additional year to 2023.
The facility can be increased by up to $100 million.
We expect to continue to be diligent in our balance sheet management through our investments in both land and vertical construction and we believe we are well positioned to provide us with the necessary flexibility given the current environment.
At this point I'd like to turn the call back over Terry.
Thanks, Charles throughout this challenging time, we remain focused on our commitment to our customers dreams of homeownership.
Home has always played a vital role in our lives now more than ever our homes have become commandcentral for all that we do and our LG I team has worked diligently to continue to provide homes for our customers. Despite many obstacles.
The safety health and wellbeing of our employees customers and trade partners as bad the forefront of every decision we have made over the past nine weeks.
As social distancing mandates and stay at home orders were released we quickly adjusted our operations to comply with government and Health Agency guidelines by the third week of March most states, where we operate at designated construction as an essential service.
Since we were permitted to continue to operate we implemented additional measures at our information centers to protect the health of our customers and employees.
These include but are not limited to increase frequency of cleaning.
Shorter selling hours showing by appointment only in a rotating schedule limiting the number of people in our offices.
We have enacted social distancing protocols in our communities and arrange construction schedules so that no more than one trade is in the home at any one time.
Due to our even flow construction schedules, we already filed many of these protocols limiting the need for significant changes, which minimize delays in construction timelines.
Additionally, we have suspended all non emergency warranty work until as deemed safe for us to enter our customers' homes.
And they are comfortable with us doing so.
A key to preserving our share beliefs and maintaining morale. During this difficult time has been a heightened level of open collaborative communication.
Management has implemented a targeted program of meetings and communications opt in the form of conference calls with our employees customers existing homeowners trade partners lenders in our board of directors.
These calls are designed to keep communication flowing efficiently as operational safety and service decisions are disseminated to the organization and real time feedback from the field is obtained.
The response these calls have been universally positive.
These calls have enhanced our ability to adjust to rapidly changing market dynamics are frequent communication to LG I employees has allowed us to express our appreciation.
Sure allow alignment on our modifications to our business practices and inform our people now we have no intention of furloughing or laying off any employees.
We have invested heavily in recruiting hiring and training and we believe our employees are the best in the business.
Each of these individuals will be instrumental to our continued success. During this time of uncertainty and in the recovery to come.
As Charles mentioned in his comments, we have been laser focused on managing and preserving cash.
As a potential scale of the Pandemics impact became clear we undertook prudent measures to strengthen our cash position by reducing our starts and focused on monetizing our existing pipeline.
Homes under contract.
As we work closely with our customers through the mortgage and closing process because that's the only comment that recent events have only increase their desire to relocate their families to the comfort space and security single family homes offer.
As a result, we saw strong pull through and our pipeline and pending verification of fundings. We expect to formally released 605 closings for the month of April later today.
These closings in conjunction with our cash management initiatives have solidified our balance sheet and put us in a strong position to whether this uncertain environment.
Year over year April demand in sales were down approximately 35%.
This decline was expected given the combined effects of stay at home orders reduced information center hours and restricted staffing.
In addition, we proactively reduced marketing spend to manage consumer demand allow for social distancing and focused our attention and the most motivated buyers.
Before I conclude I want to highlight that inline with the announcement in our press release, we are withdrawing our 2020 full year guidance.
Due to the ongoing uncertainty in the US economy from recent events the longer term economic impacts to our business are impossible to predict at this time.
However, I do want to provide you with a near term outlook that will be reflective of what we're seeing in our markets and business now.
Although April sales were slower our pipeline remains strong and we continue to build sell and close homes in all of our markets. Additionally rates remain at historically attractive levels and despite recent modifications to underwriting standards, we're not seeing a measurable reduction in the available.
The mortgages for our buyers.
As a result and based on what we've seen so far this month, we expect to close between 506 hundred homes in the month of May.
We expect our average sales price for the second quarter two ranged from $230000 to $240000. This is lower than the first quarter and is primarily the result of expected mix shift indicate different markets across the country.
Finally, we expect our gross margins at our adjusted gross margins in the second quarter to be similar to what we generated in the first quarter of this year.
In closing, we will navigate the unpredictable days ahead by focusing on the proven fundamentals that enabled us to grow and succeed since our founding.
First we are a systems based company.
Creates a disciplined framework for building and selling homes, regardless of market conditions, what we call. The LG I weigh allows us to focus on the things we can control into control them effectively.
Next we manage our balance sheet conservatively and have the capital structure and liquidity, we need to support our business through any period of uncertainty.
Additionally, we build in cell quality homes that address the needs of entry level buyers at a compelling value.
The consistent theme from our customers is that now more than ever they are ready to move out of densely populated living situations and into homes that offer more space and privacy.
Our 100% spec focus strategy positions us to address these needs what it matters to our customers most.
Finally, and most importantly, our greatest asset as our people.
They will be the key to our long term success as we create value for all of our LG ice stakeholders with that mine I want to reiterate that we have no plans for layoffs or furloughs for existing employees to the contrary, we plan to increase our employee count in the coming months to support our growth and continue on our.
Path to becoming a top five builder, we're now prepared to open the call for questions.
As a reminder to ask a question you need to press star one on your telephone to withdraw your question press the pound.
Yes. Thank you please limit yourself to one question and one follow up question. Please stand by what we compile the culinary roster.
Our first question comes from a line of Michael Ray from JP Morgan. Your line is now open.
Hi, Thanks for taking my question has a lot home and on for Mike.
First question.
Wanted to.
Maybe you could get a little more color on that closing number for April.
Any regional stand out.
Were you have seen kind of slow down and also held on the demand side and then definitely going into may.
In your press release, you talked about.
Some positive momentum and recent sales trends, so any more color kind of on that more like a weekly trends and any regional standouts would be helpful. Thanks.
Yes. Thanks for the question. This is Erik I can start on April 605 closings will afford 115 communities, so averaging 5.3 closings per community.
As far as recent trends.
We talked about April as as a month being down 35% overall.
The first two weeks of April were softer than the last two weeks of April and then the first week of May was the best week. This past weekend. The best weeks since we've had since the beginning in March so like other builders of side, we are seeing positive trends I'm in seeing more people come out to our off.
Offices as of C. Chem orders have been limited.
It is also important I think as we sat in the scripted remarks that what we're talking about sales to comparisons everybody does have to realize we have put the safety and health and wellbeing of our customers employees first we then complying with all the government orders. So when you reduce your hours you limit your staffing in the office we've.
Bat marketing by approximately 80%.
It's hard to get a real good field, where sales are and we've been pleasantly surprised by the demand were seeing with all those restrictions in place.
Okay.
Great any anything on a regional.
You mentioned he seems very strong in.
During the quarter.
How about saying trending given the decline in oil prices and the market there or any other kind of regional sand.
Now I think the regions and then consistent yeah like you mentioned in the first quarter. The northwest is real strong San Antonio Houston, The Texas markets remains strong.
Carolinas has been strong over the last month and then most recently I think the state of Georgia, The states of taxes, the states of Tennessee.
Oklahoma State that of loosened up on the restrictions and opening up some restaurants and getting more people comfortable what's going out.
As far as last week, we so little bit more momentum in those areas.
Great. Thank you just on my last question here.
I want to follow up on you mentioned.
A lot less and.
Advertising spend then.
And marketing spend so I'm just wondering what your.
In terms of the pace getting improving or getting a little better you know what's what's your current level of incentives in the market and have you been adjusting knees and I think it's more broadly your strategy regarding price versus pace.
Yeah I'll take the incentive question just start with were not offering any additional incentives to our buyers right now we're seeing strong demand relative to the world that we're living in.
There is a shortage of supply and most of the markets of new homes.
We think there will be coming out of this very strong demand from customers that are living in densely populated areas or living in apartment complexes to get out and get more space and privacy and we expect that demand to get there an increase as we move further away from this situation.
That we're in so we don't think it makes sense rail dji business to offer additional incentives will stay with our historical way that we price or houses and right price to margin.
New communities come on line, if we see some pricing pressures relax and we can offer better value to our customers were certainly do that and if prices continue to increase whether its materials labor fees development, Boston will adjust pricing accordingly in that direction as well, but no no additional incentives.
Got it sounds good thank you very much.
Welcome.
Thank you all our next question comes on the line of Truman Patterson from Wells Fargo. Your line is now open.
Yes, actually it's a possibility I was wondering first off you know if there was a pretty meaningful increase in your wholesale business year over year.
How are you looking at that you know here over the let's call it near to intermediate term.
And our those buyers still in the market or is there their appetite waned at all.
Yeah sure. Thanks, Thanks, Paul for the class yen to first quarter 2020, we had a very positive.
Quarter from the wholesale standpoint, we had 199 closings in Q1 that was 10.8% of our business and that is up from 30 closings or 2.4% of our business in Q1.
That was not because of large discounts to our wholesale partners is because these these homes that closed in Q1, where contracted a quarter or two quarters previous to that.
So we've we've been very excited about the wholesale business, it's been a growing part of our business and then in April we had 86 closings from the wholesale business or 14.2% of our business. We think wholesale similar to the first quarter will be 10% to 15% of our closings in Q2 and al.
As you probably heard somebody.
Public Reis Se just like we are in buying new new land properties. Our wholesale partners are in a pause right now from new acquisitions men, we think that will come back and be another very positive the store positive part of our story when we get passed the cobot 19 situation that we believe is temporary.
Yeah.
Okay.
You mentioned.
States, but we're opening or have opened you you've seen some positive response have you been able to make any operational changes in the state yet.
Or is going back to your basic normal sales process.
We have to a limited extent, we're still being very much cognizant of social distancing and doing all the proper hygiene and focus on the health and safety our workers, but the fact that I'll use Texas. For example, the fact that in tax machine go out to a restaurant that are it's only 25% path.
Steve and I think thats good moral boost for the economy here in Texas and people are more comfortable going out and then we've been able to increase our staffing and we've increased marketing spend just looking forward to that increased traffic and its early at Texas just opened up last Friday and the state that I mentioned just opened up last week.
So it's early but we did see some positive signs over the weekend and had what we consider a very solid weaker sales.
Okay.
Just one final one.
Noticed any increase in your <unk>, sorry real for sales.
I don't I don't think so you know it's consistently run about 30% of our business over the last couple of years I believe that was a pretty consistent number in the first quarter as well so no I think it's similar.
Okay. Thank you appreciate it.
Welcome.
Thank you as a reminder, Tasco question you wanted to press Star one on your telephone to withdraw your question press about.
We ask that you please limit yourself to one question and one follow up question. Our next question comes from the lineup Carl range from BTI. James Your line is now open. Thanks, Hi, guys. Thanks for all the detail that's really helpful. I'm just a follow up on Truman's question about about Cobra, you said, you hadn't raise incentives to customers.
Brooks about the same it if you have you raised.
Which will pay a buyer's brokers.
We have not no we actually beginning of 2019 in the first quarter 2019, we reduced the co broker.
That we pay brokers from 3% the 2.5% and that has remained the same up to this up to today, Okay Super. Thank you for that clarification.
On the.
And the land side.
Okay got me know trade you have 20000 lots underdeveloped mid 7800 finished.
Are you pausing your spend on under developed lots.
Yeah, Hey, Carl this is Charles.
The answer is is that any any section that we're currently in development on is continuing as normal we're being cautious at the moment under our strategy just managing cash to release any new sections or go out to bid just yet.
As we just continue to monitor.
What's happening and we'll continue to evaluated on a community by community basis.
Okay. So if you had a community where you had where we were matching starts and sale starts the sales and it was running well then you've got a phase in front of you might go ahead.
Finished development there, but in general you are not that the best right. No. That's correct. Okay. Thank you for that and then I'm sorry, if I. If you don't mind me sneak in one more just on your community count, which is which is running has been running like that have what's your thinking now in terms of communities, where you you could open in the next quarter or.
Those on pause as well should we just sort of budget for flat communities until this is over.
Yeah, Carl Drake Lash and this is Eric we're going to report a 115 active communities for the end of April and then we're not giving guidance for third quarter or ended the year community count our prior guidance has been.
Taken off but we haven't we have communities ready to go there just to on too much uncertainty on the timing of those openings and where we're going to be with the state regulations and if we put people on airplanes and continue our recruiting process.
But the plan is to recruit and opened new communities and third or fourth quarter, but the timing is sell one known that we can't give guidance. Okay. That's that's perfectly fine I appreciate that thanks, Eric.
Youre welcome.
Thank you Sir our next question comes from the line of Alex Barron from housing Research Center. Your line is now open.
Yes. Thank you hope you guys are all doing fine fine.
I wanted to ask I know generally in your sales process.
You guys.
Focus a lot of.
Face to face kind of meeting some kind of curious.
I think you focus most of your sales over the weekend some kind of curious how you've adapted.
The current environment are you using more online tools.
Or are you selling throughout the week or like has any of that changed.
The primary thing that's changed Alex It's just all the social business, even protocols and really focusing on the safe and healthy safety and health of our customers employees. So.
Our process has not changed now we're very.
Positive butter process, where systems based company. So we're not going to change that process in a temporary situation, but we certainly all had to adapt to these changing times. So we certainly limited number of people that have come into our offices limited the staffing, but we're still meet and customers. One on one might with a lot of social distancing and a lot of.
Restrictions in place.
Got it makes sense.
And as far as your build times have those been.
The impact that at all or how much by the social dispensing between the crews and stuff.
Yes. This Charles.
No not not significantly at all is I think in the prepared remarks, we actually mentioned that we had a lot of the scheduling processes are already in place.
Where we limit the number of trades that are in the homes at any one particular time I am I think at the end of March you saw a lot of movement in terms of how to get inspections and certificates of occupancy is and things like that which we were able to manage through pretty effectively so our construction schedules.
Our inline and on on on time.
Okay, and then factor that's one last one I think I heard you say you lowered your your marketing spend by 80% temporarily so has that already started to come back or where it whereas that up these things.
Yeah, it's starting to come back Alex in the markets, that's our reopening or we opening more parts of their economy, where we can ramp up our sales efforts in the field, but it's still pretty slow most states are pretty highly restricted Dolby cautious on our marketing spend and gradually increase that as states start to real.
Okay. We're best of luck instances thanks.
Yes.
Thank you. Our next question comes on the line of Barry Haimes from Sage asset management. Your line is now open.
Thanks for taking my question most might have been answered, but one I just wanted to be clear in terms of.
The regions most affected by by energy in the the reduction that we're seeing an oil patch.
Are you, saying today, you have not seen any impact from that I think you alluded to that but I just wanted to clarify thank you.
Yes, very I think when oil prices have been so substantially ahead and there is substantial job losses. The economy I don't think we want to say, we havent met impacted I think it just top to gauge the impact right now again going back to we've really restricted our hours restrictive staffing cutback marketing by 80% So were positive on the overall.
No.
Feel that we are hearing from customers and what we're hearing from the customers as far as wanting to get more space and move out of dense areas. I mean, we're a suburban entry level single family detached builder and we think that is there the REIT space to be in we're also the only public homebuilder thats, a 100% spec builder. So we.
How the inventory on the ground to satisfy the demand for customers that want to get out of those apartments situations and get into a home quickly and we also had the systems and processes in place that we can build inventory and turn on the fossett. If you will for marketing and sales and construction to ramp up very quickly.
Great good quarter. Thanks, a lot appreciate it.
Thank you.
Thank you at this time I'm showing no further questions I would like to turn the call back over to Eric Leper for closing remarks.
Thank you as a final note I would like to introduce Josh matter, who recently joined our team as our Vice President of Investor Relations. Josh has worked in and around the homebuilding industry for over 20 years prior to joining US. He was a director at Deutsche Bank, covering the homebuilding and building product space, We first met John.
Cash in 2013, when he was part of the team that worked out our IPO and he has worked closely with us on our capital market transactions every sense.
As part of the LG Highway Josh is currently participating in our 100 day training program and I know he is looking forward to meeting and working with all of you in the future. Thank you everyone for participating on today's call and your continued interest in Lj homes have a great day.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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