Q2 2020 KB Home Earnings Call
[music]. Good afternoon, My name is Devon and that'll be a conference operator today.
I would like to welcome everyone to the T V home 2022nd quarter earnings Conference call. At this time, all participants are not listen only most following the company's opening remarks, you open the lunch for questions.
Today's Congress school is being recorded it'll be available for replace the company's website to be home Dot Com do July 24th.
No I would like to turn the cold over to Joe Peters Senior Vice President Investor Relations joke. He may begin.
Thank you Devon good afternoon, everyone and thank you for joining us today to review are resolved for the second quarter of physical 2020.
[noise] the call, Jeff Mesker, Chairman, President and Chief Executive Officer, Batman Deno, Executive Vice President and Chief Operating Officer, Jeff Kaminski Executive Vice President and Chief Financial Officer, They'll Hollinger, Senior Vice President and Chief Accounting Officer, and Bad Johnson, Senior Vice President and Treasurer.
Before we begin let me note that during this call items will be discuss that are considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Payments are not guarantees a future results and the company does not undertake any obligation to update them.
[noise] due to factors outside of the company's control, including those detailed and today's press release and didn't filings with the Securities and Exchange Commission actual results could be materially different from those stated or implied and forward looking statements.
In addition of reconciliation of the non <unk> measures referenced drink today's discussion to their most directly comparable <unk> measures can be found him in today's press release <unk> on the Investor Relations page, if our website at Katie home dotcom and with that I will turn the call over to just mustard.
Thank you Jill.
Good afternoon, we hope you your families and your colleagues or a healthy I'm staying safe.
We entered the second quarter, well positioned with a substantial backlog expanding profitability and poised for momentum and another order grilled <unk>.
And what looked to be a strong selling season.
Two weeks later, a national emergency was declared for the Coven 19 pandemic.
And every state and which we operate issued stay at home restrictions.
Actively shutting down there local economies.
My residential construction was deemed an essential activity.
And we were able to continue to construct and deliver homes and the majority of our market <unk>.
We curtailed many aspects of our business.
Until we getting better visibility market dynamics and the economy.
These steps allowed us to effectively navigate through the disruption.
And with our absorption pastes now beginning to normalize we have quickly reestablished a steady rhythm to our business and selling starting and delivering homes.
Cause we emerge from the second quarter.
And looked at 2021 and beyond.
We are more efficient business and believe we are well position to restore our higher volume delivery levels.
I'm proud of the entire kv home team for their extraordinary effort and dedication to our customers and our company.
In spite of the challenges we faced our team's executed well safely delivering 2500 homes to our customers.
Which produce total revenues of 914 million.
And diluted earnings per sure Oh 55 cents.
Representing year over year growth of eight per cent.
Getting into the details of our results are profitability increased marking a highlight of the quarter.
With a 100 basis point year over year expansion and our housing gross profit margin Whitfield of 19 per cent increase in our pretax income.
We have a strong balance sheet with no goodwill and 1.4 billion N liquidity.
Our leverage ratio is healthy at 41.5 per cent <unk>.
Reflecting a 430 basis point improvement.
Compared to the prior year quarter.
On that basis.
Ah ratio is 32.4 per cent.
Throughout these past few months.
A high priority has been and remains.
The health and wellbeing of our employees customers and business partners and their families.
This guiding principle drove our decision to temporarily close our communities in mid March.
And then move and early April two a limited reopening sigh appointment only.
With only one customer group permitted in our sales centers model homes and design studios at any one time.
We continue with this approach until more fully reopening and the third week of May.
Now accepting walk in traffic.
While still restricting the number of customer groups a lot in our communities at any one time to to.
This was a conservative path to follow.
Closing our communities during three of the busiest sales weeks of the year.
And reopening more slowly than some other builders did.
Well, we felt we needed to take aggressive action and the interest of safety, while continuing to effectively run our business.
At the same time, we took steps to enhance our virtual selling and studio tools.
We set up systems to our customers to visit our communities and tour homes privately without a cave home employee present.
We also created a process by which fires could finalize our studio selections online.
Once we resumed welcoming walk in traffic and all of our communities and design Studios.
We continued to offer these options along with private appointments.
Providing flexibility in the most comfortable way for our customers to engage with us and capturing efficiency to the process.
We plan to continue enhancing R. Virtual efforts given their success and in fact, we recently introduced <unk> website.
With a range of new tools to make the home by an experienced even easier for our customers.
Given the uncertainty that we were operating under we quickly moved to the first land acquisition emphasis been land development.
Well, let's put a hold on starts in production.
To preserve cash until we had more clarity on the status of our backlog in the direction of the economy.
In addition, we adjusted our head count to appropriately aligner structure with anticipated volumes.
Ah painful but necessary stuff that we expect will result in approximately $40 million an annualized savings.
Our cash preservation actions were successful.
We increased our cash balance by 145 million sequentially.
And by nearly $450 million, you're over a year after adjusting for a modest level of cash that was drawn on a revolver than last year's second quarter.
And we accomplish it increase in a corner, where our cash outlay is typically one of the highest of the year.
During the quarter, we elected not to draw on a revolver as we we're confident in our ability to generate adequate cash flow to operate our business.
We did invest roughly $230 million and land acquisition and development.
Over 70 per cent of which was used for development M fees early in the quarter.
That's conditions have improved in recent weeks.
We have now Holy resume land development and increased our acquisition activity once again as well.
From an orders perspective my remarks. This afternoon will focus on our gross orders with a separate discussion of cancellations.
We believe this will provide more clarity the underlying demand trends in our business.
And that we took a proactive approach to evaluate in our backlog, which materially impacted aren't that order results.
I'll provide more detail on this in a few moments.
At the time of our last earnings call in March or year over year gross orders were positive.
But quickly decelerator from that point and I ended up declining 4% for the month.
This decline became more pronounced in April with gross orders down about 60 per year over year represented the low point for the quarter.
We were encouraged to see an acceleration and gross orders.
The beginning of May.
As many counties in cities and our served markets began their phased approaches to reopening.
In addition to the optimism fuelled by the reopening demand was also driven by low mortgage interest rates limited resale inventory.
And a heightened desire among consumers.
Both one a new home for health and safety reasons.
And also to relocate away from dense urban areas.
This improvement on a weekly gross order trends in the first week of May.
Continued steadily is the month progressed.
And the final week of the month gross orders were at their best levels since the second week of March.
Along the way, we did not take steps that would compromise margins.
In order to stimulate sales and in fact, we were able to increase prices and about 60% of our communities for the quarter overall.
From a geographic standpoint, the increase in demand was broad based.
Cross our entire footprint.
And I'll highlight a couple of markets.
In spite of the compounding effective depressed oil prices Houston's weekly gross orders were healthy inmate and by the final week of the month at their best level since August of 2019.
That's <unk> performance reflects are affordable price points.
And the ability of Houston's diverse economy to withstand volatility in the oil market.
As to California.
[noise] was the first day to issue stay at home restrictions. It's local governments began lifting news orders at varying points during Meg <unk>.
[noise] contributing to some unevenness and demand trends market by market.
We saw solid order activity in several markets as they reopened, particularly the inland Empire, Sacramento and the Central Valley.
And also in the Bay area.
With respect to cancellations, we entered the quarter with a substantial backlog of 5800 buyers.
It's counties and city shut down and.
And layoffs, furloughs and <unk> wage reductions intensified.
We took a proactive approach to confirm any intentions and capabilities of our customers and backlog.
This reassessment process resulted in significant order cancellations.
Situations, we refunded most deposits and maintained good relationships with our customers. So that they would return to us when they were able and ready to buy again.
And a number of our communities. We are seeing some of these buyers coming back to purchase a home upon returning to work.
The combination of lower gross orders and higher cancellations resulted in a year over your increase in our cancellation rate to 43 per cent and the second quarter.
The majority of cancellations, where an order is already in backlog at the beginning of the quarter.
Primarily on homes that are not yep and started.
Although roughly 20 per cent of cancellations run homes that were scheduled for delivery during the second quarter.
Oh, no or Las Vegas, and Orlando divisions, two of our larger volume businesses.
Where hit, particularly hard reflecting their economies dependents on travel and tourism.
An accounting for roughly 25 per cent of our overall cancellations in the quarter.
We are now comfortable with the stability of our backlog as our cancellation rate has returned to a more normalised level.
As we moved past the disruption and head into our third quarter.
And that makes sense to return to evaluate and an order trans on the net basis.
So far in June demand continues to accelerate.
[noise] week over a week night orders have further improve for amaze levels.
Overall are net orders for the first three weeks of the month or maza modestly positive you're over here, which is noteworthy given the strengthen orders and June 2019.
We're pleased with added the quarter with a backlog I've nearly 5100 orders and the value of 1.9 billion considering the operating environment.
That said, given our pause and land development housing starts and production during the quarter.
[noise] expect our backlog conversion and the second half of 2020 will be below historical levels and some of the deliveries that we would normally have anticipated will shift into 2021.
On the mortgage site K V. H S has been a strong partner.
And supporting and communicating with our customers.
And in providing better predictability and managing through the closing process.
The jv's capture rate increase in the second quarter to 76 per cent <unk>.
Driving it's income up about 90 per cent year over here.
This past quarter highlighted the power of the Jv's technology, which enhances it's ability to serve our homebuyers remotely.
And increases already efficiencies and delivering homes.
K V. H S offers a digital mortgage platform, allowing customers to complete their loan application online or via the mobile app.
The platform automatically verifies employment <unk> and borrowers can upload any other required documents electronically simplifying the process and streamlining loan approval.
The clothing borrowers can review all alone disclosures prior to clothing and sign a majority of the documents electronically.
Any documents requiring a wet signature can be signed curbside at the tidal company.
Or a remote notary can meet borrowers that their existing residents.
The JV is also pilot any remote online <unk> capability.
Beginning in the third quarter for home buyers with conventional loans, and our Arizona, Florida, Nevada, and Texas divisions.
This program will allow borrowers to sign all loan documents electronically.
Or virus credit profile remains stable with an overall average FICO score of 720.
Which has been consistent over the past five years.
Our first time buyers, who represented 58% of our deliveries and the second quarter.
Flight uptick both year over year and sequentially have an average FICO score of close to 710.
Turned our focus to our business model, we remain committed to bill to order as we view it as the right approach for our company and one that buyers value.
Bill to order off for certain advantages that we find very compelling.
First we can align our business to demand and build to our sales pace.
This allows us to minimize are spec starts and cashed tied up in production.
Thereby mitigating inventory risk and managing capital outflows, both important tools, particularly as we navigate it through the uncertain conditions of the past three months.
Second and working from a large backlog of sold homes, we can manage starts to achieve even flow production in our communities.
This helps us to provide greater predictability on deliveries of margins with consistently higher margins on our bill to order sales.
And finally.
Where proponents of giving homebuyers choice.
Consumers value personalization in a studio process and we saw evidence of this in the second quarter.
With a year over your increase in studio revenue per home.
We have long believe that are built to order model is one of the primary drivers behind our sustained high absorption rates over the years.
In fact during the second quarter or gross orders of personalize homes perform better than orders on inventory homes.
With bill to order, representing roughly 75% of our business. We gave him the benefits of this business model, while maintaining adequate availability of homes available in each of our communities to meet the needs of buyers, who Wanna quicker move it.
And clothing, while the second quarter pose numerous challenges we emerged a stronger company as a result of the actions that we took.
And the efficiencies we gained.
Which have lowered our cost structure.
Our balance sheet as strong.
[noise] backlog is stable and our net orders or modestly positive in the first few weeks of June.
While our deliveries and revenues will and the year lower than we had originally planned we are more efficient and profitable business, then we would've otherwise been.
With a gross margin that is approaching 19% for 2020 ahead of last year.
We are mindful of the risk present in the economy and that Cove at 19 continues to pose.
Yeah, well our orders having normalized we are working to restore our higher annual volume levels and intend to keep growing from there.
We are encouraged US we look ahead, the 2021 and the opportunity it provides.
We look forward to updating you on our progress as we move through the balance of this year.
With that I'll turn to call over to Jeff for the financial reviewed.
Yep.
Thank you jumping good afternoon, everyone I will now provide highlights of our financial performance for the 2022nd quarter.
During the corner, we navigate it's really very challenging operating environment.
Generate improvements in many of our key profitability measures and continued to enhancer balance sheet strength liquidity.
In addition, with positive weekly sales trends in May and June that reflect progress on the path toward normalized activity in our serve markets, we're providing for guidance because the 2023rd quarter and full year.
And the second quarter or housing revenues total of $910 million compared to just over $1 billion and probably a year period, reflecting a 10% decline and the number of homes delivered in a slight decrease in their overall average selling price.
The lower deliveries and housing revenues reflected the severe cove at 19 pandemic induced economic and social disruptions and related uncertainty during the quarter.
Which drove increased home purchase contract cancellations and slowed or deliberate recycle.
We ended the second quarter with 5080 homes and backlog as compared to the year earlier level of 5927.
Alright, ending backlog value was one $9 billion, a decrease at 12% versus the prior year.
Considering a quarter on backlog current construction cycle times in recent improvement Internet orders, we anticipate or 2023rd quarter housing revenues to be in the range of 822 $880 million.
For the full year, we believe our housing revenues were range from 3752 $395 billion.
And the second quarter are over all average selling price at homes delivered was down slightly year over year to approximately $364000.
We anticipate an increase mix of deliveries from higher priced communities will result in higher average selling prices and the second half of the year is compared to both the first half of the year and a year earlier period.
For the 2023rd quarter, we're projecting an overall ever selling price and a range of 395 to $400000.
We believe R. A S P for the full year will be in a range of 385 to $395000.
Homebuilding operating income decrease slightly from the year earlier quarter to 51 $6 million.
At the same time homebuilding operating income margin increased 60 basis points to five seven per cent.
Excluding inventory related charges, and four $4 million and severance charges of six 7 million and the current quarter.
In inventory related charges, a $4.3 million in earlier quarter.
This metric improved by 140 basis points year over year, 269%.
[noise] merrily due to improvement in our housing gross profit margin.
The inventory related charges for the current quarter, where comprised of abandonment charges and mostly related to one land option contract in Texas.
We had no inventory impairment charges and a quarter.
For the 2023rd quarter, we expect her homebuilding operating income margin, excluding the impact of any inventory related charges will be in the range of 5765 per cent.
For the full year, we expect this metric excluding inventory related charges and the second quarter severance charges to be in a range is 64272 per cent.
Our housing gross profit margin for the second quarter was 18, 2% up 100 basis points from 17, 2% for the prior year period.
Current quarter metric reflected favorable impacts from that makes it poems delivered and lower amortization of capitalized interests, partly offset by reduce operating leverage due to lower housing revenues <unk>.
Excluding inventory related charges are gross margin for the corner was up 110 basis points year over here to 18 seven per cent.
Are adjusted housing gross profit margin, which excludes inventory related charges as well as the amortization of previously capitalized interest was 21, 9% for the 2022nd quarter compared to 21, 3% for the same 2019 period.
Assuming no inventory related charges, we expect a sequential increase in our 2023rd quarter housing gross profit margin to arrange a 18, 8% to 19.4%.
And further improvement in the fourth quarter.
Considering this expected favorable trend we believe our full your housing gross profit margin excluding inventory related charges.
Won't be within a range of 18.6% to 19.2%, reflecting in 28.00 increase in the mid point.
Selling general administrative expense ratio of 12, 6% for the quarter compared to 12, 1% for the 2019 second quarter.
Excluding the current quarter severance charges is six $7 million yesterday expense ratio was 11, 8% a year over year improvement of 30 basis points due to reduce expenses for certain employee compensation plans, partly offset by decreased operating leverage from lower housing revenues.
Due to the mid May implementation of the workforce reductions related second quarter expense savings, we're not material.
Beginning in the 2023rd quarter, we expect to realize annualized S. G N a savings of approximately $25 million, resulting from these unfortunate but necessary actions.
In addition to the workforce reductions during the quarter, we focus on achieving additional cost efficiencies. The crossword, usually all companywide expense categories <unk>.
Considering these actions and anticipated future revenues, we believe that are 2023rd quarter SG&A expense ratio will be in the range of 12 seven to 13, 3%.
And a full year ratio, excluding the seventh charges will be in a range of 11 eight to 12, 4%.
Income tax expense for the quarter was $15.8 million, which reflected $3 million a favorable impassion federal energy tax credits, we expect or effective tax rang for the remaining quarters of 2020 to be approximately 24% excluding potential impacts from stock-based compensation.
Overall, we reported net income for the second quarter of $52 million or 55 cents per diluted sure compared to 47 $5 million in net income and 51 cents per diluted chair for the prior year period.
Turning out a community count or second quarter average of 247 decreased 2% from 252 and a year earlier quarter.
We ended the quarter with 244 communities as compared to 255 communities at the end of the 2019 second quarter, a reduction a 4% primarily due to a decline in the number of active communities that were previously classified as land held for future development.
As a result of the uncertain macro environment due to the Coke with 19 crisis <unk>.
We implemented actions early in the second quarter to preserve cash and enhance liquidity.
As part of this effort, we moderated land investments working with Lance hours extended closing date for certain plan land purchases as well as delaying some development activities.
This resulted in a reduction in our investments and land land development a D. As during the quarter to approximately $230 million with $65 million at the total representing do land acquisitions.
Despite are lower land spend we ended the quarter with an ample supply of more than 60000 lots owned and controlled with a three one year supply of one loss Nathan homes delivered in the last 12 months.
On a year over year basis, we anticipate or 2023rd quarter average community count will decline in the low single digits range as compared into 2019 third quarter.
We expect our average community account for the 2024 year to be approximately flat year over year.
Favorable operating cash flow and a quarter generated primarily from homes delivered together with lower levels Atlanta investment.
Drove quarter and total liquidity to approximately one $4 billion, including $575 million of cash and $788 million available under unsecured revolving credit facility.
This compares favorably divulge at 2019 year and total liquidity at $1.2 billion.
And the $600 million in total liquidity at the end of the 2019 second quarter.
We've had no cash borrowings under our 800 million dollar credit facility at any point in time during 2020.
In summary, our focus during the quarter was and quickly adapting to the unprecedented destructions and uncertainty caused by the Coke with 19 pandemic and a wide ranging public health efforts to control it.
We made significant changes in her business practices and processes to I'll protect our employees customers and business partners, while continuing to deliver central shelter to our homebuyers and implemented expense reduction in cash preservation initiatives.
We ended the quarter with a stronger balance sheet enhanced liquidity and a solid backlog value over $1.9 billion.
While we cannot predict the trajectory of the pandemic the public health efforts to come back at it or the magnitude order ration of the current recession.
We believe that we are well positioned to continue to navigate through the housing market conditions. We currently expect for the remainder of the year.
We will now take your questions seven please open the lines.
At this time, we'd be conducting a question and answer session. If you would like to ask questions. Please my star one on your telephone keypad, a confirmation till indicate your line isn't the question cute.
Start to if you would like to remove your question for the cute.
As a reminder, when asking a question. Please let me yourself to one main question and one follow up.
Four participants using speaker appointment and maybe necessary to pick up the handset before pushing the star keys.
Our first question comes from the line of treatment Patterson Wells Fargo Sushi with your question.
Hi, Good afternoon, guys and thank you for taking my questions.
First wanted to touch on your second quarter in June orders they seem.
Little bit lighter than what we've heard in the market. So I'm I'm, hoping you all could just elaborate on this a little bit you know it seems like maybe you were a bit more aggressive and scrubbing your back log maybe a bit more aggressive and closing communities slower to reopen I don't know if there was anything with the technological or or video initiatives.
Just trying to understand or even if if you think it's just the end Marcus just trying to understand the moving parts there.
Oh terminate touched on a lot of them with you know when you shut yourselves off was down to.
Protect your employees, you're not gonna sell a lot of houses for that period, but.
I also think we did taken aggressive position on the backlog because we wanted to make sure as we're building homes that there's somebody that can perform when the home.
It gets completed and all that.
That process and everything we went through was and April and an early may <unk> as we shared in our prepared comments coming out of May order strengthened each week, both gross and that.
And here and June as we shared where it normalised level, so I I can't speak to calm versus other builders.
Last year or third quarter was the strongest.
Orders per community, we'd had in many years and right now we're slightly out of that so we actually feel good about our current sales place.
Okay. Okay. Thank you for that.
Just a quick question on on recent trends.
You know in June.
How old are your incentives trending relative March and April have they started to normalize and then also from a demand standpoint.
You know, we're three a little over three weeks end of June how did you know the third week trend versus the the first two you know <unk> did it continue to improve or you're seeing possibly slow down and any of the markets that are starting to spike with.
Virus cases again.
Okay, well you just you exceeded the two question limit, but I'll go ahead and add extra mile [laughter].
It is I shared in the comments <unk> sequentially through June each week has gotten a little stronger so we've seen those slow down here in the month of June.
R. As you know where you're not a big incentive focus company. So what we didn't do anything with incentives for the last four months are are incentives or less than a per cent of revenue.
Because of the the extra ordinary nature of the disruption.
It was in in elastic demand. So we didn't well we were working through trough and gross sales and working through the can right. We didn't do anything to to try to juice sales because we didn't think it would really make that much of a difference.
We did sure as you know when most of it happened in May but as the order strengthening may we ended up raising prices in about 60% of our community. So <unk>.
Demand as salad for all the reasons I I shared in the comments and we're seeing buyers are really wanna be come in and get a brand new home today, so incentives low.
Raising prices on our sales paces right, where we wanted to be today.
Our next question comes from the lineup Alan Ratner with someone and associates. Please see what's your question.
Hey, guys. Good afternoon, I'm glad to hear you both doing well and thank you for all the the guidance and color I appreciate it.
You know first question, Jeff I think early on we heard from a lotta builders that the initial on top and demand coming out the the worst period of the pandemic seem to be a little bit more focused on spec inventory and and you guys walk through Uhm you know your commitment to the to be built strategy I'm curious as you look at the order improve.
You've seen over the last several weeks I would imagine you probably came out of April with a little bit more second Detore. Then you typically have given the cancellation. So have have you seen.
You know a greater share of orders or demand coming on those spec homes understanding it's not a huge part of your business or has that improvement accelerated to the to be built business as well.
Yeah. Good questions Allen again in my prepared comments, we were specific the the majority of the cans were on homes. It hadn't been started yet we did take some cans on homes that were under construction or completed and for a very short period of the quarter.
[noise] inventory levels were up a little bit just moderately up.
And as I also shared in a prepared comments during the second quarter or gross orders on our to be built homes perform better year over year than gross orders on inventory. So even though our inventory levels were up moderately our bill to order a mix of our business still outperformed.
And.
As we sit here today.
We always look at it is per cent of whip and our inventory as a per cent of whip right now is lower than it was at any point in.
And the second quarter, so our our challenges to create more with so we're working diligently now to get as many permits old in as many sold starts in the ground.
That we can that frankly were frozen then in April and the first half of me. So that's our our focus in the meantime are are built order business is working very well.
Got it that's helpful. I appreciate the the extra calling in there.
Second.
Hoping you can maybe just provide a little bit more information on your your virtual home selling capabilities at this point we've heard from.
Some other builder so they've been pretty surprised at the you know the willingness of of shoppers to actually you know shopping even execute contracts I haven't seen on homes completely online and I'm curious if you guys have those capabilities and if so you know what percentage of your orders and in May and June of come entirely virtually without a buyer stepping put in the community.
I don't have the percentage it and Alan but it's.
It's definitely similar to the trends you're hearing from other builders I'm kind of old school and I like the emotional side of home Sally and you have to feel it live at in and touch it but but.
The new consumer a lot of them are comfortable buying homes virtually so we sold a lot of homes.
Virtually and we're gonna continue to tweak that if you get on our website you can see all the the capabilities we know F.
I was also surprised that the willingness a buyer's two final in the studio.
Virtually which isn't even more emotional part of it because it's the way they personalize their home and there were weeks in the corner. We final 200 customers all virtually online through the studio process and they're they're very comfortable there and it didn't impact the sales per unit at all so there.
There finalize and online and it's actually caused us to reflect more here on how to refine R.
Our business model approach and leverage the virtual tools more you can be more efficient lower your overhead and and keep or improve on your productivity with the customer.
So we're pretty bullish on it.
Oh My next question comes from the line of Stephen Kim with Evercore ISI. Please see what's your question.
Oh, Thanks, a lot guys I wanted to follow up on the the bill to order versus spec dynamic a little bit here because.
I think that there's two ways.
And which the bill to order strategy in this particular near term for this particular short term window. They had been hurting you and I was curious if you could comment on whether you agree with that on the one hand or on the.
First off on the cancellations because the bill towards strategy always makes it. So do you have a lot of homes are you selling there haven't been starting with a lot easier one would think for the customer to cancel those.
And because of the fact that they are.
Doing a lot of options.
And for process. It may make it harder for you to sell virtually so it was kind of two things one that might affect your cancellations in the other one that might affect your gross orders negatively because of the bill toward a strategy I was curious as to whether or not you think that is something that caused your <unk>.
<unk> to.
Be impacted this quarter.
Verses, let's say, if you would pursuit of a speck strategy and whether that is something that might therefore leave you more vulnerable with a second wave environment, where to manifest again over the back half of the year.
Yeah.
Well hopefully we don't have to experience that again, Stephen that's it's been very very painful and this this disruption that the industry's had to to manage through is something I've certainly never never seen in my career and hopefully nobody ever ever sees it again.
<unk> you have to assume we lost some bill to order sales when they couldn't even access the studio couldn't go to the community and stand on the lot they were picking and and all that so I would assume we'd probably lost <unk>.
Some salzer I couldn't tell you how many.
He didn't pick it up by sell a lot more inventory that's why I shared the comments that I did our bill to order sales perform better and cute too then our inventory yourself in about 20 per cent of our web is unsold at any one time so.
The inventory was out there are built to order is still the consumers telling us they value the choice proposition and now that cities or more predictable and we can get starts and we can tell people when their own there's gonna be delivered again, which we couldn't do and in March and April certainly in there.
There's consistency to it in June our Bill to order sales are right back to where they were before March 15th and are are performing very well. So it may have been I couldn't tell you what the impact was for the 60 day.
Disruption that we went through but I I do think overtime, so far better business and I I think it's in part why we could could hold our revenue as well as we did in a second quarter because the backlog wanted to move in.
It was the most motivated backlog that I've seen in a long time, where people were.
Where challenged enough hey can I get in there.
So we're still big Big proponents of this approach.
Yeah, no doubt and obviously it shows up in your margins, which we're good to.
Question relates.
To the most recent information you've given about sales for the first three weeks of June which are admittedly, good, but but also not particularly.
Very different Ah well, certainly not better than what we've heard from some other than maybe there's some positive by as to what kind of makes news, but it. It seems that that number is you know kind of what you would expect maybe a little light. It's the way I'm I'm feeling a lot of investors react into it but given the amount of cancellations that you would've had.
I kind of would've thought that you would've had a lot of return business on top of the just the general improvement and I'm in the overall market that you guys would get kind of like a double boost and that therefore, you're June numbers and then maybe July you know from these returning customers would be additive to the new customers that would wander in the door.
You said that you saw some of those cancellations return I was curious you could give us a little more color on that whether it as much as you would have expected or or not.
Well I I think some was.
It's an appropriately.
Generic comment saving we've seen some come back but these people that cancelled where you lost your job you'd have to get a job back to.
To come back and buy from us again stolen while it so I'll call a repeat customer because they come back it's really a new customer because they are employed again and yep.
You start over so I don't know that.
You still have a lotta people that are furloughed, where it's a question mark and who knows what.
It will happen with with that group.
But.
If if if our sales and the third quarter ended up in the range of where they're at right now compared to last year on a lower community count we'd be pleased with a sewing result.
Okay.
Alright, thanks very much.
Oh My next question comes on line of Matthew Blank with Barkley's. Please do with your question.
Hey, good afternoon, hope everyone's doing well and thanks for taking the questions. So.
So I wanted to ask about I guess, you know sort of with the benefit of hindsight's and seeing the market come back as quickly as it did obviously you guys took a lot of these proactive steps around you know closing communities and scrubbing the backlog and.
Pausing land development and acquisition I mean going forward.
If you know there is I mean, an unfortunate such a situation of a second wave or or just simply rolling lockdowns.
Look at the headlines today I I think this was worth addressing the question is would you take any more of a risk on approach reacting to future shut downs or or at least act differently.
And anyway.
Hello. This is I reflect on the last 90 days, we put our employees safety first and it was the right thing to do and.
The experienced we've had with Covid paces in our company reinforces that we did the right thing because we've been been very fortunate.
Within the cave home team with everybody's help.
Well being we took the steps on the overhead reduction we're not even though you see this.
Quick recovery and demand, we're not quickly going back and add any overhead back in it's it's a pedal and break so.
We'll keep moving it along as things continue to look okay, we'll keep.
Getting a little more aggressive, but if it turned down we've already taken the steps to deal with turn down we have plenty of liquidity, we are comfortable with our cash position.
We may slow down land spend again if things.
Turned down, but I think we.
As a company we're more efficient today, we're smarter and what better position than we were in March. So it's a second wife it I think we're already there.
Got it Oh, okay. Thanks for that color, Jeff and then just secondly, I wanted to drill and on the cancellation is a little and just I guess wondering if you could elaborate any further on some of those efforts that you called out in particularly you know the employment status of buyers and you mentioned the financing available.
D as well do you have any ability to quantify how much each of those contributed to the cancellations or I mean really the question going forward is given where employment is you know <unk> is there any further risk.
That you know as you look at the current backlog as it stands thank you.
Yeah.
<unk> I don't I would say that the percentage that was tied to financing was very limited. It's people that were their income dropped because they're no longer working overtime or their job skull changed or they're no longer getting tip income if they're working at a casino in Vegas, because they were closed.
And so their income dropped and that would affect their ability to qualify but other the largest driver with people that either lost her job or have a a longterm furlough.
So.
I don't <unk>, there's another wave of.
Unemployment hidden today and.
And as we monitor the cans each week, we're not seeing that kind of a driver anymore. Now it's it's the normal nuts and bolts candle calm versus the <unk> the intensity of last job and furlough.
So I I don't think we'll see that again, unless there was a severe downturn to hit the economy and we're not expecting that right now.
Our next question comes on line of Brooklyn, with Raymond James proceed with your question.
Yeah, Hey, thanks, Good afternoon, I, just want to start making back up to like the revenue guidance for third and fourth cord and just the backlog conversions and it does seem reasonably conservative at least my first glance here and I'm just wondering if if some of that relates to are you seem cycled times extend here in the field or there's some bottlenecks.
That could be last thing in the construction process and you know what are you seeing out there whether it's.
Okay safety protocol or labor shorted your land availability unless you get highlight just or is that just just reasonable conservatism into guidance in terms of how you see the backlog converting from here.
Yeah.
It's.
If you split the components upcycle time, our time from contract to start is lengthened because a lot of cities are still having to sort through the permit process. So <unk>.
And the old days, if it was 30 days to start it's longer than that about 45 days whatever.
The build times actually in the quarter were down a few days and we're continuing to work with our contractors to see if we can compress build times going forward I think you'll see the delays and construction.
Hit and the third quarter because of our pause on production not because the subs went out there we couldn't get things done the subject quickly rallied around going to work and figuring out how to build homes with only one contractor in the home at a time and if you think about the.
The build time the majority of the days are in foundation frame.
Getting it under roof, that's where all the days are and it it isn't that part of the process is typically only one contract or on the site anyway, there's only a framer there. The plumber has to go in or the H V. I C guy, they're the only ones there at that time, so you're where you're limited now as in the finish and if the.
Electrical trim was going in at the same time as the plumbing trim, which on their own or each one day. So now it's two days instead of one day on the other end so it it incrementally and the Bill time, we have figured out how to to whole Bill times, while ensuring that are contractors are safe.
There's been a couple of days added on the post completion cycle time, because the lenders are looking for more.
Employment Verifications right before the clothing or the fundings and and things like that so if the if you look at what we call. Our cycle time, it's cost me enough time on the start and it's causing US a couple of days after the homes completed the portion in the middle we're doing fairly well the backlog conversion getting back.
To that is so our bill times, we think are pretty pretty normal right now for us but.
When you stopped production for four or five six weeks whatever the timeframe was when you reset. It you don't just flip a switch and everything starts to the next day first you have to get your homes that were sheet rock moving again and then you go back to your friends. Then you go back to your foundation until you clear the foundations you have a lot of.
Starts to go.
That you don't put in the ground until you clear the foundation. So our backlog at the end of May had a higher percentage that hadn't started yet.
And those are the ones were just now getting in the ground and we don't think in some cities there won't be able to deliver them in November so it's.
It's a a whip pressure that we have that we're trying to power through right now.
That's really helpful. I appreciate all of that that's a lot of great color. There. So let me I ask you a little bit on the demand in Kennedy uptick we're seeing here recently and if you've gotten any center <unk> ability to characterize where it's coming from whether or not are we getting a a tangible sensed it.
You know more first time buyers are are showing up with her former apartment renters or or you seen more cross market or out of market demand from people actually migrating to more affordable locations any any characterization you can give to this this uptick in demand each week.
Well I I do think that there's some of the.
The the resetting where people little like up in the Bay area a lot of the tech companies have already announced that you can work from home permanently and if you can work from home why would just stay in San Jose If you can live in Sacramento for half the price and still do your job. So I I do think there's little relocation going on.
For the group of employees that can permanently work work from home and we'll see how bad.
That plays out we are seen some relocation again from one state to another Texas, and Florida or big benefactors of.
<unk> influx right now other than that is it's fairly broad based our first time buyer.
And the second quarter was the highest we've seen in a long long time and it was definitely up your over here at at 58%, So I would say.
That fire, it's a well-heeled first time buyer with a 710 fecal that has good employment today.
Our next question comes to a lot of chocolate Vanilla would think of America soon with your question.
Thank you for for taking my questions.
First one is on gross margin and just sort of the sustainability of.
Positive mix and in in pricing that we're seeing I know there was also some benefits lower amortization, but I'm just wondering.
How sustainable the the the mixed portion, particularly is and then is there anything on the input side I am and materials that that are benefiting as well here.
Yeah, I'll take that in segments I guess, you know first talking about the amortization yeah. There's we do expect to see some continuing benefit from Laura amortization at a year over year basis that was part of what we.
Included in the guidance for the third quarter.
Of course, we're losing a little bit of leverage on a roller volumes, but it will pick up you know most of that frankly through lower amortization on the mixed side, you know, there's a little bit but I mean, we had we still have.
Continued tailwind from the lower percentage of reactivated deliveries that we're seeing and at the same time, a higher gross margin within that category. So we've seen gross margins improve in that category and we seem to category reduce overall as a percentage of the total.
So that helped US you know about half the mix uptick in a corner was actually just from that and we do expect to see that again in the corner. So it's much much the same as what we just saw you know a little picked out and operating leverage <unk>.
Positive on the amortization side and certainly some positive on the mixed side and we think it'd be pretty consistent with what we just saw on the second quarter, leading into the third and then onward into the fourth you know empowering through some.
Decent gross margin improvement considering the current conditions.
Okay. That's helpful.
And then maybe just on.
Homebuilding equity income looks like there was a nice came there it looks like about maybe six or seven cents and the quarter what drove this I imagine it's more one time in nature.
Oh, you're talking about the joint venture and yeah.
Yeah, we have a project in the Bay area that deliver quite a few units in the corner and that was driver <unk> from it we have a few more you know to deliver and a third and then on into the fourth quarter, we don't expect the.
Quite as much as see quite as much income coming from it and a third and fourth but it's basically a single time value project very profitable project in the Bay area.
Okay.
Our next question comes on line of my Dog with Rbcs Harper markets. Please see with your question.
Alright, Thanks for taking my questions I wanted to go back and kind of follow up to a question a couple of prior around actions I've taken in March April and and some mornings from that but I wanted to focus specifically on on safety since from a community and design Center standpoint.
<unk> did act fairly aggressively and proactively so just I guess in N y.
Some of the upticks in cases across your court foot today can you describe kind of how your from a sales from our community and design Center standpoint, how your safety measures are today and how you plan to approach.
Those.
Eight of some of these recent upticks.
Good question, we've been pretty diligent in ensuring that were in full compliance with either a C. D S V or for each local.
Set of standards and and a lot of the cities were in.
The the standards been more rigorous made more rigorous the last week or two but it's things that we were fundamentally already doing like okay, everybody should wear a mask well our employees were were already wearing masks and we have mess available for our customers as well.
It's not a little more rigorous in the wording so hopefully the.
The general public.
More diligent to wear masks right now, but our our standards are already there. So if you have cases pick up.
And a day across all of California.
Won't change our standards, if they really got elevated from there will will be sensitive to it and take take the appropriate stops we're continuing to focus on the telephone wellbeing of our customers and our employees.
Okay. Thanks, and my second question, just on the pricing front and I think Jeff <unk>.
You mentioned the 60 per cent of communities in your opening remarks for thought it was for the quarter and then in response to another.
Question I think he said that was maybe a may specific comment.
I just wanted to clarify when you when you think about what kind of pricing trends and the quarter and how how many and when you were raising prices and communities <unk>.
What's that it may specific comment.
There was probably some in late April there was none in early April.
So, but but it was waited to the back half of the quarter, certainly and most of it and maybe because the sales space was right, there and and let's take advantage of a demand.
Okay.
Thank you.
Our final question comes from the line of Michael Rehaut with J P. Morgan Please see with your question.
Hi, This is Maggie on for Mike first and I apologize if I Miss days, but I was wondering if you could <unk>.
Talk through how the rebound and demand she's played out in your different buyer segments.
I I know that you called out the first time buyer, but I was hoping you could give a little bit more color around that.
Well Maggie the mix has been been pretty consistent first time buyers up.
Three or four percentage points from.
The last several quarters and the first move up cause where it has moved down a couple of points that are.
Or active adult over 55 buyer is held pretty steady so I I think the the resurgence in demand is pretty broad based right now I don't think it's just.
First time buyers I do think when you get to the highest price points, it's probably a little more discretionary right now, but people that want to be at home. The first time or the first move up.
Or or an empty nester, that's relocating to a small new home I think those all those fire profiles, a pretty strong right now.
Got it and a second.
In terms of the drivers of the reason I've taken demand I mean, you've already called out some buyers returning and.
Some relocation is more people are working from home but.
To what extent are you thinking about these is kind of temporary.
Drivers a demand and may be kind of a relief Simpson pent up demand versus.
Returned to more normal sales environment and kind of a longer term friend.
Yeah, well I I do think they're still pent up demand.
Because the country shut down in the strongest selling period of the year. The demographics didn't go away and I think the the headline employment unemployment numbers are not necessarily homebuyers. It's.
Low level wage.
Service employees or whatever solar there's a lot of demand out there from the the demographics and the people that are employed and there's no inventory.
And you you add onto that people want a new house, it's healthier it's safer if there's a there's you read it in the media everyday where they're talking with people that don't want them by us they want to buy a brand new home now.
And then you throw on top of it the people want to get to a little less.
<unk> situations. So there's a lot of things pushing the the demand-side right now that I think it could be structural shifts in favor of the industry.
Ladies and gentlemen. This concludes today's teleconference. You mean now just to make too much at this time. Thank you for your participation and have a wonderful day.
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