Q2 2020 LGI Homes Inc Earnings Call

[music].

Welcome to the Oh, Gee I home second quarter 2020 conference call today's call is being recorded and a replay will be available on the company's website later today at W.

W.W. dot El <unk> homes Dot com.

We have allocated in our prepared remarks and couponing.

If anyone should require operator assistance during the conference call. Please press Star zero.

This time I'll turn the call over to Joshua Fatter, Vice President of Investor Relations Mr. Fatter you may begin.

Thank you and good afternoon, welcome to LG I homes conference call to discuss our second quarter 2020 financial results.

I'll remind listeners that this call will contain forward looking statements that include among other things.

Statements regarding LG I homes business strategy outlook, including the impact can be cobot 19, pandemic plans and objectives, all such statements reflect management's current expectations.

However, these statements do involve assumptions and estimates and are therefore subject to risks and uncertainties that could cause managements expectations to prove to be incorrect.

You should review our filings with the FCC, including a risk factors and cautionary statement about forward looking statements section.

For a discussion of the risks uncertainties and other factors that could cause our actual results to differ materially from those anticipated and 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 does not have tended to be considered an isolation or as a substitute for the financial information presented in accordance with gap.

Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with gap are included in the earnings release that we issued this morning and in our quarterly report on form 10-Q for the quarter ended June 30, 2020 that we expect to file with the FCC later today.

This filing will be accessible on Fccs website, <unk> FCC dot Gov and in the Investor section of the LPI homes Web site at L. G eight homes Dot com.

I'm pleased to introduce our hosts for todays call Mr., Eric LIBOR LG I Holmes Chief Executive Officer in Chairman of the Board Mr., Charles Meridian, LG, I Holmes, Chief Financial Officer, and Treasurer, I'll now turn the call over to Eric to discuss our second quarter.

Thanks, Josh Good afternoon, and welcome everyone participating on our call today, we sincerely hope that you and your families are remaining safe and healthy as we continue to navigate these unprecedented times.

Well, we held her last earnings call. The majority of the country was still under stay at home orders businesses were only beginning to reopen.

In our industry was navigating new safety and health guidelines rising levels of on unemployment in the future that has anything but certain.

So the pandemic, it's still with US today the landscape in our business has completely changed.

The period from April to June was full of positive surprises demonstrated the strength of our business model. The uncompromising dedication of our employees and adaptive Americans' desire for homeownership.

Reflecting back on our second quarter, it's clear that the cold at 19 pandemic has caused the momentum shift in the importance Americans place on homeownership.

In the aftermath of the great recession, the nation saw a decline in many people's interest and owning a home.

The combined impact a record foreclosures in a painful recession caused many to abandon the idea of homeownership and except that they would likely be renters for life.

However, the arrival of coal the 19 and the restrictions opposed to control it spread has reminded people devalue desirability and safety of owning a home.

Customers visiting our information centers have ultimately expressed or dissatisfaction with apartment living in a post coded world.

Shared halls, and stairways limited parking.

Close proximity to neighbors and lack of flexible space have reawaken, many to desirability of homeownership.

Renters, who dreamed of owning a home at urgently moved up their timelines.

Others, who have never considered ownership an option have been inspired to explore the idea for the first time only to realize that the American dream is within their reach in either case the value of a single family home is undeniable from our perspective, just renewed appreciation for home ownership is evidence of.

Our broader secular shift that will drive higher rates up homeownership for years to come.

Further we believe that LG I homes with a suburban 100% spec entry level focus is particularly well positioned to benefit from this dynamic.

And our last earnings call, we highlighted steps, we had taken to protect the health of our employees customers and trade partners.

During the second quarter, we continued to prioritize health and safety across our company.

Travelers remain limited corporate employees continue to work from home and marketing has been targeted to drive a sales pace that facilitate social distancing in our information centers.

Now require faced coverings, and all our sales and construction interactions and meetings with customers remained by <unk> appointment only.

In partnership with our preferred lenders, we pivoted to our virtual loan application process that reduces direct contact between individuals.

In May we announced our plan to hire more employees to support our growth.

For our July sales training class.

This quarter, we hire teams to staff three new communities instead of holding new employee training at our corporate headquarters as we have done traditionally for the health and safety of our new employees, we chose to conduct separate small training classes in the regions, where these new employees will work.

While we do plan to return to our normal process as soon as it is safe to do so our ability to delegate this quarter's training toward division leadership speaks to how deeply embedded DLJ culture is in our organization.

We thank everyone, who stepped up to help with these trainings and we welcome our new hires to DLJ family.

Even with the safety focused limitations, we placed on our operations. We saw strong demand materialize into continued growth and profitability in our second quarter.

Charles will share more details of our performance shortly but here are few highlights.

Our net orders in the month of April were down approximately 67% year over year due to stay at home orders and other efforts to reduce the spread of cobot 19.

As conditions improve and the economy began to reopen our pace of sales rebounded and our net orders were up in May and June over strong comps in the previous year.

Demand continued to increase in July and our net orders for the month were up more than 60% year over year.

During the second quarter, we closed a record breaking 2005 homes and our revenues increased to $482 million our industry, leading gross margin percentage was up this quarter and we delivered record breaking net income as a percentage of home sales.

On a closings per community per month basis, Austin with our top market and the second quarter, averaging nine closings per community per month.

Close behind where Dallas Fort worth in Houston, with 8.5, and 8.4 closings per month, respectively.

Rounding out the top five where Atlanta, and Phoenix was 7.9, and 7.1 closings per community per month, congratulations to the teams in these markets for an outstanding performance.

We ended the second quarter with 117 active communities, a 25.8% increase over the second quarter of 2019.

As most of you know June was designated as National Homeownership bonds, and we we're especially proud to announce that we closed our 40000 cone during this event.

For seven years now our company has celebrated this month long events by making a focal point in our sales and marketing as we educate renters and help them become homeowners.

Well filling our customers dreams of homeownership is what inspires us and why we started building and selling homes.

Our 40000 closing in June as another great milestone in L. Dji homes 17 year history I want to thank our employees for their dedication to making homeownership reality for so many families across the nation.

I'll now turn the call over to Charles Merdian, Our Chief Financial Officer for more details on our financial results.

Thanks, Eric.

As previously highlighted home sales revenues in the second quarter were $481.6 million based on 2005 homes closed a 4.3% increase over the second quarter of 2019.

Sales prices realized from homes closed during the second quarter averaged $240200, a 1.1% year over year increase and a 3.1% decrease from our first quarter due to changes in geographic mix driven by fewer closings and our northwest Division as a result.

Community transitions and stay at home restrictions in Washington, which directly impacted our ability to build and sell homes in that state.

Gross margin as a percentage of sales was 24.5% this quarter compared to 24.1% for the same quarter last year, an increase of 40 basis points, primarily due to lower interest costs and lower construction overhead as a percentage of home sales revenue.

We closed 199 homes through our wholesale business this quarter, representing 9.9% of our closings compared to 82 homes or 4.2% of our closings in the same quarter last year.

Gross margin, excluding wholesale closings was up 80 basis points year over year end up 90 basis points sequentially.

Our adjusted gross margin was 26.6% this quarter compared to 26.3% for the same quarter last year, a 30 basis point increase.

Adjusted gross margin excludes approximately $8.7 million of capitalized interest charged to cost of sales during the quarter and $1.3 million related to purchase accounting together, representing 210 basis points.

Combined selling general and administrative expenses for the second quarter were 10.4% of home sales revenue compared to 11.4% in the prior year, resulting from lower advertising and other expenses. In addition to higher home closings and higher average selling prices.

Selling expenses for the quarter were $30 million were 6.2% of home sales revenues compared to $33.9 million or 7.3% of home sales revenue for the second quarter of 2019.

110 basis point decrease.

We reduced our quarterly marketing spend by nearly 70% year over year.

Reduction was due to our ability to quickly Taylor, our marketing to react to covert 19 related uncertainties and we expect to increase our spend as needed in future quarters to support our closing objectives.

General and administrative expenses totaled $20.2 million or 4.2% of home sales revenues compared to 4.1% for the second quarter of 2019, a 10 point increase the increase in general and administrative expenses as a percentage of home sales revenues reflect costs associated with an increase in active.

Communities compared to the prior year.

We believe that SDMA will continue to vary quarter to quarter based on home sales revenue and uncertainty related to the ongoing impacts of covert 19.

Uncertainties aside we would expect our full year SGN, a as a percentage of revenue to range between 10.5% and 11%.

Pre tax income for the quarter was $68.6 million or 14.2% of home sales revenue an increase of 110 basis points over the second quarter of 2019.

EBITDA for the quarter was an impressive $77.4 million, an EBITDA margin was 16.1% a 200 basis point improvement sequentially and a 100 basis point improvement over the same same period last year.

For the second quarter, our effective tax rate of 18.9% was lower than the federal statutory rate due to a 3.5 million dollar benefit related to the extension of energy tax credits.

We expect our full year effective tax rate to range between 21% and 22%.

As Eric highlighted our record breaking second quarter net income increased 20.8% year over year to $55.6 million or 11.5% of home sales revenue an increase of over 150 basis points over the same period last year.

Our second quarter, EPS was $2.22 per basic share and $2.21 per diluted share.

And as of June Thirtyth, we had 25.1 million shares outstanding.

Second quarter gross orders were 3018, and net orders were 2253 cancellation rate for the second quarter of 2020 was 25.3%.

We finished the second quarter with a backlog of 2127 homes, an increase of 29% year over year with the value of $558 million.

As of June Thirtyth, our land portfolio consisted of 44307 owned and controlled lots and 11.9% year over year decrease primarily driven by our decision in March of 2020 to delay or cancel a number of land acquisition contracts, reducing our number of controlled.

Lives from approximately 19000 to 12500.

Of our owned lots 7674, we're finished vacant lots 20506 were either raw or under development and 3608, where either completed homes information centers or homes in process.

Our focus on cash management has resulted in positive cash flow.

During the quarter, we paid down $155 million on a revolving credit facility, which in combination with our strong operating results contributed to a net debt to capitalization ratio of 37%.

Decrease of over 500 basis points from March 2020, and the lowest ratio since 2014.

Additionally, total interest incurred this quarter was $9.3 million compared to $12.1 million in the same period last year due to favorable interest rates and lower outstanding debt balances.

As of June Thirtyth, we had approximately $49 million in cash and our available borrowing capacity was approximately $283 million, resulting in $332 million in liquidity.

At this point I would like to turn the call back over to Eric.

Thanks, Charles as we mentioned earlier strong demand has continued into July resulting in an increase of over 60% and net orders year over year.

Pending verification of funding, we will issue a press release tomorrow. After the market closes announcing between 610 and 615 home closings and I'll, a 111 communities for the month of July.

The decline in closings is primarily due to our decision to start less than 50 homes in April resulting in us starting July with a lower inventory of completed homes.

Once we were comfortable with the direction of demand trends, we accelerated our pace of starts and began actively acquiring land to support our growth plans.

We really 600, new starts in may to backfill our inventory of homes available to close in August.

We expect our closings in August to be similar to July.

Even with the benefit of hindsight, we still believe it was the right decision to slow our pace of construction at that time.

We've always accomplished our goals in a measured and conservative way that protects the long term interest of our employees and shareholders.

Given our strong second quarter results and the demand we're seeing in our markets, we are providing guidance for 2020.

For the full year, we expect to close between 8080 800 homes at an average sales price of 245 to $255000 and end the year with 115 to 125 communities.

We expect our wholesale business to make up 7% to 10% of our 2020 closings.

Despite the challenges caused by the pandemic, we maintained a strong sales pace, while raising prices and controlling costs, which resulted in strong gross margins in the second quarter.

We believe this trend will continue for the duration of the year and expect full year gross margin to be in the range of 24% to 25% and adjusted gross margin in the range of 26% to 27%.

One final and important announcement before we turn the call over for questions on our last earnings call. We stated that we had no plans for layoffs or furloughs since our founding we pride ourselves on hiring the best people and investing significant time and resources into their training.

Retaining 100% or workforce, regardless of demand increase or fell in the short term was the right thing to do if we expect to reach our shared goals.

We're thankful we made that decision you watch the thank each of you for your dedication and commitment to LG Guy and our customers. During this uncertain time.

We also know that the heaviest burdens of navigating this crisis fell primarily on the shoulders of a select group of our employees.

Those referred to refer to as our frontline workers. This group of approximately 750 individuals.

Made up of our sales managers office managers, new home consultants and construction managers lead home everyday to interact directly with our customers and trade partners.

These individuals have been and continue to be our boots on the ground.

Our commitment to our customers has been nothing short of inspiring.

We thank you and as a token of our gratitude, we're excited to announce that each of our frontline workers will be receiving a $2000 bonus.

Without you it would have been impossible to fulfill our obligation as an essential business and help 2005 families become homeowners this quarter.

We're proud of your accomplishments and grateful for everything you do for our customers and for our company now we will open the call for questions.

Thank you to ask a question you'll need to press star one on your telephone begin to ask a question press. The Star then one key on your Touchtone telephone.

Interest the time, please limit yourself to one question and one follow up and then re queue for any additional questions.

Your first question comes from Truman Patterson with Wells Fargo. Your line is open.

Hey, good morning, guys. Thanks for taking my questions and nice quarter.

First wanted to touch on you said that you were maybe behind a little bit on starts are specs and.

You know July orders are up 60% very strong could you just give a timing of when you think those will actually close or are there any other supply side constraints that might be keeping you from delivering them.

In the back half from 20 Watt municipality constraints labor.

I mean, if you could also discuss just some of your construction cycle times I'd be appreciated.

Sure Tremont. Thanks. Thanks for the question. This is Eric I can start and Charles going out if he'd like.

Yes, I would the sales backlog and pipeline we have going into this month of August is a strong as it's ever been.

July we're going to announce between 610 and 16 615 closings, primarily because of inventory because July orders as we talked about the scripted remarks was up over 60%.

And that is primarily driven the number of closings by the lack of releases in April looking back to April we had made a decision to start very few houses less than 50 houses and essentially we're on a 90 day cycle time from a release and going through the permitting process and our construction.

Time to get the house finished and it's going be similar in August. We're at low 600 houses in May we really 600. So August closing is going to be similar to July.

In that 600, 650 range more than likely and then what we have done over the last couple of months because we're seeing such strong demand trends is really ramped up our releases.

They are excuse me in June released over 800 houses in the last two months.

We've released over 1000.

For the last two months of start so we're building out that inventory our cycle times about 90 days and then we'll ramp up in the fourth quarter to get our guidance goal of 8000 8800 homes.

Okay. Okay are you pretty much where you would like to be on those starts being at 1000. I believe you said in June and July or is that still a little bit behind where you'd like to be given the strong July order trends.

Yes, I mean, we've ramped up to match demand. So it's July and August where we have release more than 1000 thousand starts to the field and thats what demand trends dictate. So it's a temporary shortage of inventory, which results in a few shortage closings months, we certainly would have close more end.

July and we would close more in August of we had more inventory, but when you purposely slowdown starts for a few months due to all of the uncertainty that that all of us had to deal with.

It's a temporary shortage by bad the ended the year, we'll be able to ramp back up and end up it seems like same place.

Okay. Okay, great. So by year end, it will be kind of flush with where you wanted to be.

Thinking about that as well gross margins were up 100 bip sequentially.

I believe including wholesale you all we're guiding to flat.

Can you walk us through the biggest driver of this delta.

Looks like in the back half the year looking at your guidance, we should see further improvement.

Could you maybe discuss some of the price cost actions that you all to give you push pricing a little bit harder as we move through the quarter.

Sure trim and this is Charles so.

As we mentioned in our prepared remarks has been the driver.

Year over year was more on the interest and the and the construction overhead. So we are little more efficient one other things about one of the things about being.

A little bit behind if you will like Eric mentioned is that were being more efficient and how we're taking our houses through the production cycle. So there once they are being completed their cycle time from completing the house in closing the customer.

Is quicker than it historically has been as well, which is gaining some some operating leverage efficiencies for us.

We were up 80 basis points year over year, excluding our wholesale.

Closings.

Wholesale in the second quarter was roughly about 10% compared to 4.2% last year in the second quarter and year to date, whereas 10.4% for our wholesale closings compared to about three and a half.

So we saw that start to materialize when we raised prices in July really started seeing.

That in April excuse me in a April when we raised prices.

Well, so big driver is raising prices and then more efficient from a construction cycle time.

Okay. Thank you all and good luck on the upcoming quarter.

Gentlemen.

Thank you and our next question comes from.

Okay.

Ken Lewis with Wedbush Your line is open.

Thanks for taking my questions.

I guess the first question I have Eric is what Youre seeing on the land develops.

More comfortable with the higher end or are the low end of the community guidance that you put out for the full year.

Sure. Thanks, Jay land development is back.

Started again, we took a pause for a couple of months on starting new sections. Our current sections continued to develop and really the active community count is going to come down to the ended the year, we're going to trend down to 111, we plan on announcing tomorrow evening as far as active community count because that we had quite a few projects.

Sell out in the month of June and then we'll ramp back up to 115 to 120 by by the ended the year and really the difference between the low end in the high end of the guidance is the same as every year. We've got a number of different communities that will start construction on over the next couple months and start sales in the fourth quarter and how we.

Measure community Count really comes down to whether those new communities have a closing by year end or the first closing in those communities end up going to the first quarter. So it really depend on on that last month of closings and the high end of the guidance. If we didn't get there in December we'd anticipate getting there in the first quarter of next year.

And then.

In terms of the wholesale business nice pick up there.

Are you more inclined to.

Just to.

Build up a little more cash flow.

And to help get yourself set up for some new land are you more inclined to sell into that channel right now or do.

You do you want to hold off.

You see bigger pickup in retail demand consumer demand I guess, it just looking into two buckets of demand trying to figure out which ones more preferable for you guys, right, now and which ones easier to go out and get that business.

Yeah, It's a great question, Jay and the good good thing as and it's a great position to be in as our retail business selling to the consumers that are currently running is very strong as strong as that every bit as Ben and also our wholesale channel selling to investors that are leasing.

Houses to individuals that want to get out of rental situations because of the same dynamics. There is also strong we gave guidance on the call around the scripted remarks that wholesales can be 7% to 10% of our business.

I think that has also somewhat in this inventory constrained. So we are.

Maxed out on some of the closings we can have from the wholesale business are really focusing now on 2021 closings, but theyre, they're both strong and we're going through bolt on building inventory is as fast as we can to satisfy both both fronts.

Got it and then just to the other question I had.

What are you seeing out of competitors are you having to respond to any type of discounting right. Now is is everyone you and your competitors enjoying situation where demand is moving higher everyone's taking reasonable price hikes.

Theres no real need to get aggressive.

On a widespread basis.

Yes, I think Jay Great question, you know debt and also going on Charles is answer about growth, while gross margin, we never discounted even when things got slower from an order standpoint, we knew laws.

A temporary situations, we never discounted earlier that affected Q2 gross margins, we havent discounted since then and what we've been hearing and same thing even reading on other builders transcripts and what they're talking about earnings calls I think the demand is strong for all of us New homebuilders and we're all seeing increased increased demand and sales are going and stay.

Dreamily, well, so I think we're all raising prices I know LG guy as really focused on raising prices because the demand and also to offset the increases that were seeing in our costs, especially around lumber.

Yes, when should we expect that lumpy higher lumber prices to affect your gross margin.

Well it won't affect our gross margin negatively it's going to make remain consistent because we have already raised prices to offset the cost of lumber as we do every quarter no matter what the cost increases we raise prices to offset that so our margins can be consistent.

Okay, great. Thanks for taking my questions.

Youre welcome.

Our next question comes from Michael Rehaut with Jpmorgan. Your line is open.

Yes.

Uh huh.

Hi, Thanks, Thanks for taking my question.

Good morning, everyone.

First I just wanted to focus on.

You know the gross margins as well a little bit and the pricing situation obviously.

Kind of curious number one.

What component.

Drove some of the upside to expectations for the second quarter and with the full year outlook.

On a.

Oh.

On an adjusted basis 26 to 27.

To put should closer to the range that you're doing in 2017 2018.

I was curious with the recent strength or momentum that you're starting to see in pricing. If you think that.

As we look.

Path. This year that you know the 17 18 type of.

You know adjusted gross margin is within reach more at the 27% level.

Yeah, Mike This Charles I can start so.

Between really going back to 2019 from the first quarter of early 19 through this quarter, we've been ranging between.

23, and 24 and a half this was the high end of that scale. So this was the highest gross margin we posted.

Since early 2019, and I think raising prices in April was definitely a key driver we saw stability and costs in the early part of the year, which allowed us to capture a little bit wider margin than we would have otherwise low.

Lower interest costs, both from LIBOR or decreasing.

And from being efficient with our cash flow drove our average outstanding balances lower so we were able to.

Say, we mentioned 9.3 million in interest costs this quarter compared to 12.1 last year. So I think that that is certainly going to be a tailwind for us as we maintain our debt to cap at the lower end of where we've been we've been in.

Coming in at at 37.

Lois that we've been since 2014 right. After the IPO, we think we can manage the business in the high Thirtys and low fortys.

Only for the foreseeable future from a from a leverage standpoint.

So thats going to benefit as down the road.

As well.

So just to understand I mean, obviously no forecasting 21 is not what you want to be at this point, but when you look back at the.

No.

Adjusted gross margin that you were able to hit around a 27% level.

No.

Looking forward.

Again with kind of the price cost that you see today.

I mean, you're already talking at 26% to 27% for this year.

Im just kind of curious about.

Given your land book, giving the cost basis that you see it's a current trends continue if you think you you get back to that 27% type of an under a number on an adjusted basis.

Well I guess great question. This is Eric and yet we're certainly not getting 21 guidance today on adjusted gross margin, but I can say historically, we've always said and we would expect over the next couple of years for our margins to be similar.

We get Thats, how we price our price our houses and when we faced similar within a couple of hundred basis points.

Of every year in our historical gross margin.

But it also depends a lot different factors like you mentioned, one as a percentage of our wholesale business has an effect on that now how much development, we're doing because our gross margins are different whether we're taking the development risks we price that in or wherever they are buying finished lot that take down and then also which markets.

We are building and then where most of our closings are they're all generally in the same range, but Texas does produced the highest gross margin. We do a lot of development in Texas and then what the other thing that that you're likely to see as Jay thoughts about we do believe costs are going to continue to increase land costs are likely to.

We continue to go higher labor costs material cost the fees of doing business with the respective cities.

All likely to go higher and when you are a cost plus builder to margin like we are that's going to drive our average sales price higher as evidenced even this year with our increase in our guidance in average sales price.

Right right now I appreciate that Eric Thank you.

Secondly, just wanted to focusing on the lots in the.

Owns an option than the our community count.

Obviously, you reiterated your community count outlook I believe for the end of year and that's despite you know the dip that you saw.

This past month.

Your lots are down on a total control base, 18% year over year.

So I'm just trying to get a sense from you obviously had tremendous community count growth.

This past year.

In late this year in last year.

You know.

You know our understanding that part of the decline this quarter is due to some of the deals put on pause.

How do you think your lot you know.

Controlled lot position.

My fair over the next couple of quarters, and you feel that that this might impact the ability to grow your community count next year.

Yeah, I think as far as the what we're seeing Lan business a controlled lots over the next couple of quarters. We're optimistic to that number is going to start increasing we are very much Bakken business. If you will I'm looking at buying deals from the sellers out there across the markets our sales pace at absorptions and margins.

That we're seeing are all extremely positive so it gives our acquisitions employees.

A lot of room to make sure that deals underwrite because we're underwriting to current demand trends, which is very strong. So we approved five new projects at our acquisitions Committee yesterday, we've got a couple more common today. So we're still we're seeing a good.

Pipeline of deals coming through we obviously have the capital to buy those deals and Thats one advantage as we have because most of what we're seeing out there our raw land opportunities rather than finished lots and land opportunities takes not only the expertise, but a lot more capital.

Which obviously us and the other largest larger publix have the ability to do.

So I think we're going to be in good shape.

The cycle time on land deals are longer so most of what we're buying really impacts 22, and 23 community count.

Fair enough if I could sneak in one more if you don't mind.

Yes, the European a guidance against the closings guidance.

Looks like the closings guidance, if you take the midpoint.

It's you're kind of talking roughly flat closings year over year for the back half.

Whereas to get to your.

Midpoint of your question, a looking NSG named maybe being up a little bit year over year, just want to make sure that the math on that is correct and what's driving that.

You know I guess negative leverage if you want to say on the SDMA side.

Yes sure Mike This is Charles so.

So yeah, if you look at quarter over quarter to your point about them the midpoint of the guidance it would look.

Flat.

This year versus last year, we just announced our frontline workers bonus so thats going to be coming into the financials in the third quarter. So 750 proximately employees at $2000 piece, there is a million and a half this becoming in.

In the third quarter that that wouldn't normally be there when you look at comparative to prior years, and then really the back half of the fourth quarters going to be determined depending on how community count starts to shape up for next year.

As we build out our markets and make sure that we have to the people in the infrastructure and everything in place.

For going into 21, and then the last thing I would just add is that we pointed out.

Savings in our marketing and advertising spend.

Bye bye limiting travel.

We did not Whos, our normal July sales training class like we normally would so this quarter is receiving some of the benefits. If you will from the expense side related to co bid by not having some of those additional travel.

Expenses and meeting expenses that we otherwise would incur.

So.

I appreciate that Charles I guess, just understand the community count prep or you know towards the end of the year kind of preparing for community count.

Next year.

Yeah again, appreciating that you don't want to go too far into 2021 at this point, but it might take that that you are planning for some.

Degree of community count growth for next year. So you know when you look at the US you named the back half there is sort of.

Some additional expenses in advance of some amount of growth on the community count side.

Yes, Yes my business. This is Eric certainly girls and community count at 21 as planned the percentage of growth really to pan depends on where we end up this year, whether it's at the low end or high end of the range, but we're reporting 111 active communities. Currently at the end of July so we're expecting to be above that number now.

Next year for sure.

Okay. Thanks, a lot.

You're welcome.

Thank you. Our next question comes from Carl Reichardt with BP I changed your line is open.

Guys.

I just wanted to ask on the guidance for pricing for the year Charles about its growing obviously relatively fast that did this quarter, which was unusual how much of that is is that the pricing that you're putting into place versus just a mix shift is as higher priced states like Washington sort of flow back into the mix after not contributing in Q2.

Yes, I mean that so great question Carl has definitely a component I mean, we saw our northwest Division was was down this quarter our year to date average sales price is right around 243000, so definitely implies a an increase in the back half.

For this year, so we've been fairly consistent year over year after year in terms of raising prices in.

Within existing.

Communities that can be anywhere from 1% to 2% or so on a per community basis.

On a quarter over quarter basis, and then entering in new communities in the west and continuing to expand primarily in California, and then really.

Introducing the communities in the northwest with closings will will balance that out so.

Fairly well balanced mix I would say between.

Individual communities and just price increases within within them and then geographic making up the other the other half.

Okay. That's that's perfect. Thank you guys and then I'm curious if the kind of product that you're that your customers are interested in has changed where do you called out.

The specifically that that your customers are saying, we're not happy with multi family living right now we we'd like to make a change is that actually changed the size or type of product that your customers are demanding now versus pre covet. Thanks.

Yes, I don't think so like we said in our remarks the customers are looking at space, they're looking to get out of the apartment and those shared holway isn't the elevators and they want to yard and they want more bedrooms, but considering the fact that we havent changed our floor plans nationwide and we're still seeing elevated sales I must say now because addition.

Well for plans or any changes we just haven't made on our end. So I think just just they desire for homeownership and getting more space.

Terrata performing at the that is sort of similar growth rate to the to the.

And Scott Absorptions, obviously, because as higher end, but is there an alteration and demand in that side. That's been is palpable is for your core product or.

Well, that's a very small part of our business me close 30 try to homes of three communities in the second quarter. So us one half percent of our total.

I was in units so it's not a big for percentage, but we're very pleased and only three communities close 30 houses for the quarter at an average sales price that was likely about 400000 dollar. So it's been positive we're seeing positive demand there as well, even though it's more of a move up type of buyer.

What we're seeing strength across all of our price points right now.

Thanks, a lot.

You're welcome.

Thank you.

As a reminder, if he would like to ask a question press the star than the one key on your Touchtone telephone. Our next question comes from Alex Barron with.

Housing Research Center your line is open.

Yeah. Thank you guys.

Great job and bouncing back I guess, it's understandable.

On you took a pause in starts in April but sounds like things have really picked up.

Recently I was hoping you could kind of fill and you said April was down 67% July up more than 60% would you mind filling in what.

May and June.

Yes, the corridor almost flat year over year total since April was down 67% may and June or roughly up 67% combined.

Making a flat year over year quarter, and then again July very positive, but at up over 60% year over year.

Okay. So I mean, if you're starting.

A thousand homes now I guess unless I'm reading it wrong it would suggest to me.

It might be similar to the kind of orders that you're seeing now is there any reason why you don't thinking to hit that type of run rate next year.

I can thousand a month.

Well I just can't spend on demands that we base our starts based on the demand we're seeing in the market and add right now we're seeing strong demand and we're comfortable at our guidance of 8000 8800 homes. This year and next year's strength in sales and closing is to be determined and we're optimistic that the idea of homeownership.

As here to stay and there will be demand.

But the pace of demand and the pace of closings has just begun depend on what's happening at a later timeframe.

Okay, and then I guess you guys had a slightly less expenses on DSG in eight line that sales and marketing specifically.

You guys investing a little bit less than mailers, and those kind of things or was it just the less lower travel and some other expenses that you mentioned I guess I'm just trying to figure out.

Going forward, whether to assume a slightly lower run rate, there or or not.

Yes, a couple of things I'd point to great question, Alex throughout the quarter first of all in April we are more conservative with our spend because the uncertainty.

So we really spent hardly any dollars on driving leads the community really focused on health and safety and minimizing the number of customers and our offices and then we gradually ramped up the marketing spend in May or June and then also what we've seen happening in May and June as the marketing team has done a great job and the demand is.

Ben So strong that our efficiencies with every dollar that we're spending in marketing is the best we've ever seen.

So thats, allowing us to spend a fewer dollars, we actually did not do any direct mail in Q2 because of the uncertainty in the in the lead time. It takes to do direct mail with the printing and mailing et cetera.

We are bringing back and doing more marketing and direct mail in Q3. So we think the spend will increase over Q2, but early indications through July is it still we're seeing a lot of efficiencies and seeing a lot of demand for the dollars that we're spending.

Okay and affected ask one one more.

Sure I guess I guess a lot of the buyers that you guys deal with no sometimes tend to be.

Credit sensitive or rate sensitive so now that interest rates are down.

I'm wondering are you guys seeing any you know buyers that maybe didn't qualify afford or two ago when rates were higher.

Are you guys seem some of that.

I think we could say a in generally lower rates helps all of us lower rates leads to a more affordable monthly payments. So it will allow some more individuals to qualify it will allow customers to look at a larger floor plan then they previous would they would have been able to so thats a little bit under our average sales.

Price as well.

We believe so there's certainly some of that and we do believe that lower interest rates is helping demand right now.

Okay, Great best of luck. Thank you.

Alright, thank you.

Thank you and I'm showing no further questions at this time I'd like to turn the call back to Eric for any closing remarks.

Thank you everyone for participating on today's call and for your continued interest and Lj Helms, Please stay safe and have a great day.

Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

[music].