Q4 2020 Meritage Homes Corp Earnings Call
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Ladies and gentlemen, please continue to hold our program will begin in just a moment we are experiencing some technical difficulties. Please continue to hold.
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Greetings and welcome to Meritage homes fourth quarter, 'twenty 'twenty analysts call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Emily Sudano, Vice President of Investor Relations.
Thank you Brad.
We apologize for the technical difficulties, just now, but good morning, everyone and welcome to our analyst call to discuss our fourth quarter and full year 2020 results. We issued a press release yesterday after the market closed.
You can find it along with the slides we'll refer to during this call on our website at investors that meritage homes dot com or by selecting the Investor Relations link at the bottom of our homepage.
Please refer to slide to caution you that our statements during this call as well as the press release and accompanying slides contain forward looking.
Statements, including but not limited to our views regarding the health of the housing market potential disruptions to our business from COVID-19, economic conditions and changes in interest rate community count and absorption projected first quarter on full year 2021 home closings in revenue gross margin SG&A expenses tax rate and.
Diluted earnings per share as well as other.
No than any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update.
Any forward looking statements are inherently uncertain, our actual results may be materially different than our expectations due to a wide variety of risk factors, which we've identified and listed on this line as well as in our press release and most recent filings with the Securities and Exchange Commission, specifically, our 2019 annual report on form 10-K.
And subsequent quarterly reports on form 10-Q, which contain a more detailed discussion of those risks.
We've also provided a reconciliation of certain non-GAAP financial measures referred to in our press release as compared to their closest related GAAP measures.
With us today to discuss our results are Steve Hilton Executive Chairman Felipe Loy, CEO and he left theory that executive VP and CFO of Meritage homes.
We expect this call to last about an hour a replay will be available on our website within approximately two hours. After we conclude the call and will remain active through February money I'll now turn it over to Mr. Hilton Steven Thank.
Thank you Emily I'd like to welcome everyone participating on our call today and hope that you and your families are continuing to stay safe and healthy.
I'll start by giving a brief overview of our significant accomplishments in 2020 and current market trends.
We will cover our strategy quarterly performance he will provide a financial overview on the quarter and 2021 guidance.
Despite the gravity and impact of the pandemic has been affecting so many individuals across the globe.
<unk> ended up being a great year for the homebuilding industry and for Meritage in particular, we.
We set the bar for new operational and financial Records every quarter during the year, culminating in our all time high annual sales orders and home closings.
Turn on our best average absorption pace of $5 two per month since 2005.
We also delivered our greatest annual home closing revenue and home closing gross profit in the second strongest annual homebuilding gross margin in our company's history.
Even me on the balance sheet income statement 20, joining was quite a year.
We closed our 130000 homes.
And as the industry leader in energy efficiency, we were the first homebuilder to introduce Merv 13 nationwide. The most advanced air filtration system offered today for residential construction, which controls and improved air exchange within the home.
Keeping with our commitment to innovation and enhancing the customer experience, we rolled out 100% contact go sell into our customers.
Our homebuyers can begin on search online qualify for a mortgage to our model virtually electronically remit. The Arista mine that furnace deposit side, new sales agreement and even close on homes close on a home online sales allow us.
We are driving digital enhancements to continuously improve the way customers employees and trade partners interact with Meritage will have more to share with you on this initiative throughout 2021.
We pride ourselves on our reputation as a premium homebuilder focused on customer satisfaction 2020 marked the eighth straight year of award winning recognition from Meritage as received various average diamond goal and benchmark awards across nine separate divisions.
In line with our dedication to fostering healthy committees on which we live and work we don't have it over half a million dollars or Meritage care Foundation to nonprofits like being in America and Americares, we're focused on helping those affected by COVID-19, fighting hunger and combat homelessness.
To promote ratio equity nationwide, we donated 200000 to enroll and the United Negro College funds and began on multiyear partnership with these organizations our board of directors and management are committed to drive.
Diversity equity and inclusion throughout our organization and our industry will have more to share on the 2021 as well.
And we were also one of only three public homebuilders to Forbes recognized as one of America's Best Midsized companies.
Our employees accomplished all these milestones in 2020, while keeping the health and safety of our furloughed team members customers and trade front of mind are the simple go year.
Thank you to everyone at Meritage for their hard work as we turn to 2021 on beyond we look to the favorable macro macroeconomic factors to provide some visibility to future demand.
Housing market remains robust with low mortgage interest rate and other supply of new and existing homes for sale and advantageous demographic trends in new new homes, new ownership for the moly on Baseload generation.
The homebuilding industry is already experienced an uptick in demand prior to COVID-19, and after a brief pause in late March and early April 2020, as umbrella and strength in the housing market was particularly focused on increased demand for healthier and safer homes at affordable price points.
We anticipate these fundamentals to continue into the foreseeable future, which align well with our strategic focus on entry level and first move up homes.
I'll now turn it over to Blake to discuss strategy on our quarterly performance.
Thank you Steve.
Since 2016, our strategy has centered around the entry level and first move up markets.
Operating customers affordable yet high quality homes.
Frankly, the housing market. This past year enabled us to capture pricing power, which combined with our streamlined more efficient operating model produce growing sales volume higher margins improved SG&A leverage and our strong Q4 results.
<unk> from.
The fourth quarter of 2020 was another record quarter for Meritage, which reflected the continued momentum on the first nine months of the year.
We sold 3170 homes for homes, this quarter, which was 52% higher than the same quarter of 2019.
This represented the highest third highest quarterly orders only to be surpassed by Q2 and Q3 earlier this year.
Home closing revenue of $1 4 billion in the current quarter increased 8% year over year in.
In the fourth quarter of 2020, we delivered our best quarterly home closing gross margins from 2006 by improving 420, <unk> to 24% from 19, 8% in the prior year.
2020 lakh normal cadence or seasonality on the housing market remained robust during a traditionally quiet time of year capitalizing on the overall industry demand as well as the expansion of our community mix towards entry level homes, which sell at a higher pace on our first new upon our absorption of $5 three per month for the quarter was up 87% year on.
For year, even as we increased pricing in all of our geographies in line with strong local market demand.
First our absorption accelerate faster than total order growth demonstrating our capacity to generate significant sales volume once we achieve our 300 community target.
Five out of the 90 day kind of absorptions increased over 100% year over year this quarter. Despite a 19% decline in average active communities.
We continue to focus on growing our spec inventory from our entry level communities as well as refining our offerings for the first move up market, which has also experienced solid demand over the last few quarters.
Angela will comprise almost 70% on total orders for the quarter up from 55% in the fourth quarter last year.
And two other represented 67% of our average active communities during the current quarter compared to 45% a year ago.
We have a relative product mix goal, we expect these ratios to sustain for the net for the near to mid term, although mix. It individually individual geographies is always adjusting communities opening and closing.
Our first move up communities also experienced improved demand year on year with absorptions, 91% higher than a year ago.
Slide decks.
All regions reflected solid year over year performance in Q2 on the strength in the market was driven by low interest rate limited supply and shifting buyer preferences for single family less densely populated homes on.
Our east region led in terms of order growth with a 76% improvement over the fourth quarter of 2019.
The absorption of the East region increased 118% year on year for the quarter offset by a 20% decline in average community count.
64% of our average active communities in each region. So on entry level product during the quarter. The East region performance on product mix are now on line with the rest of the company the shift to entry level nearly they are at average it's hard from exceeded by per month.
Our central region comprised of our Texas market increased orders by 46% over the fourth quarter of 2019, despite a 20% reduction in average community count.
Entry level communities represented 71% of the central regions average active communities during the fourth quarter of 2020.
This region continues to see solid demand with shifting migration into the state, particularly in the tech sector with Austin and Dallas Fort worth seeing outsized demand even by today's standards.
Our fourth quarter 2020 of orders in the West region were up 34% over the same quarter in the prior year, driven by 65% increase in absorptions and partially offset by 18% fewer average knees entry level communities, representing 67% of the west region's average active communities during the quarter.
Colorado had on highest per storms are to new companies. This quarter with an average of $6 four homes per month in the fourth quarter of 2020 compared to $2 five in the prior year. This produced a 48% year over year orders growth in orders, reflecting the hardship down the ASP price band over the last four to six quarters.
Turning to slide seven.
We closed 32% more homes in the fourth quarter of 2020 on prior year and our backlog was 4672 units at the end of the fourth quarter, reflecting the high absorption pace, we achieved this quarter.
Of the 3744 homes closing this quarter, 71% came from previously started stacking Tory compared to 61% a year ago.
At December 31, 2020, less than 10% on pulp total specs were completed versus one third which is our typical run rate.
We are selling more specs in early stages of production to meet the surge in demand and are focusing our production efforts on completing our backlog inventory.
Our backlog conversion rate has decreased to 71% in the fourth quarter this year compared to 80% last year, reflecting the early stages of construction or sold homes. We expect similar trend over the next couple of quarters as demand in the market absorbs our spec inventory at an accelerated pace.
That building is a core tenet of our entry level market focused strategy resulted which resulted in a higher spec inventory as communities compared to the first move up communities. We try to keep a four to six months supply of specs on the ground of our entry level product.
We ended the fourth quarter of 2020 with a little over 2500 spec homes in inventory or on average of 12.9 per community compared to approximately 3000 or an average of $12 four last year, reflecting the significant sales order growth during the fourth quarter.
While expect for community grew our total staff kaltenbach quite achieve our goal of 3000 as these homes convert to backlog as quickly as we started that however, we are still focused on increasing our specs in January as we move into the spring selling season.
I will now turn it over to Hilla to provide additional analysis of our financial results. Thank you free let's turn to slide eight and cover our Q4 financial results in a little more detail as.
As Felipe Nowadays, the 28% year over year closing revenue growth in the fourth quarter was the net impact of 32% increase in home closing on 4% decline in A&P. While this ASP decline reflects the shift from product mix towards affordable entry level homes. It also includes price increases throughout 2020.
And all of our geography from strong market demand.
We on our highest quarterly home closing gross revenue since 2006 net quarter, reaching 24.0% of 420 bps improvement from the prior year. The margin reflects our A&P increases achieved throughout the year, the additional leveraging of fixed costs from higher soybean volume as well as the operational efficiency we have.
Our entry level and first move up construction processes really dialed in today, we know all of the components of our homes intimately and continue to focus on reducing our cost of material COVID-19.
On a consistent purchasing volumes on a limited number of Skus were able to negotiate lower pricing impulse purchasing discounts from our vendors.
This consistency and transparency also provide scheduling visibility to our trades and suppliers, allowing all of us to be more efficient and enabling us to attract local labor as we'd like to be the builder of choice for our contractors with this clarity we have maintained a tight control over our production in game company to start a spec homes.
<unk> today, we've not experienced the longest cycle times from shortages in the labor pool, but we continue to monitor the space for an 18 day as we look into early 2021, we acknowledged at the rising cost of lumber and other commodity are impacting construction costs across the building sector, although lumber inflation has retreated.
From a tight earlier on the year. These costs still remain holiday day, we've been able to mitigate the costs the cost inflation with price increases during 2020. Although this is also an area that we are watching closely.
SG&A as a percentage of home closing revenue was nine 3% for the current quarter, which was our lowest quarterly percentage since 2000 balance.
The 80 day improvement over prior year reflects greater migrates.
Sales from efficiencies and.
On higher closing revenue and ongoing permanent cost benefits from technology enhancements, particularly leading to our sales and marketing. We believe we can sustain closing stock price strong margins in 2021, despite higher commodity costs, we will incur minimal negative impact to our SG&A leverage over the next several quarters.
As expected we will have some additional costs related to achieving our 300 community call prior to the incremental closings and revenue from that new business. However, we expect to improve our SG&A leverage beyond 2021, once our higher community count start to materially contributing to closing.
Included in our Q4 results are $20 3 million impairment charges on land sale impairments consist of two projects one in California that is no longer on strategy for us as it is not an entry level first move up product and another in our active adult market that we are looking to wind down we anticipate that sales will close in the first half.
Half of 2021.
The fourth quarter's effective income tax rate was 21, 9% from 2020 compared to six 3% in the prior year in 2019, the extension on the eligible energy tax credits on qualifying volume occurred in December resulting in the beneficial impact for full year 2018, and 19 reflect.
In Q4, 2019 generating the low tax rate with the extension of the 45 observations into 2020 line. We expect to continue receiving energy tax credit and a significant percentage of our commodity incident here are.
Our fourth quarter diluted EPS was $3 97, increasing 50% year over year compared to 265 in the same quarter of 2019.
To highlight just a few items for the full year 2020 results on a year over year basis, we generated a 70% increase in net earnings orders were up 43% and closings were up 28%. We delivered $4 5 billion in full year home closing revenue of 310 debt increase in homes.
Clothing gross margin to 22.0% and on 90 bps improvement in SG&A as a percentage of home closing revenue ending the year at 10 point here on perhaps but trying to just covered for Q4 were primarily in placements of 2020 translating to these record results.
Moving on to financing.
We continue to focus on strengthening our balance sheet, even as we push toward our 300 community goal. We achieved several objectives. This quarter late in the quarter, we amended our revolving credit facility to extend the maturity date to 2025, changing our revolver to a five year maturity, we opportunistically repurchased 100000 shares for total.
On the $8 $8 million in advance of the routine first quarter employee share issuance in 2021 on.
On November 13, 2020, our board of directors authorized an additional 100 million for share repurchases under the existing stock repurchase program and we also received two credit rating upgrade.
At December 31, 2020, our cash balance was $746 million, reflecting positive cash flow from operation of 530 million. Despite an increase in land acquisition and development spend on.
Our net debt to cap reached an all time low of 10, 5%. We previously noted we've adjusted our maximum net debt to cap target to high 20 to low 30 range from our prior low to mid Forty's range as our assets turn quicker with entry level and first liens on the operating we intend to use our excess cash on hand.
Graphically pursuit, our community growth target, while also ensuring we do not overextend, our balance sheet or liquidity.
On to slide 10, we already control all the land we need to achieve our 300 community growth. Our focus now is on developing the land to prepare the community to obey we also plan to increase our spend on additional land and development in order to sustain this growth level beyond 2022.
We spent 506 million on land and development this quarter, our highest single quarter from the company's history and over a 100% increase year over year for full year 2020, we invested nearly $1 3 billion in land and development, we anticipate spending more than one 5 billion annually in 2021.
And beyond to sustain and replenish our 300 community.
In the fourth quarter of 2020, we secured a quarterly record of approximately 11200, new land, which translates to 69, new community. We put nearly 29500 gross new lots under control in 2020 is 63% increase as compared to about 18000 lots in 2019.
Adjusting for land sales and termination we secured approximately 27200 net new lots in 2020, representing 192, new communities of which approximately 81% are entry level.
At year end at over 55500 total lots under control, we had four seven year supply of land based on trailing 12 months clothing in line with our target of four to five year supply of lots on heating we increased our land book by 34% from December 31, 2019, we are using options.
Our staggered purchasing terms, where financially feasible, allowing us to preserve our liquidity and about 59% of our total inventory at December 31, 2020 was owned and 41% with operating improvements compared to the prior year at 63% zone and 37% auction, we've been putting larger.
Land positions under contract several hundred lots at a time sidetracked on accelerated sales take larger higher volume entry level communities reduce community level costs per lap and allow us to minimize the community count churn and the inefficiencies associated with opening and closing out a community for full year 2020.
Our new lots under control, having average community size is about 140 loss line.
I'll direct you to slide 11.
We're encouraged by the continued strength in the housing market for full year 2020 in line. We are projecting total closings to be between 11000 512500 units.
Total home closing revenue of 4.2 to $4 6 billion home closing gross margin of 22% to 23% an effective tax rate of about 23% and diluted EPS in the range of 10, 50 211 50.
We ended 2020 with 195 active communities down from $2 44 in the prior year during the year, we opened up 105 communities up 40% from 75 in 2019 since we anticipate continued strong sales demand in 2020 line community Count will remain plus minus.
200 for Q1, and Q2, a new community opening will be offset by community clothing, and our projected volume of clothing between 11000 512500 for the full year. We expect to end 2020 in line with approximately 235 to $2 45 community the community cash growth.
It will continue into Q1 and Q2 of 'twenty two when we anticipate achieving our goal of operating 300 communities by June 2022.
As for Q1, 'twenty 'twenty, one we are projecting total closings to be between 26, and 2900 units home closing revenue of 950 million to 1.15 billion home closing gross margin of approximately 22, 5% and diluted EPS in the range of Q2.
<unk> five <unk> 50, <unk> with that I'll turn it back over to Felipe. Thank you.
Moving on to slide 12.
Our results in 2020 validate that we have a solid strategy and are executing at a high level.
We are achieving strong clothing revenue growth due to market strength combined with an increase in both pace and price.
While we are increasing prices in all of our geographies and aligning with local market conditions. We are also optimizing sales volume spec.
Spec building has allowed us to sell at a greater pace from capture market share while not sacrificing profit our efficiencies allowed us to accelerate 2020 closings into 2020, which in turn will lead to redeploy the capital to fuel future growth.
Our balance sheet strength reflects increases in operating cash flow on our lowest levels of net debt to capital. This in turn provides a long runway for growth as well as a safety net in the event of a market downturn.
Since the start of 2019, we've accelerated investments in land acquisition and development to support our sustained future growth levels in the fourth quarter. We spent a record 500 506 million on land and secured approximately 11200, new lots, we already control all the land necessary to achieve our 300 active community go.
On May 2022, our strong land position enable us to focus on developing a loss to get those can be as open and to continue to replenish the land pipeline beyond 2022.
To summarize on slide 13, we are entering 2020 on with a heavy backlog of almost 4700 sold homes and more than 2500 specs completed or under construction, giving us some additional build visibility into 'twenty 'twenty one with.
With a solid strategy strong balance sheet, a healthy land position and a great team that is executing a high level, we are well positioned for growth in conclusion I would like to thank all married employees for their dedication and job well done in 2020, and I look forward to a great 2021 with that I will now turn the call over to the operator for instructions on the Q&A.
Brock.
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Our first question today is from Alan Ratner of Zelman and Associates. Please proceed with your question.
Actually good morning, its Ivy Zelman and congrats on a strong fourth quarter on a great 2020 are remarkable.
And maybe I don't know if I'm heal or this is more directed for you and your comments around you know buying larger land parcels and that's something that you know really allowed for you guys to expand more broadly the entry level product offering can you talk about what youre seeing in land prices I know that it might be a little bit better than buying finished lots of masterplan.
On communities, but just give us an idea of what lat am overall lot inflation looks like for 2020, and what you see for 'twenty one.
Yeah Ivy this is felipe I'll take that.
So certainly.
Coming out of Covid, there was a pause.
On buying land across the industry. So we were actually saw some softness in land prices that quickly changed as we moved into Q3 and Q4 I think people recognize debt. How do you is going to be strong I COVID-19 himself.
Pricing started to move up but very modestly.
We look at 2020, I would say that for the most part they were kind of flat with the pullback and then moving forward as our peaking in 2021. They are certainly starting to land prices are starting to move up and we expect that to that to occur.
Phoenix.
Sure.
Some of the markets in the south.
On our really where we're seeing that on the highest land cost pressure you know.
As we continue to push out on.
Two the tertiary markets, where we're focused on our entry level strategy strategy on we're still seeing really favorable land residual prices across the board as we move farther out by those large deals.
We're still securing land at similar prices than we were before but that being said, there's more people coming out there. We're seeing we're seeing an increased competition and so we're expecting those land prices to increase as move through 2021, but I would just tell you through 2020, we didn't see a lot of pressure.
One last comment I think I think you hit the nail on the head the larger community.
Community side allows us to reduce the per lot cost were not expecting on a percentage base day for the la Costco Tibet for that higher percentage in 'twenty one than you did in 'twenty and in fact, we may be able to see it ticked down a little bit because we're better able to leverage that cost over a larger number of law.
From an individual community.
Very helpful guys. So given that you're out in the tertiary markets. You know we follow the single family rental industry and you know there's definitely.
The significant expansion in capital being allocated to build for rat and we're hearing a lot of those projects are going out on the tertiary markets.
Do you see that competition today in cancer is it the concern you that it could cannibalize buyers. How do you frame that I know you guys arent doing belt per rep, but do you have it from a competitive perspective any concerns.
No. So far we haven't seen a lot on those projects.
<unk> realized I know, it's early and we certainly know of a number of projects that are in queue and are coming to the market I think they're frankly do different buyers.
I think obviously as home prices.
Continued to increase there'll be demand for FFT for rent, which as you know the whole thesis behind that strategy, but I still think there is a.
Homeownership is still highly appealing.
And we don't feel like that's a direct competition for us.
Where we sit and finally, there I'm not seeing a ton of that pushed that far out I think it's sort of the second rate versus the third rate. If you will and so where we're going I think it's still more about the for sale market versus the for rent market any IV. Your first question probably ties into the second one when you're buying a couple of hundred.
Lots at a time, that's probably outside of our comfort zone of this format guys, they're looking for something a little smaller than media and tertiary markets with the larger lot count on.
We are still at this time reserved for that for that Homebuilder group.
Yeah, I, just think what we see in the pipeline not this year and maybe even beyond 'twenty, one, but they're pushing further out just because land costs are up so much and theyre trying to hit their return hurdles, but we'll obviously watch that play out so Felipe if you had to put your.
Crystal ball and think about the future what what keeps you up at night, the most about running the business today and that's my final question. Thanks, guys.
I think.
We're we're very focused on affordability, that's the key to our strategy.
Our entire pivot that's that's the dash line on the dashboard that we're watching the most closely.
Pricing as you all know the pricing power on the market as significant even.
Even with the FHA limits being.
Creased across the board I still think that's a governor and once you get past that I think you you move into a different part of the market and you get less buyers that could qualify. So it's really all about affordability for us there's a lot of cost pressure out there so as prices continue to escalate.
We're going to be very mindful of affordability and making sure that we continue position on our product and the affordable side many of the market, which in turn goes back to your question about land prices and making sure that day don't escalate too much as well. So it's all about affordability for us as we move forward, we know exactly where we need to be to meet the long term demand for affordable product in.
And that's what kind of keeps me up at night.
Yeah.
The next question is from John Lovallo of Bank of America. Please proceed with your question.
Hey, guys. Thank you for taking my questions as well.
The first one just on the on the 300 communities by mid 2022.
It implies call it 40% to 45% growth in the first half of 2022 I mean.
Given the sales pace today and in the close outs that are happening how confident are you guys hitting this 300 ish number by June.
Yeah, we're very confident.
And we've been we've been kind of we put this flag out there a couple of quarters back and we focused on that.
The entire organization is focused on getting there as he mentioned and I mentioned, we bought the land to get there.
And we're continuing to bio land to make sure we achieve that goal. So we're very very confident and we're going to hit it.
John just I think we talked about this last quarter, but it might be repeating the community that are experiencing accelerated closeouts now they were not even 300 community count to begin with right media clothing, a quarter or two early but these were not community that were going to be here six quarters from now.
Community that we have our ion for those 300 community count growth those are still either in the pipeline or have enough slot to sustain themselves through to June 2020 here.
That's helpful. On the maybe just following up on that having the land that's either that's obviously a very good start any concerns about being able to procure the labor.
You know to get these communities built out on time.
The horizontal labor is I think is what you're referring to the guys and gals, who pushed the tractors around and lay the pipe.
No I think if anything the more concerns I have around me.
They support approvals on that type of thing, which we talked about that that's probably providing the biggest bottleneck for us to get out to the market, but as it relates to the trades and getting the land development I think we're still seeing pretty good performance. It's tighter just because of the amount of land that's under development across the board but.
I think we're confident in our trade base that we'll be able to deliver and that's not a big concern for us right now.
Okay. Thanks, guys.
Okay.
Yeah.
The next question is from Steven King Kim of Evercore ISI. Please proceed with your question.
Yeah, Thanks, very much guys.
Obviously, a good quarter just wanted to ask two questions I had one on your volumes that you're forecasting for next year.
Thank you gave a range of 11 five to 12 five let's just deal with it too high in that range. Because I think you guys are being pretty conservative, but even at the high end of the range.
12500, I look back at what I think you probably started over the last six months and it looks like you've started well over 7000 units and then I think you also over the six month period and so it would seem that 12 five is a pretty conservative in light of that what you did over the last six months and then.
Can you talk about the fact that cycle times really have any long dated yet and so I'm just kind of wondering whats embedded in your assumption for only getting into 12 five is that truly a ceiling for you or is that just something that you're throwing out there based on.
I wanted to be cautious and not presume too much about demand over the next six months.
Even if he can do that on the buy components and be answering the question, which is we're not having issues on cycle times and we've no day and.
We know the sales pace and is maintaining we're not assuming net sales piece is going to decline. It's just the availability of locking community. We wanted to give the community count guidance with that midpoint in the script as well.
With that the guidance and a model to make sure that everyone understands that it's not a demand or a labor issue.
That's good that that that a governor on our guidance that if those were lifted that we were able to get to a higher number. It's just how quickly can we get new lost from the ground 19 gasoline covered our goals are fairly static we have the labor to get to know you got to do it.
Community count targets, but theres not a week to accelerate that so that the.
Governor is really that availability of locked on community not elongated cycle times are concerns about demand.
Well said earlier in the script.
Community count is going to be.
Close to 200 for the first six months, so we're not going to see the community count growth to the back end of the year, which is going to be difficult to expect closings.
We're in the last six months of the year just opening these communities.
Yeah, if you look at it a different way in a way that we think about it as a lot of the closings that were forecasted.
Are we in the analyst models for 'twenty and 'twenty, one we got a big chunk on those into Q4, we pulled them out because our cycle times were shorter and we were able to get those clothing into 2020.
He kind of take the combination of the 2000 22021, New York.
Five rolling quarter, probably on top of where you guys thought we would be adjusted came in Q4 of 2020, instead of Q1 of 'twenty and 'twenty one yes.
Yeah, I think that's a really important point, we were just able to accelerate the closings in Q4.
Due to our efficiencies. So if you put Q4 back in there you get to that number.
Yeah. That's helpful. Obviously, the degree to which you can continue to surprise yourselves pleasantly as is going to probably create the opportunity for upside in 'twenty one obviously.
In that regard I wanted to talk about the margin that you reported in in your four Q.
You know again real happy news here you gave a number by our reckoning you were implying in your full year 'twenty 'twenty guide on gross margin somewhere around 22.
Two at the high end and I think you did 24.
I assume youre going to say that some of that was a result of some things you thought would land in <unk> next year.
<unk> through 'twenty, one that actually land in <unk>, 'twenty, but I got to imagine maybe a little better pricing because you were selling specs, which are real time with the market just give us if you can give us a little more granularity around what drove the increase in your gross margin that was in excess of what you had initially envisioned are just a few months ago.
It's almost all elaborate dry mix significantly exceeded our clothing and revenue target. There is significant improvement in leverage which is also the answer for why the guidance for Q1 of 'twenty one jobs a day from the performance of Q4, obviously the guidance the midpoint of the guidance that we gave for <unk>.
Clothing, there's a thousand units left in clothing.
Theres not an anticipated deterioration on that new material or labor side, our asp's.
Really the leveraging on the volume that we're seeing that really material improvement in Q4, and the slight decline in Q1 comparatively.
The next question comes from Carl Reichardt of BT I G. Please proceed with your question. Thanks, when everyone I was curious about when.
When youre looking at controlling more lots going forward on land bankers versus traditional sort of developer third party vanilla options are you seeing an expansion in opportunities to use land banking and are you using them and obviously that was a big part of your strategy back in the early two thousands if I recall right. So I'm just kind of curious what you see.
Yes.
Yeah right right now.
As we look at kind of look on the reverse most of it is through the land development type of options, where maybe we tap stage takedowns not that traditional off balance sheet financing that youre, referring to were evaluating that each and every year, it's pretty expensive. These days.
We have a lot of cash so we're trying to figure out the most efficient use of our capital, but certainly it's a lever that we continue to evaluate as we want to grow our business beyond the 300 and sustain that and then really maintain our balance sheet integrity going forward. So it's out there.
Talk to those folks every every quarter to understand where pricing is et cetera, but we havent deployed deployed it just yet.
Alright, Thanks, Felipe and then the orders this particular quarter, where I think stronger than we and a lot of other folks were looking for and and I'm I'm interested whether or not pricing.
Pricing is not controlling absorption and I given that you want to try to keep your affordability.
Adam as you.
<unk> stated earlier, a pretty consistent level and not get too over your skis on price.
Did you think about.
Not doing phase releases to slowly on a pace down or was it just a function of the demands here you've got the product burden burden of hand, let's take the orders now because obviously the implication on the EPS guide is for it's been a potential at least for for down for down earnings next year. So I'm just kind of curious about that thought price versus pace this quarter.
And then also just phase releases did you slow those down at all.
Yes, that's it that's.
That's a great question.
So the price and pace discussion I think we've been echoing this we're about both.
But certainly.
Paces page is really important.
So the leverage we got out of the pace.
Buyers hydro market today is we believe the right strategy when we have the product on the ground and so we had the product on the ground and took those buyers, but but not but not because we are compromising price.
There, we seem to be able to get meaningful pricing power, while maintaining the pace that we wanted to achieve right now so we're in and company and <unk>.
And we're in some pretty good times right now, where we can get and.
And we haven't gotten to the point, where we believe we have to meter on sales honestly sales are being new you're out in some way it anyway, we get the lots on the ground and continue to keep a watch out in front of us theres only so much we can do there and so that's that's kind of the governor.
The next question is from Adam Baumgarten of Credit Suisse. Please proceed with your question.
Hey, guys. Good morning, just given such a low leverage that you guys are at now and should we expect a ramp in share repurchase or even kind of a renewed interest in acquisitions.
Yeah, We mentioned good morning, Adam we've mentioned in the past that we're looking to kind of keep the share count neutral than we'd ever we intend to issue in employee awards annually, we try to repurchase debt. We used that that's our current strategy doesn't mean that we're not going to be opportunistic if we see dips in the stock price obviously, we.
Purchased 1 million shares earlier this year. So we have enough cash to the balance we're not aggressively repurchasing shares above our target, but we are keeping our eye on the market for debt.
As far as the acquisition.
Question.
I think Steve said this every single time, a net carry the torch forward, we look at M&A all the time, we're open for business.
But we have tremendous conviction in our strategy.
And we're always looking at things that fit into our strategy.
And we feel like we can invest our capital in our existing teams on our existing markets and potentially new markets down the road.
And grow just as just as <unk>.
Favorably organically, so we're looking and if theres something that beds, where we're active around it but we haven't found something just yet.
Okay got it and then just can you give us a sense for what type of like for like pricing you guys pushed through on the quarter.
Ross the business.
I'm, sorry did you say in the quarter for.
For the full year, it's been on.
Low double digit I would say the channel pretty much consistent to maybe 343, 4%. This quarter on average I mean, obviously there are some communities that are on running hotter income communities that aren't depending on new local market demographics. That's a fair that's a fair expectation.
The next question comes from Michael Rehaut of Jpmorgan. Please proceed with your question.
Hi, This is a lot hillman on for Mike just following up on that are there any regional standouts, we've been able to push price more aggressively than other markets.
Yeah.
Well I think it's more just about a community by community story honestly, some communities have more competition or a master plan communities, where it sort of build our ROE and then other communities we have.
We're sort of a standalone location infill or volume.
Got some more upside from that.
So on and what we're seeing is when we don't have a ton of competition, we're able to push a little harder and when we have a lot of competition. We've got to stay in line with what other builders are doing.
Some of that.
Generally across the board, we're seeing pretty good appreciation.
It relates to the markets that we're in but but it's more about a commodity by commodity basis Theres no place on operating.
Yes.
Yeah.
Got it okay and so just just following up on that if I look at sort of the pace trends regionally.
The Carolinas, Colorado, Georgia seem to be particularly hot almost the highest in the company like sticks absorptions per month.
And those are the kind of content continued better just curious in Arizona. It seems like pace. It decelerated from $6 five per month last quarter to $4 eight this quarter and just any color on what's driving that slower pace as it related to price increases or mix or how do you think youre comparing to the underlying market there.
Yes.
More about just the lots on the ground.
In community Count question, we closed out on some really high selling communities in Phoenix, we're replacing them with some also really high selling communities, but its just sort of the inflection that you're seeing.
And we really haven't seen any slowdown in Phoenix, yet, although certainly we've been pushing prices aggressively there, but theres a lot of in migration going on in Phoenix and the market is really strong. So there's no slowdown in pace. It's just more a from our perspective, it's an inflection of kind of community community counts.
The next question is from Charles Perron of Goldman Sachs. Please proceed with your question.
Hey, good morning, everyone I'm in force Susan This morning.
My first question is on the supply chain environment, we've heard of shortages across multiple building product companies and I was wondering if you could provide some color on what youre seeing on there for you guys, but also what initiatives you're putting in place to ensure minimal impact on the on production.
Sure.
I know, we sound like a little bit of an outlier, but I think that's because of the strategy. We put in place four years ago. When we went through the rationalization of our product and everything that we're putting into our products. We partnered with our national trade vendors, our local trade banners too.
Understand the supply chain and so we're not seeing a lot of issues on the labor and the supply chain, although we're certainly aware of them being out there.
We're certainly aware and talk to our other builder friends, we know what they are experiencing but our business model has allowed us to sort of navigate that probably a little bit better and we haven't we haven't seen that that's why we were able to again close the homes. We closed in Q4, our cycle times are not getting elongated and.
You see our margins so we're maintaining a pretty good cost cost structure, although there's pricing power in there.
You know what we have seen is that sort of COVID-19 disruptions here on there.
Certain plants being shut down certain factories, sometimes crews being shut down and navigating that has been probably the trickiest part at this point.
The supply chain has been relatively stable from our perspective and again I think it just goes back to your the alignment we have around our skus with our national vendors. They can pull in different product channel for us because we're not really changing a lot of what we're building on what we're putting in our homes on a quarter by quarter basis, we can give them more visibility earlier on in the cycle.
All right, we're not waiting for the customer to be halfway Steven build and make decisions in the design studio so for us they're able to pre order.
A couple of months in advance and get the supplies revenue eliminate a number of product offerings on any number of acute so they have a lot more visibility that allow balance he match pace with that.
No. Thank you for the color on that and then my follow up is on the SG&A margin outlook I understand do you think it will see any margin will go up this year due to ramp up in communities, but you also think it's going to improve beyond that.
I'm just wondering if there's a rule of thumb, we should follow to understand how much volume changes are impacting your SG&A, but also maybe community count growth as well.
I don't know that Theres, a great rule of thumb to use it as a function.
And how quickly we have to staff up where are we reaching kicking pointing divisions, where the additional personnel on the ground in additional supervisory employees. So I don't know that there is nothing.
Mathematical relationship that you can you can use from model I would just say, yes, as we mentioned in his script a 10 percentage.
Full year SG&A is we're really proud to have achieved that in 2020 Allegheny vehicle, a little north of that in 2021, and we have new mark more folks working in a more payments going out the door with Eaton Vance and the revenue, but once we hit 2022, I would expect to see that number.
Decline and continue to stay at 10 sub 10 level.
The next question is from Jade Rahmani of K B W. Please proceed with your question.
Thank you very much just a big picture question I'm wondering to what degree you think the impact of this pandemic have driven any pull forward of demand are there any customer survey data you are capturing at your local communities or overall demographics that you believe point to this the sustainability of the current demand trends that you are.
I'm, saying.
Yes, I think.
The way we look at it we think the number one driver right now as interest rates and with interest rates, where they are homeownership is more accessible than it's been before so people are taking advantage of these and and I think that's driving a lot of what's happening the second way of for us.
It's really the supply conditions.
Retail market is relatively nonexistent right now so I think the supply if you want to move.
Theres not a lot out there and that's driving the demand dislocation with supply and then the third would be the pandemic and certainly I think.
With with the pandemic consumer behavior.
People are thinking about where they are.
The housing situation looks like today, and what it could look like and they're thinking about where their homeschooling their kids and working from home and et cetera, et cetera, and that's driving some some behavior as well, but at the end of day I think this thing can continue as long as interest rates are low on that to me is the biggest.
We will have the biggest impact on where we're at today on where we're going.
Thanks, very much it seems that those three factors new games are all highly correlated because the reason that interest rates are so low is due to the pandemic. The government interventions at least that's a significant driver and then the reason that supply conditions are so low as no. One really is moving right now.
Because of the risk factors there.
So I guess are there as you think about the land spend that targeting the community count growth on their risk management factors that you are also considering in terms of how you would manage to any potential downstream shortfall in demand.
Could occur.
Yeah, I mean, we're always managing the risk of our land book and a lot of ways.
From the very beginning of our sourcing land what the rate land prices are on how we manage the development phasing keeping as much off book as we can I think he will talk a lot about where where we're comfortable taking our balance sheet as well. So we're not looking to get you know wayworn on land here.
We're looking to find the right amount of Ford of Europe, five year supply.
To serve our sort of tar.
<unk> targeted 300 community count goal and the units that follow so no land is the most risky thing we do in our business and more constantly.
Looking at keeping as much of the land.
Our off balance sheet as possible in other types of things. He we demonstrated you know at the end of Q1 early Q2 that we certainly have the ability to pull the brakes. If there was a sharp market correction right. We can slow down on certain developments, we can accelerate the region certainly slowing down we can also exited out on a.
Project.
And of course, we would force they are some costs that we could certainly avoid spending additional capital having said that our underwriting standards have not changed we've not assumed price appreciation, we've not assumed accelerated sales pace that we're built to operate at a much lower absorption pace per month.
So if that occurred that's fine we can certainly flat top line like you've seen us do for the last three quarters, but we're not assuming that this type of success will continue on underwriting land assets.
So we're already dealt for normalization.
On demand as it comes into 'twenty, two and 'twenty three not to mention our incredibly low leverage on a bulletproof balance sheet.
There are no additional questions at this time I would like to turn on the call back to Phillipe Lord for closing remarks.
Alright, well. Thank you very much we appreciate your support we appreciate all the questions and we apologize again for the technical difficulties. We had early on to make sure we get that rate. The next time and we'll see you next quarter appreciate everybody stay safe and healthy.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Yeah.
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