Q2 2021 New Home Company Inc Earnings Call

[music].

Greetings and welcome to.

The home company second quarter 2021 earnings call at this time.

All participants are in a listen only mode. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder of this conference is being recorded.

I'd now like to turn the conference over to your host drew.

Macintosh Investor Relations for the New home company thinking you may begin.

Good morning, welcome to the New home Company's earnings Conference call earlier today. The company released its financial results for the second quarter 2021.

Documents detailing these results are available on the Investor Relations section of the company's website at M. W.

H M Dot com.

For the call the Gander I'd like to remind everyone that certain statements made in the course of this call which are not historical facts are forward looking statements.

And involve risks and uncertainties.

Discussion of such risks and uncertainties and other important factors that could cause actual operating results to differ materially.

And the forward looking statements are detailed on the company's filings made with the SEC.

Including its most recent annual report on form 10-K and in its quarterly reports on form 10-Q.

The company undertakes no duty to update these forward looking statements that are made during the course of this call <unk>.

Additionally, non-GAAP financial measures.

May be discussed on this conference call reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through the new home Companys website and in its filings with the SEC.

During the call today is Larry Webb Executive Chairman, Leonard Miller, President and Chief Executive Officer.

From the old on Stevens, Chief Financial Officer, with that I'll now turn the call over to Larry.

Thanks true and good morning to everyone joining us on the call today.

Last week, we announced that the new home company has entered into a definitive agreement with certain funds managed by affiliates.

It's of Apollo Global management to acquire the company in an all cash transaction for $9 per share.

Our board of directors unanimously approved this decision following a thorough review of alternatives to maximize value for stockholders.

And Jay concluding that the proposed transaction with the power represented the best way forward for our company and our stockholders.

We believe that the proposed transaction, we will provide our stockholders with immediate liquidity in the form of an all cash offer at.

At an attractive premium.

And aligns our company with a highly respected global alternative asset manager with a proven track record of success.

We are excited for this next phase of the new home company's evolution and believe our potential partnership with Apollo.

Ultimate Hake, our company to new Heights.

In terms of our results this quarter the new home company continues to make progress on a variety of fronts in the second quarter of 2021.

And generated earnings of 26 cents per share.

Home sales.

Sales revenue grew 75% year over year, thanks to a 98% increase of new home deliveries.

Our home sales gross margin and continued to move higher on a year over year and sequential basis.

Coming in at 17, 3% for the quarter.

As we.

Contestable in the implementing price increases ahead of cost inflation.

We are very pleased with these financial results and we look forward the carrying this operational momentum forward.

In addition order activity remained healthy in the second quarter as we average 3.

<unk> 3 sales per community per month.

The 50% improvement over last year.

Demand continues to outstrip supply in all of our markets, putting us in a favorable position with respect to our sales efforts.

Similar to last quarter, we intentionally.

We're 6 sales releases at a number of communities in an effort to raise prices and manage our backlog and construction schedules.

This strategic decision has been instrumental in our ability to improving our operating margin and better aligned construction starts with sales.

Metered and other strategic initiative that has paid off for our company is the product repositioning we undertook to target more affordable segments of the market.

Our goal over the last several years was to bring our award winning new home designs and customer experience to a wider audience.

Banding, our product offering to include more affordable product.

We believe we've established a presence in this market as well as continuing to offer of more traditional move up product.

With most of our competitors trending towards the entry level of segments of the market.

<unk> fully debt there was a great opportunity for new home to gain share among move up buyers, who are looking to get more out of their homes and just the place to live.

This belief was further strengthened by the pandemic, which placed an even greater emphasis on how and where we live.

We'd be overall improvement in the housing market at large has been a key factor on our success, but we think our product repositioning has played an equally important role.

In terms of the broader market, we continue to see favorable conditions for our business. Thanks to the low interest rate environment.

Moving economic conditions and of low supply of new and existing homes on the market.

With a healthy industry outlook and improved market presence and a significant quarter ending backlog for the.

The new home company is well positioned to build on our strong results from the second quarter.

With that I'd like to turn it over the Leonard for more color on our operations this quarter.

Thanks, and good morning to everyone on the call today I want to Echo Larry's excitement for the announcement of the proposed Apollo transaction, which we believe represents a great opportunity for our stockholders.

In per maximize the value of their investment in us there.

Our vision for the industry and the company aligns with ours.

And I'm excited to work with their team to build on the significant progress we've made.

Turning to our results I'm extremely pleased with how our teams performed this quarter.

<unk> as we were able to surpass the high end of our stated guidance for both revenues and gross margin.

This was no easy task, considering the well documented operational challenges that persist in the market today and I am appreciative for how our teams executed during the second quarter.

As Larry mentioned homebuilding fundamentals remained strong in all of our markets characterized by limited supply and a motivated pool of buyers.

We took advantage of this demand by raising prices in all of our communities during the quarter, which led to margin improvement in the quarter and.

The homes in backlog.

We generally expect more normalized seasonality trends in the back half of the year, while pricing should remain firm given the ongoing lack of supply we see in our markets.

New home community counts are down significantly year over year on our markets and.

And are expected to remain lower given the robust sales environment and difficulty all builders are having bringing new product to the market.

In terms of local market color Phoenix remains a great example of the opportunities and challenges facing every builder as.

As demand in.

And then all of it stayed elevated during the quarter, but sales and new home construction were limited by labor and material availability.

Demand continues to be driven by a healthy local economy as well as a steady flow of buyers from other states.

Orders in our Arizona.

On the operation were up 76% year over year for us.

And the market driven by higher community count and could've been higher if it were not for the intentional metering of sales we implemented during the quarter.

Our southern California.

<unk> posted the best absorption pace in the quarter for a company of 5.7 orders per community per month.

We continue to see buyers migrate to the more affordable segments of this region, which drove strong sales and pricing at our more inland communities during the quarter.

This market is also characterized by a lack of available supply.

As total new home community count as of the end of June was down 36% and 38% in the river site in La County markets respectfully when compared to last year. According.

The market research firm Zander.

Demand trends were also strong in northern California at both our more affordable and move up communities at each new phase release was quickly snapped up by buyers during the quarter.

We increased our closing volume by 65% year over.

Adding to the in the quarter. Despite the operational challenges that persist a testament to our northern California team's ability to deliver homes in a difficult environment.

Our new division in Denver has transitioned smoothly into our homebuilding platform and we are extremely optimistic.

For years about the opportunities in this market.

Similar to Phoenix, Denver is benefiting from in migration to the market as well as solid job growth.

Despite the significant price appreciation Denver has already experienced we believe there is further upside to pricing relative to.

Other markets, given the demographics and the steady growth in high paying jobs.

Overall, it feels like our business in general is transitioning from a very strong market to a more normalized 1 characterized by steady order activity and firm pricing.

We.

<unk> that this is a welcome change given the operational challenges.

Of the overheated market composed and look forward to building on our successes from this quarter.

Now I'd like to turn it over to John who will provide more detail on our financial results from the quarter.

We believe Leonard and good morning to everyone on the call.

For the 2021 second quarter, we generated pretax income of $6.1 million as compared to a pretax loss of $41.2 million. The prior year second quarter, which included $39 million of inventory and joint venture impairment.

Thanks, guys.

On a $1.1 million.

And severance charges.

Net income for the 2021 second quarter was $4.8 million or 26 cents per diluted share compared to a net loss of $24.3 million or of $1.32 per diluted share in the prior.

For year period.

Adjusted net loss for the 2022nd quarter after excluding impairment charges for severance and a net deferred tax asset remeasurement benefit was 7.

$706000 or <unk> <unk> per diluted share.

Our home sales revenue for the 2021.

The charge was $136 million as compared to $78 million in the prior year period.

The 75% year over year increase was primarily attributable to a 98% increase in deliveries driven.

Driven by a significant increase in deliveries from Arizona and Northern California.

And to a lesser extent an increase.

<unk> and Southern California, and the addition of our Colorado operation in 2021.

The increase in deliveries was partially offset by a 12% decrease in average selling price driven by a mix shift to more affordable communities as a larger concentration of our deliveries incurred in Arizona.

The quarter, where the average selling price was $399000 and fewer deliveries in southern California, as a percentage of the total mix.

Our homebuilding gross margin for the second quarter was 17, 3%.

As compared to a negative 9.6% for the prior years second quarter.

The prior year included $19 million and inventory impairment charges and excluding these charges. The homebuilding gross margin was 14, 8%.

In the 2022nd quarter.

The 250 basis point increase in gross margin was primarily driven by.

190 basis points.

<unk> reduction and interest in cost of sales as a percentage of home sales revenue.

And to a lesser extent price increases and a mix shift.

The 2021 second quarter also included $730000 of purchase accounting adjustments related to the acquisition of.

Of epic homes.

Excluding these adjustments the homebuilding gross margin for the second quarter was 17, 8%.

Excluding inventory impairments in the prior year and interest in cost of sales. Our adjusted gross margin was 21, 4% for the 2021 second quarter.

Quarter compared to 28% in the prior year.

Our SG&A rate as a percentage of home sales revenue for the second quarter was 12, 7% versus 17, 1% in the year ago period.

The improvement in the 2021 SG&A rate was largely.

The result of higher home sales revenue during the quarter and to a lesser extent lower amortization of capitalized model costs in southern California, due to a lower community count.

And a <unk> $9 million and severance charges in the 2022nd quarter.

These items were partially offset by.

The higher personnel costs attributable to incentive compensation, and our new Colorado operation and a $706000 decrease in G&A expenses allocated to the fee building cost of sales compared to the prior year.

Net new orders for the quarter increased 14% to 187 homes.

Compared to 164 in the prior year's second quarter.

This increase was driven by a 50% increase in absorption rate to 3.3 net orders per month per community and.

And partially offset by a reduction in average community count on.

Our cancellation rate for the quarter was 7%.

<unk> compared to 11% in the prior year period.

We ended the quarter with a robust backlog of the 632 homes, a 6 of 169% increase compared to the end of the 2022nd quarter.

The dollar value of homes in backlog at the end of the quarter was $439.4 million.

Up 160% compared to the prior year second quarter, and our highest quarter ending backlog dollar value in the history of our company.

In addition, our Arizona and Colorado operations combined to account for over 50% of our backlog dollar value as we continue to diversify our juice.

Geographic footprint.

We ended the quarter with 19 active communities compared to 25 and the 2022nd quarter.

The reduction in community Count was primarily attributable to our California markets and was partially offset by our acquisition of epic homes, and a 75% increase in our community count and Eric.

Zona.

In regard to our balance sheet, we ended the quarter with the $117 million in cash $281 million of debt related to the senior notes due 2025.

And no borrowings outstanding under the revolving credit facility.

During the quarter, we generated $2.5 million on operating cash.

So and spent approximately $33 million on land and land development.

I'll now turn the call back to Larry for his concluding remarks.

Thanks, John the last several years have been quite a journey for the new home company as we transform the company from a high end homebuilder.

Cash flow exclusively in California into a much more diversified builder with operations in 3 states.

Along the way, we strengthened our balance sheet streamlined our cost structure and repositioned our product offerings to cater to a deeper pool of buyers.

However.

Operator ability to scale the business has always been constrained by our relatively small size and limited capital base.

As a founder of the new home company I have consistently communicated at building homes and communities with the noble occupation.

And with that came of response.

Sponsor ability to continually strive for improvement.

I would like to thank all of the members of the new home team for accepting this belief.

It is true your hard work and dedication that we have been able to build the company into what it is today.

And I am very appreciative of your efforts.

<unk> I'd like to thank our stockholders for their support for the last 7 years.

That concludes our prepared remarks.

Thank you ladies and gentlemen, this concludes our conference today, we thank you for your interest and your participation you may now disconnect your lines.