Q2 2019 Earnings Call
[music], ladies and gentlemen, this is the operator.
Today's conference is Sharon will begin momentarily until that time your lines will again before we start <unk>. Thank you for your patience.
Good morning, My name is Chris and I will be your conference operator today.
This time I would like to welcome everyone to the Cutest 2019, Pultegroup think burning.
Earnings Conference call.
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Gym's Zimmer you may begin your conference.
Great. Thank you cursing good morning.
Pleased to welcome you to Pultegroups Conference call and webcast review operating and financial results for our second quarter ended June 30 2019.
Here with me today or land Marshall, President and CEO , Pablo Shaughnessy Executive Vice President and C.F.
And Jim Us ASCII senior VP finance.
The copy this morning's earnings release, the presentation slides that accompanied today's call have been posted to our corporate website at Pultegroup Dot com.
Well also boasts an audio replay of today's call to our website a little later today.
Want to point out the contact group's financial results for the second quarter of 2018 included several unusual items, which are noted in our earnings release.
As part of today's call, we will comment on our reported results as well as our 2018 financial results adjusted to exclude the impact of these items.
We have provided reconciliation of these adjusted 2800 numbers to the reported results in earnings release.
And within the web cast slide closely as part of this morning's call.
We encourage you to review this information to insist to assist in your analysis of a year over year Q2 results.
Before I turned the color room I'm, Brian Marshall, Let me remind everyone that today's presentation includes forward looking statements about pultegroups expected future performance.
Actual results could differ materially from those suggested by a comments made today.
The most significant risk factors that could affect future results are summarized as part of today's earnings release.
Within the accompanying presentation slides.
Excuse me these risk factors and other key information are detailed in or a C.C. filings, including our annual and quarterly reports now let me turn the call over to buy a Marshall right.
Thanks, Jim and good morning.
I'm excited to speak with you today about Pultegroups second quarter results.
And I'm pleased to say that on a seasonally adjusted basis market conditions for the second quarter and the first six months of 2019 remained consistently stronger than what we experience through the back half of 2018.
Further based on feedback from our operators I would tell you that the market generally felt stronger in Q2 vending Q1.
It was mortgage rates down roughly 75 basis points from the start of the year, it's easy to understand how market momentum continued to advance as the year progressed.
Our second quarter performance reflects a small amount of build as orders increased 7% over last year.
This is a notable swing after orders were lower in the first quarter of 2019, compared with Q1 of the prior year.
On a year over year basis orders were a little slow in April , but then we realized strong gains as the quarter progressed.
While that are always a number of factors that influence the homebuying decision. It is reasonable to assume the decline in interest rates had some impact in attracting additional buyers.
As it relates to the current sales environment I'll paraphrase my comments from our first quarter earnings call.
Insane that through the first six months of 2019, we've experienced what we view as a typical seasonal recovery and buyer demand.
It is great to see the consumer demand has been so resilient. This year given the saw sales environment in the back half of 2018.
I think this characterization is consistent with the government data, which show new home sales through the first five months of 2019 were up 4% over the comparable period last year.
It is certainly nice to see the year over year increase.
But as important we're not seen signs of a pending fall off and demand like the industry experience starting toward the middle of last year.
I'm not sure that lower rates will materially altered typical seasonal buying patterns, but we see no obvious signs of a replay of 2008 teams back half slowdown.
In a couple of minutes Bible provide details on our second quarter operating results and our strong performance across key metrics, including orders closings margins.
E.P.S. and returns.
I want to take a moment, however to highlight that along with great financial performance.
Our second quarter offers a great example of Pultegroup continuing to execute gets playbook.
Operationally, we delivered against our objective do effectively balance price and page to achieve high returns.
While taking every opportunity to drive A.S.P.'s revenues and gross margins.
We then allocated the resulting strong cashflows in alignment with our stated priorities.
This included investing $857 million of land acquisition and development in the business, including the American West transaction in the second quarter.
As a reminder, through the American West acquisition, we'd put 3500 lots under control in Las Vegas.
In addition to dramatically improving our size and scale and the biggest market. The deal structure is extremely capital efficient as we purchased only one third of the lots while controlling the other two thirds of the option.
Along with investing than the growth of our business, we returned to $114 million to shareholders in the second quarter through share repurchases and dividends.
Bringing the total of our returns to shareholders to over $170 million this year.
I would also highlight that our board approved a 500 million dollar increase our share repurchase authorization during the quarter.
And finally during the quarter. We also completed a tender for $274 million of our senior notes that were scheduled to mature in 2021.
This repurchase helped the lower the company's got to capital ratio to 35% on a gross basis, which is well within our guidance range of 30% to 40%.
Perhaps most importantly, the strong cash flows generated by or business allowed us to implement these actions and still in the corner with more than $650 million of cash.
I can tell you that in prior cycles or capital allocation would have likely look very different than this with most if not all available capital invested into the business.
Are more balanced approach, including the measured increase in land spend is consistent with our capital allocation priorities and with our view that this current housing cycle can continue to move higher.
Now, let me turn the call over to Bob.
Thanks, writing a good morning, everyone as Jim noted our second quarter results. In 2018 included several unusual items, which impacted are reported numbers for that period.
Where appropriate I'll highlight these items and discuss reported as well as adjusted numbers to provide a clear picture of our year over year performance.
For the second quarter, we report at 6792 net new orders.
Which represents an increase 7% over last year.
Breaking down orders by by a group shows first time orders increased 30% to 2099 homes.
Move up orders increased 3% that 3043 homes.
Well active adult waters were lower by 7%.
Two 1650 homes.
For the quarter, we operated out an 877 communities.
Which is an increase of 3% over last year.
Adjusting for community count absorption pace in total was up 4%.
Driven by increases a 14% and 5% respectively.
First time and move up borders.
[noise] pace among active adult communities was down 13%.
Specific to the second quarter, the lower pace among active adult communities reflects the close out of several high volume neighborhoods in combination with replacement opening later in the quarter.
More broadly this buyer group is generally more cautious it appears to be rebounding at a slower pace.
Following the weakness in the back half of 2018.
I would like to point out that we realized approximately 100 sign ups from the 11 communities that we acquired in connection with the American West transaction.
[noise] that close during the quarter.
While we expect orders will continue to pace between 30 to 50 per month for the balance of the year from these assets.
We don't expect to realize any closings related to American wet until the first quarter of next year.
In total we currently expect to realize approximately 600 closings from the American West assets in 2020.
Looking at our income statement wholesale revenues for the second quarter, we're down 2% $2.4 billion.
Reverend used for the period reflect a 1% increase in average sales price $430000.
Offset by a 3% decrease in closing the 5589 homes.
Espy and clothing values for the quarter, we're both in line with company guidance.
In the second quarter S.P.'s at $364000 and $486000 for first time and move up buyers respectively.
Where effectively flat with last year.
Well active adult pricing gained 6% to $411000.
The increase in average selling price with an active adult is due primarily to a change in the geographic mix of homes closed in the period.
Closings by by a group for the second quarter consisted of 30% first time, 44% move up and 26% active adult.
In Q2 of last year closings were 29% first time.
47% move up.
And 24% active adult.
At the end of the second quarter. The company had a backlog of 11793 homes under contract.
Which is comparable with the prior year period.
We also ended the quarter with 11454 homes in production, which is up 3% from last year.
Of the homes currently being built 8528 or 74% or sold while the remaining 26% or spec.
Consistent with comments provided a previous calls spec production has come back into historical ranges following the strategic decision to allow aspects to rise.
In the back half 2018.
Based on the current volume of homes under construction, we expect third quarter deliveries to be in the range of 5700 to 6000 homes.
Further we currently expect full year 2019 closings to be in the range of 22300 to 22800 homes.
Given the average sales price of our homes that backlog and pricing trends in the market. We expect their average sales price of clothing for the remainder of the year to be in the range of 425400 $30000.
Well, we are seeing some opportunities capture incremental price in the market.
We also expect our mix it first time closes to increase slightly over the back half of the year, which will influence our report it is p.
The company second quarter gross margin was 23.1%, which is consistent with our previous guide.
The lower margin compared with last year reflects higher land labor and material cost as well as the more competitive market conditions that developed in the back half of 2018.
While down slightly from last year gross margins continue to benefit from our strategic pricing program.
The resulting gains an option revenues and lot premiums.
For the second quarter option revenues, a lot previews increased 5.9%.
$4653.
To $84082 per home.
On a year over year basis sales discounts for the quarter up 80 basis points at 3.9% or $70600 per home.
It's worth highlighting that are higher option revenues in la Creme is offset most of the increase we incurred sales discount.
I would also note that sequentially discounts and cute too or flat on a dollar basis and down 10 basis points for the first quarter of this year.
Well market conditions generally remain competitive and incentives continue to be elevated.
Buyer demand has clearly improved from the end of 2018.
Given these market dynamics, we expect gross margins to be relatively stable over the back half of 2019.
We currently expect gross margins to be in the range of 22.8%.
23.3% for the for for the third quarter.
Based on our expectations for the balance of the year combined with our performance through the first two quarters of the year. We currently expect our gross margins for the full year via the range of 23% to 23.3%.
S G. inexpensive the second quarter was $259 million or 10.8% of Homesale revenues.
Reported S.G., they expensive $226 million or 9.2% of Homesale revenues in Q2 of last year included a pre tax benefit of $38 million associated with insurance adjustments taken in that period.
Adjusted S.G.N.A. Q2 of last year was $264 million or 10.8% of wholesale revenues.
Based on our expectations for the balance of the year combined with our performance to the first two quarters. We currently expect Sta expense for the full year to be in the range of 10.8% to 11.3% of Homesale revenues.
In the quarter, we realized net land sale gains of $1.4 million, which compares the gains of $27 million in the comparable prior year period.
I would highlight that last year's gains included $26 million for the sale of two bigger land parcels, which generated unusually large profits.
I would also note that this year second quarter results include a $4.8 million pretax charge.
<unk> costs associated with the successful tender for $274 million of our senior notes.
Discharges reflected and other expenses on our income statement.
In the second quarter of financial services business generated pre tax income of $25 billion, which is an increase of 21% over last year.
The gain and pre tax income for that period was driven by higher volumes as capture rate increased along with higher profitability per loan.
For the quarter mortgage capture rate was 81% up from 76% last year.
Income tax expense for the second quarter was $80 million, which represents an effective tax rate of 24.9%, which is generally in line with prior guidance.
Last year is reported income tax expense of $85 million.
Which represents an effective tax rate of 20.8% included $17 million attacks adjustments recorded in the period.
The adjusted tax rate for Q2 2018.
Was 25%.
Consistent with our previous guidance, we expect our tax rate in the third quarter to be approximately 25.3%.
On the bottom line the company generated second quarter net income of $241 million or 86 cents per share.
In the prior year the companies reported that income was $324 million for $1.12 cents per share.
And on adjusted basis that income last year was $259 million or 89 cents per share.
Diluted earnings per share for the second quarter was calculated using approximately 278 million shares.
Which is a decrease of 9 million shares or 3% from Q2 of last year.
The decrease in share candidate due primarily to the company's ongoing share repurchase activities.
During the second quarter, we repurchased 2.6 million common shares for $83 million for an average price of $31.82 per share.
Through the first six months of the year, we have repurchase 3.5 million shares for $108 million or an average cost of $30.61 per share.
Inclusive of the 500 million dollar increase in our share repurchase authorization that are bored proof.
Our board approved this quarter.
We had $691 million remaining on our repurchase authorization at the end of the second quarter.
Inclusive of our stock and debt purchases during the period.
We ended the quarter with $659 million of cash.
And a debt to capital ratio, 35.1%.
None of our cash on hand, our debt to capital ratio is 29.1%.
That's right and also mentioned we've continued to invest in our business, including the American West transaction that we closed during the quarter.
In total we paid $164 million for American West of which $136 million was described to the land we acquired.
The balance of the consideration was described to model homes and the American West trade neat.
Looking at our land acquisition activity in the quarter, we invested $473 million in the business, which includes the hundred $36 million for American West.
For the year, we have invested $778 million in land acquisition, all at $735 million and land development.
With a little over 1.5 billion of total land related spend in the first half of the year.
We're on track to invest approximately 2.9 billion for the year, which would be an increase of about 10% over 2018.
And finally at quarter end, we controlled approximately 154000 lots.
Of which approximately 40% are controlled the option.
Now, let me turn the call over to Ryan for some final comments on market conditions.
Right.
Thanks, Bob.
As I said at the outset of this call we experienced a meaningful improvement in our business with your over your orders up 7% in the quarter.
The increase reflects improved order metrics across many of our markets.
And specifically looking at conditions across our regions I tell you the following.
The eastern third of the country continued to experience good demand with the southeast scene, and nice pickup and buyer activity, while Florida remained one of the top performing areas of the country.
In the middle third of the country, Texas remain strong, particularly in the Houston and Austin markets.
But demand among the higher price points in the mid west was a little bit slower in the core.
And out West, Nevada, inclusive of the new American West communities as well as our Arizona market enjoyed very strong demand.
Business in California remain challenging.
But conditions do seem to be stabilizing with buyers beginning to venture back into our communities.
I would note that the improved level of buyer interest experiencing q. to his carried into the first few weeks of July .
As the strong economy, low unemployment and falling interest rates continue to support the demand for new homes.
Before opening the call for questions I do want to thank all pultegroup employees.
For their tireless efforts to deliver a great home and customer experience to every home buyer.
I'm also proud to say that based on the feedback from our employees Pultegroup was just certified as a great place to work.
This is another important milestone as we work to demonstrate the strength of our corporate culture, I mean outstanding environment, we seek to maintain.
Now, let me turn the call back to Jim Zimmer Jim.
Great. Thank you Ryan.
We will now going to call the questions.
Contrary to the operators comments, they're open to it all not just financial analyst.
So that we can speak with as many participants as possible, though during the remaining time of the call. We ask that you limit yourself to one question one follow up.
Chris let's cut the Q. and a process started.
At this time I would like to remind everyone in order to ask a question.
Star than the number one on your telephone keypad first question comes from my stall of RBC capital markets.
<unk>.
Morning, Thanks for taking my questions a nice results.
Thanks, Mike.
Ryan wanted to start out and dig in a little bit more on the active adult commentary you mentioned that it just seems like it's taking.
A little bit longer for that buyer segment to rebound I was hoping you could break it down you know even just anecdotally.
If you could between kind of some of the legacy.
Larger del Webb projects and some of the.
Kind of newer.
Projects that might have kind of the smaller footprints more urban footprints in it.
There have been a notable difference.
Within that.
Segment in terms of performance there.
Yeah, Mike Great question.
And you know what I would tell you as we as we highlighted in some of our prepared remarks.
We closed out of a number of our communities are sections of communities that we're generating.
Relatively high sales paces.
The replacement positions for those selling locations came on a little while later in the quarter.
And had you know slightly lower sales pays and so the combination of those two things is really.
You know what had an impact on the comparative results.
Oh I would tell you there's not a differentiation in performance between the in town communities and some of the bigger larger legacy.
Communities. They they bowled perform well one on a relative basis year over year are very similar.
You know more broadly might just kind of get into the question about the active it'll buyer I would tell you that.
This buyers take it a little bit longer to regain some momentum coming out of the back half of last year. The the group is I think.
Most of you know is is less rate sensitive.
[noise] on both the upswing and the downswing so.
You know the drop in interest rates doesn't have quite the same.
Push that it does for for other buyer groups say, they frequently pay cash or take very small mortgages.
I think it's also a buyer group that tends to be.
A little bit more cautious and so.
Probably not a total surprise that it's been a tad bit slower than the other the other buyer groups.
Okay. That's that's helpful and then I guess.
Conversely had this really nice pick up in the first time.
Buyer and so I think part of that is clearly been some of the pivot they've had towards that but.
Hoping you could elaborate.
You know a little more on forgive me if I missed this but that 30% increase in in orders for the first time, you help us understand how much of that is coming from absorption.
Versus the community count growth.
You've seen there and.
Any other color you can you can give us around that thanks.
Yeah. So.
Mike.
I'll start with the absorption question, we had a 14% increase in absorption so pretty meaningful increase their.
Further you've heard us talk over the last.
Really 18 to 24 months that we've men.
Intentionally and investing.
In the first time space.
And we've been bringing.
Assets into our book of business that are specifically targeted for this buyer group, which we think is a meaningful differentiation between.
Doing that which we have done and taking existing assets and simply re purpose scene.
From something they were originally intended for into the first time space. So.
You know we highlighted on our call last quarter that if you look at the lots that we control that are specifically targeted for the first time buyer group, it's about 35% of our controlled book now.
So you'll see this segment continue to have.
More meaningful presence in our closing volume over time.
So.
The last thing maybe on on that point, Mike just highlighted absorptions, we're up 14% and community count was up 13%. So those are the two elements that contributed to the overall increase in first time.
Your next question comes from Stephen Kim Evercore I aside.
Your align yourself.
I know.
The community to Count Guide I was curious if you could talk to us about what your expectations Opera community account and you know what the the challenges and opportunities are metrics specifically.
Yeah, Stephen we didn't give a guide but in answer to your question, we expect community account to be up between one and 3% in the third and fourth quarters relative to the prior year period.
In terms of the challenges.
You know it's difficult to open communities.
You know entitlements are challenging today, our team has done a great job.
In doing this and obviously that would that 1% to 3% growth would include the communities that we picked up in the American West transaction.
Yeah, Okay got it.
Mmm.
And this year on land in the first three and six months.
If you exclude the money we spent for American West were actually flat so the increase in Spain in spend.
Is largely on development dollars, which is bringing lots that we've put under control in the past.
To market.
I don't want to get into expectations for growth beyond this year, we've given the guide for what we think it's going to be for the balance of the year.
But when we look at capital.
We start with investment in the business you heard Brian's commentary on our view of the market we remain constructive.
And so this this reflects the opportunities that we're seeing in the market, including American West So.
No not really growing as much as I think you're inferring.
So we feel comfortable with the level of spend yes, just Stephen I'd Echo Bob's comments and further I would say that we continue to make excellent progress against our goals of three years owned and three years options.
Our field teams have just done an outstanding job in.
Working on on a local level on a transaction by transaction basis to really secure lots that.
Are helping us to turn our assets faster and to minimize the risk that is associated with having too much land on the balance sheet.
Your next question comes from John Lovallo of Bank of America. Your line is open.
Hey, guys. Thank you for taking my questions.
The first one Bob it looks like adjusted SG Cheniere as a percentage of sales 10.8 was.
Equal to last year's quarter, despite the 2% decline in revenue. It also appears that adjusted dollars Christian $8 are down on a year over year basis can you just help us understand what percent of the moving parts there.
Yeah, you know its an interesting question, there's no one thing to highlight as the driver of the performance during the quarter.
I think you've heard us talk about the controlling cost is always a focus of ours, we challenge our team.
All the way back to 2016, when we when we took a pretty hard look at expenses and we've continued that focus.
So really it was across a bunch of different areas Theres no.
Unique or significant things happening in the quarter.
Okay Thats helpful. And then Brian you mentioned not seeing any signs of another pending slowdown like in the second half of 18.
Right I guess curious in hindsight, what signs did you guys see heading into the back half of last year and what are you looking for.
Yes, it's a good question and if you'll remember in our second quarter earnings call last year, we highlighted that we started to see some softening was really in about the third week of April and for US. We saw really in two forms where we would see it in two forms.
The traffic that crosses the threshold of our model homes is certainly one of the leading indicators.
Website traffic.
Tends to be.
A little less.
Predictive, but certainly another metric and then.
You know on a daily basis, we can see the number of new contracts.
The reported from our sales offices and that's that's arguably the proof in the putting in the best indicator of an impending slowdown.
As I highlighted in my prepared remarks, the first couple of weeks of July .
The momentum that we have experienced in Q2 has sustained.
We're still seeing.
Very positive trends from buyers.
Your next question comes from Alan Ratner of Zelman and Associates. Your line is open.
Hey, guys good morning nice quarter.
So ill.
Ryan I thought you were talking a little bit about.
And just the fourth quarter and building up some specs during that softer demand period, and obviously I think a lot of builders did the same thing.
And in retrospect, it turned out to be a decent decision because the sales environment improved.
If you look at the the starts data so far year to date, it's definitely lagged orders and I think a lot of that points to an absorption of a lot of that standing spec that was on the ground heading into the year.
So my first question is can you talk a little bit about what the inventory situation looks like in your markets today, both yours as well as probably more importantly, other builders.
And the second question on that point is just.
<unk> costs have remained in check here and I think a lot of that has to do with that the labor situation, maybe not being quite as bad up to this point given that that standing inventory is there any risk now that that the orders are improving that you start to hear more about that the labor tightness and challenges that the industry has faced over the first few years of this recovery.
Sure ill take the question on inventory and then I'll have Bob address your question on costs Sars inventory goes to your point the back half of last year, we made the decision to let.
Our spec inventory around a little bit higher than what we typically do.
And that was that was purely aimed at maintaining the momentum of our per talk of our production machine.
At the end of the fourth quarter, our specs as a percentage of total inventory was about 31%.
Actually a little higher than that as probably 30, 33% I think at the end of the fourth quarter, we saw that come back down in the first quarter and went out now back down to 26%, which is more in line with where we typically Ron.
That's that's total spec inventory at all stages of construction and then when you specifically look at final inventory.
We continue to be at less than one per final unit per active community, which is the kind of the barometer that we've typically targeted so as far as our inventory levels go Alan we think we're in great shape.
We continue to start homes very much in line with our expectations and so.
You know, we havent necessarily.
Experienced within our business the same.
Situation that I think you described in the overall starts data.
As far as inventory goes in the broader market I think it's in a healthy spot when we look at months of supply for both new homes as well as for resale.
Almost every single market that we operate in remains.
At a healthy.
Level.
Certainly we've seen some markets take some increases, but even with those increases.
We believe the levels are still at healthy.
Healthy healthy spot.
There are a few competitors that have put more inventory into the ground.
In an effort to achieve.
Stated closing goals for the year.
We're managing against that and competing against that on a case by case basis.
Where we run into that but.
It hasn't had a a system wide impact on our business as I think as evidenced by our Q2 results.
Great and Alan Barry.
Sorry, just I wanted to I wanted to address the comment sort of the question about costs. I think you asked about labor, specifically I'll broaden it to talk about our cost in general.
Yeah. The pleasing news is that lumber has trended down I think everybody is well aware of that.
Based on that and generally benign cost environment.
We had guided to a 2% increase in our vertical construction costs.
And we now see it at about 1% for the year. So the benefit of that lower lumber cost has really come through the only sort of outlier to that really is concrete very specific locally we've seen some pricing pressure there.
As it relates to labor I would characterize it is still generally pretty tight but not not as bad as it has been so to your question, we've actually seen some moderation in the pricing pressure pricing isn't going backwards, but certainly less upward pressure than there has been.
And in certain markets, we've actually had trades coming to us looking for work, which I think is a good sign in terms of pricing.
So in general the labor market feels about as good as it has.
And I think with that there is room for them to do more as evidenced by the fact that we've seen some folks looking for work.
Got it thats really encouraging to hear.
If I could ask one more Brian just few builders recently have started talking a little bit about single family rental and either.
Building for operators, where you're kind of.
I think the bulk selling ends of communities or even phases of projects entirely for single family rental operators. I was curious if you guys have have pursued that at all if it.
Any part of your business today, or if theres any thought about embarking on that going forward.
Yes, Alan it's not.
We have looked at it we have evaluated.
In an environment, where it's becoming increasingly more difficult to find well located land get it entitled developed et cetera, We don't believe that thats, the highest and best use of.
The associated land parcels, we think we're better off.
Putting that that available land into our for sale.
Operation So.
Other than.
Some small ones the twosies here and there in specific markets as we closed out of communities, that's not a business that we've engaged in.
Your next question comes from Matthew Bouley of Barclays. Your line is open.
Good morning, Thank you for taking my questions.
I wanted to ask about pricing power in this environment I guess, you know Ryan I guess.
Interest rates have come down obviously you have you.
And have you found that that's helped kind of allowed you to perhaps I guess stimulate price increases what are you seeing I guess on pricing power today versus eight months ago across the different buyer segments.
Yes, so we've had.
In specific locations, we have had the opportunity to raise prices a bit.
But on the I would I would tell you that's the minority the majority of our communities have.
Frankly kind of how.
Been held flat.
It is still a competitive market the incentives are still elevated.
We have.
We continue to make decisions on a community by community basis too.
Adjusted pace and price.
In such a way that we think we can drive the best outcome for our shareholders and.
Drive the highest return on invested capital and I think you're seeing that in our results.
So.
You know with interest rates coming down it was widely talked about the back half of last year that one of the biggest.
Headwinds that we had was overall affordability interest rates were certainly contributing to that as we've as we've seen interest rates come back down along with some stabilization in overall pricing I think thats helped to bring affordability in a lot of markets back in back in line.
Okay. Appreciate that and then I guess you mentioned incentives.
Looking at the third quarter margin guide.
I think Bob said, you said discounts were down 10 basis points sequentially in the quarter is there a way to quantify what that looks like on orders is I mean, you. Ryan you just mentioned the incentives are still elevated but is there any reason to believe at least that sequentially that the discounts on closing shouldn't.
Continue to diminish further in the second half thank you.
Yes, I'd, rather not it's Bob I'd, rather not get into the specific what's based pricing whats option pricing.
We feel pretty good about the market obviously, we work to maintain the margins that we have we have among the highest in the.
In the industry.
Yeah, we're pushing opportunity for pricing and that comes in lot premiums and option revenues and then we're working to make sure we're turning our assets and we will use.
Discounting to get there so the relative percentages of each of those move over time a little bit.
I think that the message we want you to hear is.
There are still incentives in the market and to the question earlier about inventory there is inventory in the market and we're competing with that to try and turn our assets.
And we will continue to do so its the reason you saw it move up year over year little less so.
First quarter to second quarter also important to remember we're a more build to order. So you won't see the impact of today's discounts in our closings for probably a quarter or two.
Your next question comes from Truman Patterson of Wells Fargo.
Your line is open.
Hi, Good morning, guys. Thanks for taking my questions and.
Nice results.
First wanted to dig in.
Yes, I wanted to dig in on your demand commentary you know you said June and July it seemed like lower interest rates kept.
The selling season elongated if you will.
In the first quarter you guys noted that the traffic that can to order conversion.
Was it a bit low I guess from the second quarter has that conversion improved.
What I'm trying to dig at was the second quarter order results was it really.
Driven by better traffic or better conversion.
Yes, Jim its Ryan so.
What we have seen in the in the second quarter as we've seen an increase in traffic.
That combined with.
Higher community Count has led to.
Higher gross sales and also higher absorption rates, but I would not attributed to higher conversion rate.
In the quarter.
Okay, Okay, great. Thanks, guys.
Looking at your cash balance currently about $660 million what level.
Are you guys comfortable with and could you guys discuss your capital allocation.
Strategy moving forward and if you don't mind.
If I could.
Piggy back off of.
Stevens question earlier.
How should we think about your your land strategy over the next couple of years.
Especially when you overlay this with how you guys think demand is going to shape up.
Sure.
We have a lot of liquidity, you know 600 plus million dollars of cash.
Yes, the $1 billion revolver has about $750 million of availability on top of that so liquidity is really strong for us.
I wouldn't want to put an artificial number around it I think it would depend on what we were spending the money on.
Obviously, if we had need for increased liquidity, we could go to the capital markets. So really no no target number for cash.
And as it relates to how we're going to invest that I'd point, you right back to what we've been telling you for years now which is first in the business.
We're going to pay a dividend we increased it by 20% at the beginning of this year.
We would buy back stock with the balance and we had been talking about.
We might also look at our leverage you saw US act on that and this quarter. I think you can and should expect to see us continue to do exactly that exactly that order of priority going forward. We're fortunate the business is cash accretive we are generating cash strong cash flows even this quarter once again.
Cash flow from operations positive.
So.
As as it relates to our land strategy over years I think you know.
I'll refer you back to the first answer which was.
We want to invest in the business as long as we are constructive on it we want to grow with or slightly in advance of the market will invest to try and do that.
You heard Ryan talk earlier, a little bit about how we're doing that as we're building the optionality in our book, which provides capital efficiency greater liquidity.
So you until you hear a start to say, there's something about the market, that's causing us to either moderate or reduce.
Our land spend that's where I think you'll see us put the majority of our capital.
Your next question comes from Carl Reichardt TRG.
Your line is open.
Thanks, Hi, guys, Bob I wanted to ask about the community Count Guide, you've got 1% to 3% I think each quarter for the rest of the year, but your first time.
Buyer communities were up 14% this quarter. So as you look out for the rest of the year are you expecting a.
More significant acceleration in.
A certain price point or a certain geography in terms of store count, especially with the active adult being sort of lagging here and you are getting the stores opened late.
Well I don't want to get too granular on that it becomes a quagmire ramping the color Bob I did I did so I would I would offer that we also had community count growth in the active adult space in this quarter just like we did in the first time and actually we had a decrease in.
Move up I don't think you should expect to see a meaningful change in the business. We did highlight that we would expect the first time business to be growing based on the sales that we reported.
We'll see a little bit of moderation in pricing related to that.
Over time, I think it's fair to say.
We've highlighted that we want to get to a little bit closer to 35% of the business in the first time space. Our land bank today is 37% targeted towards that buyer, that's typically you're going to have community count associated with it.
So I think you'll see that you'll see our community count move in line with the dialogue we've had over the last.
Two three years in terms of where we have our investment going and what demographic targeting.
Okay, Thanks, and Ryan could you talk maybe a little bit about two things one is the private builder acquisition environment, what it might look like if things have changed in the last six months and then also just the availability of.
Of lot options, and whether or not we're starting to see developers to return to the business in more meaningful numbers.
As you look to continue to move your mix sort of gradually towards the options side. Thanks.
Yes, Karl Thanks for the question in terms of the private builder market I would tell you it's been fairly consistent.
There are opportunities out there in various markets we.
I think given our size and our geographic footprint, we tend to get a look at a lot of them.
You know, we're not necessarily interested in all of them because I think what you've heard from both.
Me and Bob is we're looking for acquisitions to be aligned with our overall strategy.
And we're going to continue to be very disciplined along those lines. The Vegas acquisition was one that fit very well with our strategy with how we are trying to position our business and as well as we were able to structure.
The acquisition such that it also aligned with what we've been trying to do with our land book and with our balance sheet and.
We will continue to do that so.
As far as.
I forgot what the second part was.
Oh are we seeing more developers in the market not really.
I think it remains a very tough space too.
See new entrants come into so I think you've got certain markets, where there are well capitalized developers and they continue to develop land for us.
But we're not seeing a wholesale return of developers that went away.
In the in the prior downturn in the real constraint there banks just aren't willing to lend.
And so without capital and access to capital is pretty tough for for that group to come back into the space.
Your next question comes from Michael Rehaut of Jpmorgan.
Your line is open.
Thanks, Good morning, everyone. Thanks for taking my question.
Thanks.
Firstly just wanted to.
Make sure I'm understanding you know the puts and takes to the gross margin guidance in the back half.
Bobby you referred to the you know.
Benefit some of the benefit from lower lumber impacting your overall.
Construction cost inflation outlook positively.
I guess you are still looking at a down year over year dynamic for the second half, but I just wanted to.
Trying to get a sense, if that was more driven by the higher incentives or land cost inflation.
Combined with other cost inflation.
You know because the.
I guess the incentives aren't peeling off maybe as quickly as some.
I had hoped for as as this better environment. So far this year. It has played out.
Relative to the back half.
Yes, Mike I think you got it right. It's all those things candidly, we we obviously enjoy like I said earlier.
Among if not the highest margins in the space. We're proud of it were protective of it.
But house costs are going up the tariffs while not significant are are impactful.
Our land costs are up we are cycling through land very quickly about three years on average.
Yes, the Optionality, we've built into our book does introduce some cost to that.
And as Ryan talked about pricing, while we take opportunities where we have them.
There are there are discounts in the market and we're playing the as we want to turn our assets, we're going to continue that that rotation of the asset base.
So.
Yeah like I said, it's a it's a pretty healthy world. We're living in we've got some cost pressure and we think we're going to hold serve we think thats pretty good.
No I appreciate that.
I guess secondly, you referred to earlier in the call.
In terms of your order growth cadence throughout two Q.
That April was slow year over year, and obviously then you know things kicked in more strongly in May in June .
I was just hoping to get a little bit more granularity in terms of the degree of magnitude there was April actually down year over year.
Was main June up over.
10% or low double digits.
And you know obviously rates came down, but most builders kind of really didnt point too.
Rate being a driver per se.
In may in particular, given the fact that mortgage rates really didn't even decline in may materially relative to the 10 year.
So I was wondering what the drivers were.
Either certain geographic regions certain markets or certain product segments.
Yes, so again kind of a two parter one little more granular on.
The degree of magnitude of the improvement and then what the drivers were there. Thanks.
Yeah, Mike.
So the comment was that on a year over year basis April was a bit slower.
And as I touched on in one of my earlier.
Question or one of my earlier answers April was really the last kind of strong month in 2018, So I think the year over year.
Comp was probably a little bit more difficult.
In terms of.
The other thing that I'd, probably offer the Easter holiday with where it fell head a little bit of an impact in terms of kind of April overall numbers, but.
I think that all kind of comes out in the wash as you move through the quarter.
Seasonality I would suggest.
You know is fairly normal.
Little bit better than last year.
So we like the way the business is performing we like what we're seeing we saw.
Coming out of April which was a fine month that just.
It was against a comp from last year, there was a little tougher got a nice may we had a nice June and the strength has continued into July .
Your next question comes from Jack Micenko of C. Aside you your line is open.
Good morning.
Bigger picture question.
You know as you move.
You know thinking through.
The mix and you move from say 27 to 30 on to that 35 first time.
Conventional wisdom is that the.
The lower price point, the first time homes are.
You know inherently lower margin I mean, your first times a bit different.
But as we think about past.
Threeq to Fourq and into next year and beyond.
Can you sustain margins all else equal on products that I guess, the better way to ask it is is your first time margin.
Comparable to move up comparable to active adult and where does that 35% share take from.
Any other categories in that margin discussion.
Jack It's Ryan.
Good morning, I. Appreciate the question I think what you've heard from us in the past as we don't underwrite to gross margin.
We're underwriting to return and we're positioning our overall book of business in a way that we think we derive.
The optimal.
Net result by plane in certain geographies and playing against certain consumer groups that gives us.
The best best opportunity to manage risk and have success.
I think conventional wisdom to your point would tell you that the first time space typically comes with a little bit lower margin. The volumes in the inventory turns tend to run a little bit higher which gives you.
Comparable return as the other segments that have a little bit higher gross margin. So.
We've we've kind of provided the guide for the full year of this year and you heard Bob talk about all the puts and takes around what were expecting in terms of cost increases and where we've got cost pressures, where we've got some tailwinds in what the resulting margin is and you can see that we are still.
Maintaining the best margins in the space, we're very pleased with where we've been able to keep our margins and that is reflective of more business coming through the first time space.
As we get closer to.
Q4 of this year and get into next year, We'll we'll update our guide.
For 2020 at the appropriate time.
Okay, and then the mortgage capture rate you called it out it jumped pretty significantly year over year.
Is that market conditions and execution and gain on sale getting better or was that partially a component of maybe trying to drive some of the slower.
Demand activity in the back half over the finish line.
In more recent quarters.
No actually it's a concerted effort on our part.
Our operators have done a great job as our mortgage company.
Of identifying the divisions, where we didnt achieve real success with our capture rate and trying to figure out what caused it.
So we're trying to make sure our incentive structures are right. So that we drive folks to the consumer to the mortgage company because what we know is.
They serve as a captive model, yes, they do a great job, serving only us as a builder.
And their their customers asset Thaksin scores net promoter scores are off the charts and so we think it's actually a better experience for our consumers at the same time.
Yeah, what you saw last year was.
It was a very very competitive market the new money origination had become some of the banks were paying a lot of attention to.
So as rates go down and re Fi business comes up it.
Softened that a little bit I wouldn't say it was a lot. So this is really about us focusing on.
How are we providing that opportunity to the consumer.
Showing them the benefits of working with our mortgage company driving higher capture rates. It was mostly internal effort.
Your next question comes from Jay Mccanless of Wedbush.
Your line is open.
Hey, good morning, Thanks for fit me in the first question I had the order decline that you saw in the Midwest.
Was that.
Related to any weather issues or delays in getting communities open because of the weather.
Not really Jay the weather to your point was tough.
And it certainly has an impact, but we wouldn't we wouldn't want to hang.
The specific results in the Midwest on weather.
You know I I think we mentioned in our prepared remarks, we just saw the up and the higher price points of our move up communities, which we have quite a few of in the mid west were a little bit softer.
Okay, and then on the active adult in terms of pricing do you guys feel like you need to adjust some pricing there or is this just kind of a temporary blip in demand.
Yes, I don't think we need to adjust you heard Ryan talk about that that is generally a cautious buyer group.
Yes noise in the marketplace.
Kind of puts them back a little bit it's not about interest rates for them. The other thing that that I would highlight is it's also a consumer that buys what they want they have got the healthiest balance sheet.
Have any of our consumer groups and they're willing to pay for the things that are important to them.
So we havent seen a real need to try and address pricing there.
Yes traffic is up I think at the end of the day it just needs they need to get their head in the REIT space and they will be back in the market.
Got it thanks for taking my questions.
We have run out of time for questions and answers today I'll now return the call to Mr. Zimmer.
Great. Thank you I. Appreciate your time this morning, certainly be available the remainder of the day. If you have any follow up questions and we'll look forward to speaking with you on the next call.
This concludes today's conference call you may now disconnect.