Q4 2022 Century Communities Inc Earnings Call

Hello, and welcome to the century communities fourth quarter 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

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Please note this event is being recorded.

I would now like to turn the conference over to senior Vice President of Investor Relations Tyler Langton. Please go ahead.

Good afternoon. Thank you for joining us today for century communities earnings conference call for the fourth quarter and full year 2022.

Before the call begins I would like to remind everyone that certain statements made during this call may constitute forward looking statements. These statements are based on management's current expectations.

Subject to a number of risks and uncertainties that could cause actual results to differ materially from those described or implied in the forward looking statements.

Certain of these risks and uncertainties can be found under the heading risk factors in the company's latest 10-K as.

Supplemented by our other SEC filings.

We undertake no duty to update forward looking statements.

Additionally, certain non-GAAP financial measures will be discussed.

Conference call.

The company's presentation of this information is not intended to be considered in isolation or as a start.

Institute financial information.

Presented in accordance with GAAP.

Hosting the call today are Dalfen Seth.

Chairman and co Chief Executive Officer, Rob <unk> Co Chief Executive Officer, President and David Messenger, Chief Financial Officer.

On today's prepared remarks, we'll open the lineup for questions.

I'll turn the call over to Bill.

Thank you Tyler and good afternoon, everyone.

During the fourth quarter, we focused our sales efforts and incentives towards available homes near term deliveries to monetize these homes, even though they carry lower margins due to inflated direct construction costs given their start dates earlier in the year.

The goal is behind this strategy included increasing our cash position.

Reducing leverage metrics and positioning us to start new and lower cost homes.

As a result of the efforts, we generated $382 million of operating cash flow during the fourth quarter.

And reduced our net debt to net capital ratio down to 23, 5%.

Lowest year end level in our history as a public company.

Our solid results. This quarter also included $102 million in pre tax income.

Net income of $79 million.

Diluted earnings per share of $2 47.

And EBITDA.

$121 million.

In the fourth quarter, we delivered 2903 homes, the second highest level of closings in our history and only 12 homes off our record level of homes delivered in the fourth quarter.

2021.

While supply chain pressures weighed on the pace at which we can deliver homes throughout most of 2022.

These disruptions improved as the year progressed, helping us to achieve this strong level of closings in the fourth quarter.

Yeah.

Revenues from home sales were $1 $2 billion, the highest quarterly level in our history.

While our average sales price increased by less than 1% on a year over year basis to $397000 consistent with our goal of building affordable homes.

Gross new contracts in the fourth quarter totaled 2008 homes and net new contracts were 1258.

Are you an elevated cancellation rate more.

Mortgage rate volatility and overall economic uncertainty keeping many potential homebuyers on the sidelines.

Our quarter end backlog consisted of 1810 sold homes valued at $671 million.

While we expect home sales will continue to be pressured in the near term.

Or is it just the higher mortgage rates and uncertainty in the economy.

Also believe that underlying demographics remain favorable.

Additionally, we think buyers are beginning to return to the market now that rates are stabilizing at levels below recent highs.

An indication of this is it both our net and gross new contracts in November and December were well above October levels.

Leading us to believe that the decline in mortgage rates that started in November led to an improvement in sales.

During January we have experienced further improvement in homebuyer activity.

Similar to the past several quarters homebuyers are continuing to look for homes that are closer to completion in order to lock in their interest rates.

Consistent with our strategy.

Tend to continue concentrating our sales efforts on homes with more near term completions and are not focused at this point on building up a significant sold backlog of later term deliverables.

Incentives on closed homes in the fourth quarter increased to about 900 basis points of average sales price from roughly 300 basis points in the third quarter.

A significant amount of decent incentives were in the form of forward commitments and rate buy downs that drove traffic and sales.

Especially when mortgage rates went above 7%.

While we will continue to move inventory by finding the market clearing price on a community by community basis.

We expect the average level of incentives that we're offering to moderate a bit, especially with the recent retrenchment in interest rates.

In the fourth quarter, we generated adjusted gross margins of 20% with higher incentives being the largest driver of this expected decline compared to last quarter.

These incentives applied not only to new sales with near term closings, but also too many backlog homes that had been sold earlier in the year.

Consistent with our strategy of prioritizing the sale is complete and completing inventory.

We expect our margins in the first quarter of 2023 will be consistent with those of the fourth quarter of 2022.

The homes delivering will be burdened with similar elevated construction costs given their start dates earlier last year and higher incentives than historical norms.

Many of our planned starts in the second half of last year, we were postponed due to increased incentives and elevated input costs. They have become commonplace in our industry.

Our corporate regional and divisional purchasing teams rose to the challenge and have made great strides in reducing costs across the board.

As a result, we begin starting homes at a greater pace in November and December .

Which has accelerated into this year.

Due to the improvement in direct construction costs.

Reduced incentives and shorter cycle times.

Homes are expected to carry a higher margin profile as they begin to close.

As a result, beginning in the second quarter of 2023.

We expect homebuilding gross margins to trend positively on a sequential basis through the balance of the year as they return to more normalized levels.

Yeah.

Before turning the call over to Rob I wanted to briefly recap our record setting performance for the full year 2022.

During the year, which was not only the company's 20th anniversary.

But the 20th consecutive year of profitability, we delivered 10594 homes, the second highest level in our history.

Gross margins and adjusted gross margins for the year averaged 25% and 26% respectively. Both company Records.

Net income increased 5% year over year to a company record $525 million.

And earnings per diluted share increased 10% to $15 92 per share.

So a company record.

Finally, our book value per share at year end increased to a record level of $67 67, with our total stockholders equity increasing to $2 $2 billion the highest in our history.

We believe we have the right strategy to navigate the current headwinds in the housing market.

And one that positions us well as conditions normalize.

Buyers are currently looking for affordably priced homes with near term completions and we intend to meet this demand.

You will find the market clearing price for our homes nearing completion.

Knowing that it may weigh on margins in the near term.

We are also confident that we will be able to redeploy capital and starting new homes from our current lot supply.

That will earn both better margins and higher returns going forward.

Due to the lower direct costs improved cycle times and reduced levels of incentives.

In closing on behalf of the entire senior management team.

I want to thank our employees across our national footprint.

Our achievements this year would not have been possible without their hard work and dedication.

And we greatly appreciate their commitment to both century and our valued customers.

I'll now turn the call over to Rob to discuss our business and plans going forward in more detail.

Thank you Dale and good afternoon, everyone.

Our strategy of concentrating sales efforts and incentives on inventory with near term completions was very productive and enabled us to deliver 2903 homes, representing 84% of beginning backlog and approach we intend to continue.

We have a strong presence within the affordable new home category with approximately 81% of fourth quarter deliveries coming from homes priced below FHA limits, allowing us to target the widest range of potential buyers in any given market.

Additionally back in December the FHA announced higher loan limits for 2023 and with these higher limits approximately 90% of our fourth quarter deliveries would have come from homes priced below FHA limits.

Our homebuyers continue to have a healthy financial profile.

Century communities and century complete homebuyers had respective average FICO scores of 737 and seven.

111, consistent with levels experienced throughout the year.

Our cancellation rate was 37% in the fourth quarter with roughly equal rates at our century communities and century complete brands.

Our cancellation rate declined as the quarter progressed to a rate of 28% in December .

Also roughly equal rates at both brands.

The number of cancellations further declined in January .

The homebuilding industry continues to be challenged by a municipal and utility delays supply chain issues and trade shortages. These pressures are starting to ease, especially as housing starts have slowed and capacity has improved.

We have seen improvements in our direct costs throughout the construction cycle, which declined by roughly 9% in the fourth quarter versus the high watermark in the second quarter of the year, an average of approximately 16000 per home.

Looking forward, we expect our direct costs to continue to decline and our cycle times to improve our supply chain and trade shortages further subside.

We ended the quarter with approximately 53000 owned and controlled lots with roughly 60% owned and 40% controlled this.

This total lot pipeline was down from roughly 63000 lots at the end of the third quarter 2022, and 80000 lots at the beginning of the year.

This decline was almost entirely within our bucket of controlled lots as our own lots have remained relatively unchanged compared to the last quarter and the beginning of the year.

Our 32000 owned lots provide approximately three years of deliveries based on 2022 volumes, which is consistent with past years.

We continued to step away from land deals throughout the second half of 2022 that no longer met our investment standards and that were generally higher in price than our own lots.

Given the effectiveness of our land strategy, we were able in the fourth quarter to reduce our land pipeline by nearly 10000 lots in our acquisition commitments by approximately $270 million, while incurring minimal abandonment costs of roughly $4 million.

For the full year, we reduced our land pipeline by a total of nearly 27000 lots in our acquisition commitments by over $650 million for only $12 million and abandonment cost.

This strategy allows us to control significant amounts of land for future growth during periods of high sales absorptions for limited investment and exit those positions at a reasonable cost in the event of a market downturn, all without adversely impacting our near term need for lots on which the STAAR com.

<unk>.

Looking forward, we expect the recent decreases in our controlled lots to start leveling off.

Century's total community count at quarter end stood at 208 down from 217 in the previous quarter, but up from 202 in the year ago period.

Our community count dropped sequentially in the fourth quarter due to close out our various communities and our conscious decision to delay the opening of certain new communities in the second half of the year as market conditions deteriorated.

Looking ahead, we expect to grow our community count at a measured pace as the recent declines in direct costs.

Moderation of incentives and expected improvements in cycle times has given us increased confidence in our ability to generate solid margins and returns from the new communities we opened.

Given the extent of our existing land pipeline, our year end 2023 community count could be in the range of 250 to 260 communities. If we elect to open all communities that we expect to be available.

In the face of numerous market challenges, we are very pleased with our performance this quarter and for the full year.

Going forward our strategy remains consistent.

Turning to find market prices for completed and completed homes that were started earlier last year with elevated costs.

Manage land spend and generate operating cash flow that will be reinvested in new homes with improving margin profiles that will be started in the first half of 2023 and beyond.

I will now turn the call over to Dave to discuss our financial results in more detail.

Thank you Rob.

We met our objectives and delivered healthy results this quarter, which resulted in the generation of strong operating cash flow and meaningful reductions in our gross our net homebuilding debt ratios.

During the fourth quarter of 2022, net income was $79 $5 million compared to 165 million in the prior year quarter, while earnings per diluted share of $2 47.

<unk> to $4 78 in the year ago period.

Full year net income increased to $525 $1 million, while earnings per diluted share increased to $15.92. Both company records.

Fourth quarter pretax income was $102 $4 million and our full year pretax income increased to $676 $9 million the highest in the company's history.

Home sales revenues for the fourth quarter $1 $2 billion slightly above last year's levels.

Home deliveries of 2903 homes or down less than 1% on a year over year basis, while our average sales price of $397000 was up by less than 1%.

Home sales revenues for the full year increased 9% to a company record of $4 $4 billion, driven by an 11% increase in our average sales price.

Home deliveries of 10594 homes were the second highest in our company history and nearly flat with last year's record levels of 10805.

In the fourth quarter net new contracts across our footprint were 1258 <unk>.

Similar to last quarter. This year over year decline was primarily due to elevated cancellation rates and the impact of the sharp increase in interest rates had on potential homebuyers.

New contracts before cancellations totaled 2008 homes at quarter end, our backlog of sold homes was 1810 valued at $671 million with an average price decreased by 8% year over year.

In the fourth quarter adjusted homebuilding gross margin percentage was 19, 8% compared to 27, 3% in the prior year quarter.

Homebuilding gross margin was 17, 6%.

Or 18, 4% when excluding inventory impairments compared to 25, 9% for the same period last year.

As we discussed on our last quarterly call. This reduction in margin percentage was expected.

Primarily resulted from our strategy of generating cash and reducing our leverage profile by focusing our sales efforts and incentives on near term deliveries, even though they carried elevated construction costs due to their start dates earlier in the year.

In the fourth quarter of 2022, we also recorded an inventory impairment charge of $10 $1 million.

For the full year homebuilding gross margin percentage improved to 24, 5% compared to 24, 2%.

And adjusted homebuilding gross margin percentage improved to 26% from 25, 9%.

SG&A as a percent of home sales revenue was nine 5% in the fourth quarter compared to nine 3% in the prior year.

This minor increase was a result of higher commission costs year over year due to market conditions with the balance of the cost below the prior year levels.

For the full year SG&A as a percent of home sales revenue was nine 8% compared to nine 7% in 2021.

Pre tax income margin for the quarter was eight 7% compared to 17, 6% in the prior year.

For the full year pretax income margin was essentially flat at 15% versus 15, 2% in 2020 one.

We incurred $5 1 million of other expense in the fourth quarter, including $4 $2 million of expense from the abandonment of certain deposits and feasibility costs.

The full year, we incurred $11 6 million of expenses from the abandonment of deposits a feasibility costs.

As a reminder, our charge off of these deposits and feasibility costs was a result of our deliberate decision to step away from land deals that no longer met our investment standards as a result of the market shift.

During the fourth quarter.

Actual services captured 65% of their closings generating $23 $1 million in revenues compared to $31 $2 billion in the prior year quarter, primarily due to poor commitments entered into in prior quarters fewer loan originations and increased competitive pressures the business.

Contributed $12 million in pretax income compared to $12 $7 million in the prior year quarter, a significant accomplishment given the decline in revenues and volatility surrounding the mortgage market.

During the quarter, we maintained our quarterly cash dividend of <unk> 20 per share and did not repurchase any shares of our common stock.

As a reminder, in the first three quarters of this year, we invested $126 billion and repurchasing two 3 million shares of our common stock at an average share price of approximately $52 at 32 cents or roughly 23% discount to our year end 2022 book Val.

<unk> of $67 67 per share.

These share repurchases in 2020 to reduce our share count by approximately 7% with approximately one 5 million shares remaining available for repurchase under our current authorization.

As a result of executing on our objectives, we generated $382 million in operating cash flow in the fourth quarter.

Our net homebuilding debt to net capital ratio declined significantly to 23, 5% compared to third quarter 2022 levels of 32, 5% and the lowest year end level in our history as a public company.

Our homebuilding debt to capital ratio declined to 32% at quarter end compared to 36, 3% as of the end of the third quarter of 2022.

For the 12 months ending December 31, 2022, we generated a return on equity of 26, 8%, which represented our seventh consecutive quarter with a return on equity above 25%.

We ended the quarter with a strong financial position, including $2 $2 billion in stockholders equity by 22% year over year increase and a $1 $2 billion in total liquidity, including $353 $3 million in cash.

In the fourth quarter, we paid off the $165 million outstanding on our revolving credit facility and have no borrowers no borrowings outstanding on the 800 million dollar facility that does not mature until April 2026.

Additionally, we have no senior debt maturities for five years, providing us ample flexibility with our leverage management.

Now turning to guidance.

The homebuilding industry last year was impacted with increasing interest rates rising costs declining asps and deteriorating demand we have begun to see mortgage rates stabilizing input cost proceed and homebuyer traffic on sites increase.

Yeah.

For the first and second quarters, we expect our deliveries to be below prior year levels. This expected decrease was due to the fact that we delayed community openings started fewer homes in the second half of 2022 as the market softened and successfully executed in the fourth quarter on our strategy of prioritizing the sale of near term deliveries.

Leaving us with a limited number of completed spec homes. As a result, we will simply have fewer homes available for delivery in the first two quarters of 2023, while we start new homes with lower input costs for delivery in the second half of 2023.

For the full year 2023, we expect our deliveries to be in the range of 7000 to 8000 homes in our home sales revenues to be in the range of $2 6 billion to $3 $1 billion.

In closing, we believe that our spec based model dedicated focus on are on more affordable homes.

Graphic footprint and solid balance sheet positions us well to navigate the current market as well as thrive and improved economic environments.

With that I'll open the line for questions operator.

Thank you very much we will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

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At this time, we will pause momentarily to assemble our roster.

Today's first question comes from Carl Reichardt with B P. I G. Karl. Please go ahead, thanks and afternoon everybody.

I wanted to add to that.

Hey, I wanted to ask a regional question.

Southeast orders came down quite a bit I think 70% in our store count was flat.

Just curious.

The performance there can you talk a little bit about what happened there and then following onto that.

From the West and Mountain region perspective, you've got a lot of lots backlog stand up in the west. So is the focus, especially in the first half of the year going to be on working through lots and houses in the west.

Hey, Carl This is David I would say you know to answer your question on the southeast community Count was flat and sales were down but that was really a function of the south east throughout the first half of the year was still strong on sales leaving.

Leaving 'twenty one into 'twenty two we're strong on sale that we just didn't have any product and so we just didn't have enough near term completing spectra and completed specs really available in those markets for us to be selling in Q4. So you saw that drop off even though we've got some open communities on the West Coast you had the first half of this year as sales have come down.

You're going to see us work through some of that existing inventory that was started earlier last year and that's that's the stuff that we started at a higher direct costs and we've seen those prices come down and we'll work through that inventory here. The first half of 'twenty to 'twenty three.

Okay. Thanks, Dave So southeast and is it a function more of the product availability as opposed to in excess of the elevated can rate compared to the rest of the company.

Correct, correct, though we definitely still see the southeast being a strong region has been just more a function of homes under construction. Okay. And then one second one you talked a little bit about the trends continuing in January from from the improvement as you saw through the quarter and in <unk> would you describe what youre seeing in January as better than what you'd expect seasonally.

First then or about what you'd expect seasonally.

Well in in terms of seasonally I mean, we're certainly seeing a.

An improvement in sales traffic and overall sales and so whether you whether you call it seasonally or just an improvement because of the lower interest rates that are now in the market it's hard to tell.

But you know the easiest thing to say is.

January is improving over December and from what we can see we expect that to continue as we go forward.

Great I appreciate it thanks.

Sure.

The next question comes from Alan Ratner with Zelman <unk> Associates. Please go ahead.

Hey, guys. Good afternoon. Thanks for all the great info a lot of interesting comments, there first I'd love to drill in a little bit on some of your comments on pricing and incentives it sounds like.

If I'm interpreting your comments correctly that you think that you know pricing or net pricing has effectively bottomed here given that you're kind of guiding for incentives to to decline as the year goes on so first of all I want to make sure I'm understanding that correctly and assuming I am.

Does that imply that you feel like among your your cohort of buyers that affordability is kind of where it needs to be two to generate volume growth in the business over yeah, obviously a longer time.

Great.

You know Alan in the in the fourth quarter, we were really.

Addressing affordability across.

All subdivisions and we had forward commitments, we had rate buy down programs available. We don't have any of those in place now.

We obviously still helped some of our buyers on a case by case basis, but has as rates have have come down we don't see the need that we have to do it across our entire portfolio.

And to that point have there been any offsets to that that we should think about as far as pricing like them, they're being based price adjustments or anything I'm just trying to think like obviously incentives is one way you are.

Tac the affordability equation, but home prices have gone up quite a bit over the last several years. So.

Are you keeping the base price like even as you're you're pulling back on those those mortgage incentives that you had been offering.

Well typically in an existing community, we won't be dropping we won't be dropping based prices, but as we're as we're opening new communities. It becomes far easier to adjust based prices. We don't have any backlog and more importantly, we're bringing out homes that have lower input costs in them then.

Something that would have been started quite some time ago.

But in general is as we're seeing that are.

In the fourth quarter, our incentives went up pretty significantly over what we had in the third quarter and what we would normally see.

A significant component of that related to really the company wide.

Mortgage programs that we were offering.

Perfect Okay.

I appreciate that.

You brought up the input cost, which was kind of a second question I was I was going to.

Are you guys.

And if I heard you correctly I think you said that your direct costs are down about $16000 from the peak.

Correct me, if I'm wrong on that but.

Generally I think your commentary.

It sounds more bullish than I think a lot of other builders up to this point a lot of beacon and kind of highlighting their optimism that they will be able to see some cost relief as twenty-three goes on but I think you guys are probably you know.

The first to kind of highlight significant reductions and I'm curious if you could kind of split that out a little bit like how much of that is lumber versus other inputs or labor that you've actually seen some relief on.

Yeah round numbers, it's around two thirds of it on lumber and the balance on some of the other areas.

Areas and.

Hence two and some of the backend areas. We've got released but really a lot more on the front end, where things have slowed down on starts across the board and people are not nearly as busy as they were so we're getting that potential reduction there where people are.

More readily available to come in and perform.

Our pricing so it's an ongoing fee.

Focus of ours and not only in the division, but regionally and then from a corporate team as well and I think our team has done a really good job of getting the input costs down because candidly they were just way too high.

At the beginning and middle of last year.

Got it that's helpful. So.

That's 16000, if I just look at Iraq, and rough math here. Your average price in backlog is about 370000, so call. It a 4% margin impact all else equal is that how we should think about your comments as far as you know once you get past the first half of the year you see.

Margin lifting sequentially.

Is that 400 basis points kind of assuming all else equal pricing stays flat.

Everything else stays flat, what we should expect to see.

You hit it right on the head.

Did the math and Thats exactly yet so yes, okay perfect.

Scott Best of luck.

Uh huh.

Yeah.

The next question comes from Jay Mccanless with Wedbush. Please go ahead.

Hey, good afternoon.

Just a couple of questions on the guidance for 'twenty three.

You know if you average out the community count to around $2 25 to 30, and then the closings the midpoint of the closings. It looks like you guys are expecting maybe less than three closings per month for.

For fiscal 'twenty, three versus being anywhere between three and four really since fiscal 18 I guess.

It seems it seems a bit cautious a bit hesitant maybe talk us through why why you all are growing at such a low closure, what we perceive to be a relatively low closing guidance to start the year.

Yeah, I think it's a lot of that is just based on where we sit today with homes under construction.

We significantly reduced the number of starts in the second half of the year, we started picking them up.

November and December and we've continued those into January so when we look at it.

Part of it is we just need to build back up.

And so in the in the first half of the year, our deliveries will be down and then they'll start.

Increasing and then as we as we look at that we'll have at the end of the year, we will have more houses under construction and by that time.

We'll be at a at a higher run rate, but as.

As we just look at balancing out the first half and second half of the year.

Where we see that we'll have the available homes to deliver.

Okay.

Basically just a timing issue because you gotta get communities opened and you Gotta get more specs up I guess, what what were your total homes under construction at year end and how many of those respects.

Oh I'm sorry.

We don't disclose the number of homes that we have under construction at any given time by nearly 100% of them are spec.

That's always been our model.

Okay.

And then just the other than our backlog homes.

Go ahead.

I guess the other question.

Just thinking about price I mean, it looks like kind of a drift down through the year I mean, what.

With these newer smaller base prices I mean are you guys thinking you'll have a drift somewhere down by like 5% to 10% by year end or is it going to be something smaller than that but I know that the midpoint of the guidance works out to 380000, but if if you've already.

<unk> started to put in some of these lower priced homes and lower priced four plans just kind of wondering where were average prices shut in in Europe .

Well I think part of it is in it.

And it's.

It's hard because of our two brands and there's obviously a big pricing disparity between them.

And when we look at it last year, our century complete brand really group.

And so we think that that is well set up for the affordability challenges that we saw last year and obviously as prices have gone up.

To a certain extent so there's.

Some of that is a higher <unk>.

Percentage of century complete as well as we pivoted a number of our plans to smaller plans in subdivisions.

And particularly on new communities, where we've done that to get the overall price point down. So it's really a combination of those two things.

Okay, Great I appreciate it thanks for taking my questions.

Okay.

The next question comes from Michael Rehaut with J P. Morgan. Please go ahead.

Thanks, and good afternoon, everyone.

Wanted to just circle back and make sure.

Thinking about the gross margins correctly and I appreciate the additional color on our mountains question around the 400 basis point Matt.

When you originally though you know when you described that you were saying that you.

You could think that.

You know.

You expect second quarter to improve and eventually I guess in the back half the second half of the year and get back to more normalized levels.

When you look at normal I mean, I guess the question is what's what do you consider normalized gross margin levels, because just a quick look.

You know from 2016 to 'twenty 'twenty, you averaged 18.3%, including interest amortization so after interest amortization.

Hum.

Even with the 400 basis point, Matt that's putting you to like 22, 5%.

Just wanted to get a sense of of you know.

If indeed, that's what you're thinking again to get to that 22, 23% range by year end. If that's what you consider the new normal or if there's other factors we should consider.

Hey, Mike It's Dave.

We've talked about this on past calls in terms of how margins have been all over the board over the last year or two they've obviously swung in our favor and now they're another a little bit against us being you know call. It 18, and a half the end of <unk> and in Q4.

As we've talked about before here and we think theres been a lot of improvements in our pricing our scale, our plans and our efficiencies our cycle times and such that if we start getting all of that back into a good rhythm in Q4.

We ought to be building at a more normalized margin, which will be higher than what we had in the past where you're calling something on the 18 and 19% range and now the new norm is hopefully going to be something in that low twenties range, but I think that's gonna be a result of a lot of the stuff we put in place over the past several years.

Okay. That's helpful. So yeah something.

Yeah, 'twenty, one 'twenty two 'twenty three that type of range is kind of what you're thinking.

Yes.

Right. Okay. Secondly, appreciate that secondly.

Just kind of looking a little closer to turn them on the first quarter.

I guess you kind of said that you expect gross margins again after.

Or inclusive of interest to be similar to <unk>.

<unk> was 18.4.

Hmm.

Can you give us any directional guidance on the on the closings, obviously, you're talking about seven to 8000 for the full year.

You kind of talk to you know the issue that in the first half of the year, you'll be working off a very low backlogs and as a result of your strategic approach past couple of quarters.

How should we think about closings in terms of any type of range or you know, perhaps you know first half second half split.

I think that'd be pretty helpful. Just for modeling.

Yeah, I think that youre going to see Q1, being our lowest closing quarter of the year and then they should grow sequentially as not only do we work through our backlog when we start bringing online a lot of the homes that we saw.

Started construction on here in December January that we'd expect to start construction on a through.

Through the balance of Q1, and Q2 that we could still deliver into Q3 and Q4 and so I think it's gonna be backend weighted to third and fourth quarters, but it will get back to a little bit more of a traditional trend for us, whereas the first quarter is your lowest closing quarter and then it begins to grow through the course of the year.

Okay, Great one last one if I could sneak it in just around how to think about SG&A, obviously, you've had a lot of success over the years.

Around significantly.

Hmm is gonna be you know a more challenging year obviously.

Anything in terms of just you know.

No variable expense are or any ways to think about the type of deleveraging that we should be expecting.

I think next year, you have deleveraging gets a little bit more difficult just because you've got closings of revenue.

Coming down and we've got a fairly.

Fairly large national footprint across 18 different states that we're managing our we've been running about a 65 35 split.

On a fixed versus variable basis, I think we'd probably continue that that split.

Over the course of the full year and as we've been you know we've been prone to act quickly in the past you know we work with whether it's staffing adjustments division adjustments or whatever the case is what we'll look for any opportunity we have to find that deleveraging opportunity within the SG&A categories and put more to the bottom line, but we acknowledge that next year.

It gets a little more difficult with a lora Lora revenue line.

Great.

Thank you.

As a reminder to ask a question you May Press Star then one.

The next question comes from Alex Barron with housing Research Center. Please go ahead.

Yes, Thank you gentlemen.

I was wanted to see if you guys could talk about improvement in build times, you know what how how much the build times get extend it out to you know last year end.

Where do you feel they are today, and where where do you think there'll be you know I don't know six months from now.

So.

It's basically a mixed bag Alex.

Looking back over the past 12 months.

And depending on the particular market.

That particular plan and all the cycle times vary quite significantly with the supply chain challenges of labor challenges at all going forward, though that's a real focus to reduce that down as I mentioned earlier in the prepared remarks, the supply chain is easing we're seeing more of it.

<unk> ability of labor and everything else. So all of that are great.

As we look at our new templates going forward on homes that were starting now versus homes that were started.

Let's say at the peak pricing six months ago, we're looking at a 57 day reduction on cycle times on average there's variations from that but on average. We're also shooting for as a maximum as a round number of a six month build time.

In some areas, we can do much better than that other areas, it's still a long dated but we're.

We're getting great traction.

Traction on getting our cycle times reduced where we're gonna be at the end of this year you know I think it's going to be back to a more normalized basis on what you know pre pandemic cycle times, where it's going to be closer to that type of scenario.

But it's getting better.

Great great good to hear.

And then on the subject of of course, you know obviously at the beginning of last year first half of last year everybody was.

Up up and away in terms of home prices and home costs.

And so I imagine you know a lot of those those specs that were started.

Had high cost and as you mentioned and you're now starting to achieve lower costs on the new stuff.

But I'm just kind of curious you know how far along do you guys think you are through Flushing out the high cost inventory such.

Such that you don't need to focus so much on selling that they can focus more on selling the lower cost stuff going forward.

Well, if we have homes listed for sale, we're focused on selling them I think that youre going to see in the first quarter, we're still going to have some of those older homes that we started last year at higher direct cost youre going to see those coming through and that's what's weighing on our gross margin. So should we think that you know Q1 is going to be.

And similar similar range compared to what Q4 was.

And so you will get through a lot of them probably in Q1, but I think you're going to see him bleed into Q2, and she's going to take us some time to work through all of that inventory, but we're definitely focused on building new homes that have better cost affordable better pricing and will produce a better margins for us in the latter half of the year.

<unk>.

Got it and if I could ask one last one so.

So you guys mentioned that pretty much all the homes you start or specs.

Our cycle times are going to be down and I think I just heard you say close to 60 days or something on the new stuff.

So what what about that's the projected thousands or or.

Or the average what about the average price or the average size of those of that inventory that youre, creating is that.

Generally speaking smaller cheaper houses or or is it the same type of stuff as before.

Generally.

It would be smaller or similar but but generally just a little bit smaller and how we are doing that is in our plan library, we may not be building the largest plan.

In our particular series or whatever to get it down from a square footage standpoint affordability standpoint.

No.

As a trend it would be smaller homes at a lower price point.

Okay, great well best of luck, guys and I'll get back in the queue.

Thanks, Alex.

The next question is a follow up from Michael Rehaut with J P. Morgan. Please go ahead.

Hey, Thanks, a lot it just wanted to get any more granular sense, if you're able to provide it on the the level of improvement that you saw.

In terms of describing.

Remember in December well above October and further improvement in January .

You know if it could be either on a year over year, you know what the year over year declines had done or even sales pace.

Any additional color would be helpful. There.

Well you know like some of it is just anecdotal from a standpoint of where our focus is and.

As we've made it very clear our focus is on completing completing homes and if something is.

Further downstream in terms of delivery, we've not been incentivizing those homes. So it's when we look at it it's really more a function of have we been able to sell all the homes that we've prioritized for sale.

And that's how we're really quantifying it that and really the traffic and the amount of incentives that we have to provide and so as we as we've said is the.

As the quarter progressed things improve which means that we were selling more of the near term delivery houses and we were doing it with less incentives same thing has continued into January so.

So from our standpoint, it's not really a focus on.

The number of houses that we're selling but it is making sure that we're selling the proper homes.

Okay.

Alright.

I guess secondly.

You're saying that you expect in incentives to moderate a bit.

And any way to how to think about that from a <unk>.

Quantification standpoint, I mean, you talked about incentives, reaching 900 basis points.

As part of your <unk> deliveries are so up 600 basis points sequentially.

Is that expectation for for incentives moderating a bit something that you've already seen in your January orders.

And moderating a bit would that be a couple of hundred basis points or.

It's something a little more than that or less than that.

Well as as we said our historical norm has been around 300 basis points.

It spiked in 900 basis points and.

Q4, and a significant component of that where the the forward commitments that we were we were purchasing really across our entire company. So when we look at it we've taken that away and so that's probably.

Somewhere that impacted our margins somewhere between a point and a half and two points. So.

We don't expect to get back to 300 basis points of incentives overnight, but we're moving in that direction. So.

To say, we're down a couple of hundred basis points is probably is probably where we are.

Great. Thanks, so much.

Sure.

This concludes our question and answer session I would like to turn the conference back over to Dale and Geoff King for any closing remarks.

Thank you operator, I'd like to take this opportunity to once again, thank all of our team members for their incredible work and continued dedication to our valued homebuyers.

I'd also like to thank our investors for their time today. We appreciate your continued support and investment and look forward to speaking to you again next quarter.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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