Q2 2019 Earnings Call
Good afternoon, and welcome to M.D.C. Holdings, 2019 second quarter Conference call.
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At this time I'd like to turn the conference call over to Mr., Derek Kimberly director of FCC reporting. Please go ahead.
Thank you.
Good morning, ladies and gentlemen, and welcome to NBC Holdings' 2019 second quarter earnings Conference call.
On the call with me today, I have Larry Mizel, Chairman and Chief Executive Officer, and Bob Martin Chief Financial Officer.
At this time all participants are in a listen only mode. After finishing our prepared remarks, we will conduct a question and answer session at which time, we request that participants limit themselves to one question and one follow up question.
Please note that this conference is being recorded and will be available for replay.
For information on how to access the replay please visit our website at MDC Holdings Dot com.
Before turning the call over to Larry It should be noted that certain statements made during this conference call, including those related to Mdcs business financial condition results of operation cash flows strategies and prospects and responses to questions may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These statements involve known and unknown risks uncertainties and other factors that may cause the company's actual results performance or achievements to be materially different from the results performance or achievements expressed or implied by the forward looking statements.
These and other factors that could impact the company's actual performance are set forth in the company's second quarter 2019 Form 10-Q , which will be filed with the SEC later today.
It should also be noted that NCC regulation G requires that certain information accompany the use of non-GAAP financial measures any information required by regulation G is posted on our website with our webcast slides.
And now I will turn the call over to Mr. mizel for his opening remarks.
Good morning, and thank you for joining US today. This call is we go over our results for the second quarter of 2019.
Discuss current market trends and provide some insight into our company strategy and outlook.
M.D.C. turned in another strong performance in the second quarter of 2019.
Generating net income of 55 million or 86 cents per diluted share.
We released selected financial results earlier this month.
Several of which bear repeating.
Net new orders for the quarter were up 32%.
As compared to last year.
Driven by the absorption pace of 4.1 homes per community per month.
As a result unit backlog increased 7%.
Sure the highest level in 13 years.
Additionally.
Our quarter end community count grew 14%.
To 187 active projects.
Our home building gross margins exceeded 19%.
As we anticipated in our pre announcement.
Coming in at 19.5%.
Which is 40 basis points higher than last year.
These highlights serve as further evidence that the investments we made over the last several years in our strategic shift to more affordable product.
Are producing great results today and have positioned us for the future.
The order strength, we experienced.
In the quarter was due in large part Jordan move down in price point, where demand continues to out pace.
Supply.
This is a trend we expect to continue.
Given the lower level of new home construction activity in this market segment and the increase in home prices, we have seen for more traditional products.
This is why we are committed to focus our land acquisition efforts on this market segment.
In fact, 65%.
Oh, the lots we acquired in the second quarter are slated to become future seasons communities.
For one of our other more affordable price collections.
The favorable market dynamics and the more affordable housing segment.
I have also given us a solid environment to manage pricing and incentives.
This is evidenced by the margin improvement we've achieved over the last few years.
Through careful planning and thoughtful design.
We have created attractive reasonably priced communities that appeal to a number of buyer segments and yield attractive gross margins.
Our margin to further been enhanced by or build to order business model.
Which allows us to capture additional higher margin revenues from the options and upgrades or buyers, what it or home galleries.
Well the recent decline in mortgage rates slightly served as a tailwind for both demand and pricing in the second quarter, we believe our market positioning and the value proposition. We offer homebuyers were also important factors in driving our positive results.
Hey third benefit.
Through our shift to more affordable product has been the favorable impact it has on our construction cycle times, which decreased 7% year over year in the second quarter.
This important improvement in cycle time allows us to turn or projects more quickly providing a lift to our return metrics.
To sum up.
I'm very pleased with our performance this quarter.
We generated strong profits.
Sold homes at an elevated pace and ended the quarter with the backlog.
That sets us up nicely for a strong finish to the year.
In addition, we grew our community count by double digits versus last year.
Giving us a platform for additional growth in the future.
We have been able to achieve these successes.
Well, maintaining one of the strongest balance sheets in the industry.
We have also consistently paid out a healthy dividend to our shareholders.
In short.
I believe we're hitting on all cylinders at MDC.
And I'm very excited about what the future holds.
With that in mind.
I'd like to turn it over to Bob for more in depth look at our results for this quarter.
Thank you Larry and good morning, everyone.
As you can tell from Larry's comments, our Q2 results exceeded the expectations set forth started the quarter.
Even so our consolidated pre tax income for the second quarter decreased by 3% year over year to $74.3 million.
Homebuilding pre tax income for the 2019 second quarter was down only slightly year over year to $61.6 million as a decrease in homebuilding gross profit and an increase in selling general and administrative costs were mostly offset by an increase in interest and other income.
Financial services pre tax income decreased by 11% year over year to $12.7 million.
The decrease was due mostly to $1.4 million of gains recognized in the same period in the prior year on the sale of conventional mortgage servicing rights as well as the year over year decrease in the servicing income related to those loans.
These decreases in financial services pre tax income were partially offset by $2.3 million of net gains on equity securities in the second quarter of 2019 compared to $1.3 million for the second quarter of 2018.
Net income for the 2018 second quarter decreased by 15% to $54.6 million.
Or 86 cents per diluted share.
Our tax rate increased from 16.6% for the 2018 second quarter to 26.6% for the 2019 second quarter.
The year over year increase was mostly attributable to energy tax credits, which provided a benefit to us last year, but not this year.
The 26.6% rate.
It was above the estimated 24% to 26% range. We provided during our last call primarily due to additional tax expense on stock options that were exercised during the quarter.
Our wholesale revenues for the 2018 second quarter were down 2% year over year to $732.8 million due to a 2% decrease in the average selling price of homes delivered.
Our backlog conversion rate was 43%, which was at the top end of the expected range for Q2 that we discussed on our previous call at higher than the 40% achieved a year ago.
The improvement in backlog conversion was aided by better cycle times, which were achieved in part due to a higher mix of more affordable product.
For the second quarter of 2019, 52% of our closings came from product lines, we characterize as our more affordable product offerings.
As compared to 40% a year ago.
Backlog conversion for the quarter was also helped by year over year increase in the number of spec homes, we sold and closed during the quarter.
Furthermore, last year cycle times, and the mountain region were negatively impacted by a product defect issue involving I joist in Colorado, but that issue has since been resolved and did not impact current your closings.
On the other hand backlog conversion in our West segment was negatively impacted in the current year buyer, Nevada market due to utility company delays that pushed a number of closings out of the second quarter of 2019.
Looking forward to the third quarter, we are targeting a backlog conversion rate in the 39% to 41% range.
Compared to the 40% backlog conversion rate, we achieved in the third quarter of 2018.
The potential for a lower conversion rate is primarily a result of the strong sales we experienced throughout the 2019 second quarter. As these homes are in our quarter end backlog, but most are unlikely to close in the third quarter.
Also we anticipate a decrease of between 5% and 10% in average selling price from Q2 2019 to Q3 2019.
This is due largely to mix, including the continued increase in the percentage of our closings coming from more affordable product lines.
Geographically, we expected temporary spike in the percentage of closings coming from Nevada. This is the result of the delays I mentioned earlier, which shifted the expected closing date for a number of more affordable units in Nevada from Q2 to Q3.
We also expect an unusually low number of closings from our more expensive subdivisions in southern California during Q3.
However, our Q4 average selling price should rebound somewhat as the mix of closings in southern California, and Nevada, just back to a more typical level.
Okay.
Our gross margin from home sales was up 40 basis points year over year to 19.5%.
This increase was driven by a $1.4 million or positive warranty adjustment and a decrease in the amount of capitalized interest in cost of sales as a percentage of home sales revenues.
Our gross margin in backlog to end the quarter remained healthy.
Though at a level slightly below the 2018 second quarter gross margin of 19.5%.
Note that the $1.4 million positive warranty adjustment I, just mentioned added 20 basis points to gross margin for the second quarter closings, which helps explain why backlog gross margin is slightly lower than the closings.
As always remember that the gross margin level, we actually realized in future periods could be impacted by cost increases cancellations price or incentive changes impairments reserve adjustments and other factors.
Our total dollars DNA expense for the 2019 second quarter was up $1.1 million from the 2018 second quarter.
The increase is mostly due to a $2.3 million increase in marketing expenses caused by additional costs incurred to open advertise and staff are significant year over year increase in active subdivision count.
In contrast, our general administrative expense decreased by $1.1 million, resulting from year over year decreases in the amount of bonus and stock based compensation expense recognized during the second quarter.
These decreases were partially offset by an increase in salaries and benefits due to higher average head count.
Relative to Q1, 2019, our general and administrative expense decreased by $3.3 million.
I believe that this decrease is likely temporary as I expect Q3, 2019, and general and administrative expense to slightly exceed the $42.6 million we experienced in Q1.
However, the amount we ultimately recognize.
In general and administrative expense for Q3 will depend on the timing and magnitude of various accruals and other factors.
The dollar value of our net orders increased 25% year over year to $967.9 million driven by a 32% increase in unit net orders that was slightly offset by a 6% decrease in average selling price.
The demand for our more affordable product lines remained strong during the second quarter of 2019 accounting for 63% of our net new orders compared to 40 or 52% a year ago.
The increase was largely attributable to the continued success of our seasons collection.
Which alone accounted for 41% of our net new orders in the 2019 second quarter.
The increased prominence of our more affordable product lines across most of our markets contributed to the year over year decrease in the average price of our net orders.
Additionally, we saw a shift in the mix of our net orders to Florida, which has our lowest average selling price.
Our monthly absorption rate of 4.1 was a 12% increase from the 2018 second quarter.
It was our highest second quarter absorption pace since 2005.
This increase was driven by our mountain in these segments.
While our west segment experienced a small year over year decrease in its absorption rate. It continues to have the highest absolute rate overall.
Our second quarter 2019 unit net orders further benefited from a 19% year over year increase in average active subdivisions.
We ended the quarter with an estimated sales value for our homes and backlog of $1.93 billion, which was down 1% year over year.
This decrease was driven by a lower average selling price of homes and backlog that was mostly offset by an increase in the number of homes in backlog to its highest level since 2006.
Active subdivision count was at 180 710 to 2018 second quarter up 14% from 164 a year ago.
We saw an increased number of active subdivisions in both the mountain west segments with the West segment experiencing the largest increase.
Active subdivisions in the segment were flat year over year.
Oregon, our newest market finished the quarter with three active communities compared with none a year ago.
Looking at the graph on the right. The number soon to be active communities only exceeded the number of soon to be inactive communities by two at June thirtyth, whereas the prior three quarters had a larger difference.
This indicates a strong possibility that any increase in subdivision count from the end of Q2 to the end of Q3 will be smaller than the increases we saw in the first two quarters of the year.
Nonetheless based on the progress we have already made we are on track to end 2019 with community growth community count growth of 10% or greater from where we started the year.
So the 2019 second quarter, we acquired 2138 lots for roughly $141 million with an additional $87 million of spend on development costs.
Approximately 47% of the lots acquired in the second quarter were finished lots and about 65% were lots intended for our more affordable homes.
2019 second quarter land acquisition spend was notably higher than the first quarter of 2019, as we began to Reaccelerate our land acquisition activities. Following our positive start to the spring selling season in the first quarter.
We expect this trend to continue into the third quarter given the level of demand we have seen.
For now we are pleased to see that the total number of lots. We controlled is again rising with our balance at the end of the second quarter of 2019 modestly higher than where we started the quarter.
Net homebuilding debt to capital was only 23.4% at the end of the second quarter down 290 basis points from a year ago, and clearly demonstrating our firm commitment to maintaining a strong balance sheet.
Furthermore, our liquidity to end the 2019 second quarter was up 29% year over year to $1.47 billion, providing us with significant resources to fund continued growth.
Our debt ratings are important to us and we run our company in a way that we believe is consistent with investment grade principles to that end. We are pleased that standard and poors revised their outlook on mdcs rating to positive during the quarter recognizing the significant progress we have made in growing our company and improving our credit metrics.
With that I will now turn the call back to the operator for our question and answer session.
Ladies and gentlemen, we will now begin the question and answer session to ask a question you May Press Star and then one I have touched on phones. If you are using a speakerphone, we do as you. Please pick up your handset before pressing the keys.
To answer your questions you May press star two.
Again that is star and then one to ask a question.
At this time, we will pause momentarily to assemble the roster.
Our first question today comes from John Lovallo from Bank of America. Please go ahead with your question.
Hi, This is actually spent check off and on for John . Thanks for the question I wanted to start with the gross margin I understand that you guys are saying that excluding the warranty and would have been about 19.3%.
For two Q and I guess, just looking at historically we've seen.
Kind of three Q3 gross margin increased sequentially and I guess my understanding of slightly lower would be roughly that 19.3% as well.
So I guess is there anything else to call out there.
Anything else or kind of help bridge the gap there. Thanks.
Thanks, Spencer I really don't think there is anything else.
To call out I think given where demand has been so it's a great environment for pricing and incentives, which is helpful. Overall to the margin picture. So I think your characterization is is a good one.
Okay. Thanks, and then with regards to as China.
It was relatively flat on a quarter over quarter basis.
On a dollar basis excuse me. Despite you know maybe another 85 million in revenue.
Is there anything else like to call out there in July of its yes.
So good.
Yes, I think theres.
Theres various accruals that come into play for a lot of different reasons could be stock comp could be.
Could the bonus comp.
So I think probably the biggest point.
Is that if I'm looking at the DNA piece.
I think our run rate is probably closer to what we experienced in Q1, which was 42.6, maybe even a little bit above that.
As we look forward in into Q3.
Whereas commissions, obviously varies pretty directly with the revenue part and then the the marketing piece.
Probably will be up year over year continue to be up year over year, because we have more communities and were opening new communities.
Very helpful. Thanks, guys and good luck.
Our next question comes from Stephen Kim from Evercore ISI. Please go ahead with your question.
Hey, guys, thanks, and good quarter.
Wanted to start off by asking you a little bit about cadence moving from.
Three q. actually into Fourq, you why you Didnt, specifically give guidance on for Q and I understand that.
My question is.
The the comments you made about the turnover rate in Threeq, you would seem to imply that we could expect a pretty significant pickup in the turnover rate in fourq or certainly some some some nights deliveries.
Potentially in for Q I was wondering if it's first of all that is consistent with the way you see things and then secondly, if that could have knock on effects on your SGN a.
At the Investor Day, you talked about an SGN a rate of 11% or lower for the year lots changed since then but your gross margin certainly coming in line with what you had talked about then and a lot of your other strategic initiatives or are firing on all cylinders and so wondering how you would characterize at 11% SGN and whether or not for Q may play a role and allowing you to hit it.
Yes.
And you're right, we didnt didn't say.
Specifically on Q4, what we thought was going to happen, but I think your your points are valid said another way I think.
There is the potential for.
Closings to be very heavily weighted towards Q4.
And of course, that's that's a risk when you have so much rate weighting towards Q4, given the strength that we've seen in sales recently in Q2.
So that does have the potential to significantly drive down the senior rate in Q4.
But but again.
I would caution that's without much volume in Q4.
We're certainly keeping a very close on it we know that there is some risk there so.
The other thing I guess to note about the SG nave fronts.
As much as we think that 11% is a good target for us.
Generally speaking.
Sometimes you you get punished by your own success for example, the better we do.
From a revenue standpoint, we have certain amounts of stock based comp that reach elevated levels and contribute more heavily to DNA. So some of the reason why we've seen that DNA rate be a little bit higher is simply because we're.
Successful and therefore, there is some compensation.
Accruals that come along with it.
Got it.
That being said I imagine you contemplate those things when you sort of talk about long term planning around SGN a right. I mean, you did make an assumption for stock based comp within that 11% when you gave that right.
You too at some level.
But not necessarily with for example, the maximum level.
Sure Okay, Great and then next question relates to Fandstan could you give us the actual numbers for land spend acquisition and development in the quarter and then just to put it into some sort of context for us.
You've been undergoing this strategic initiative to.
By a lot of land appropriate for your move down strategy.
That obviously has has yielded a lot of fruit and it seems like.
We might be getting to the point in time, where your land spend could generally decline as a percentage of revenues.
But wanted to achieve see if you could give us some handle on whether we generally should be expecting land spend to be a little less as we go forward.
From what it had been as you'd been starting to make this shift.
In in the new products.
Yes, So I guess first of all we did give a number for the land spend this quarter. So it was $141 million of acquisition then on top of that.
We had $87 million.
Development costs.
On a year ago, those same numbers were 188 million.
And 78 million, so not too far off from what we had this year.
The other comment is in Q3, I do expect it to continue to pick up a little bit.
Q3 of last year.
It was about $245 million in total so.
I don't think it's unreasonable to think that we could actually be above what our land spend was.
A year ago in Q3.
So I think stay tuned on that one I think we are still looking very much to grow considering what we've already seen.
Occur in the market and as long as we continue to see strong demand, we're going to be thinking about buying subdivisions and all of our markets.
Our next question comes from.
Truman Patterson from Wells Fargo. Please go with your question.
Hey, good morning, guys nice quarter.
Just wanted to see if you guys have updated your your kind of target or for the seasons and cityscape. Your your entry level product you know the second quarter, you guys bought 65%.
Of your lots were for the more affordable product previously I think you guys have broken out a 40% to 50% target.
Just seeing if you guys have.
Updated that at all.
I think just to clarify for our overall more affordable offerings.
I think 50% to 60% is the range. So that would include a season's landmark cityscapes our urban collection.
So that's that's the range we're targeting our recent land acquisition, it's been at 65%. So if anything I could see it being a little bit higher than that most recently for orders it's been 63% in the worst most recent quarter. So I would think that anything you'd be slightly above that.
Okay. Okay, and then just following up on that.
Your affordable rollout by region, I guess, which region has the most you know leverage to the seasons and the cityscape product and how should we think about the penetration moving forward any regions going to see outsized growth in the affordable product.
Yes, I mean it it runs the gamut for example in our Orlando market were almost 100% seasons.
In other markets were like a Colorado for example, it's a lesser percentage.
And thats, because we have a deeper market penetration overall.
I don't know if I would highlight.
One region over the other I think overall continues to be a focus for our company I think you should continue to expect that overall for the company.
It's going to be.
The majority of what we do from a land acquisition standpoint is the more affordable product.
And then finally I would note that it's not that we're looking to necessarily reduce the number of units that were doing.
On some of the move up product that's been very successful for us in the past. It's just that we expect a lower rate of growth for that product in a in a greater rate of growth.
For a more affordable segments. So we're not looking to lose share of other product that's been more traditional for us.
Okay, Okay, and if I could sneak one more in.
Could you discuss the margin profile on some of your newer entry level or affordable communities that opened recently in the past quarter relative to once it opened a year ago embedded in that is.
Land competition heating up where you can't find is attractive product et cetera.
Or land.
I don't know that I would say that.
Yes, you almost have to look at it market by market because one market can be a much different margin profile than another market.
I would still say us it's been.
A good margin profile.
For us overall, I don't think we're losing margin because of it.
I think your point is a good one I think there is more competition in the space and that's something that.
We have to keep an eye on just like all of our our costs, we have to keep an eye on land costs and therefore, we have to be very focused on making sure. We are taking advantage of of price increases.
When appropriate.
Okay. Thank you.
Sure.
Our next question comes from Michael Rehaut from JP Morgan. Please go ahead with your question.
Thanks.
Good afternoon, everyone and good morning in Colorado.
The first question just want to make sure I have some of the details right here. So for the full year or you are looking for and SGN nay of roughly 11% is that right Bob.
Well, we didnt reiterate that guidance I think the question was just.
More about hey, that's a that's what the target was.
When we talked about it during investor day, and what what it would take to get there. So I think what it would take to get there is.
Seeing.
To add to Steve's point a significant.
Increasing our backlog conversion rate in Q4 of 2019.
And.
Yet to be determined.
Whether or not that will happen or not obviously, we've not provided official guidance on that.
Okay. So in other words, you know all else equal given your expected backlog conversion in the third quarter.
Should we be expecting the s. DNA as a percent of revenue to continue to be a little bit higher year over year as we've seen in the first two quarters of this year.
Yes, I think if if.
Of course, depending upon what your revenue assumptions are.
Q3, we put that 39 too.
41% backlog conversion guidance with our ASV coming down.
The the rate of DNA.
Should be about.
Closer to that $42.6 million number that we had in Q1 just for the DNA number.
So thats going to pop up a little bit.
In.
Q3 relative to where we were in Q2.
Mhm.
Okay.
And the Asap, you said, you expect to be down 5% to 10%.
From two Q1 9.
Is that right and then rebound to a degree in for Q.
Right that's right.
Okay and can you give us any sense of in terms of the rebound in Fourq you should get back to you on that for 80 ish type range that we saw on average in the first half of the year or would it not fully get back all that way.
I don't think you it fully get back there because remember I think some of the decreases is more permanent because we are increasingly.
Seeing more mix towards a more affordable products.
And we are seeing.
Markets like Florida.
In Arizona, getting a a lot of orders.
And I think we'll see a little bit of a shift in mix to those markets.
So going all the way back to Brady I don't I don't think is is what I would expect.
Yes somewhere in the middle it's hard to tell because of those clinics and where you see different things coming in.
Right right and just lastly, I just have one more detailed question and that kind of a big picture question. The tax rate after three Q and or the full year, what how should we think about that.
Yes that 24% to 26% that we've talked about.
And that excludes discrete items I think is still good overall, maybe a little bit on the higher side of that.
It's always tricky to tell.
Exactly what discrete items will come through the quarter.
By definition, they're not something you can predict because of where the stock price goes or the timing of.
VX exercise of certain options, which was was the case in prior quarters, so kind of using that.
At the higher end of 24% to 26% I think is the most appropriate.
For the full number for just the last few quarters.
I just think of it in terms of those individual quarters, and then you'd layer in what happened in the first half of the year.
Okay. One last one if I could just kind of bigger picture and this might be more for question for Larry.
You know Larry Yes in the last couple of years, you have shown a willingness to get out of a smaller market or to that.
You weren't just achieving scale are hitting profitability you know when I take a step back and look at your three different regions the east region.
Seems to just be lagging materially.
In terms of pre tax income is reported on a segment level maybe just.
A touch over breakeven.
Can you just give us a a feeling as to why.
Ah you need to be in that region. What what are the what are the benefits and is that's an area that you could.
Evaluate from a strategic.
Okay perspective.
Over the next you know in the in the near to medium term as to whether or not you need to continue to be operating there.
It's like that.
It deals with opportunity and growth.
Uh huh.
Florida.
You can look at to.
The industry and you can look at us specifically.
So were growing.
Oh very quickly.
And we're committing.
Capital.
To wood.
It fits the affordable model.
And.
It's interesting because we.
Compete with the other large builders and.
Our product is personalization.
ER has a great.
Nishu there.
Where the larger competitors are.
You know a pretty much a or doing the standard home kind of stripped down and.
We're in some cases in the same subdivisions during providing personalization.
And the meeting that same.
A competitor.
And the consumers paying the very nominal incremental costs from personalization. So I would say, Florida is a very very robust market and we're very pleased with it.
The Virginia, Maryland area, we are.
Focused very much on increasing our community counts.
There is a little bit slower in the sense that the demand is robust.
But our underwriting is very very tight as you know all over the country.
Weve advocated the most conservative land strategy for decades.
And that sometimes people appreciate it sometimes they don't.
But since many of our major competitors are now advocated to I think it's pretty clear builders shouldn't be speculating in land they should buy land for inventory.
To be built.
And so a I would say that.
It's exciting to see.
Growth virtually.
In all markets and it's our intent than our desire and our execution for growth.
In the all segments of.
The markets that we serve the biggest growth as you know is in the affordable, but Bob made an important comment we do expect growth in our more traditional product because we build a very very fine product.
And that product is well received.
And we're growing that product also.
So the opportunity to the.
At the right time at the right place with the right product and with a.
Balance sheet that is pretty spectacular.
I think we are achieving the aspirations. It only took his 40 50 years to get to.
Thank you.
Our next question comes from Alan Ratner from Zelman and Associates. Please go ahead with your question.
Hey, guys. Good afternoon, congrats on the great quarter.
You know what I wanted to focus in on a little bit is just the volume growth and the trajectory in some of the drivers there because you guys did a great job you know dating back a couple of years ago to tying up a lot of land, obviously geared towards the lower price points and we kind of saw the writing on the wall. When your lot count was accelerating double digits year over year and and now we're seeing that up of course filter through on the community count side.
And you know with orders up over 30% I mean, obviously that that's not a sustainable growth rate long term, but what we're seeing now if I look at kind of the forward looking indicators is your your community count to the slide you showed it looks like that that growth might start to slow a bit here your lot count or the growth there and it's roughly flat year over year.
So I guess my question is is that when you look out beyond the next quarter or two but just the next several years do you feel like your portfolio right now is to position where you can drive continued double digit volume growth even without necessarily the same type of growth you've enjoyed on on the community count that you know is the product. The price point positioning is that's supportive of continued strong growth or do you need to see that lot count growth Reaccelerate in order to act to drive that type of growth.
Yes, I think.
We said that the real good thing about a that we saw in Q2 is that the absorption rate came up year over year for the first time in a couple of quarters.
So certainly that's helpful and I think that is indicative of us hitting the.
The affordable segment.
And I think that's helpful in terms of ultimately driving that.
Double digit year over year growth for for next year.
But I do think there is also a lot to be done in Q3, and Q4, whether it's getting the deals under contract or actually a acquiring them and putting them on balance sheet. So I do think it's a mix of both you know part of what we've already done in shifting our mix, but it will also be dependent on what we do in Q3 and Q4.
Got it that's helpful, but it sounds like there's still a hope or expectation that absorptions can continue to move higher given the focus on the lower price points and then you know just on a similar vein nearly 30% order growth I think it's always a little bit dangerous when you win a builder puts up such strong results that that that's over extrapolate it in and I guess my question isn't you know now that Youve rebuilt the backlog you know he was under pressure and now now you're you're positive year over year. How are you thinking about the price versus volume interplay. There are there any constraints that you you see that he on the volume side, whether it's labor or whether it's running running lower on lots and open communities is there anything that that would kind of cause you to throttle back that growth meaningfully the comps are pretty easy in the back half of the year. So on the surface. It would seem like you are poised for some continued strong growth, but maybe you're thinking about that differently, maybe prioritizing price and margin just given the.
Fact that the backlog is has rebuilt.
Yes, I mean, I think we always have to be he focused on on price to a degree.
We I want to take advantage, if we're hitting our plan. If we are growing year over year already or freight standpoint to have that discussion as to whether or not it makes sense to increase price or or reduce incentives.
In terms of whether or not there is anything really active out there that's telling us that we should be favoring that the labor constraints that you mentioned I don't know that theres anything.
Out there that I would say no we talked a little bit about a vegas and how we had some issues with the power company hooking up a couple of subdivisions during the quarter, but outside of that.
There is nothing that that stands out.
That said, obviously, we're going to keep a very close watch on that as we go through.
Q3, because we know that other builders have reported pretty strong orders as well and others the potential for the competition for the the labor and other resources to continue to increase.
Got it that's what I was getting at so that's helpful. Bob and then final one if I could sneak one in.
Any thoughts on July that you could share with us how that shaped up.
Yeah, I think July has been been very strong for us it's up it's not over yet.
But we're seeing the continued strength.
Great. Thanks, guys.
Once again, if you would like to ask a question. Please press star and then one to withdraw your question you May press Star and two.
Our next question comes from Buck Horne from Raymond James. Please go with your question.
Hey, Thanks, good afternoon.
I guess it in a slightly different way of asking questions that have been asked here a little bit, but just given the strength of demand that you have seen in places like Arizona and Florida, How do you think about the potential for M&A activity or how you're evaluating the opportunity set out there too.
Add land more quickly or maybe.
Build some operating scale more more rapidly.
Is that something that that you would you guys you would consider at this stage of the cycle.
Yes, I mean, we prefer to buy.
One subdivision at a time I think that's what our history has shown.
The last acquisition, we did was in 2011 so.
Well, we always look and see if theres opportunities out there I don't think its a anymore likely today than it's been.
Over the past eight years since we lasted one.
Okay.
And just.
As the.
I guess the inventory that's out there for the affordable product continues to be so constrained and the demand seems to exceed the supply and a lot of respect everyone's saying much of the same things, but have you considered taking the seasons concept and maybe even going further down price points to them.
Even more lower to your entry level and maybe operating on a more spec heavy construction model.
On not necessarily spec heavy construction, but we have.
Consider doing a different series in fact, we have one in production in several markets now it's called our urban collection.
That's more on that say 1200 to a 1400 square feet type of range.
There's two units in a building party walgreen.
And the initial response has been that it's a it's been very successful because it does achieve better affordability even than what we've already achieved with seasons.
Okay.
Hi, great. Thanks.
Sure thing.
And our next question comes from Jay Mccanless from Wedbush. Please go with your question.
Hey, good afternoon, everyone I jumped on late so apologies if you've already touched on these items.
The first one one of your competitors. This morning discussed the improving demand for move up housing both first and second move up what did you guys see during the quarter and and I know you all talked about having a an overweight towards buying more affordable land, but are you seeing anything in first or second move up that says maybe you need to by a little bit more of that over the next couple of quarters.
Yeah, well first of all a I will.
I got to tell you one of the same as we noted earlier, maybe before you got on the call.
We don't see that we want to decrease our our move up units.
We just see it as a slower growth rate relative to the affordable part of our business. So we want to make sure we're maintaining a strong presence there.
As for.
The improvement in activity I think that consumer group, certainly benefits from lower interest rates as well.
So I think yeah that could be part of the reason why there's.
Improved demand there.
But though we are focused on making sure we're maintaining share in that segment as well as increasing the share of what we're doing in the affordable segment.
Got it and then in terms of.
Pricing power I mean, how are you.
Do you maybe have a percentage of communities, where you were able to raise price during the quarter or.
And and.
Do you see any opportunities now, especially with rates continuing to move lower to maybe inch prices up a little bit.
Yeah, I don't know if I have a specific percentage on how many communities. We increased spring selling season, you have a better opportunity to do that typically than in the back half of the year.
We did see a incentives come down certainly versus where they were in Q4 and then the first part of the year. So I think that was a positive and is reflective of the of the better pricing environment.
Got it thanks for taking my questions.
Sure thing.
And ladies and gentlemen at this point in showing no additional questions I'd like to turn the conference call back over to management for any closing remarks.
We appreciate everyone joining on the call today, and we look forward to speaking with you again following the report of our Q3 2019 earnings.
Ladies and gentlemen that does conclude today's conference call. We do thank you for joining todays presentation.
You may now disconnect your lines.