Q3 2019 Earnings Call
Good afternoon, My name is Devon, and I will be a conference operator today.
I would like to welcome everyone to Kb home 2019 third quarter earnings Conference call. At this time all participants are in a listen only mode. Following the company's opening remark to open the lines for questions. Today's conference call is being recorded I will be available for replay of the company's website Kb home dotcom through October 25th.
Now I'll turn the call over to Jill Peters Senior Vice President Investor Relations, Joe you may begin.
Thank you Dan Good afternoon, everyone and thank you for joining us today to review our results for the third quarter fiscal 2019.
With me are Jack Lascar, Chairman, President and Chief Executive Officer, Jeff Kaminski, Executive Vice President and Chief Financial Officer.
Hollander Senior Vice President and Chief Accounting Officer, and Bad Johnson Senior Vice President Treasurer.
Before we begin let me note that during this call I never thought leader that's that are considered forward looking statements.
Within the meaning the private Securities Litigation Reform Act 1995.
These statements are not guarantees of future results and the company does not undertake any obligation to update.
Due to factors outside of the company's control, including their detail in today's press release, and then filings with the Securities Exchange Commission.
Actual results could be materially different from those stated or implied in the forward looking statements.
In addition, a reconciliation of non-GAAP measures reference during today's discussion to their most directly comparable GAAP measures can be found in today's press release and or on the Investor Relations page on our website at Kb home Dot com.
And with that I will turn the call over to Jeff now Okay.
Thank you Joe and good afternoon, everyone.
We're pleased with our results for the third quarter, which reflect the underlying strength of our business and consistent execution of our returns focused growth plan.
Our performance this quarter is important not only for how we're positioned to close out fiscal 2019.
But also in the foundation to provide for continued success in the 2020, which we believe it is shaping up to be quite solid.
As we approach the three year Mark of our plan with meaningful results generated during this period our focus remains the same.
To profitably grow our business through consistent implementation of our core business strategy.
Strengthen our balance sheet by driving greater productivity and efficiency of our assets.
As a result of our solid execution on this plan.
We expect to increase our diluted earnings per share in 2019.
The more than 150% relative to 2016.
Our higher profitability contributes to significantly improved return.
With our return on equity expected to accelerate from 6.3%.
2016.
Well were 12% in 2019.
Over the past year, our business has generated significant operating cash flow.
Putting incremental cash from monetize our deferred tax asset.
Which has enabled us to grow our inventory by $230 million.
While reducing our debt by over $200 million.
These accomplishments contributed two important outcomes.
In addition to our planned double digit growth in community count this year.
We are positioned for additional expansion of our community count in 2020 with an enhanced portfolio that reflects the continued shift to higher margin core community.
This outcome supports our anticipated revenue and margin growth next year.
Second we reduced our debt to capital ratio by 550 basis points over the past year.
We essentially achieved the high end of our tightened target range at the ended the quarter.
And expect this metric to improve further by yearend.
Carrying less debt while building a larger asset base continues to lower our interest incurred per unit, which contributed to a higher gross margin in the third quarter.
We believe this will be an ongoing tailwind and both fourth quarter and in 2020.
Getting into the details of the quarter, we generated total revenues of 1.2 billion and diluted earnings per share of 73 cents.
We expanded our gross margin excluding inventory related charges to 18.9%.
We anticipate another step up in the fourth quarter with a gross margin north of 19%.
Supported by the composition of our 2.3 billion dollar backlog at the end of the third quarter.
We opened 26, new communities during the quarter boosting our average community count 18% from a year ago.
Each of our four regions generated an increase in average community count what the west coast and southwest, leading the way with greater than 30% year over year growth.
We remain on track for double digit expansion in our average community count this year.
I've mentioned earlier, we expect to lift our average further in 2020.
Market conditions remain favorable supported by low mortgage interest rates steady economic growth.
Hi, consumer confidence and positive demographic trends.
While demand is healthy supply continues to be in sufficient to meet homebuyers needs.
Particularly at the affordable price points, where we operate.
Which is a key element of our success.
We remain an industry leader in absorption pace as our monthly net orders in the third quarter advance to 4.3 per community.
The combination of a strong pace and substantially higher community count fueled 24% growth in our net orders.
As with our 2019 second quarter each of our four region produced a double digit net order comparison to the prior year.
This was our highest third quarter pace in many years.
Which is significant considering that we also increased prices in about 90% of our communities.
Net order value grew 25% in the third quarter to 1.3 billion.
Helping us to drive the 13% expansion of our backlog value to 2.3 billion.
In terms of units.
Our backlog grew to more than 6200 homes.
Our highest third quarter backlog in a number of years.
We believe our core business strategy is a key differentiator driving the strength of our net orders.
By investing in land positions in prime growth sub markets.
And positioning our product.
I get the median household income in each submarket.
We primarily cater to the first time buyer.
This core competency as reflected in our third quarter deliveries of which 55%. We're the first time buyers.
Over the past year. This buyer segment has purchased homes and nearly 100% of our communities.
Operationally with our built to order model.
We enhanced the value we delivered to home buyers by Arpanet choice of lots and a range of square footages in each of our communities.
And the ability to them personalized and upgrade features in our design studios.
While we position our product for the first time buyer our business model also appeals to move up buyers and empty nesters, who can make a different set of choices in the same community.
As a result, we see a variety of buyers within each of our communities.
And therefore, we have a clear ability to attract the largest demand segments of the market.
We believe the opportunity to further increase our scale and gain market share will come from continuing to expand our community count.
While maintaining our high absorption pace.
In addition, we will continue to invest in locations and products targeting the median household income.
While sustaining our leadership in the first time buyer category and attracting a mix of buyers to our communities.
We currently have a top five position and above 70% of our served markets.
We remain committed to advancing our market share recognizing the benefits of local scale.
Hi, good illustration of scale benefit is our ability to reduce our build times, even in a tight labor market.
And we have done so both sequentially and year over year for the last two quarters.
Moving on I will now highlight a couple of our regions beginning with the West coast.
This region delivered 32% growth in net orders with every division in California, producing a positive net order comparison.
We continued to rebuild our community count in the west with its average up from 34%.
While we essentially maintaining our high absorption rate of 4.5 net orders per community per month.
While market conditions were generally healthy across California, we generated an outsized order conference comparison.
In Northern California, particularly in our Bay area communities, where net orders and community count more than doubled.
With these results in the region, we expect the Bay area mix shift to drive a year over year step up in both our fourth quarter and 2020 West coast average selling price.
Our southwest region delivered the highest net order increase of our four regions with a 40% ryzen net orders.
Our business in Las Vegas continues to lead the expansion of this region with strong market fundamentals supported by population and job growth.
There are a number of large projects underway in Las Vegas that will fuel job creation for years.
Including the Raiders Football Stadium, and headquarters, a new Convention Center and hotel and Casino development.
In addition, our product positioning and price point have proven compelling for the growing demand, enabling this division to sustain one of the highest community absorption rates in the company at above six per month.
With a third quarter average base price of 313000, we're well positioned below the new home median sales price of about 400000 and had a slight premium so the resale median sales price of roughly 300000.
Demand in Phoenix is also strong with net order growth exceeding 60% in the third quarter driven by increases in both community count and absorption pace.
The economy in Phoenix as robust and this market is experiencing significant in migration as a result of more jobs in higher wages.
Together with its lower cost of living relative to other major metro areas.
Similar to Las Vegas, our position in that affordable price points in Phoenix.
As helping to fuel demand.
With a third quarter average base price of 254000 below both the media new home price of 330000, and the median resale price of 270000.
Before I wrap up.
Spend a moment on KVH as our mortgage banking joint venture with Stearns lending.
The JV is continuing to elevate its execution.
Providing high levels of customer service to our home buyers and supporting our divisions with greater predictability in deliveries.
In the third quarter.
The capture rate advanced to 72% of deliveries from 55% in the year ago quarter.
As a result of the capture rate steadily climbing.
And our expectation for ongoing solid execution, we anticipate healthy year over year growth in profits from our JV in both the fourth quarter and next year.
In closing we are poised for a strong finish to 2019.
As we look to produce meaningful year over year increases in our key financial metrics, including revenues and gross margin in the fourth quarter.
In addition, with our community openings from earlier this year starting to produce revenue in the fourth quarter, we expect to leverage our SGN a expense.
Which we believe will result in year over year growth in our fourth quarter operating margin as well.
Although we are nearing the three year Mark of our returns focused growth plan. The principles of the plan will continue past 2019.
With an ongoing focus on profitable growth and driving higher return.
Looking ahead with healthy market conditions, and our backlog value of 2.3 billion.
Together with community count growth and an industry leader in absorption pace.
We are positioned to deliver greater than $5 billion in revenues next year.
In addition, we foresee generating higher profitability on this larger revenue base.
We look forward to updating you on our progress as we move ahead.
With that I'll now turn the call over to Jeff for the financial review Jeff.
Thank you, Jeff and good afternoon, everyone I will now review highlights of our financial results for the third quarter provide details on our outlook for the fourth quarter and discuss our 2020 housing revenue and community count expectations.
We're very pleased with our third quarter performance, particularly the measurable expansion of our gross profit margin and the solid absorption pace and significant community count growth that produced a 24% year over year increase in net orders.
We believe we are well positioned for a strong fourth quarter and expect to generate meaningful improvements in virtually all of our key financial metrics.
In the third quarter, our housing revenues were $1.15 billion compared to 1.22 billion in the prior year period, reflecting a 7% decrease in our overall average selling price and a slight increase in the number of homes delivered.
The housing revenue decrease was primarily attributable to a decline in our west coast region average selling price.
Stemmed from both the mix shift toward deliveries and lower priced inland markets and the absence of certain communities with relatively high average selling prices they closed out in prior quarters.
We ended the third quarter with over 6200 homes in backlog, an increase of 14% versus the prior year.
Our ending backlog value of $2.3 billion was up 13% as compared to the year earlier level of $2 billion, reflecting increases in each of our four regions ranging from 7% in central to 20% in the southwest.
Based on our robust quarter and backlog value expected continued strong absorption pace and improves construction cycle time, we currently anticipate fourth quarter housing revenues in the range of $1.56 billion to $1.64 billion up from 1.34 billion in last year's fourth quarter.
Yes.
In the third quarter, our overall average selling price of homes delivered decreased 7% year over year to approximately $381000, mainly due to the impact from our West Coast region that I previously mentioned along with a mix shift in our central region with a lower proportion of deliveries from our Colorado operate.
Okay, and which typically have a relatively higher average selling price.
We believe in expected higher proportion of West Coast region deliveries driven by our strong third quarter net order performance and the successful expansion of our California community Count.
I will result in higher average selling prices in the fourth quarter, both on a year over year and sequential basis.
For the 2019 fourth quarter, we're projecting in overall average selling price in the range of 400 to $410000.
Homebuilding operating income decreased from the year earlier quarter to $85.5 million or 7.4% of revenues.
But improved sequentially from $52.1 million or 5.1% of revenues in the 2019 second quarter.
Excluding inventory related charges of $5.3 million in the third quarter and 8.4 million in the year earlier quarter operating income margin was 7.8% compared to 9.3%.
For the fourth quarter on both the sequential and year over year basis, we expect to realize improvement in our homebuilding operating income margin.
Excluding the impact of any inventory related charges. We believe this metric will be in a range of 9.9% to 10.5%.
Up from 9.7% a year ago.
Our housing gross profit margin for the third quarter was 18.5% compared to 18.0% for the prior year period.
Excluding inventory related charges gross margin for the quarter was 18.9% compared to 18.7% for the 2018 third quarter.
The current year result was favorably impacted by lower amortization of previously capitalized interest as well as a change in the classification of certain model complex complex costs due to our adoption of the new revenue accounting standard.
See six so six.
These favorable impacts were partly offset by pricing pressure, we experience and first quarter orders due to the weaker market conditions at that time.
The effective certain high ASP in high margin West coast communities, having closed out in previous quarters and reduced operating leverage due to lower housing revenues and higher fixed community level expenses supporting community count growth.
Assuming no inventory related charges.
We expect our fourth quarter housing gross profit margin to increase on a sequential and year over year basis.
To a range of 18.9% to 19.5%.
Our selling general and administrative expense ratio of 11.1% for the quarter.
Increase from the 2018 third quarter record low ratio of 9.4%, mainly as a result at the AMC six so six impact mentioned earlier reduced operating leverage due to lower housing revenues.
And increased marketing expenses to support new community openings.
As we continue to prioritize containment of overhead costs and expect to realize favorable leverage impacts from higher housing revenues in the period, we are forecasting our fourth quarter SGN a expense ratio to be in the range of 8.8% to 9.2%.
Income tax expense for the quarter was $23.8 million, representing an effective tax rate of approximately 26%.
Compared to $27.2 million and approximately 24% for the year earlier period.
We are projecting an effective tax rate for the fourth quarter of approximately 28%.
Turning now to community Count we ended the quarter with 254 open selling communities, including 27 communities or 11% that were previously classified as land held for future development.
Our third quarter average of 255 was up 18% from 217 in the same quarter of 2018.
On a year over year basis, we anticipate our fourth quarter average community count will increase about 10% as compared to the 2018 fourth quarter, resulting in an increase of approximately 12% in our overall average community count for the 2019 full year.
As of the ended the third quarter, our land held for future development was less than 4% of total inventories.
With our continued success in monetizing these in active assets and our investments in new core communities. We have realized an improved mix of our community portfolio with a lower percentage of reactivated communities.
We expect further improvement in our portfolio mix in the future as we believe the number of reactivated communities will continue to decline.
We invested $442 million in land land development fees during the third quarter with $174 million of the total representing new land acquisitions.
Over the past 12 months in addition to the capital allocated to pay down debt and to pay dividends to stockholders, we deployed nearly $1.7 billion into land related investments and opened 123 new communities.
With respect to next year, we expect the land investments we've made over the past 12 months to drive additional community openings throughout 2020 and produced year over year growth in average community count in the mid single digit range as compared to 2019.
Combined with our strong order pace per community and anticipated yearend backlog. We believe we will generate full year housing revenues in 2020 in the range of 4.9 billion to $5.3 billion.
We ended the third quarter with total liquidity of approximately $611 million, including $184 million of cash and 427 million available under our unsecured revolving credit facility.
Over the past 12 months, we've made significant progress in reducing our leverage ratio.
At quarter end or debt to capital ratio of 45.1% improved by 550 basis points as compared to the third quarter of last year.
We still expect to be within our tightened target range of 35% to 45% by year end.
As our credit metrics have continued to steadily improve we recently received or fourth credit rating upgrade in the past two and a half years.
In July Moody's Investor service upgraded our corporate credit rating to be a three from B one.
Our capital allocation priorities remain consistent we continue to focus on investing in land assets to grow the business and improved returns.
Deleveraging the balance sheet through retained earnings growth in potential additional debt reduction.
And returning capital to stockholders in the form of our quarterly dividend.
Consistent with these priorities in July we announce an increase in our quarterly cash dividends on our common stock to nine cents per share.
In summary in the third quarter, we measurably increased our community count and improved our already strong average sales pace per community driving a 24% year over year increase in net orders.
<unk> rated year over year improvement in our gross margin.
And produce the sequential expansion of our operating margin.
We believe that are higher community count solid quarter and backlog value and continued focus on consistent execution of our returns focused growth plan.
Position us to achieve significant growth in housing revenues along with improvements in both our gross profit margin and operating income margin during the fourth quarter and continuing into 2020.
We'll now take your questions Devon, Please open the lines.
Thank you at this will be conducted a question and answer session and fuel that does question. Please press star one on your telephone keypad confirmations will indicate your line is in the question Q you may push start to if you look to remove your question from the Q for participants easy speaker.
The necessary to pick up your handset before pressing the star keys.
Next question comes the line of two invention Wells Fargo.
With your question.
Hi, Good afternoon, guys nice results.
Right.
First question I, just wanted to get a little bit of an update on the pricing I believe you guys said, we were able to push pricing in about 90% of your communities.
Clearly strong results is there any way you could maybe parse out the strength of the price hikes by product segments entry level move up.
And possibly the magnitude of some of those price hikes you're seeing.
Terminal per community story, so I don't know that we have any of.
The data that we can share on the magnitude or.
So certainly the product mix in my prepared comments I spoke to the fact that we're appealing to the barbells. If you will have demand in that we're seeing a lot of empty nesters.
Along with obviously lot of first time buyers and then move up.
In between.
As we guided we expect the higher margin in the fourth quarter.
Based on our backlog and add some part tied to the some of the pricing that we've been able to.
But I can tell you that the markets or are pretty good right now very rational so.
We continue to bounce price and pace and we'll take price, where we can as long as we're achieving our are targeted absorption in that community.
Okay. Thanks, Thanks for that.
Jump from the California, really nice order growth, even better than than what we were expecting.
Can you just walk through.
The various regions, you know, England versus code coastal and possibly consumer price point and one other item I'd like to touch on in Northern California. I believe you said communities were up two x.
So orders I guess.
Given given that growth.
Could you maybe talk about your ability to keep the pipeline flowing out into 2020, where we're not going to see potential hanging over if you will.
While the the two X on the community Count was specific to the Bay area driven as I recall it.
In the comments, we said that comes up 34% in the state and Thats the community count growth as kind of chunky I'll say in the.
In the Bay area, because it's so hard to get things and title none hard to bring them to market and then when you finally, bringing to market they do very well.
And part of what we've been bridge and through this year was.
We sold through.
The existing communities and the new ones took longer to get online and Thats all starting.
To come into place now here in the.
Actually started in the second quarter, but even better in.
The third quarter so.
With that comes a solid backlog position that we're set up heading into 2020, we already control all of a lots we need for deliveries in 2000, pointing so we are hoping to sustain this and keep going from here, we think weve, we'd bridge the gap through the trough that we deal with.
Our next question comes on line of Alan Ratner with Zelman <unk> Associates. Please proceed with your question.
Hey, guys congrats on another really strong quarter.
Yes, Hi, who is I was encouraged to hear you talk about your cycle times, continuing a trend lower and just kind of occurred to me as I look at your order numbers and and strengths from some of your peers that have announced recently.
Kind of feels like maybe some of the order strength in the first half of the year across the industry not not necessarily for you guys, but might have been.
Weighted more towards some standing inventory that was built during the softer demand period last year.
I'm curious with while it certainly encouraging to see the cycle times trending lower have you had any conversations or gotten any inkling from your trades that as backlogs are starting to build up across the industry now that we might start to revisit any of the labor tightness that that was obviously a big issue across the industry several years.
As it goes as the cycle was accelerating.
I do think element that's that comes with a stronger demand.
We're predominantly built to order 70, 580% built to order. So we have the backlog and we're building backlog out over the next five months or.
For six months so in the spring are a lot of our competitors at an inventory overhang, we really didnt have that.
We will monitor our pace and do what we have to that keep the pipeline going.
And we built through that backlog.
Of our sales in Q1 actually delivered out in Q3, and so on as you go forward I do think that the industry has cleaned out a lot of the inventory overhang that we had from.
Them last fall and into the first quarter and it wouldn't surprise me. If there is a little more pressure now on labor it starts to pick up but.
Our offset to that and our strategy is to continue to lever our scale and we've been able to.
I think bill times in part because we've got bigger businesses.
Solving that are more attractive to the contractor base, where they like workforce. So we'll continue to push the scale and hopefully be remain a builder of choice for the contractor base.
Got it Okay Thats helpful. Jeff.
Second question just thank you for the preliminary color on 2020, you I think you kind of flags coming into this year that you were expecting a lot of community growth in California, and obviously thats come to fruition as you look at the the plans over the next 12 months can you just give us a little bit of insight into kind of where youre, maybe more heavily invest.
Operating today for growth are there any markets or price points that you're overweighting your investments in based on kind of the strength the market are or what you perceive and opportunity to be.
Alan as we talked about before I mean, we we really push growth across the business I mean, the targets in the scale targets are relevant for all of our divisions and we review deals across the business, we own the budget certain divisions at lower dollar investment numbers and others.
Judge every deal on its own as we move forward I think the though the most significant.
Factor.
Relating to our community Count next year, we'll just be the shift between our core communities in or reactivated communities weve been seeing.
The percentage of our reactivated communities coming down fairly steadily this past quarter is down to 11%.
We believe for all of next year, we'll be in a single digits and will be trending probably close to that 5% level by the end of next year.
It's just going to strengthen our portfolio our community portfolio tremendously to see that shift.
Happening and to see some of the new investments, we're making coming to market. So.
That's probably one the most important things I mean, when you look at our community Count you split on that basis, our core communities will be up fairly strongly into double digits and the reactivated communities will be down and in double digits and because of the size of the weighting of each ITL and arrive at about a mid single digit increase for the year, but much.
Better book of business as we come out of 2020.
Our next question comes on line of Mike Dahl with RBC capital markets. Please proceed with your question.
Hi, Thanks for taking my questions.
Sticking with the 2020.
Commentary and yes. Thank you for the preliminary guide I just wanted to talk about margins I think you mentioned margin gross and 20 it seems like at the.
Revenue growth certainly should be semester, DNA leverage, but you've also got the tailwinds from the gross margin.
Side from the reactivated community.
Roll off and also the lower interest expense is there any color you can give on just.
Do you expect both gross margins.
In a down and.
Order magnitude there.
Got it at this point.
Right.
Yes, we went through preparing for the call I mean, we basically elected we normally don't provide a lot of detailed guidance on the third quarter call, but I could give you a little bit Directionally, where we think things are heading and I think your assessment is correct. We do expect to see incremental improvement in our in both gross margin Ns DNA for next year and that certainly.
Stronger operating margin.
We will gain leverage on fixed costs contained in both the gross margin as well as interest DNA next year with the higher revenues as we guided as.
As you pointed out we will have continued tailwinds from both lower interest amortization and from a lower percentage or lower mix of reactivated communities coming into it and what we're seeing right now as.
Really strong performance from our recent community openings as well as from the communities that have been open throughout the year anniversary and strengthen our backlog gross margins. So we're fairly confident at this point assuming stable market conditions.
That we should see further gross margin gains out into 2020 at this point, it's a little early for us to put an exact range on Twitter to exactly quantify for everyone but.
Directionally things are improving on both both fronts. Both gross margin then SGN and obviously, resulting in stronger operating margin for next year.
Okay I appreciate that mix makes sense the second question.
You guys touched about the strength in key DHS.
Which I think is interesting just given some of the noise around.
The parent company.
Bankruptcy proceedings seems like like you've got cancellation rates are down across your your business Morris capture rates up.
Not apparent that theres been any impact at all on that joint venture, but can you give us a little more detail on what youre seeing if you're hearing anything from the field and if you're having to evaluate.
Any other changes to that that structure or partnership.
Just given the parent company proceedings.
Mike has been an interesting.
Chain of events with timing and that.
The parent company's firms didn't announce a bankruptcy action after our last earnings call and the owners on.
Creditors have already concluded a resolution.
End of this call and.
On our JV its wholly owned between us from the employees or employees on the JV. It was really a non event in the operation.
If you look our deliveries in the quarter I think part of the upside in units was because of the performance of the mortgage company in there. They are just now hitting their stride. That's why I'm in my prepared comments I called it out well, but capture rate 72 in the third quarter. We think there's still going to go up here in the fourth quarter and in 2020.
There are very solid business partner for us.
And managing our backlog and we see a bigger income stream coming out of it.
Our next question comes on line and Matthew Bouley with Barclays. Please proceed with your question.
Hi, Thank you for taking my questions and congratulations on the quarter.
I wanted to ask a couple of questions about sales pace.
Just given the strength we saw in the quarter.
Obviously last year was a tougher market you guys saw pace kind of below three per month, but the prior two years.
That number was up over three so just based on the communities you've got operating right now and what we're seeing in this market here just how do you think about what a normal seasonal patients should look like in the fourth quarter. Thank you.
Matthew if you just look historically for us over the years Theres typically an 8% to 10% falloff in pace in Q4.
As you look at our comps.
And there was the reason we felt that the way we did in our comments last year. Our third quarter was very good we were at for a month last year and then we saw the slowdown right after earnings call last year, where it tapered off.
And it was a combination of the market getting a little tougher and we had a transition in community count that really that our pace last year in the fourth quarter. So we're set up to have a very good order comp this quarter impart because of the community performance and in part because it was Bob.
Last year, we expect that our Q4 pace will go down.
From Q3.
If it were to hold at the Q3 levels, we'd be pushing price more.
Yep understood perfect and then just thinking beyond the fourth quarter, we kind of capacity.
Easier comps I think you made the comment Jeff that.
You kind of expect to maintain pace, while increasing community count to boost your market share.
The community Count you guided to mid single digit growth. So is that a good way to think about modeling 2020 at this point that we kind of get pass easy comps.
But you're effectively planning to manage sales pace.
A relatively normal seasonal rate going forward.
And that most of the order growth would therefore come from community community growth is that how should we should be thinking about 20 to 20. Thank you.
That's absolutely correct Matthew on a on a normal comparable if we had.
Tougher passed last year, we'll have a stronger comp, but we're going to manage the pace, we target on an annualized basis about for a little lower in Q4, a little lower in Q1 little higher in two and three but on average it'll be foreign if we're running stronger that will get price.
Our next question comes on line of Stephen Kim with Evercore ISI. Please proceed with your question.
Yes, thanks, very much guys good quarter.
Not to like really.
I did want to dig a little bit more into the SGN, a specifically I know the do you guys had been.
Seeing a little bit of burden, although you performed well in that metric, but you have been burdened by your aggressive community count ramp.
I was curious if you could quantify.
What you think that headwind was in the quarter on your SGN a rate from just having an unusually large number of newer communities.
Right, Yes, it's maybe a little bit difficult to quantify and basis points or whatever I think probably the best way of looking at it is just looking at where it's going to turn and how it's going to turn in the fourth quarter.
So we're finally going to see some revenue coming in from the community count build in the fourth quarter will have a higher.
We're forecasting a higher revenue.
I think revenues in Q4 19 relative to the prior year and as a result, we believe our AR.
SDMA percentage and our ratio will come in nicely at the midpoint, rather on that 9% range, which is.
Pretty pretty nice improvement compared to where we beds. So that puts us back on again at the midpoint about even putting with last year after overcoming about 70 or.
70 basis points that Scott 50 to 70 basis points in the fourth quarter of assay six was six impact so is starting to come around and I think.
Investment we made throughout 2019, the early part of 2019, starting pay back in the fourth quarter and we'll see more strongly as we get into next year.
Because you're right. There was a lot of expense that went into building that community count the way we did this year and we'll start to reap rewards.
Starting right now in the fourth quarter.
Yes, I know, it's really encouraging.
Good question from my second question I wanted to follow up on your comment about reducing cycle times, even in a tight labor market.
Wanted to take a slightly different direction then Alan question.
I know you've been one of the industry leaders in homebuilding technologies and that you've been actively studying what I call. He builder initiatives like panelization and ready frame and things like that.
Can you talk about what you think the opportunity as in the next couple of years from utilizing offsite manufacturing to a greater degree.
Maybe not.
Hello.
The whole hog or anything like that but just utilizing that.
More than you do now one of the most promising area, which probably just hype.
[laughter].
Yes.
Steve on we've we've been a big user a wall panels for.
25 years now and.
Thank you to do so in that as a way to pick up several days and you're framing pardon.
The cycle and you're right. We are always pushing the envelope and trying to find new ways to do things better and faster and hopefully less expensive and a lot of what you're seeing with pre built in the modular and those things, it's not that type, but it's because it's real but it's not.
It hasn't crossed over where it makes financial sense yet.
The cost far outweighs the time savings and we're trying to figure all this out we as you know we did that project home in Las Vegas early this year, where we shipped in cubicles prebuilt sections of the home and then put it together on site.
And the whole thing came together in a couple of days the structure, but it was not.
Nowhere near as a affordable was building that on site that is really challenged for the industry we can't.
Count on being able to raise price and land isn't getting any cheaper so we have to find.
Our ways to manufacture home that keep expanding margins for all the companies in the space. So far it's been difficult really advanced that area.
Our next question comes on line of Megan Mcgrath with Buckingham Research Group. Please proceed with your question.
Thanks for taking my question.
I wanted to clarify a little bit on California.
Given your commentary around the impact.
On fourth quarter Asap.
And margin.
Is there.
Incremental sort of boost that you're getting in the short term from those California communities that we shouldn't expect as we make our way through let's say the next three or four quarters or given the pace of community openings Barrett, that's something that we should kind of expect to continue at least for the next.
Three 2020.
Right I think the story with the community count in California.
Trough.
In 2018, and we've been rebuilding it really since mid 2018, and we've seen nice improvements nice increases actually in community count.
Much every quarter since that time.
The again, we won't get in a lot of regional detailed for next year, but if you think about the number communities that were opened this year in most of those have.
Generally at least a two year life.
You'll see muscles openings continue to perform as part of our base community Count in 2020, and I don't think you'll see a big fall off again in community count through the end of next year in fact, we hope to build out a bit more.
So.
You are looking at kind of the ups and downs, we've had in California, and everything else I'm wondering where that's heading I think it will be little more save one.
So in a more or less upward trend as opposed to what we saw in 2018, but it's it's just more more or less a continuation of trends. We're seeing this year, okay, great and then Jeff just a quick follow up.
On your comments around the reactivated community count percentage going now next year can you remind us what the current margin differential is funded community.
Yes, the reactivated communities are performing plus or minus 10%.
Consistently on a gross margin basis. So it's a pretty large differential it's been about 100 basis point headwind to the consolidated gross margins. So to the extent, we can continue to move that down by selling through the inactive lots.
And activating them and then selling through them.
It will help overall gross margins.
And I always like to reemphasize appoint no. One we are talking about that in talking about those low margins about the tremendous returns we're seeing in those communities and the amount of cash generating for the business. It's been one of the.
Areas components of the returns focused growth strategy that we've put in place and.
It's been an important piece of it but we're getting closer and closer to the end of the road on US we finished the quarter for $150 million left in.
Inactive status as far as that land held for future developments and we'll keep moving through it and it's been good for the business and continue to be in.
It will be a tailwind I think a little bit to margins next year as a percentage comes down.
Our next question comes on line of book, one with Raymond James Please state your question.
Hey, Thanks, good afternoon.
I Wonder if you could just talking about.
Potential land optioning strategies and.
How you think about you know the availability of land options in today's market and versus the cost and.
Other aspects of what you can do with potential partnerships and just what's your current mix of optioning and what do you think your target mix would be for the next year. So.
But we haven't really set a target where we're going to achieve ex London X option.
At a high level, we would love to option everywhere, but it's difficult to do.
And the more land constrained desirable submarkets.
If you look at our mix today, we're about 70 30 owned.
It is option and that the option component of that is up.
From a couple of years ago were probably 80 20 in the mix. So our options are.
Lift and up a little bit, but primarily in the.
In states or ER, Submarkets, where they are more option friendly as opposed to places like California, or Las Vegas today, it's very difficult.
To acquire lots on the options for what.
We stay focused on our strategy getting a good sub markets and.
We know that we can achieve returns, whether we pay cash and develop for.
Or whether we options more about getting the community open in a preferred submarket at a price point that is aligned.
With our strategy and the more we can option the better.
Okay. That's helpful.
And wondering if your thoughts have evolved at all on building for rent or the strategies around that I know a lot of other builders are.
Contemplating it or exploring options around it.
You guys.
Explored it or thinking about growing the concept or what's your general thoughts on the build for red platforms.
We pick it back in our view right now is let's focus on what we know when do well and.
And put our efforts to grow market share.
In new markets that when there's a lot of upside and for sale, So thats where were going to fund our our priorities right now.
Our next question comes on line of John The bundle with Bank of America Merrill Lynch. Please proceed with your question.
Hey, guys. This is actually spend check off and on for John Congrats on a quarter and thanks for the question.
I wanted to start with orders for third quarter of 24% I was obviously pretty strong and better than what we were looking for can you walk us through the monthly cadence of that throughout the quarter as well as any commentary you have thus far for September order growth. Thanks.
John I.
I would say that the market conditions and demand were strong throughout the quarter. So I don't know that anyone quarter was.
Any one month in the quarter was driving our those pretty good all the way through.
The three weeks in the September is but we don't want to really give too much color on that either but you can help from the.
Sorry outdoor market conditions are for holding pretty well right now.
Okay that makes sense and then I guess I'm not sure if I Miss this or not but do you guys mentioned anything about incentive levels from the quarter. I think you mentioned last quarter was up roughly 30 basis points sequentially I'm. Just curious if you had an update for this quarter. Thanks.
Yes, I mean, we look at number one we're not an incentive heavy companies you guys know I mean, our business models.
Basic pricing and everyday low pricing so to speak without a lot of discounting. So it's not a big factor for us and you need to consider was at the base prices as well as incentives. If you just purely look at the incentives.
I think we were up again about another 20 or 30 basis points, but that was more or less since offsetting part of the price increases that we put in place on a net net basis.
Definitely improved or pricing position.
Overall average for the company you can see in our guide.
For gross margins.
You kind of.
Calibrated everything last quarter, you can come back with an implied fourth quarter margin guide and we're actually guiding up from that level and also a further improvement expectations ahead of us so things are going well on that side and we're seeing margins progressed as a result.
Some of the price actions and some that new communities that were opening and.
Sounds good thanks for the fourth quarter.
John I was still less than 1%.
As Phil total de Minimis number right.
Our next question comes on line object in sync with SSG. Please proceed with your question.
Hi, good afternoon.
What did.
Appreciating that you're not really of incentive driven business model given the build to order.
Curious whats your observations were in the quarter on the industry and have there been a lot of incentives earlier in the year I think earlier in the call. Jeff you said some of that excess standing inventory.
Kind of got absorbed but curious if theres any notable direction and competitor activity on incentives.
Through the summer.
Our our impression as the summer evolve that incentives were lessening some builders were taken price others were reducing incentives.
So I think as the inventory cleared it so.
Goals cycle, where there's not a lot inventory pressures, there's not a lot of incentive pressure either.
I think it was pretty rational.
As there is unfolding, okay and then.
On the mortgage business I think you get your captures it was 72, which is a big increase where does that go where do you think or do you have any internal goals as to where you think you can move the capture rate up to over time.
Well, we think it can get hired 72, we havent put a safe in the ground that it will be this than that are our customer as options either to go with our joint venture to go use their own lender and hopefully our or service levels. When at the end of the day, but it wouldn't surprise me, if we get up to 80%.
Thats realistic.
The little higher in the more FHLB V.A. markets, it's a little tougher in the.
Finally conventional markets.
In the jumbo markets.
Our next question comes on line of gene weekends with Wedbush. Please proceed with your question.
Hey, Thanks for taking my questions. The first one I had looked at the 20 revenue guidance at the midpoint of that versus where we should come in for the midpoint. So 19 looks like about 11 in the half percent gross and was just wondering if you can talk about how much of that is going to come from volume versus price increases.
Yes, when you look at the ASP I mean, the ASP for next year, well I don't want to get into single point guidance on any of those comments. So let me back up from that.
It'll come obviously from a combination, but when you look at where our community counts going and where it's been you look at our yearend backlog number and assumption that we have stable market conditions.
Throughout next year.
I think the revenue guide is a pretty reasonable number and I think it's pretty much in midpoint of where we'd expect to get to its nice to get back over that 5 billion dollar Mark.
We're looking forward to the leverage benefits that will bring us on both the fixed cost side contained within gross margins as well as.
The fixed cost contained within SGN a in.
Our target and that's where we see right now at this point, so I don't really want to get any more granular, but today I can share we we have ground up business plan.
Where we we have a range of units by division and every city and their revenue forecast as type current pricing.
We take the position that if prices go up it covers costs. So.
Your your current revenue and margin are based on the reality of today.
Yes, good morning.
Yes.
Got it.
And then I know someone asked about move up earlier, but in our field checks, we've seen move up demand and move up pace in certain cities starting to improve.
Was wondering if you guys can talk about what you're seeing and is there a.
Better ability now to push a little more price for the 45% of your.
Sales that are to first time buyers.
We don't look at it that way Jay So that's a hard question to answer we we react based on our sales pace.
And what price and margin we have an out are we optimize that asset and we have communities.
That you and I could stand in front of the sales office and say this the first time buyer community and it'll be 70% empty nester.
But it doesn't matter your we're tracking to the median incomes and position our product that way. So we don't.
We don't look at a buyer segment given you the ability to push prices as strong as demand in that location and are you run rates and optimize your return.
Our final question comes on line of Jade Rahmani with KBW. Please proceed with your question.
Thanks, very much can you comment on the M&A environment, and if you're seeing any opportunities you might.
Be interested in looking to execute on his M&A in priority for you guys.
Date, our top priority is growing our business organically and you either do that through buying lots or buying land and develop and lots or we're always looking at up builder in a city that may want to sell their portfolio. Just like we did this time last year in Jacksonville, what's the land purchase but.
It is M&A is really not a top priority for us with more how can we grow organically.
Right.
And regarding the 2020 revenue plan can you just talked about how much land spend is required to execute that maybe range on anticipate land spend.
But to be honest at this point in time very little since mostly communities have already been purchase and many of them are under development. So there'll be a little bit more development dollars to get communities up and running but most of the deliveries at will.
Achieved next year will come from communities that are already.
Open underground and already invested in so we don't see really much if any incremental spend for communities next year.
Ladies and gentlemen, this concludes todays question and answer session as well as today's call. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.