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Greetings, ladies and gentlemen, and welcome to Century Communities First Quarter 2019 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Scott Dixon. Thank you, sir. You may begin.
Good afternoon. We would like to thank you for joining us today for Century Communities First Quarter 2019 Earnings Conference Call. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are 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 most recently filed annual report on Form 10-K as supplemented by our other SEC filings. Our SEC filings are available at www.sec.gov and on our website at www.centurycommunities.com. The company undertakes no duty to update any forward-looking statements that are made during this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Management will be available after the call should you have any questions that did not get answered. Hosting the call today are Dale Francescon, Chairman and Co-Chief Executive Officer; Rob Francescon, Co-Chief Executive Officer; and David Messenger, Chief Financial Officer. With that, I'll turn the call over to Dale.
Thank you, Scott. Today on the call, I will review our operating highlights and business updates. Rob will then discuss our business and markets in more detail. Afterwards, Dave will follow up with further information on our financial results, balance sheet and outlook. Following our prepared remarks, we will open the lines for questions. While 2019 started with the same muted buyer interest that characterized much of the second half of last year, solid momentum across our national home building platform began to build as the quarter progressed. By the end of the quarter, we were experiencing an overall stabilization in demand trends along with better affordability across our business. This welcome uptick has continued into the second quarter. In the first quarter of 2019, we increased home sales revenues by 33% to $523 million and grew net new home contracts by 35% to a record 1,858 homes. This progress was largely driven by our successful expansion into lower price point homes. Operationally, we continued focusing our efforts on streamlining operations and process improvements to improve core profitability while expanding Wade Jurney Homes asset light, fast turning business model into new, as well as existing geographies. Looking more closely at our operating metrics, our improved first quarter revenues were driven by a 77% increase in deliveries to 1,663 homes versus 941 a year ago. Excluding the impact of the Wade Jurney Homes acquisition, deliveries from our Century Communities branded business increased 13% year over year. This substantial improvement in revenues helped us increase our gross margin dollars to $104 million despite the increasing costs of home construction and incremental incentives. As one of our primary focus areas, we made further progress managing down SG&A, which as a percent of home sales revenues improved 120 basis points to 13.2 percent in the first quarter 2019 compared to 14.3% in the prior year quarter. This improvement is the result of our national platform and expanded scale, which has allowed us to drive enhancements throughout our business. As a reminder, SG&A as a percent of home sales revenues is seasonally highest in the first quarter and will decline as the year progresses assuming stable market conditions. In the first quarter, we executed a record 1,858 net new home contracts compared to 1,378 net new home contracts in the prior year quarter. Our homes in backlog increased 35% to 2,376 homes at the end of the first quarter with a dollar value of $718 million, down slightly year over year and consistent with the shift in our business to more entry level product mix. We achieved a 25% decline in ASP over the same period last year, in line with our expectations given increased entry level offerings in our legacy offerings and the continued regional expansion of our Wade Jurney Homes brand. As a supplement to our core business, the continued penetration of our mortgage title services and insurance offerings to create a one-stop solution for Century's home buyers remains one of our key focus areas for 2019. Even with the recent slowdown that the industry has experienced, we remain confident about underlying housing fundamentals and the overall economic conditions. The years of double-digit price increases are over, however we believe we are well positioned for continued success due to our diverse national geographic footprint and our concentration of affordable homes at lower prince points. These strong attributes are reinforced by the proven ability of our experienced and cycle tested team to source land, control costs and strategically deploy capital into sound investments with attractive returns. As we move into the second quarter, we will continue to generate core profitability, streamline Century's operations in our legacy and Wade Jurney Homes businesses and prudently invest capital to further enhance returns to our shareholders. I'd now like to turn the call over to Rob to discuss our markets and business in greater detail.
Thank you, Dale, and good afternoon, everyone. Our markets continue to exhibit solid fundamentals and we are encouraged by the improving trends in traffic and contracts as the months progressed in the quarter. Lower interest rates have helped to mitigate some of the affordability challenges across the country, although some markets remain more constrained, primarily parts of California and the Southeast. We continue to employ the use of incentives where we feel it is necessary. However, indicators such as household formations, employment and population numbers all remain healthy. Encouragingly, the average month's supply across our legacy markets decreased to 2.3 months since our last earnings call. These positive economic indicators give us confidence in the longer term housing story. Now looking more closely at our markets. Starting with our Texas region, Houston was a significant driver of the excellent results we saw in this region during the first quarter, helping to generate a 54% improvement in net contracts, a 33% year-over-year increase in home sales revenues, and a 54% increase in deliveries in Texas. During the quarter, our absorption pace increased over 110% and we closed out a number of communities throughout the region, which will be replaced by new, larger and lower price point communities opening throughout the balance of the year. The success in our Texas region continues to validate our company wide strategy to pivot to lower price point homes. In regard to the Mountain Region, our home sales revenues and deliveries increased 10% and 7% respectively year over year in the first quarter. This region followed the national trend experienced month-by-month sequential improvement in traffic and contracts as the quarter progressed. Our Las Vegas and Colorado markets have held up well, as has Salt Lake City, which John Burns recently highlighted as one of the top performing markets in the country. Throughout our Mountain Region, we expect to open 11 new communities during the second quarter that will positively affect our net new contracts as the year progresses. In our West Region, lower interest rates have helped to improve the tight affordability we saw earlier this year and in the later portion of 2018. Year to date, demand has improved throughout the region, particularly in the Bay Area and Seattle, where employment growth is promising in higher paying job sectors. In our Bay Area division alone, we are scheduled to open three new communities during the second quarter, which will collectively generate nearly 1,100 closings over the next few years. Southern California, which is our smallest division in the region, has a focus on growth to achieve operational scale. We have and will continue to open a number of new communities that will position us to capitalize on what we view as stabilizing improvement of homebuilding activity in the West. In the Southeast region, our home sales revenues and deliveries increased by 20% and 60% year over year respectively during the first quarter. Charlotte and Nashville have seen steady improvements in traffic while Atlanta has seen lower than usual seasonal activity, which we believe is temporary. We have continued to utilize incentives to drive demand in this region where new community openings have been most impacted by weather. We continue to invest capital and other resources into Wade Jurney Homes asset light entry level business line to support its growth. As discussed last quarter, this includes process enhancements and geographic expansion, in fact, generated closings during the first quarter in the new markets of Texas, Arizona and Indiana, where Phoenix has been particularly strong. And the existing markets' demand in the Carolinas continues to be very positive. On our last call, we also provided updates on changes to our sales approach and our Wade Jurney Homes brand whereby we are now selling homes later in the construction cycle. This change to our sales strategy is progressing well and we continue to believe that it will not have a material impact to the timing of closings in this spec based business model as evidenced by a 15% year-over-year increase in deliveries. We continue to anticipate that our implementation of enhanced systems, processes and procedures, including the back office conversion, will be largely completed by the end of the third quarter. Throughout 2019, we will continue to focus heavily on creating additional efficiencies in our operations, maintaining consistent strength in our balance sheet, sourcing accretive investments, building and closing homes on our nearly 38,000 owned and controlled lots and expanding Wade Jurney Homes into carefully selected areas. I will now turn the call over to Dave, who will provide greater detail on our financial results and outlook.
Thank you, Rob. During the first quarter of 2019, our adjusted net income was to $18.4 million or $0.60 per diluted share compared to $0.75 per diluted share in the prior year quarter. Net income for the quarter was $17.1 million or $0.56 per diluted share. We experienced benefits from our continued efforts to streamline our operations despite margin and bottom line pressure driven by increasing home costs to higher incentives and integration initiatives. EBITDA in the first quarter increased by 11% to $38.6 million. Adjusted EBITDA in the first quarter of 2019 was $40.4 million compared to $42.3 million in the prior year quarter. Gross margin for the first quarter was 17.1%, primarily due to the use of incentives and incurring the remaining $1.7 million of purchase accounting charges pertaining to the Wade Jurney Homes acquisition. Adjusted homebuilding gross margin percentage was 19.8% compared to 23.2% in the prior year quarter, which benefited from a particularly favorable product mix. When we look at our backlog of deliveries for the next couple of quarters, we see adjusted gross margins trending upwards such that we see the full-year adjusted gross margin to be in the range of 20% to 21%. SG&A as a percent of homebuilding revenues improved to 13.2% in the first quarter compared to 14.3% in the prior year quarter. The 110 basis point improvement was primarily due to process enhancements, tighter cost controls and scale benefits derived from our expanding homebuilding platform. Compared to the fourth quarter, our variable costs were consistent at 3.6% of homebuilding revenues and our fixed spend was only $700,000 higher sequentially due to certain legal settlements, severance costs and the start of the Wade Jurney Homes back office system conversion. Reducing our SG&A as a percent of homebuilding revenues remains one of our primary focus items for the remainder of 2019 and we expect that it will improve as the year progresses such that we see improvement on a year-over-year basis. In the first quarter of 2019, our financial services business continued to scale and contributed $1.6 million in pretax income compared to $1.2 million of pretax income in the prior year quarter. Now turning to our balance sheet and liquidity, as of March 31, 2019, we had total long-term debt of $1.1 billion with total liquidity of $416 million, including $63 million of cash and $353 million of availability on our unsecured revolver. With $875 million of stockholders' equity, our net homebuilding debt to net capital ratio stood at 53.6% at March 31, due to the typical sequential buildup of work in process and backlog and certain land investments. We are targeting our net homebuilding debt to net capital ratio to be in the upper 40% range by year-end. With greater visibility following the first quarter, we are introducing our full year 2019 outlook. We expect deliveries to be in the range of 7,000 to 8,000 homes and home sales revenues to be in the range of $2.2 billion to $2.5 billion. In regards to our tax rate for 2019, we expect to incur an income tax rate of approximately 26.5% compared to 25% in 2018. We expect to deliver another year of earnings improvement as we utilize our expanded scale to drive operational efficiencies in our business while strengthening our current positions in legacy markets. We have a strong backlog of homes and land positions to achieve our strategic growth objectives for 2019. In closing, we are confident in our outlook for growth in 2019 and are well on the path to capturing another solid year of profitability and improvement across our national footprint. Operator, please open the lines for questions.
[Operator Instructions] Our first question comes from the line of Thomas Maguire with Zelman & Associates. Please proceed with your question.
I guess just first on the Wade Jurney side of the business, just to revisit some of the transitory repositioning you called out there last quarter that's waiting on the orders, just where we are in digesting it. Was it less of an impact this quarter versus last quarter? And when should we be all the way through that? And then I guess if we just take a step back, I mean, timing issues aside, how do you guys feel about demand in that piece of the business and is the 15% closings growth the right way to think about the longer term volume potential there?
Thomas, this is Dale. The impact of that change in the sales is actually going to continue to a certain extent through the third quarter. And then by that time it will be all washed through. We still think that's the right decision. The 15% closing growth was nice to see. As we go forward, we're going to expect to see more increase in that as we continue to expand into new geographies and continue getting closings out of those. As far as the business, I mean we still remain completely bullish on it. We think that there is a tremendous growth opportunity for us in this area and we're continuing to deploy resources to enhance the business and grow the business.
And then just on the incentive environment and how that affects margins, understanding that you're still using them kind of per the prepared comments, but can you talk about how incentive levels trended through the quarter and maybe where we are versus what you guys would think about normalized. And then just on the pickup in March and expected through the year is that a function of incentives having been peeled back year to date or what's driving that?
As things progress for us through the quarter, I think it is probably relatively similar to what other people have said that they saw. But each month of the quarter sequentially improved both from a standpoint of actual number of net sales as well as sales absorptions. January was by far the worst month. We were year over year off by about a third. And then it continued to build from there and has continued into April. And when we look at our absorptions in April, they were consistent with April of 2018, which was a pretty strong comp. So when we looked at that, while we are still having some cautiousness in the market, overall we have felt that we have been able to reduce incentives, so we have done that. And so we've slowed them down. We still have them as we need them on a case-by-case basis. But overall we're certainly feeling much better about the marketplace.
Our next question comes from the line of Michael Rehaut with JP Morgan. Please proceed with your question.
Congrats on the results. First question, I just wanted to perhaps talk about Wade Jurney from another angle and I don't know if it's the right one. Obviously there's still growth, but when you look at and still expected a good amount of growth obviously, as the opportunity geographically kind of still presents itself, but I'm just kind of looking at closings over the last three quarters now plus or minus 600. And I'm just kind of wondering if that's kind of a good annualized quarterly run rate. And then on top of that you would add perhaps that 10%, perhaps a little bit better type of growth. Is that the right way to think about the trajectory there or given that at points Wade Jurney has had more of even a stronger growth rate or a step function we could expect something bigger? Because obviously the law of numbers and you're rolling this out and you don't want to perhaps bite off more than you can chew. Just trying to think about the right way to think about the trajectory.
Michael, I think as we're continuing to grow that platform we're going to continue to see growth somewhere in the 10% to 15% range going forward. And we feel very confident that that number's achievable over the next several quarters.
Secondly, on the community count, I guess you ended the quarter at 125, obviously ex-Wade Jurney. How should we think about that number through the end of the year?
Hi Mike, this is Dave. I think as we said on our last call that while we haven't provided any specific guidance on community count, we definitely have lots under development and communities under development that we're going to be looking to open throughout the course of 2019. As Rob mentioned, we have double-digit communities opening up here in the West and in the Mountain region in the second quarter of this year. And so we are looking to see growth, but a lot of that is really going to be contingent on timing of when we do close out some of the legacy communities that we opened in years before. But we do expect to see some sort of growth in our overall community count through the balance of 2019.
I guess just another couple of quick housekeeping items here. Just to clarify, when you said before that January was down by roughly a third, was that referring more specifically to sales pace? Just wanted to make sure I got that right.
That's our net sales. Our net sales are down by about a third from January 2019 compared to January of 2018. But then we saw it sequentially improve each month throughout the quarter, so we finished the quarter strong.
Our next question comes from the line of Alex Rygiel with B. Riley FBR.
Great quarter, gentlemen. Can you give us a little bit of help in appreciating or understanding directionally where ASPs will go as Wade Jurney continues to expand?
I think if you look at our backlogging and see our backlog today it's just a tad over $300,000 at $302,000 as an ASP. I think that you're going to seeing this based on whatever the mix is for the quarter being somewhere in that 300 to 320 type range for an ASP that we're looking to do. So depending on each quarter in terms of what percentage of the overall closings come out of the Wade Jurney Homes brand versus the Central Communities brand will really dictate that. But as you can see, we've been pretty diligent about it in the Century brand, bringing that price point down and looking to be bringing on lower price product. And then obviously with the way Journey brand, it definitely helps us drive that price point down.
And then coming back to your comments on adjusted home sales gross margin, can you go back through directionally what you were guiding us towards?
Yes. From an adjusted gross margin basis, we're looking at we think we'll finish the year between 20% and 21%. So in the first quarter we had 19.8% and as we look at our backlog as it sits today we think that 20% to 21% is achievable for the balance of -- for all of 2019.
And lastly, there's been a number of new entrants in the Carolina marketplace. Have you seen any increased pressure on pricing? Has it changed your strategy in the Carolinas at all?
No, not really. When we look at it, the Carolinas, both in our Wade Jurney Homes business as well as our Century business where we're just in the Charlotte market, we've really not seen additional pressure coming in beyond what we're just experiencing on a more national level. But when we look at Charlotte, Charlotte has rebounded from the very beginning of the year just as the rest of our business has.
Our next question comes from the line of Nishu Sood with Deutsche Bank. Please proceed with your question.
This is actually Tim on for Nishu. Thanks for the time. My first question is you all were discussing the Texas strategy pivoting to some more new entry level communities. We noticed a few weeks ago that you were all were offering floor plans under the Century flag around $160,000, which seems much more priced in line with Wade product than Century's. So thinking about the community openings that you'll have this year, how many will be offering floor plans with that level of, I guess, relative affordability? And how are you achieving kind of the underwriting of your margins with prices that low? It's really kind of more, I guess, Century traditional style community.
It starts with the land positions we're buying and to answer the first part of that, yes, our new offerings that are coming up, as we mentioned, they're all, generally speaking, going to lower price point offerings. And so they will be in that range. Now the $160,000, that would be on the low end of that range. They would go from there to the low $200,000s. And the basic focus of our strategy within Houston is to keep within that low price point band. As far as the offerings, they're very efficient plans that have been designed specifically for that market, as well as some of our other markets where we're offering the low price point of the Century complete brand. And we started doing this about, I don't know, 18 months ago or so and it's really ramping up now with the new communities that have been opening, the success we're getting. And as we mentioned, we have several new communities that are ready to open over the second, third and fourth quarter of this year that would fit that same profile.
And then I guess the next question is we also noticed that you guys did I think, I believe, had your first national open house the weekend of kind of March 23 and 24. Just focusing more on finish spec side of things. So just curious, how did that go? How many closings in the quarter came from that? And did that weigh on the margin -- the gross margins that you guys delivered this quarter? Or just kind of the general margin profile that came out of that event.
Yes, in terms of closings for the quarter, they really had no impact, just given of the timing of when that was. And I think you'll see as we've enhanced our marketing efforts, you'll see more national campaigns that we'll be rolling out on a consistent basis that'll have different themes. And that's just as we've continued to grow and evolve as a company, it starts making sense to be able to do things on a national scale as opposed to just doing it on an individual market basis. So you'll see us do more and more of that.
And then just one final one if I could. Wade Jurney has a pretty unique lot acquisition strategy picking off some lots and parcels from kind of more outlying areas that maybe more traditional builders would maybe shy away from. So just curious, during the volatility of the past few months, we've heard of anecdotes builders may be taking a pause in their land acquisition strategy, particularly in further out markets where this kind of Wade model really does work. So were you able to kind of maybe scoop up some additional lots this quarter or find any -- or in general kind of was the land market receptive to maybe lowering prices or giving better terms as you kind of shift towards this asset right strategy?
When we look at on the Wade Jurney home side, I don't know that I would say we've seen a specific impact over the last, say 90 or 120 days. We've been very active in the land market, adding to our positions. We're very specific on the types of deals that work there. They need to be finished lots, they're typically done on a rolling option basis so that we're not bringing them on balance sheet. And so in that area we really haven't seen much of a change. On the broader business, we have seen some flexibility on land sellers in terms of in some cases pricing, in some cases terms. And it really kind of is case by case and market by market. And depends on the needs of the seller and what their motivations are.
We now have a follow-up question from the line of Michael Rehaut with JP Morgan. Please proceed with your question.
Again just a couple of points of clarification. Dave, the purchase accounting in the gross margin, did I hear it right that that's now fully exhausted and going forward that adjustment is not going to be necessary?
That's correct.
And then also circling back to Wade Jurney with the transition and the sales process, I was curious if you guys had any sense they booked still obviously pretty healthy number of orders, 627 in the quarter. I was curious if you had any sense of what that number might have been without the changes to the sales process? What those changes might have done from in terms of suppressing a potentially bigger number.
Obviously, it impacted it because there's a lot of homes that we could have sold that we didn't. To what that extent is, we really haven't spent any time trying to figure that out because once we made the decision from a business perspective make that change, we just knew that the sales were kind of going to be what they're going to be. And we've really been focusing on making sure that we get our closings and that we don't have inventory that remains unsold. And that hasn't changed at all. So as I indicated earlier, I mean we're still committed to that strategy, we think it's the right strategy. And how many more sales we could have, we haven't really focused on it. We're really more focused on selling homes when we can close them.
Ladies and gentlemen, at this time there are not further questions. I would like to turn the floor back to Dale for any closing comments.
Thank you, Operator and thank you again to everyone for joining us on today's call. We look forward to speaking with you again next quarter.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.