Century Communities Inc (CCS) 2018 Q1 法說會逐字稿

Greetings, and welcome to Century Communities First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Scott Dixon, Vice President of Accounting. Please go ahead.

Good afternoon. We would like to thank you for joining us today for Century Communities First Quarter 2018 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 other SEC filings. Our SEC filings are available at www.sec.gov and on our website at 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 earnings conference call. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the forward 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 will 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 homebuilding markets. Afterwards, Dave will follow up with further details on our financial results, balance sheet and increased outlook for the balance of the year. Following our prepared remarks, we will open the lines for questions.

Our dynamic growth strategy and focused execution on our strategic plan allowed us to achieve another quarter of double-digit percentage growth on nearly all of our key metrics. We achieved record levels of home sales revenue, net new home contracts and backlog during the quarter while improving our adjusted gross margin performance by 150 basis points year-over-year to 23.2% within an environment of increasing cost and tightening labor supply. We are very pleased with the performance of both our legacy and acquired operations, especially in the West region where growth has continued to accelerate.

Continuous improvements in our operations, along with positive market fundamentals, led to a 128% increase in net income to a record $20 million for the first quarter 2018. Excluding the impact of onetime charges related to our homebuilder acquisitions, adjusted net income was $22.4 million, an increase of approximately 144% from the prior year's quarter. We grew home sale revenues to $395 million, an improvement of 74% from the prior year quarter, led by a 55% increase in home deliveries and higher average selling prices. This progress is a result of continued multiyear execution on our business strategy, which includes creation of a dynamic and scalable national homebuilding platform; a focus on situating operations in attractive markets with sound economic fundamentals; maintaining a strong capital position to support accretive, strategic investments; the acquisition of attractive land parcels to capitalize on the robust demand in our markets; and a commitment to driving continual execution improvement in all aspects of our business.

Beyond our core homebuilding operations, our joint venture and financing divisions each continue to surpass our expectations, contributing pretax income in excess of $4 million during the first quarter and impressive returns on invested capital. The performance of our joint venture partnership with Wade Jurney Homes has been extremely positive and allows us to further benefit from increasing first-time buyer demand through a high-returning, asset-light model. Since the inception of the joint venture in November 2016, our share of income from the venture has reached over $15 million, including $3.2 million of income in the first quarter. The venture sold 837 homes and closed 517 homes for $78.2 million in revenue, representing year-over-year increases of 45%, 61% and 66%, respectively.

We are continuing to expand our financial services group, which provides mortgage and title services to create a one-stop solution for our homebuyers. This effort contributed $1.2 million in pretax earnings during the first quarter compared to a loss of $754,000 in the prior year quarter, and we expect to further scale it throughout 2018.

Overall, we continue to maintain a positive view of the current homebuilding environment and our business in particular, while maintaining our focus on improving efficiencies in our operations and continuously evaluating opportunities that provide attractive returns. The integration of our prior acquisitions was completed early in the second quarter. And looking ahead to the balance of 2018, we remain on track to grow home deliveries and leverage our cost base to deliver another full year of record earnings and increased returns for our shareholders.

Lastly, I want to thank our team here at Century. Just last week, Century Communities was named the fastest-growing public homebuilder by Builder Magazine. Additionally, our joint venture, Wade Jurney Homes, was named the fastest-growing private homebuilder by Builder Magazine. Neither of these accomplishments would have been possible without the efforts and dedication of our people.

I'd now like to turn the call over to Rob to discuss our markets in greater detail.

Thank you, Dale, and good afternoon, everyone. We continue to benefit from favorable economic environments in our markets, resulting in increased new home sales growth in all of our regions. Economic indicators remain positive as the industry outlook for single family construction growth and home price appreciation both remain strong, while inventory levels remain low. These 3 factors, combined with our record levels of backlog, position us to drive additional earnings improvement for the remainder of 2018.

Our record first quarter operating performance was driven by significant growth in net new home contracts, deliveries, home sales revenues and backlog, all of which grew in excess of 40% year-over-year, in excess of 20% excluding acquisitions. Additionally, we continue to strengthen our positions in current markets by sourcing additional attractive land parcels that meet our disciplined underwriting requirements.

First quarter net new home contracts grew 44% to 1,378 homes, with organic growth accounting for approximately half of that increase, led by our Texas and Southeast regions. Our stable absorption pace, combined with an increase in selling communities, allowed us to end the quarter with homes in backlog up 60% to a record 1,757 homes. This represented a record backlog dollar value that was up 69% to $738 million.

We ended the quarter with land inventory in excess of 30,000 lots in many of the most robust U.S. homebuilding markets. We have demonstrated our ability to deploy capital at attractive returns and see many opportunities to replicate that success in both new and legacy markets. Consistent with the prior quarters, approximately 50% of our land was controlled rather than owned compared to less than 1/3 as recently as 2015. We expect to continue sourcing additional land parcels where it makes sense for our business, with a similar weighting towards controlled land to accelerate our scale while preserving our financial flexibility.

Looking at our market portfolio, we enjoy an increasingly stable growth profile due to our diverse geographic footprint and balanced exposure to many vibrant economies. Starting with our West region. We are seeing strong demand across the board and are strengthening our land positions by acquiring additional lots throughout the region. All of our California markets, which include the Bay Area, Central California and Southern California, continue to experience low supply, steady job growth and home price appreciation. The Seattle homebuilding environment remains strong with record low levels of supply and particularly strong demand in submarkets throughout the region.

Our Mountain region experienced solid growth, with home sales revenues up 19% year-over-year. Colorado, where Century has been a top 5 builder for many years, experienced strong new home sales and single-family permits growth. And entry-level demand in Denver remains promising. Pricing has been strong in this market and in Utah, where traffic is relatively steady despite tightening affordability. In Las Vegas, where we are also a top 5 builder, annual job growth has been the strongest of our Mountain region markets. Entry-level and move-up demand have also been trending positively, while resale supply remains constrained. Each of our markets in the Mountain region is benefiting from positive economic indicators, including employment growth, home price appreciation and limited new home inventory.

In Texas, we increased our lot positions by 43% year-over-year and continue to experience success with our recent pivot to lower-price-point homes, as highlighted by home sales revenues up 26%, net contracts up 30% and backlog up 30% year-over-year. Each of our markets in this region are benefiting from a tight supply of less than 3 months. The spring selling season got off to a strong start in Houston and in San Antonio. Construction growth and home price appreciation are expected to continue through the end of 2018. In Austin, we are continuing our transition to entry-level buyers as affordability has continued to tighten at higher price points.

Looking at the Southeast. We are pleased with the strong performance as home sales revenues and backlog increased 25% and 37%, respectively. In the first quarter, we took advantage of the rising demand trends in the region by opening 10 new communities and increased the number of selling communities by 46% year-over-year. Solid home price appreciation, job growth and rising entry-level demand have all contributed to make the Southeast one of the most attractive regions in the nation. Given robust entry-level demand in Atlanta, where we are the second-largest builder, we are continuing to roll out our Century Complete line, which is focused solely on entry-level buyers with smaller-sized homes, as we are doing in most of our markets.

In summary, we are pleased with our progress during the first quarter and focused on sourcing value-enhancing opportunities to generate additional returns for our shareholders. The positive economic fundamentals in each of our markets should continue to support a favorable homebuilding backdrop, and we remain well positioned to capture a rising share of demand in our markets.

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 2018, we experienced strong demand in all of our markets, grew homebuilding revenue and achieved solid improvement in adjusted gross margin. [This] has led to record net income of $20 million or $0.67 per diluted share, a 128% increase compared to the $8.8 million or $0.40 per diluted share in the prior year quarter. Adjusted net income, excluding onetime acquisition charges and purchase price accounting, was $22.5 million or $0.75 per diluted share. This compared to $9.2 million or $0.42 per diluted share in the prior year quarter. Adjusted EBITDA more than doubled to $42.3 million compared to $19.8 million in the prior year quarter. Home sales revenues increased 74% to $394.8 million compared to $226.4 million in the prior year quarter. This improvement in revenues was mainly driven by a 55% increase in home deliveries to 941 compared to 608 homes in the prior year quarter. Our average selling price was up 13% to $419,600, reflecting favorable product mix and core price momentum, along with a positive impact primarily from the addition of our West region. Net new home contracts increased to a record 1,378 homes, an increase of 44% compared to 957 homes in the prior year quarter, with half of that attributable to stronger demand trends in all legacy regions and the remainder bolstered by the new West region.

A combination of higher selling prices, tight cost controls and favorable mix led to a 150 basis point improvement in our adjusted homebuilding gross margin percentage to 23.2% compared to 21.7% in the fourth quarter and 21.7% in the prior year quarter. Adjusted gross margin excludes capitalized interest and purchase accounting impacts from cost of sales. Our strong performance this quarter was a result of a favorable product mix closing in the first quarter. Consistent with my comments on previous quarterly calls, we expect the 2018 adjusted homebuilding gross margin percentage to be consistent with 2017. Homebuilding gross margin was 19.1% as compared to 19.5% in the prior year quarter, including the 180 basis point impact from purchase accounting adjustments.

As a result of our anticipated final purchase accounting for the UCP and Sundquist acquisitions, we expect approximately $10 million of purchase price accounting adjustments to be incurred during the remaining 3 quarters of 2018.

SG&A as a percent of homebuilding revenues improved 40 basis points to 14.3% in the first quarter compared to 14.7% for the prior year quarter. We expect SG&A as a percent of revenues to trend down sequentially. With the integration of UCP completing early in the second quarter, we expect to begin realizing synergies in the back half of 2018 that we have not been able to see in our SG&A percentages to date.

Our financial services subsidiary contributed $1.2 million in pretax income, with $5.6 million of revenue in the first quarter 2018 compared to a $754,000 loss in the prior year quarter. JV income improved to $3.2 million during the first quarter, an increase of 152% compared to $1.3 million in the prior year quarter, which demonstrate a continued success from the ventures focused on entry-level buyers.

Now turning to our balance sheet and liquidity. As of March 31, 2018, we had long-term debt of $777 million, with total liquidity of $452 million, including $52 million of cash and the full availability of our $400 million unsecured revolver.

In closing, we are pleased with the substantial improvement in our results, along with the positive fundamentals exhibited in our markets during the first quarter. Looking at the full year 2018, we remain confident in our plan to deliver another year of record earnings as we take advantage of our national scale and diverse geographic footprint while constantly evaluating potential new opportunities. As a result, we are increasing our 2018 outlook for deliveries to be in the range of 4,600 homes to 5,100 homes and home sales revenue to be in the range of $1.8 billion to $2.1 billion. We continue to expect to end the year with between 130 and 140 selling communities. And as mentioned earlier, based on our mix of deliveries, we project a stable gross margin profile for the full year 2018 compared to the full year 2017. We expect net income trends to be seasonally similar to 2017 and earnings to grow as the year progresses. We continue to anticipate an income tax rate of approximately 25% for the full year 2018 as a result of tax reform.

Operator, please open the lines for questions.

(Operator Instructions) The first question is from the line of Michael Rehaut with JPMorgan.

This is Neal BasuMullick in for Mike. So I wanted to start on the gross margin in the quarter, if you could touch on it a bit. So, I guess, what were some of the big contributors there, maybe a little lower basis land versus California contributing more? What are some of the other puts and takes? And how should we think about those going forward?

Neal, it's Dave. I think that when you look at the gross margin, we had a favorable mix roll through in the first quarter. A variety of components went into it, whether we've been able to push price in the West Coast or other markets and being able to offset some cost increases. But overall, when we look at our gross margin of the backlog and going forward, we're still projecting, consistent with prior calls and prior results, kind of a gross margin in that 20% to 21% range on an adjusted basis, that is.

Okay. Yes, I guess, going down to SG&A, looking at the leverage you got this quarter on strong closings. Maybe what were some of the big items that outperformed your expectations in terms of limiting cost? And, I guess, maybe have your expectations for SG&A changed at all?

I think on the SG&A side, a couple of things to think about. We're down 40 basis points on a year-over-year, but when you look at the company, it's quite different from where it was the first quarter of last year to the first quarter this year. You look at fourth quarter to first quarter on a sequential basis and our fixed G&A is actually down. We're running commissions. Now that we've had about 8 months of the consolidated company that we've been reporting on with the UCP and Sundquist transactions, commissions have been running about 3.5% of revenue. Our fixed G&A is actually down from the fourth quarter to first quarter. So we feel as though G&A is trending in the right direction, as we've been saying we'd be looking to do for some time. And I think that now the UCP integration was completed early in the second quarter, we're going to look to see some of these synergies that we've talked about in the past calls, start to see some of those start to roll through here in the second half of the year. With that, we've said that it's about $10 million on synergies. Some of that will come through in the margin line. Some will come through in the G&A line items.

The next question is from the line of Jay McCanless with Wedbush.

The first question I had in term -- you all talked about pricing power a couple of times on the call. How do you guys feel like you're doing versus the input cost inflation we've been seeing in most markets? And could you maybe comment on how many -- what percentage of your communities you raised prices in this quarter?

Sure, Jay. This is Dale. As we've historically done, we really look at it on a subdivision-by-subdivision basis, and there's some subdivisions across the country where we have more pricing power than others. So as opposed to looking at it across the portfolio, it's really down to the individual subdivision. In general, when we combine the portfolio together, we've been able to overcome the cost increases. And so we think we can continue on that same path.

Great. The second question I had, if I just take the new midpoints of the guidance, it looks like it's an ASP somewhere in the, call it, 402 range for the full year. Should we expect a gradual trending down of the ASPs? Or is it going to -- is there going to be some lumpiness in there from geographic mix?

I think it's going to be both. I think that there's going to be a little bit of trending and a little bit of lumpiness. But when you look at some of the markets, we've been trending down, but that's been an intentional rotation of our portfolio going more towards entry-level product and towards a lower ASP.

And then the last question I had. Excited to hear you guys are still rolling out Century Complete. What percentage of your neighborhoods currently are Century Complete? And where do you want to take that percentage?

It really depends division-by-division. And within that division, some of the percentages are, at this point, on new deals trending to almost 100%. And then other divisions, it could be 25% and growing. But as a nice consolidated number, I think we're looking at somewhere around the 50% mark on a go-forward basis.

So 50% is the goal you're trying to get to going forward?

Yes. But as we've always said, I mean, we build a wide variety of product, and we look at our geographies, we build in a wide variety of price points. And that's not something that we're going away from. We think that's an important component to keep that balance. But with the demand that we see on the entry level, our focus is to push as much of our product in that direction as we can.

Our next question is from the line of Alex Rygiel with FBR.

Dave, can you give us a little bit of help on backlog conversion over the next quarter or 2?

I think that our backlog conversion on an annual basis, if you were to take '16 and '17 when you pass forward that second quarter and third quarter of 2018, I don't think it should be too dissimilar than what we've seen. We've got information on our website with our supplemental schedule that kind of shows what the pro forma combined UCP and Century numbers would be. So that ought to help you get to a decent backlog conversion rate for second, third and fourth quarter.

And then turning over to Wade Jurney, clearly, a huge success. Can you talk a little bit about the seasonality of that business and how we should expect it to ramp in 2Q, 3Q and 4Q?

Like all homebuilders, that business is seasonally cyclical as well. But when you look at it, we're continuing to grow into additional subdivisions. And so with that growth, hopefully, we offset some of the seasonality as we continue to grow. But with that being said, I mean, obviously, the spring selling season is important in that business, as it is in all other homebuildings.

And lastly, controlled lots hasn't changed too much over the last 3 or 4 quarters. Any thought on that? And when should we anticipate that changing?

Right now, we feel good with that percentage of around the 50-50 split between owned and controlled. And we're still actively acquiring land in every one of our markets. And we're looking to continue to grow within every one of our markets. And so with that, we like that mix at about 50-50. If we see anything change toward the future, that could switch to more of a controlled versus owned, but right now, we feel good at the 50-50 range, give or take.

The next question is from the line of Nishu Sood with Deutsche Bank.

So the synergies that are going to come through in the second half, Dave, so should we expect a $10 million run rate by the end of the year? And you'd mentioned that it would come through, I think, in the SG&A line, maybe some in the gross margin line as well. Can you give us a kind of rough breakout of how it might fall?

We haven't provided any disclosures yet on how the synergies, the $10 million, how it gets broken out between kind of some of the scale we've been able to achieve, so in the purchasing, the rebates on the operation side that would hit margin versus SG&A. We're still going through and finalizing contracts, and we'll be getting that going forward. But the $10 million run rate, you'd probably see a run rate number in 2019 because we're going to start accumulating those synergies here in the back half of 2018, but we won't get $10 million in the next 2 quarters.

Got it. And on the legacy UCP portfolio, how have your efforts been going in terms of accelerating volume growth out of that portfolio, particularly the Western legacy business? And the community count growth as well, there was the potential when you bought it to accelerate the kind of pipeline of communities in the mold of improving returns. How are both those efforts going in terms of volumes and the community pipeline?

Well, Nishu, I think we're making progress on 2 fronts. We're making progress on taking existing UCP land positions that needed capital to take them from an entitled state into a developed state. And so we have moved forward on that basis. I think we've made very good progress in that regard. On the flip side, the other area that we've had a focus is adding new land positions to each of the former UCP divisions. Because of their capital constraints that they had previously, they weren't able to enjoy some of the benefits that the individual markets would give them. And so we've been able to solve that. And so while it doesn't change overnight, we've made good progress. We're very happy about where we stand today.

Got it. And financial services, where are you with the expansion of that? How many markets is it in so far? And I think your intention is to roll it out broadly. So, yes, just wanted to get a progress check there, please.

Yes, no problem. We have loan officers in all of our divisions. We have somebody -- we have a couple divisions sharing people. But we do have our Inspire home loans rolled out to all of our divisions throughout the portfolio. And so as we've talked on previous calls, 2017 was really kind of a startup year in terms of putting people and process and licensing in place across our portfolio. And now in 2018, we're looking to really start improving the operations. Now that we have people, like in the West Coast, now that we have loan officers there, we can start capturing homebuyers. And then several months from now when the home is built and closed, we'll start recognizing the revenue and profit dollars from that.

Got it. And last one for me. The Century Complete, the press release you put out a few days ago, the Colorado community that will have Century Complete, I believe the starting point, which I assume was referring to the complete product, was in the low 300s. So is that just a reflection of that market? What kind of price point are you aiming at with that? Because in most markets, 300 for entry level would be the kind of entry-level-plus segment.

So, Nishu, it really depends on the market. So that's a function of the price points within the Denver market being an expensive market, one of the more expensive non-coastal markets in the U.S. And the low-300 price point range is truly entry level in this market. You look at that as an example with, say, Houston where we're bringing out Century Complete in the high 1s in the Houston market. So it really depends market-by-market, even though they would be essentially the same plans, they may have a little bit of an exterior elevation difference, but generally speaking, similar plans. And so that price point in Denver though is just market-driven.

Next question is from the line of Alex Barrón with Housing Research Center.

I was wondering on Wade Jurney, has there any -- been any progress in rolling those guys out to other markets? Or what's the progress there?

Well, yes. That business is -- we've looked at expanding it. We have acquired lots in Arizona at this point, and we're continuing to explore additional markets. As well as within the markets that -- in terms of the states that the business previously operated in, we're continuing to expand into new markets within the same states. So it's something that when you look at the demand for that price point of product, it's really unmatched in -- with most other builders. So it's something we see a lot of opportunity in, and we are continuing to expand it into new geographic horizons.

Okay. And as far as the tax rate, what were the factors that helped out this quarter, obviously, besides the 21% tax law?

Yes. So our tax rate this quarter was 13.5% due to just a couple of discrete onetime items. But going forward for quarters 2, 3, 4 for the balance of the year, we continue to expect a tax rate in the 25% range.

What were those couple of factors? I guess I missed them. Sorry.

So deferred tax adjustments for the remeasurement and some compensation adjustments that we made for the tax rate due to share vesting.

At this time, I will turn the floor back to management for closing remarks.

Thank you, operator. Thank you, again, to everyone for joining us today. We look forward to speaking with you again next quarter.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.