Century Communities, Inc. (CCS) on Q1 2021 Results - Earnings Call Transcript
Operator: Greetings and welcome to Century Communities First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now like to turn the conference over to Hunter Wells, Vice President of Investor Relations for Century Communities. Thank you. You may begin.
Hunter Wells: Good afternoon. Thank you for joining us today for Century Communities earnings conference call for the first quarter ended March 31, 2021.
Dale Francescon: Thank you, Hunter. And welcome everyone to our quarterly conference call. 2021 is off to a very strong start. In the first quarter, we achieved multiple all-time records, including exceeding $1 billion in total revenues for the first time. Generating our highest quarterly net sales ever with 3,455 new contracts, a 45% year-over-year increase and producing $131 million in pre-tax income, a 284% increase, a $102 million in net income, a 289% increase and a $152 million in EBITDA, a 198% increase. Home sales revenues increased 67% to nearly $960 million driven by a 50% increase in deliveries. We delivered a first quarter record, 2,797 homes with broad-based strength across our regions. Century, like the rest of the construction industry, has been impacted by elevated costs in labor and materials stemming from surging demand. Our ability to successfully push price has offset any negative impact to our margins. In the first quarter, we increased home sales gross margins to 21.1% as compared to 17.7% on a year-over-year basis. In fact, our margins on new sales have sequentially increased each month since May of last year.
Rob Francescon: Thank you, Dale. We ended the first quarter with a backlog of 4,097 homes, a 58% increase over last year and the highest in our history, resulting in a record dollar value of $1.6 billion. Importantly, as a result of our business model, 95% of these homes were already under construction at quarter end. This healthy backlog has us well-positioned to meet our growth objectives. Given the strength of the macro backdrop, we have prioritized our land investments. We ended the first quarter with nearly 58,000 owned and controlled lots, a 61% increase over last year. We already own and control all the lots we need to support our 2021 growth as well as most of 2022. While the land market continues to be competitive, we remain disciplined and still do not include home price appreciation or current absorption rates in our underwriting assumptions. We've advanced our land-light operating model, increasing our percentage of controlled lots to 64% from 42% last year. Controlled lots allow us to better manage risk as we can quickly respond to shifting market dynamics, further supporting this land-light strategy is our continued focus on spec homes. In the first quarter, 82% of our total deliveries were built on spec. Given the demand for quicker moving homes and increasing input costs especially lumber, today we allow very few presale homes to be offered for sale. This approach allows us to not only maximize the sales price of the home but gives us good visibility into its costs. Our land acquisition efforts are based on our desire to deepen and widen our share positions within existing markets, as well as strategically expand into additional ones.
David Messenger: Thank you, Rob. During the first quarter of 2021, net income increased 289% to a record $101.7 million or $3 per diluted share compared to $26.1 million and $0.78 in the prior year quarter. First quarter pretax income was $131 million, an increase of 284%, pretax margin was 13% compared to 5.7% in the prior year quarter.
Operator: At this time, we will be conducting a question-and-answer session. Our first question is with Michael Rehaut with J.P. Morgan. Please proceed with your question.
Unidentified Analyst: Hi, this is Maggie on for Mike. Congrats on the quarter. First, I'd like to dig into the SG&A line a little bit more. Obviously, you saw some really nice volume leverage during the first quarter, but I was wondering if you could talk about any other moving pieces during the quarter there? And also, how we should be thinking about that line item as the year progresses?
David Messenger: Yes, hey Maggie, this is Dave. I would say that, we've obviously seen a lot of tremendous benefits on the SG&A line item over the past several years, as we have historically done a variety of acquisitions and we've grown our top-line and we've made a lot of significant advances internally with our G&A structure, especially on the fixed side, and you're seeing some of those benefits coming through here in the first quarter. And I think you saw benefits various quarters last year as well. I think going forward we were probably somewhere in that high-single low-double digit range on a go-forward basis, as it will bounce around a little bit whether it's due to commissions or other initiatives that we have ongoing with the -- our corporate office and the fixed structure, but we're very pleased with where we are today.
Unidentified Analyst: Got it, thank you. And next, I was just wondering if you could talk a little bit about what you're -- what you've seen in the market through the first few weeks of April in terms of demand trends, sales pace, any color you can give around that?
Dale Francescon: Sure Maggie, this is Dale. Well, we're really almost a month into the second quarter and we've seen no reduction in demand or sales momentum. When we look at April, we are tracking to end April up about 50% on a year-over-year basis. So relatively consistent with where we were in Q1.
Unidentified Analyst: Got it. Thanks, guys.
Dale Francescon: Thank you.
Rob Francescon: Thank you.
Dale Francescon: Operator, next question please.
Operator: Our next question is with Alex Rygiel with B. Riley FBR. Please proceed with your question.
Alex Rygiel: Thank you, and fantastic quarter, gentlemen.
Dale Francescon: Thanks, Alex.
Rob Francescon: Thanks, Alex.
Alex Rygiel: Couple of questions here. Obviously, the first quarter was fantastic from a gross margin standpoint. How should we think about the cadence of gross margin over the next couple of quarters?
David Messenger: Yes, we had a tremendous first quarter, and I think that as we look at our backlog 4,000 homes, and what we think will be delivered in Q2, Q3. We expect gross margin to be relatively in line with where Q1 was that is -- as we're able to be pushing price at the moment, we are also experiencing relatively significant increases on the prices and materials on the supply side. So we'll continue to try pushing as much through to the end user. We are seeing pressures on the margin line from that standpoint.
Alex Rygiel: And based upon the cadence of order activity in your timeline for deliveries, historically, the fourth quarter always witnessed a pretty significant step up in closings. How should we think about the fourth quarter of this year based upon your timeline of closings?
David Messenger: I think there's probably still a fair trend that you're going to see, that we had a good first quarter, you see second quarter and third quarter will be lower than the fourth quarter, just given the way the selling season works and when we've got our sales pace happening, and especially, if certain closings get moved out from Q2, Q3 they'll end up in the fourth quarter.
Alex Rygiel: One last question. The Century Complete ASP grew significantly in the quarter, can you expand upon this little?
Dale Francescon: Yes, it's really a function of two things. We've been raising prices on the Century Complete line as we have been on the Century Communities line. So on a unit-by-unit basis, we've had have increased prices. As well as over time, we've improved our product, we've enhanced our offering. We've gone into more subdivisions as opposed to more scattered lots. And so, when we -- when you look at that, we are just having homes that we can sell for more than where the previous business was set up before we started making all the transitions.
Alex Rygiel: Great. Thank you very much.
Dale Francescon: Thanks.
Rob Francescon: Thank you.
Operator: Our next question is with Deepa Raghavan with Wells Fargo Securities. Please proceed with your question.
Deepa Raghavan: Hi, good evening.
Dale Francescon: Hey, Deepa.
Deepa Raghavan: Thanks for taking -- hey, hi. Thanks for taking my question, appreciate it. Can you talk a little bit about how the quarter deliveries performed closings with respect to your expectations? Looks like it outpaced meaningfully but the guide raise kind of seems a little conservative to us, I mean 250 units higher. Just curious how much did you beat Q1 by versus your expectations? Also any color on, if the guide raise reflects just Q1 outperformance, is there second half outlook increase also in that guide or conservate -- or conversely is their pull forward that you might have factored and just curious if you're able to just factor that components within that raise to -- of delivery raise, 250 units?
David Messenger: Hey Deepa, this is Dave. I would say that in terms of the delivery raise in our guidance, we do it on an annual basis, we don't necessarily comment on quarterly expectations and that's why we don't provide quarterly guidance. Internally as you could probably imagine, we have fairly lathy and high expectations for what the company can deliver and what we've built and what it will achieve. So, I'd say we're looking at it at 250 being a raise or is really over the course of the year and not necessarily a pull forward of anything from next year.
Deepa Raghavan: Okay, that's fair. My second is on pricing strength. Any thoughts on the pricing strength that's being witnessed year especially as we head into 2022, what are some of the drivers that you are probably monitoring to test how long this run could last?
Dale Francescon: Well, I think really from an operational standpoint what we've done is, in many cases we reduced the size of the releases that we provide, and then every time we have a release, we have a price increase in some. And some of our communities where we may have larger releases, than we set a set price increase every so many homes that are sold. So, we look at that, we're really monitoring down to the subdivision level and we really have not seen any price resistance at any levels that we've achieved. If we start seeing that, then we can adjust but it's really down to our teams who are managing on a subdivision level and each grouping of homes that are sold, we're trying to get the maximum sales price for those homes.
Deepa Raghavan: Okay, that's fair. My final one if I can sneak it in. Are you seeing any incremental challenges on the supply chain especially with delivery of an appliances, windows, doors, lumber obviously, it's well telecast more on the price increase side but just curious any regard -- are you -- are your cycle times extending because of any incremental supply chain pressures? Thank you.
Dale Francescon: Yes, we've seen a little bit of impact to that and our management team here at the corporate level that's devoted to helping the divisions with their purchasing and supply chain management have -- has really done a very good job of anticipating where we're going to have shortages or delays. And they've been able to, in many cases, transfer from different suppliers, in certain cases even different markets, to satisfy the needs that we have. To-date the -- really the delays we've seen have been pretty manageable, they've been in the case of maximum of a week to two weeks. And it's not everywhere, some markets are more than others and some we're not seeing any impact at all. But it's something that we're keeping a close eye on and we anticipate as the year progresses, we certainly could see more delays, but so far it's not something that's been a big impact to us.
Deepa Raghavan: Got it. Thanks so much. I'll pass it on.
Dale Francescon: Sure.
Rob Francescon: Thanks.
Operator: Our next question is with Jay McCanless with Wedbush. Please proceed with your question.
Jay McCanless: Hey, good afternoon. Congrats on a great quarter. I'd maybe ask the guidance question a little bit differently. The unit midpoint went up 2%, but the revenue midpoint went up 8% on the guidance. Is that price mix you think you're going to be getting from different parts of the country? Is it some of the new expansion? You all maybe just talk about why the revenue midpoint moved up so much more than the unit midpoint?
David Messenger: Hey Jay, this is Dave. The ASP that we're seeing right now was outpacing our expectations at the beginning of the year. And so given where we're delivering homes today in the first quarter, where we expect the ASP we're seeing at backlog is all prudent to be increasing the revenue accordingly.
Jay McCanless: Okay. So just price mix.
David Messenger: Yes.
Jay McCanless: I'm sorry, so my second question is on the community count, can you talk about where you think that that might be for 2Q and where it could in the year?
David Messenger: Yes. Q2, as we said on our last call, we expected Q1 to decline, Q2 probably has a small dip to it as well as we're selling out of communities faster than we had originally intended last year when we brought them on. So then you start seeing some growth in Q3 and Q4, but it will be back-end weighted to the end of the year.
Jay McCanless: And then, could you talk about order growth by month? I know everyone felt the pinch from Texas but were your orders evenly weighted to the different months of the quarter or how did that flow?
Dale Francescon: Yes. We really didn't see any spike or dip in any of the months. When we look at the absolute number of orders, they were fairly consistent throughout the three months. On a year-over-year basis, obviously, March was up more just because of the impact in the second half of March last year, but in terms of absolute number of orders they were very consistent.
Jay McCanless: Okay. And then the last question I had, could you give the stat again, I apologize I missed it, but what percentage of the backlog was started that you guys sold this quarter?
Dale Francescon: 95%.
Jay McCanless: Or sorry, you started the specs? 95%.
Dale Francescon: 95%.
Jay McCanless: Okay.
Dale Francescon: 95%. That's what in our backlog, 95% of those homes were already started by quarter end. When we look at what closed for the quarter, that was about 83% of them were started to specs.
Jay McCanless: Okay, great. Congrats, again. Thanks for taking my question.
Dale Francescon: Thanks, Jay.
Rob Francescon: Thanks, Jay.
Operator: Our next question is with Alan Ratner from Zelman and Associates. Please proceed with your question.
Alan Ratner: Hey guys, good afternoon. Congrats on the great results. First question, would love to dig in a little bit to the comment you made earlier, just about land underwriting just as far as not assuming HPA or current absorptions. First, any details you could give, just in terms of what type of absorptions you are assuming on new land acquisitions? And I guess more broadly, I'm a little surprised just in general that land sellers would be kind of willing to go along with that, just seems like the land market is pretty heated and all builders are ramping their lot counts pretty significantly. So, when you come to a land seller with your assumptions in underwriting and tell them, hey, we're incorporating something lower than where the market is today. How does that conversation go in general? I mean, is that pretty much the norm across the industry or have you started to see builders got a little bit more irrational?
Dale Francescon: Well, we are seeing some builders get more aggressive, but there's many publics that take the same approach that we do, Alan. And there is a difference between using home price appreciation in your underwriting and using current pricing, and so we'll look at the absolute most current pricing as we go forward but we're not going to put in an accelerator on appreciation and think that we're just going to keep clipping away at a large percentage each and every year during the life of that project. So we're looking at it just where it is today. Same thing on absorptions. We're looking at what we think a project can sustain over the life of it. And so if we're taking lots on the balance sheet, we may have those lots for in excess of a year, let's say. And so with that, we're going to look at what we're going to average over that period of time versus what somebody may have been selling at a robust time in the spring on a competing project. So we're going to look at it that way and candidly, most of our contemporaries from the public realm, look at it that way as well.
Alan Ratner: Okay, that's helpful. And then second question, given the fact that you made the comment you're not really allowing many presale homes to be available for sale, can you talk a little bit about kind of the production cadence in terms of how many homes you're starting each month? Are you kind of running at that 1,000 per month range that obviously your closing guidance would imply or have you been able to accelerate that even further in recent months to potentially provide some upside if the demand environment allows it?
David Messenger: Hey Alan, this is Dave. The closing guidance doing about 1,000 a month, we feel comfort with what we've been starting since the last part of last year. We obviously took a big pause in Q1, Q2 and then ramped it back up and we've been pretty consistent of what we've been doing for starts through call it Q4 into Q1, and we feel comfortable with where we are today and what we're starting and what we think will ultimately deliver for the year.
Alan Ratner: So David, are you confirming that the 1,000 per month that I just threw out that is kind of roughly what you're starting or do you have a specific number there? I'm just curious what that pace is running at today?
David Messenger: Yes. We've never disclosed what our starts are pro bond or any statistics like that. I mean, I understand that that's what the guidance implies, but we haven't previously disclosed what our quarterly starts are.
Alan Ratner: Okay, I appreciate it. Good luck, guys.
David Messenger: Thanks.
Operator: Our next question is with Alex Barron from Housing Research Center. Please proceed with your question.
Alex Barron: Good afternoon, gentlemen, and great job on the quarter.
Dale Francescon: Thanks, Alex.
Rob Francescon: Thanks, Alex.
Alex Barron: I -- yes, I thought of the progress you've been making on the land front, seems like you guys are holding the line on owned lots and increase in your option lot significantly. Just kind of curious how you see that playing out over the next few quarters, is that going to increase in terms of that direction?
Dale Francescon: Well, we're definitely moving toward a more asset light, land-light business model. And so we've made tremendous progress to get now 64% of our lots being controlled and we would hope to improve on that, on a go forward basis, but at a minimum be at that level.
Alex Barron: Is there something that has fundamentally changed in the business that's allowing that now or is it more just your choice to move in that direction?
Dale Francescon: Part of it is, we're moving through with velocities, we're moving through our inventory quicker and so that's allowing us to do that. Plus we've spent additional time on trying to bring land on a just-in-time basis, so that it is controlled until we're ready to actually use it and go forward with construction.
Alex Barron: Okay, great. So from a capital perspective, it would seem that that's going to free up some cash flow and looks like your balance sheet is obviously improving. So, any thoughts around share buybacks or dividends at this point based on that?
David Messenger: This is Dave. We have a share repurchase program in place that we've had for some time that is about 3.9 million shares available for repurchase on it. Obviously with the cash balance that we have today, our capital preference is to reinvest in the business. We've got a significant amount of lots that we are working on today, but we always evaluate whether or not share repurchase or some other distribution of capital is in the best interest of the company.
Alex Barron: Okay, great. And if I could ask one last one, obviously the -- looks like the order momentum and the Century Complete was very strong this quarter. Should we anticipate that that line of business is going to keep growing faster than the rest of the company?
Dale Francescon: It's really been our goal to increase the Century Complete brand and as we've said on past calls, that was the brand that was hurt the most when we hit pause last year and that momentum has picked back up the -- it's very dependent on land closings, because virtually every lot that we have on balance sheet for Century Complete is taken on when we're starting that home. So when we look at that, now that machine is ramp back up, we would certainly expect to see that the starts and the sales and the result in closings will continue to increase.
Alex Barron: Okay, great. Best of luck for the year.
Dale Francescon: Thank you.
Rob Francescon: Thank you.
Operator: We will now turn the line back over to Dale for some brief closing remarks.
Dale Francescon: Thank you, operator, I'd like to thank our entire team, especially our frontline employees who've continued to outperform expectations, demonstrate their commitment to exceptional customer service and their tenacity and unparalleled work ethic. Without your efforts Century would not be where it is today. Thank you all for your time today. We appreciate your continued support and investment and look forward to speaking to you again next quarter.
Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
