LGI Homes, Inc.

Welcome to LGI's Homes second quarter 2023 conference call. Today's call is being recorded and a replay will be available on the company's website at www.lgihomes.com. After many minutes and prepared comments, there will be an opportunity to ask questions. At this time, I'll turn the call over to Josh Fedor, Vice President of Investor Relations and Capital Markets.

Thanks and good afternoon.

I'll remind listeners that this call contains forward-looking statements, including management's views on the company's business strategy, outlook, plans, objectives, and guidance for 2023. Such statements reflect management's current expectations and evolve assumptions and estimates that are subject to risks and uncertainties that could cause management's expectations to prove to be incorrect. You should review our filings with the SEC for discussion of the risks, uncertainties, and other factors that could cause actual results to differ from those presented today. All forward-looking statements must be considered in light of those related risks, and you should not place undue reliance on such statements, which reflect management's current viewpoints and are not guarantees of future performance. On this call, we'll discuss non-GAAP financial measures that are not intended to be considered in isolation or as substitutes for financial information presented in accordance with GAAP. Reconciliations of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be found in the press release we issued this morning and in our quarterly report on Form 10-Q for the quarter ended June 30th, 2023 that we expect to file with the SEC later today. This filing will be accessible on the SEC's website and in the investor relations section of our website. I'm joined on today's call by Eric Lieber, LGI Homes Chief Executive Officer and Chairman of the Board, and Charles Murdian, Chief Financial Officer and Treasurer. I'll now turn the call over to Eric. Thanks, Josh.

Good afternoon and welcome to our earnings call. The results we reported this morning represent significant progress towards our full-year guidance and longer-term objectives. We're proud of these recent accomplishments and grateful to our employees who successfully executed our strategic initiatives against the backdrop of continued economic uncertainty. In the second quarter, we closed 1,854 homes, a 36% increase over the first quarter, and generated over $645 million in revenue. We're continuing to invest in the growth of our business, bringing more new communities online and identifying opportunities for additional growth in the years to come. We ended the second quarter with a total of 102 active communities, a net increase of 10 communities compared to the same period last year. Company-wide, we averaged 6.1 closings per community per month, a 30% improvement over the 4.7 pace delivered in the first quarter. The increase resulted from our continued success at connecting motivated and qualified buyers with our highly trained sales teams and the flow-through of the strong net order pace we reported on our last call. Our top market on a closings per community basis was Dallas-Fort Worth with 10.2 closings per month. Next was Charlotte with 10 closings, followed by Houston with 7.9. Rounding out the top five were Fort Pierce, Florida and Las Vegas, Nevada, each with 7.8 closings per month. Congratulations to the teams in these markets on your outstanding performance last quarter. During the quarter, we made significant progress on two key initiatives. First, we increased affordability for our customers. As the market cooled last summer, we pivoted to starting smaller square footage homes that reduced average selling prices and enabled more customers to qualify for home ownership. In a number of markets, we introduced entirely new floor plans that bridge gaps between existing sizes or further reduce the size of our smallest offering. The success of this initiative has started to materialize in our results. The percentage of closings coming from homes smaller than 1,500 square feet went from 19% in the second quarter of last year to 27% in the quarter just completed. This trend helped drive the decrease in selling prices year over year in four out of our five segments, despite increasing prices in most of our communities during the quarter. While future home sizes and selling prices in the coming quarters will vary, we believe our continued efforts to reduce the cost of home ownership will be a key factor in the success of our future results. The other key initiative during the quarter was to increase profitability and our gross margins reflected that focus. On our last call, we shared our intention to return profitability metrics back to their historical levels, starting with a 100 basis point increase in gross margins in the second quarter. I'm pleased to report that we're ahead of schedule. In the second quarter, we achieved a 170 basis point improvement in both financial and adjusted gross margins through a combination of sales price increases reduced house costs, and a successful opening of new communities at margin profiles in line with our historical results. Returning margins to their industry-leading levels is foremost in every decision we're currently making. While there's still work to do, we're encouraged by the progress we've made year to date. I'll now turn the call over to Charles for more details on our financial results.

Thanks, Eric. Revenue in the second quarter was $645.3 million based on 1,854 homes closed. Sequentially, revenue was up 32.4% and closings were up 35.7% as we continued to benefit from healthy demand and began to see the first quarter's strong order pace start to flow through our results. Of our total closings, 139 were through our wholesale channel, representing 7.5% of total closings, similar to what we delivered in the same quarter last year and in the prior quarter this year. Our average selling price of $348,042 was 2.4% lower, both year over year and sequentially. The decrease was attributable to a higher percentage of homes sold in our lower-priced central southeast and Florida segments, community transitions, and our success at delivering smaller, more affordable floor plans. Our second quarter gross margin was 22%, and our adjusted gross margin was 23.8%. As Eric highlighted, adjusted gross margin improved 170 basis points sequentially compared to the 100 basis point improvement we guided to on our last call. The outperformance was driven by our success in raising prices in most of our communities, lower input costs, and new community openings at higher margin profiles. Adjusted gross margin excluded $9.1 million of capitalized interest charged cost of sales and $2.7 million related to purchase accounting, together representing 180 basis points. Combined selling, general, and administrative expenses for the second quarter were $76.9 million, or 11.9% of revenue, a 300 basis point improvement over the prior quarter. Selling expenses were $49.2 million, or 7.6% of revenue, compared to 8.8% in the first quarter of this year. The 120 basis point sequential improvement was primarily due to reduced spending on advertising as we curtailed marketing in communities where inventory was limited. General and administrative expenses totaled $27.6 million, or 4.3% of revenue, compared to 6.1% in the first quarter of this year. The 180 basis points sequential improvement was primarily related to operating leverage realized from the increase in revenue. We expect G&A dollars to remain relatively flat in the second half of the year, with the potential for generating additional operating leverage dependent on volume. At the same time, we expect selling expenses as a percentage of revenue to increase as we turn up advertising spend in the second half to support additional community openings and drive leads to existing communities as more inventory becomes available for sale. As a result, we're maintaining our expectation for full-year SG&A as a percentage of revenue to range between 12.5% and 13.5%. Pre-tax net income for the second quarter was $71.4 million, or 11.1% of revenue. Our effective tax rate was 25.6% compared to 24.3% in the same quarter last year. The increase in the rate was primarily due to mixed shift to higher tax geographies and fewer federal energy-efficient home tax credits. We currently expect that our full-year effective tax rate will range between 24 percent and 25 percent. Our second quarter reported net income was $53.1 million, or $2.26 per basic share and $2.25 per diluted share. Second quarter gross orders were $2,609, up 109.7% over the same period last year. Net orders were 1,937 homes, an increase of 124.2% over the second quarter of last year. Our cancellation rate during the quarter was 25.8% compared to 30.5% in the same period last year. And at June 30th, our backlog consisted of 1,638 homes valued at $601.3 million. Of those homes, 131, or 8% of total backlog, were related to wholesale contracts with single-family rental partners. Turning to our land position, at June 30th, our portfolio consisted of 69,226 owned and controlled lots, a decrease of 23.1% year-over-year and down slightly from the prior quarter. Of those lots, 56,763, or 82%, were owned, a decrease of 8.3% year-over-year and 1.5% sequentially. Of our owned lots, 43,762 were raw land or land under development, with approximately 24% of those lots in active development. Of the remaining 13,001 owned lots, 1,124 were completed homes, including our information centers, 3,027 were homes in progress, and 8,850 were finished vacant lots. During the quarter, we started construction on 2,351 homes, an increase of 37.3% sequentially as we ramped up construction to meet demand. We controlled 12,463 lots at quarter end, a decrease of 55.6% year-over-year, but an increase of 3.1% sequentially. With that, I'll turn the call over to Josh for a discussion of our capital position.

Thank you, Charles. As of June 30th, we had just over $1 billion of notes payable outstanding, including 768 $1 million drawn on our credit facility. Our debt-to-capital ratio was 37.8%, and our net debt-to-capital ratio was 36.8%. This marked our third consecutive quarter of delevering. Total liquidity was $384.7 million, including $43.3 million of cash on hand and $341.4 million of available capacity under our credit facility. At June 30th, our stockholders' equity was $1.7 billion, and our book value per share was $73.52, an increase of 13% over the same period last year. With that, I'll turn the call back over to Eric.

Thanks, Josh. In summary, we delivered a great quarter, and we're entering the second half of the year well-positioned to achieve all of our targets for 2023. Demand trends remain positive, and our recent performance has created significant momentum as we focus on driving growth, improving profitability, and continuing to create long-term value for our shareholders. Based on our performance year to date, current backlog, and continued momentum and sales activity, we're raising our year-end closing guidance to a range between 6,500 and 7,200 homes. Despite the decrease in our average selling price in the second quarter, We continue to expect that full year average selling prices will range between $345,000 and $360,000. We continue to expect to be active in 115 to 125 communities at year end with an additional 20% to 30% growth in our community count in 2024 as we expand our presence in existing markets and add new ones. One of those new markets is Salt Lake City. We recently welcomed our new sales team from Utah to our corporate office for new hire training and expect to report our first closings from that state in the fourth quarter. We're focused on increasing gross margins and expect to deliver an additional 150 basis points of margin improvement in the third quarter. Given our progress to date, we're raising our full year gross margin guidance to 21.5% to 23.5% and adjusted gross margin to 23% to 25%. I'll conclude by expressing my appreciation for the LGI Homes teams around the country. Your intense focus on increasing affordability and enhancing profitability made our great performance last quarter possible. Thank you for your continued commitment to our company and to our customers. We'll now open the call for questions.

Thank you.

We will now conduct the question and answer session. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster.

One moment, please.

Our first question comes from the line of Ken Zinner. with Seaport. Please proceed.

Good morning, everybody. Good morning, Ken. Josh.

Please proceed. Can you hear me?

We can hear you. Please proceed.

Great. So my question is, starting big picture, looking into next year, your 20 to 30% community count target to range. But I assume that's based on year end communities just to get a sense of the ramp. And then can you talk to how many of those communities are going to be or what percent are going to be a new market? So if you're in X today, how many are you going to be in that you're not in currently?

Operator, are you hearing management?

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I didn't hear management.

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Ben, can you hear me now?

I can hear you now. You must be using Verizon. How are you guys doing? There's a little feedback. I could re-ask my question. I wasn't sure if you heard it. Yeah, I heard your question. So at the end, Yeah, we're getting feedback.

You want to reset it with the operator or?

Ken, can you hear me now? I hear about eight of you.

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