Yahoo Finance LGI Homes, Inc. (NASDAQ:LGIH) Q1 2024 Earnings Call Transcript
LGI Homes, Inc. (NASDAQ:LGIH) Q1 2024 Earnings Call Transcript April 30, 2024
LGI Homes, Inc. misses on earnings expectations. Reported EPS is $0.00072 EPS, expectations were $1.02. LGI Homes, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to LGI Homes' First Quarter 2024 Conference Call. Today's call is being recorded and a replay will be available on the company's website at www.lgihomes.com. After management's prepared comments, there will be an opportunity to ask questions. [Operator Instructions] I would now like to hand the conference over to Executive Vice President of Investor Relations and Capital Markets, Joshua Fattor.
Joshua Fattor: Thanks and good afternoon. I'll remind listeners that this call contains forward-looking statements, including management's views on company's business strategy, outlooks, plans, objectives and guidance for future periods. Such statements reflect management's current expectations and involve assumptions and estimates that are subject to risks and uncertainties that could cause those expectations to prove to be incorrect. You should review our filings with the SEC for a 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 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 March 31, 2024, 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. With me today are Eric Lipar, LGI Homes' Chief Executive Officer and Chairman of the Board; Charles Merdian, Chief Financial Officer and Treasurer. And I'll now turn the call over to Eric.
Eric Lipar: Thanks, Josh. Good afternoon, and welcome to our first quarter earnings call. We delivered 1,083 homes in the first quarter at an average sales price of over $360,000 resulting in total revenue of $391 million. During the first quarter, our top markets on a closings per community basis were Raleigh with 7.7 closings per month, followed by Southern California with 5.5 closings and Washington DC with 5. Congratulations to the teams in these markets for the results last quarter. Despite the slower start in closings, the improved lead and sales trends we saw in February accelerated further in March. The resulting increase in net orders allowed us to finish the quarter with 1,335 homes in backlog compared to 590 homes in backlog when we ended the fourth quarter, putting us in a much stronger position entering the second quarter.
It's also worth noting that these improvements were accomplished solely through marketing and training, not through price discounting or increasing incentives. These recent sales trends give us confidence that demand remains healthy, supported by positive long-term fundamentals, including strong demographic trends and a limited supply of affordable homes. Along with increasing leads and sales, another positive highlight was our success controlling costs and protecting our margins. We delivered a first quarter gross margin of 23.4%, up 310 basis points compared to last year and in line with our performance in the fourth quarter. Adjusted gross margin was 25.3%, up 320 basis points over last year and 20 basis points sequentially. Much of the land we acquired over the last few years has been working through development and slowly accumulating on our balance sheet is now beginning to deliver closings at margins in line with our historical results.
As more of these land deals come online, we expect revenue to grow at a faster pace than inventory resulting in increasingly positive impacts to our overall performance and return metrics. Finally, we ended the quarter with 120 active communities, an increase of 21% over the prior year. This is the highest community count in our history. In addition, we opened 13 new communities in March that will be added to community count as they deliver closings. I'll now turn the call over to Charles for more details on our financial results.
Charles Merdian : Thanks, Eric. As mentioned earlier, revenue in the Q1 was $390.9 million based on 1,083 homes closed at an average sales price of $360,897. The 19.8% decline year-over-year was driven by a 20.7% decline in closings, partially offset by a 1.2% increase in ASPs. Of our total closings, 102 were through our wholesale representing 9.4% of total closings compared to 7.5% last year. Our first quarter gross margin was 23.4% and adjusted gross margin was 25.3%. Gross margins improved 310 basis points and adjusted gross margins improved 320 basis points compared to the same period last year. Adjusted gross margin excluded $6.6 million of capitalized interest charged cost of sales and $803,000 related to purchase accounting, together representing 190 basis points compared to 180 basis points last year.
The increase was primarily the result of elevated borrowing costs coming through our cost of goods sold, partially offset by lower purchase accounting adjustments. Combined selling, general and administrative expenses for the first quarter were $72.7 million or 18.6% of revenue. Selling expenses were $41.1 million or 10.5% of revenue compared to 8.8% in the same period last year. General and administrative expenses totaled $31.5 million or 8.1% of revenue compared to 6.1% in the same period last year. While SG&A expenses as a percentage of revenue are always higher in the first quarter, this was amplified this year due to lower volumes as well as increased advertising spend to drive leads and other investments made to support the opening of new communities.
First quarter SG&A performance was in line with the expectations we held when we provided our original guidance for the full year. Therefore, we still expect our full year SG&A expense as a percentage of revenue to range between 12.5% and 13.5%. Pre-tax net income for the quarter was $23.1 million or 5.9% of revenue. Our effective tax rate was 26.2% compared to 16.7% last year and the higher rate was related to the timing of compensation costs for share based payments and slightly higher state taxes. We continue to expect our full year tax rate will be in the range between 24% and 25%. Overall, we generated net income of $17.1 million or $0.72 per basic and diluted share. First quarter gross orders were 2,198. Net orders were 1,828 and our cancellation rate was 16.8%.
We ended the quarter with 1,335 homes in our backlog valued at $519.5 million and of those homes, 178 or 13.3% of our total backlog were related to wholesale contracts with single-family rental partners. Turning to our land position. At March 31, our portfolio consisted of 70,145 owned and controlled lots. Of those lots, 54,763 or 78.1% were owned and 15,382 lots were controlled. Of our owned lots, 39,601 were either raw land or land under development. Of the remaining 15,162 owned lots, 11,008 were finished vacant lots and 4,154 were completed homes, information centers and homes in progress. During the quarter, we started 1,810 homes to meet current demand and ensure completed inventory is available for new community openings. With that, I'll turn the call over to Josh for a discussion of our capital position.
Joshua Fattor: Thank you, Charles. We ended the quarter with just under $1.4 billion of debt outstanding including $703.1 million drawn on our credit facility resulting in a debt to capital ratio of 42.5% and net debt to capital ratio of 41.6%. Total liquidity at the end of the quarter was $491.5 million, including $49 million of cash and $442.5 million available to borrow on our credit facility. We repurchased 89,227 shares for $10 million during the quarter and we expect to allocate additional capital to share repurchases in the coming quarters. Finally, at March 31, our stockholders' equity was $1.87 billion and our book value per share was $79.31, an increase of 11.5% over the same period last year. With that, I'll turn the call back over to Eric.
Eric Lipar : Thanks, Josh. The second quarter is off to a positive start. Despite the uptick in interest rates, I'm pleased to say the positive momentum experienced in March continued in April. On Friday, we expect to report that we closed approximately 500 homes in the month of April and added seven net new communities, bringing us to 127 active communities nationwide, a new company record. The slower start to the year was understood and factored into the full year guidance we shared on our last call. Despite the recent uptick in interest rates, the positive trends we witnessed in March continued into April, resulting in over 35,000 leads each month. As a result, we generate over 800 net sales per month for the last two months, reflecting a pace of approximately six homes per community per month.
With clear visibility onto our backlog and the strong demand we continue to see, we are confident in our original closing target of between 7,000 and 8,000 homes at an average selling price between $350,000 and $360,000. Our full year gross margin guidance remains between 23.1% and 24.1% and adjusted gross margin between 25% and 26%. Our teams around the country are doing an outstanding job getting new communities online and ready for sales. We recently welcomed 65 new sales reps and sales managers to support 13 communities opened in March, as well as additional openings in the coming months and continue to expect to be active in approximately 150 communities at year-end. I'll close with one final thought. For the fourth consecutive year, LGI Homes has received the Top Workplace USA award.
What makes this recognition especially meaningful is that the results are entirely based on the views of those best positioned to judge our success, our employees. We value our people immensely and it's satisfying to know that they value LGI Homes just as much. Thank you to all of our teams around the country for your continued commitment to our company and to our customers. We'll now open the call for questions.
Operator: [Operator Instructions] And our first question comes from the line of Michael Rehaut with JPMorgan.
Andrew Azzi: This is actually Andrew Azzi on for Mike. Maybe just wanted to start with trying to get a sense for how the land pipeline is looking right now in terms of inflation for land that's contracted today and maybe help us understand the difference between the development part and the raw land part?
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