Greetings, and welcome to the Century Communities Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Dixon, Chief Accounting Officer. Thank you, Mr. Dixon. You may begin.

Good afternoon. We would like to thank you for joining us today for Century Communities second 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 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 business and markets and further detail. Afterwards, Dave will follow up with further information on our financial results, balance sheet and improved outlook. Following our prepared remarks, we will open the lines for questions. Our strong performance in the second quarter helped us achieve record levels of year to date home sales revenues, net new home contracts, deliveries and adjusted gross margin dollars. As we celebrate five years since becoming a public company. We took Century public in June 2014, as one of the top five fastest growing home builders in the country. Since that time, we have continued to dramatically expand our scale and scope to become a top 10 home builder and in May we were especially pleased to be named the fastest growing public home builder by Builder Magazine for the second year in a row. So today we would like to thank the entire Century team for their hard work and dedication to excellence, which is the basis for our continued success. As the second quarter progressed, we experienced meaningful growth in net new contracts as lower interest rates and better affordability trends bolstered buyer activity across nearly all markets within our national platform. These lower rates have provided the housing market with momentum that did not exist at the beginning of the year. This improved sales environment, which has continued into July coupled with the continued positive state of the U.S. economy as payrolls remain healthy, job growth remains strong and unemployment remains near all time lows, gives us confidence in the longer-term housing story and our outlook. Looking at our operating metrics. During the quarter, we grew net new home contracts by 41%…

Thank you, Dale, and good afternoon, everyone. We're encouraged by the recent uptick in buyer traffic and the strong absorption pace across our business during the second quarter. As Dale mentioned, the current state of the U.S. economy is positive along with the local economies in our markets, which should continue to bode well for our business. This supports our confidence in home building as we move into the back half of the year. job growth, wage growth and overall economic growth along with a reduced interest rate environment influenced buyers to return to the housing market as the second quarter progressed, translating to improvement in buyer traffic and net contracts throughout our business, especially in June with momentum continuing into July. We are capitalizing on this market improvement as we open additional communities with appealing designs and amenities tailored to our local buyer preferences, especially at the entry level, which represents approximately 75% of our business. During the second quarter, we continued to source additional attractive land parcels that meet our disciplined underwriting requirements. We ended the quarter with land inventory in excess of 37,000 lots in many of the most robust U.S. home building markets. We continue to target owned and controlled lots close to a 50-50 split to accelerate our scale, while preserving financial flexibility. Now looking at our markets in further detail. Starting with our West region, year-over-year net new contracts increased by 77%, and deliveries by 20%, driven by a 67% increase in community count. The impact of new communities has benefited this region the most out of all of our regions in recent months. And we have additional communities scheduled to open throughout the balance of the year. Although, certain of our West markets are among the higher priced areas within our geographic platform,…

Thank you, Rob. During the second quarter of 2019, our adjusted net income was $23.6 million, or $0.77 per diluted share and net income for the quarter was $15.5 million, or $0.51 per diluted share, with the difference being primarily due to the transaction costs associated with the refinancing of our long term bonds, which I will discuss in more detail in a moment. Home sales revenues for the second quarter were $608.6 million, an increase of 17% compared to $522.2 million in the prior year quarter. This improvement in revenues was mainly driven by 42% increase in home deliveries to 1,967. Average selling prices of homes delivered for the second quarter of 2019 was $309,400, compared to $377,300 in the prior year quarter consistent with our expectations as we continue to expand our offerings of entry level homes. Gross margin for the second quarter was 17.2% primarily due to higher incentives and less favorable product mix compared to the prior year quarter. Adjusted homebuilding gross margin percentage was 19.6%, compared to 22.3% in the prior year quarter. Looking at our second quarter 2019 closings, a significant majority of the homes were sold prior to March 31, a period when our incentives were at their highest. In our June 30 backlog of nearly 2,600 homes, we have an improved gross margin profile and continued to expect gross margins to trend upwards through the remainder of the year as the usage of incentives on new sales has declined. SG&A as a percent of homebuilding revenues was 12.4% in the second quarter, while significantly better than the first quarter, SG&A was modestly higher compared to 12.2% in the prior year quarter, mainly due to certain one-time costs related to litigation settlements and Wade Jurney Homes back office conversion, relocation and other integration…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.

Thanks. Good afternoon everyone. Congrats on all the results. First question I had was a little bit on some of the guidance comments, specifically around gross margins, where I believe you kind of said directionally, you expect it to improve and in part that’s based on your what you have in backlog. So just trying to get a sense of the degree of magnitude there, I mean, most builders that have reported already have pointed to moderate, let’s say moderate improvement, modest – something in the order of plus or minus anywhere from 20 to 50 basis points sequentially. Is that kind of a reasonable expectation for your business? And maybe given the level of incentives that have declined I think has also been positive, but relatively modest.

Yes. Mike, this is Dave. I would say that, in looking at our backlog and looking at where we are for the year. For the first half of the year, we’re at a 19.7% on an adjusted basis and we’re forecasting kind of 20% to 21% range. So saying that we’re going to see sequential improvement somewhere in those ranges you mentioned, is not aligned. Though you look at how the margin – our backlog is starting to shape up. We have less incentives than before, we take the range of 20% to 21% is still good.

And thanks Dave. I need to clarify on that, the 20% to 21% would be for the full year or for the back half specifically.

That’s for the full year.

Okay. So that’s also kind of a reiteration from before.

Correct.

Okay. I guess, just secondly, maybe bigger picture Rob or Dale, love to hear your thoughts. Just taking a step back again from a geographic footprints and you kind of reference that, as part of your priorities, you continue to evaluate in a different investments. And I assume a part of that is on the M&A front. Obviously, your current footprint does continue to expand with Wade Jurney and you have a lot of regions that – you didn’t have a couple years ago and I’m sure, you want to get bigger in your existing areas. I mean, can you give us a sense of how M&A fits into your current thoughts? And would that M&A, be more focused on deepening where you are? Or potentially expanding and see even other areas.

Sure. Mike, this is Dale. Our focus is primarily on growing within our existing markets as well as growing within the existing and additional markets on Wade Jurney Homes. On the M&A side, I mean, we remain opportunistic. We continue to look at deals as they’re presented. In terms of – I guess if I could say, how I would weight them, ones in our existing market would probably be more appealing than ones in a new market. But it all depends on each individual transaction. But in terms of our day-to-day focus, it’s really on growing in our existing markets and growing our Wade Jurney Homes business. We look at the markets that we’re currently in, they’re all performing well, we’re happy with them and we think that we have room to grow in all of them.

And one last quick one, if I could, with Wade Jurney, obviously, expanding as rapidly as it has, how should we think about that segment? A couple of years out, from a size perspective, just given that, you’re obviously – I would presume not going to double or triple if your states in the operating areas that you’re in. I mean, off of today’s base, if you look at the last 12 months, you’ve closed 2,500 homes – I mean, how should we think about that number, let’s say in 2020, 2021, et cetera.

Well, part of what we’ve been doing and as we indicated our prepared remarks with some of the SG&A costs that we’ve incurred. We’ve spent a fair amount of money and quite a bit of time in terms of building some additional back office support for Wade Jurney Homes. And the whole purpose of that is really to support the growth that we see. When we look at it, we think we have room to expand geographically as well as in each of the markets that we’re already in. Historically, the Wade Jurney Homes model has been based on very small subdivisions or even scattered lots in many cases. And so one of the changes that, we’ve initiated is that we’re now looking and we have purchased larger communities still typically on rolling option basis, but it allows us to get more out of each subdivision and out of each market. And so that’s a big part of the focus that we have on the Wade Jurney side. In terms of giving you a number, I’m not prepared to do that, because that’s our focus and we’re just kind of have to see where the opportunities are as we go forward.

Great. Thanks so much.

Sure. Thank you.

Our next question comes from the line of Jay McCanless with Wedbush. Please proceed with your question.

Hey, good afternoon, everyone. The first question I had, could you maybe quantify where you all are seeing in July and also talk about where we’re incentives are trending from the second quarter end of July?

Sure. Jay, this is Dale. So in terms of just – and backing up and talking about the quarter, I mean, we saw a significant improvement on sales in June. And when we look at the first two months of the quarter, they were slow. June rebounded pretty strongly and July is really on the same trend. So when we look at the interest rates dropping, it seems like it’s taken a little bit of time for that to kick in on the buyer side, but we’re now seeing more traffic in the communities, and more conversion into sales. In terms of the incentives, they’re really down to subdivision by subdivision level in terms of where the incentives are. But in general, what I can tell you is that sequentially over the year, they’ve come down. I think as we said on our call in February that we had backed off on our incentives in January. We probably did that little too quickly. And then we had to pick them up as we went into the spring selling season. And then we started tapering them down. And at this point, they’re the lowest that they’ve been all year. They’re still there and we’re looking at what we have to do in each case to get the velocity that we want. But they’re trending in the right direction.

Great to hear. The second question I had in terms of pricing power, I don’t know if you guys could quantify like a percentage of total communities or certain regions, but are you able to hold the line on pricing and even raise them in certain areas?

In general, there’s no market that we’re in that I would say, we have a broad ability to raise prices. It really is down to looking at individual subdivisions, depending on the competition that’s there. If – there’s competitors have sold out and we still have products than we – we have the ability to push prices there and/or reduce incentives even further. But across the board there’s no market that we have that I could tell you that we have pricing power on a broad basis.

Got it. And then the last one for me, I’m just thinking about legacy Century, what are you all’s expectations for community growth this year and any insight you can give us into 2020 would be helpful?

Yes. Hey Jay, this is Dave. I think, we don’t provide any community count growth guidance. But right now, we’ve got 125 selling communities. That number has been a little bit staggered over the past several quarters, but I think kind of how we look at that is that several years ago – three, four years ago, we were doing on our average community size is approximately a 100 lots, taking us about three years to work through them on a normal absorption pace. Today, our average community count sized about 165 lots. And today’s absorptions, it’s taken about four years to work through on this. So while our community counts but a little bit consents, a little bit flat over the past several quarters is due to we brought on some bigger communities that we’re just taking a little bit longer to work through than we would’ve historically. But as Rob said in his prepared remarks, you’ve got by 14 coming online in the Mountain region. You’ve got another five or so coming out in Texas. And we just opened some in the second quarter in the West Coast. So we feel good about where our community count is right now and if development allows, we’ll continue to open more communities as soon as we can.

Got it. And just wanting to sneak one more in, I know you guys said in the South you’re all having some development delays, have those resolved – been resolved and what’s going on there?

Yes, that’s primarily been resolved. There were several communities that candidly should have opened earlier and didn’t due to a variety of factors. That’s really behind us now. They’re in their infancy now of opening up. And so hopefully that’s going to be a meaningful driver on net sales going forward.

Great. Thanks guys.

Sure.

Thanks.

Our next question comes from the line of Thomas Maguire with Zelman & Associates. Please proceed with your question.

Hey guys, great job this quarter. Just on the demand in order side of the business, that really strong results, and I think the thing that sits out was the redemption of growth in the Wade Jurney portion and just to keep it there. Are we at the point where the noise in the repositioning we saw over the last few quarters and just fixing where we’re selling in the construction cycle is behind us? And then just qualitatively, I know the growth rates can get skewed from quarter-to-quarter, but how would you describe the demand for that product, both in the existing footprint and as you rolled it out to new geographies?

Sure. So Tom, this is Dale. So in terms of the change that we made with regard to the timing of the sales, it’s continuing to still work through. As we indicated, when we announced that we didn’t think it was going to impact our deliveries, but it would impact some of the sales numbers. And so since, we haven’t fully lapped ourselves yet on that change, we’ll continue to have some of that as we go forward. But overall, at the price point that we’re at with an average price point of around $150,000. I’m sure as you can imagine, we have quite a bit of demand. And so that’s – as we continue to manage that business and grow that business, it’s an area of our business that we’re particularly positive on. But we’re also very positive on the overall Century positioning. When we look at where we were on just the Century business, we were -- if you just – if you break it out, we were basically flat year-over-year, but that’s really a function of two markets. Every one of our divisions, we’re up year-over-year with the exception of Atlanta and Las Vegas. And the only reason those two markets were down is not a reflection of market strength there, but a reflection of our community count. And we had, as Rob had just talked about, we’ve resolved lot of the development issues that we had in the Southeast, but we still need to get more communities open. We’ve got quite a few that are opening here in the third quarter. Same thing happened in Las Vegas. We found ourselves in a position where we had closed out certain communities and we didn’t have new communities open. And one of the focuses that we’ve had is growing the size of the subdivisions that we’re in, so that we have a longer runway. And we’ve done now on the Century side and that’s one of the positioning changes that we’re also doing on the Wade Jurney Homes site. So even though our community count made our grow as much as we would like, the number of selling opportunities that we have within a community and the length that will be in a community is going to be a long gated.

Got it. That makes a ton of sense and it’s really helpful. And then just to go back to the prior M&A question, but maybe take it higher level. Can you just talk about where you think we are in terms of just – I guess the overall scale piece of the Century story? And I know this was a focus in getting to where the company needed to be in their acquisitions that got us there. But are you still comfortable that we’re already at a tipping point where we can consolidate here on an organic basis? The heavy lifting, so to say is done in M&A would just be more of a land transaction in the normal course of business? And just what’s been the biggest surprise, I guess in terms of the benefit of scale with where we are today?

Well, it’s still really opportunistic. And our focus when we went public five years ago was that we were going to grow, primarily by acquisition which we did. With the exception of the Wade Jurney Homes transaction, all of those integrations are behind us. The Wade Jurney transaction will be fully integrated here shortly. Everything’s are going according to plan. We’re very comfortable taking on another acquisition and it really is opportunistic. Even all the ones that we’ve done in the past, even though that was really a big part of our focus, we were still very opportunistic. The number of transactions that we’ve done are just a small fraction of the ones that we looked at. So we have pretty high standards in terms of, what we’re looking for in the attributes of an acquisition. But if one of those came along, we wouldn’t hesitate to move forward on it.

Got it. Thanks. Have a great afternoon.

Thank you.

Our next question comes from the line of Alex Rygiel with B. Riley FBR. Please proceed with your question.

Thanks. Good afternoon, gentlemen.

Hey, Alex.

With the growth in Wade Jurney being so strong, do you see this continuing such that the mix of your business is going to continue kind of transition even more so towards the entry level?

We do. And it’s just – when we look at our view of the homebuilding market and I think most is, affordability is a challenge for people. And that’s really one of the challenges the overall industry faces. And so when we can deliver homes at the price point that we do on the Wade Jurney business model, we think that we have a tremendous opportunity to continue to grow that brand. And that’s where we’re spending a lot of our time, energy and resources.

So with that playing out, should we think about ASPs over the next year or so trending down as well? Or are the higher price homes going to hold their price point such that ASPs stay flattish over time?

I think, when you look at our backlog right now, we’re at $302,000, $303,000 as an ASP, if it turned it a couple thousand dollars either direction, that wouldn’t surprise us, given the current mix of business. But I think, having somewhere – having an ASP a year out from now around that $300,000 range is reasonable for us.

And as it relates to your guidance, you obviously raised the low end. I suspect it was due to sort of the strong performance in June and July. But maybe kind of benchmark or characterize if we stayed at this pace of improvement for another quarter or two. What might play out with that guidance?

Well, I think that if we continue to see an improving home building environment across our markets and we’re to continue seeing strong demand into the fall, you’d see us – look at our guidance come, at a time we have our third quarter call when we’d be looking at – by the time we had that call at the end of October, early November with eight weeks left in the year, we’d be fine tuning and adjusting it accordingly. But I think that, we still have a little bit more water to go under the bridge to make those decisions.

And lastly, any new pressure or relief in material costs or labor?

Not necessarily. Right now, I think, as we look at our margin profile and what we’ve had in the second quarter, while we had some material increases, they seem to be fairly well offset with lumber pricing. But nothing is standing out that is raising a red flag right now.

Great. Thank you very much.

Thanks.

Our next question comes from the line of Alex Barron with Housing Research Center. Please proceed with your question.

Yes. Thanks guys and congrats on the quarter. I wanted to focus in a little bit on Wade Jurney. So I’m kind of on your website here and it looks like it operates out of 12 states, and am I wrong, maybe I hadn’t paid as much attention, but am I wrong that it was only in the southeast just a year ago?

Yes, that’s right, Alex. When we first did our joint venture with Wade Jurney Homes and then when we acquired the second half. During that, which was June of last year, during that time frame, we were in the process of planning into going into additional areas. But at June of last year when we acquired the balance of the business, we hadn’t had any closings at that point outside of the southeast. And then subsequent to that, we have expanded, had closings in Arizona, Texas. And now we’re in various states in the Midwest. And when we look at it, those are all markets where it allows us to operate at this price point, that we’re very comfortable with for this business model.

Yes. Actually, I was out in Phoenix a week ago visiting many of these Wade Jurney communities and I was pretty impressive to see the level of activity you guys got going on in those. But I guess, I didn’t realize you were in so many other markets. So if this is such a great opportunity, are you guys basically operating out of kind of distressed lots that you’re still finding out in the further out areas or are you developing your own lots or how are you kind of keeping the costs low, I guess to be able to offer homes at these low price points?

It’s really, it’s a combination of both. I mean there are – in some cases they’re distressed lots and in other markets we have developers that are developing lots for us. So it’s really a combination. As we go forward, we fully expect that a larger percentage of the lots will be developed for us. We don’t develop them on our balance sheet in this business line, but there’s – in the markets that we’re in, there’s developers that are available to develop them for us.

And at the end of the day, the margins I guess are about the same as your company average?

Yes. They’re included in our numbers. We had in 2019 – we were over 19%, 19.7% for the first half of the year and those margins would be included in the overall range for the year of 2020 to 2021 on an adjusted basis.

Got it. Okay. Well I’ll get back in the queue. Great job. Thanks.

Thanks.

Our next question is a follow-up question from Michael Rehaut with JPMorgan. Please proceed with your question.

Thanks guys. Just wanted to circle back to fewer – couple earlier questions and see if I could try and get a little more detail. First on the community count, kind of working off of your comments before about the fact that you are expecting a good amount of new community openings and I believe you said, 14 and five in the different regions. Just try to triangulate that in terms of getting any sense of where you might end at the end of the year. It seems like earlier, I think last quarter, perhaps, you might’ve talked about holding at that 125 number. But it seems like we should be expecting some level of growth on a net basis. You have given that pipe a number of openings, it kind of leads me to think you’re not going to have a similar number of closings, particularly given the longer length or the bigger lot size per community. So just wanted to make sure I’m thinking about that right, if that there should be some growth in the back half off of the 125?

Yes. Mike, this is Dave. I would say that, it’s difficult for us to forecast when we’re going to close out of all the communities. But if you look at our second quarter, we were relatively flat on our community counts from March 31 to June 30. But inside that flat number, we’re opening and closing about 20 communities throughout the country. So the portfolio ended up flat. So while we are talking about opening up new communities in the third and fourth quarters of this year, one thing that we aren’t forecasting, right now the number that we’re going to close out. So we will expect to close out some. But I can’t tell you if we’ll close out of whatever number it’s going to be.

Okay. I guess secondly, just also a little bit, hopefully more detail on the comments around April, May, I believe you characterize as being slow, and then having that strong rebound in June. You did over 40% order growth in the second quarter. How should I think about that? Are we talking about zero to up 20 or something much lower in the first couple of months and then you just did a lights out, type a number in June. Or maybe if you can give us a sense by region, if there are certain regions or the Wade Jurney that that really kind of accelerated that number. Just trying to get a little bit more of degree of magnitude when you talk about slow versus rebounding strongly.

Well, when we look at April and May, there were – in terms of year-over-year improvement there wasn’t much. But as we got into June is really when we saw that the buyers started re-engaging and we started having significant growth in terms of our sales and it really came kind of across the board. It was certainly in our Wade Jurney Homes business. But it was also in all of our other regions in terms of where we saw improvement. So it was really a reflection of in our minds, the lower interest rates started resonating with home buyers and they started coming back out to buy homes.

Great. Thank you.

Sure.

Our next question is a follow-up question from the line of Jay McCanless with Wedbush. Please proceed with your question.

Thanks for taking my follow-up. Just wanted to ask with closings in 3Q and 4Q, are you guys expecting those to be fairly similar number or how should we think about backlog absorption for the next couple of quarters?

I think you can kind of look at what our historical – what our backlog margin was last year to get a sense of what the model. The third quarter last year were somewhere around 60% number and then the fourth quarter was – I think it’s somewhere around 74%, 75% number.

Great. Thanks again.

Our next question is a follow-up question from the line of Alex Barron with Housing Research Center. Please proceed with your question.

Thank you for taking my follow-up. So Dave, I heard you say the price point would be about $300,000 as time goes by. But if we exclude kind of Wade Jurney for a minute, how do you see the price point trending and how is the product mix going to be changing? Are you guys kind of aiming to be “more affordable” within all the other markets? Or can you kind of elaborate on that?

Yes. I think – Alex, this is David. If you look at the – or the Century average price point, I believe it’s just a tick under $400,000. And you look across for the markets that we’re in, we definitely try to be in the affordable price points in those markets. Even in some of the higher price point markets out on the west coast. You look at our overall portfolio, 75% of it’s qualifying for FHA loans, which typically would be your finance vehicle of choice for an entry level buyer. And so while that price point is $400,000 versus $155,000 or $152,000 for Wade Jurney, you’ll see Century continue to play in the entry level price point in the markets that we’re in.

Got it. Okay. Thanks a lot.

There are no further questions in the queue. I’d like to hand the call back to management for 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.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.