Good day, everyone and welcome to the Century Communities First Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Tyler Langton, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon. Thank you for joining us today for Century Communities earnings conference call for the first quarter 2023. Before the call begins, I would like to remind everyone that certain statements made during this call may constitute forward-looking statements. These statements are based on management's current expectations 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 in the heading Risk Factors in the company's latest 10-K, as supplemented by our latest 10-Q and other SEC filings. We undertake no duty to update our forward-looking statements. 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. Hosting the call today are Dale Francescon, Chairman and Co-Chief Executive Officer; Rob Francescon, Co-Chief Executive Officer and President; and David Messenger, Chief Financial Officer. Following today's prepared remarks, we'll open the line-up for questions. With that, I'll turn the call over to Dale.

Thank you, Tyler and good afternoon, everyone. We are pleased with our solid first quarter results, including $44 million in pre-tax income, net income of $33 million; diluted earnings per share of $1.04 and EBITDA of $55 million. We successfully achieved the objectives discussed on our year-end conference call as we continue to focus our sales efforts and incentives on monetizing homes with near-term deliveries despite their lower margins resulting from inflated direct construction costs given their start dates in 2022. During the quarter, we also significantly increased our new home starts, generated $191 million in operating cash flow and further reduced our net debt-to-capital ratio to 21.5%. We have become increasingly encouraged by the pickup in our sales activity over the past several months. Net new contracts in the first quarter totaled 2,022 homes with sequential increases in both February and March and a 61% improvement from fourth quarter 2022 levels. Given the solid demand we saw in the quarter, we believe that we could have sold even more homes if our inventory of near-term deliveries had been higher. Our quarter end backlog consisted of 1,920 sold homes valued at $714 million. Underlying demand for new homes remains favorable, given positive demographics and the scarcity of existing homes on the market. So interest rate volatility and overall economic uncertainty continue to impact the U.S. consumer. As we have seen over the past several quarters, home buyers are continuing to look for homes that are closer to completion in order to lock in their interest rates. Consistent with our strategy, we intend to continue concentrating our sales efforts on homes with more near-term completions. In terms of sales patterns, we expect more typical seasonality to return this year after being obscured by the COVID-driven sales boom that began in 2020…

Thank you, Dale and good afternoon, everyone. We have a strong presence within the affordable new home category with approximately 90% of first quarter deliveries coming from homes priced below FHA limits, allowing us to target the widest range of potential buyers in any given market. Our homebuyers continue to have a healthy financial profile with Century Communities and Century Complete homebuyers having respective average FICO scores of 729 and 713 in the quarter. We believe that we are well positioned as conditions in the housing market normalize given our spec-based model and focused on entry-level homes. Our cancellation rate was 18% in the first quarter, a significant reduction from the 37% rate we saw in the fourth quarter of 2022 as buyers are adjusting to the higher interest rate environment. For comparison purposes, our cancellation rate was typically in the 20% range in the years prior to COVID. While the homebuilding industry continues to be challenged by municipal and utility delays, supply chain issues and trade shortages, these pressures are continuing to slowly ease. As a result, we are seeing improvements in our cycle times and expect the cycle times of homes that started in the fourth quarter of 2022 and first quarter of 2023 to be significantly better than the cycle times at homes that were started earlier in 2022. Additionally, as supply chain delays and trade shortages further subside, our cycle times will decline further in the quarters ahead, such that this year, we expect to be starting and completing homes at a more traditional 4 to 6 month time period. In the first quarter of 2023, the direct construction costs on our starts declined by roughly 11%, an average of approximately $20,000 per home versus the high watermark in the second quarter of 2022. We have…

Thank you, Rob. We generated strong operating cash flow this quarter and further reduced our net homebuilding debt ratio while also increasing our starts and community count to drive future growth. During the first quarter of 2023, pre-tax income was $44 million and net income was $33.3 million or $1.04 per diluted share. Home sales revenues for the first quarter were $735.6 million compared to $988.4 million in the prior year quarter. Home deliveries of 1,912 homes declined by 19% on a year-over-year basis, a direct impact from our decision to start fewer homes in the second half of 2022. Our average sales price of $385,000 declined by 9% versus the prior year quarter, reflecting our strategy of properly incentivizing homes with near-term deliveries, building more affordably priced homes and Century Complete accounting for a greater percentage of our deliveries. In the first quarter, net new contracts across our footprint were 2022. The year-over-year decline in the quarter was primarily due to the reduced number of homes we had available for sale and the impact that mortgage rate volatility and economic uncertainty had on potential homebuyers. At quarter end, our backlog of sold homes was 1,920 valued at $714 million, with an average price that had decreased by 10% year-over-year. In the first quarter, adjusted homebuilding gross margin percentage was 19.6% compared to 29.5% in the prior year quarter and 19.8% in the fourth quarter 2022. Homebuilding gross margin was 18.2% compared to 28.3% in the same period last year and 17.6% in the fourth quarter of 2022. Similar to last quarter, this year-over-year reduction in margin percentage was expected and primarily resulted from our strategy of generating cash and reducing our leverage profile by focusing our sales efforts and incentives on near-term deliveries, even though they carried elevated construction…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Carl Reichardt with BTIG.

I wanted to ask a bit about the lot count in particular. So the complete side is now, I think, about half of your control bots, they're down a lot year-on-year. Can you talk a little bit about the developers who are feeding you those finished lots since guessing you're not typically self-developing those? And how you're feeling about how they're capitalized now given some of the concerns about regional bank capital in particular for acquisition and development financing.

It's something we're heavily focused on, Karl, with the regional banks and all. This is something that's transpired fairly quickly. With that, we've had the developers continue to be able to feed us those lots, part that ones that already had the financing new deals that are coming up, that's kind of more of a challenge. We've been able to, at least to this point, overcome it, just not to get too granular but as an example, we have a lot committee every week at Century Complete on Thursdays. Tomorrow, they have the biggest amount for this entire year coming up for lot committee. It's a large number of lots that would be looked at for purchase. Again, these are all finished lots. And so we're still getting our share lots. But definitely, the financing side, we're looking at that very closely on how that impacts the private developers.

Okay. That makes sense. And then along those lines, so what could we expect if the mix shifts substantially away from Century Complete? And obviously, from an orders perspective, it did relatively speaking, in terms of absorption this quarter. So as you look out, is your thought process on the guide for this year that you'll have a mix not dissimilar from Century Complete to what you've had in the past? Or will it grow? I just wanted to trying to figure out the margin guide and the delivery guide based on that mix of Century Complete moves a bit.

Carl, we're really not expecting that there's going to be a big shift. Actually, Century Complete side continues to grow. When we look at it, part of the reason when you look at the Century Complete sales is when we slowed down our land acquisition in the second half of last year, that impacted that part of the business more because they don't inventory lots. On the community side, we already own the land. So if we chose not to start it, it was in a situation where it was still on our books. On the Century Complete side, if we didn't start it, then we didn't buy the lots. So it took them a bit longer to start back up than it did on the community side.

The next question comes from Alex Rygiel with B. Riley.

Good evening and very nice quarter. Can you talk a bit about your product mix, geographic mix and overall direction for average selling prices over the coming quarters?

Yes. I think that if you look at our product mix, as Dale just talked about, we're still expecting Century Complete to be a growing part of our business as we expect the rest of the business to grow over the balance of this year. So the difference we have between completed counties, we expect to keep to stay there through the balance of this year. And ASP, we've seen kind of the height of where it could be. And we think that as we bring new product online and we have more new communities that we'll be opening up later this year. We're looking to be bringing on product that can be at a lower price point. So maybe not when those deals were originally approved to be developed and built, maybe we're not building the most expensive plans anymore, so we're trying to rotate down the ASP of the overall community which in turn will bring down our ASP across the portfolio.

That's helpful. And then can you talk a bit about some of the buyer characteristics that you're seeing? I know you went into a few of them there but maybe go a little bit deeper on the buyers today and the urgency they have and general age category and so on.

Well, in general, just given the positioning of our product, a significant percentage of our buyers are first-time homebuyers. And so in many cases, they're coming out of apartments or other types of non-ownership arrangements. And so it's -- that's why we have focused our efforts on selling near-term completions because those buyers are very interest rate dependent. We don't want to carry them in backlog for a long period of time and they don't want to be in backlog for a long period of time. And they want to be able to know what their interest rate is, what their payment is going to be and be able to get to closing and move on and live in a brand new home. And so to a certain extent, that's always been the profile of our buyer but even more so now with the interest rate environment, they want to make sure that they know what their payment is going to be and that it's not going to change on them before they close.

The next question comes from Jay McCanless with Wedbush Securities.

I guess the first question I had with what's in backlog at the end of the first quarter. I guess, is that backlog basically been price adjusted and that's why you're thinking gross margin is going to be flattish from 1Q to 2Q? Do you think there's any more work from an incentive or buy down that you would need to do to bring some of that backlog to the closing table?

No. No, I think that that's all been taken into account. I think what we're seeing now is different than what we're seeing in the back half of last year where there were obviously different adjustments made at the closing table are getting right up to closing. When you look at it now, I don't think that that's necessarily something that we need to be doing and incentives that we have in those deals already, we've already taken into account in that guidance.

And what should we expect for SG&A in the second quarter, either dollar or percentage amount you're targeting?

Well, I think we're always targeting lower but I think that given that we're expecting closings to be down a little bit from Q1. I think our fixed costs have been running. I think all last year, we're hanging out just under 70% of our G&A numbers were fixed. And I think right now, in Q1, we're just a tick above about 71%. And my guess is that those fixed costs stay probably pretty consistent and we've held those pretty flat for 3, 4, 5 quarters now. And then the variable piece on commissions will be just dependent on what we do from a closing perspective.

So on that, we've heard, I think, from another builder today that maybe co-broker is starting to move up a little bit. Is that something that your buyers typically use? And if so, is that something we need to think about in the SG&A line through the rest of the year, especially as you're growing the community count?

Yes. Yes. We've definitely seen the external rails or the brokers come back into the fold and into the mix. So I would expect most of our markets have a pretty healthy co-broker percentage and we expect that to continue and see it increase as our deliveries go up throughout the rest of the year.

And then any commentary you could give us on April?

Yes. In terms of sales, what we experienced in the first quarter has continued into April.

As we said in our prepared remarks, we increased sequentially in sales as the quarter went on. February was higher than January and March was higher than February was. When we look at where we stand today on April, we're above where we were at this time last year in April. So we've not seen any change with regard to the velocity out there in terms of interest of the home buyers.

The next question comes from Alan Ratner with Zelman & Associates.

First question, I guess, on the land side. On the land side, you mentioned flow deal flow is starting to pick up a little bit and there's more activity in the land committee. What are you seeing on land prices? I mean, if I look at your average closing price, it's down about 40,000 or so from the peak last year. I'm guessing lot prices have not reset as meaningfully but have you seen any pullback on lot prices at this point? And if not, I guess are you just assuming that the construction and labor cost relief you're seeing is enough to offset kind of similar lot prices?

Yes, Alan, in terms of land prices, we started seeing a little bit of relief last year. Certainly, on deal terms and structure, a lot of relief there. We started seeing some land price reductions. As the spring selling season has picked up here in '23. Other builders now are also in the market for land. People have kind of reinstituted looking at various deals. And so with that, we are not seeing the price drops in land that we had hoped to see when we were in the, let's say, fourth quarter of last year on what we thought we might have coming forward this year. So it's been pretty stable.

Got it. But I guess so on that note, do you're confident moving forward even at these, call it, peak land prices or close to it because of what you're seeing on the ground in terms of your ability to maybe pull back a little bit on incentives or kind of pricing firming up.

Yes, exactly. And also this product that we're putting in the communities as well and what we're offering, more efficient product, lower square footages, things like that, that can help make deals work. But yes, definitely, we're not anticipating right now. It'd be great if it happened but we're not anticipating land prices coming down.

Got it. That's helpful. I guess, on a similar vein on the cost side for construction materials and thank you for giving those start figures because I think it really does help to conceptualize what's been going on and kind of in terms of not only your inventory availability but obviously, the cost relief that you and others have seen and the improvement in cycle times, it's not surprising, given that pullback in starts. I guess my question now is with you and others beginning to ramp, start back up again, how confident are you in holding on to these cost savings you've been able to realize? I mean, thinking back to last year when you were starting 3,000, 3,500 homes a quarter, that was a pretty tough environment from a labor and material standpoint. So if you get close to that number again or maybe even a little bit below it, is there a risk that some of this relief you found in the near term kind of reverses?

Yes. I think there's always a little bit of risk in that. But you've got to put it in the context of how quickly direct construction costs escalated. So -- and when we look at that, I mean, they went up pretty fast and pretty high. And so as they've come off that high, they -- as we said in our prepared remarks, I mean, we're not expecting going forward that we're going to be able to continue getting the same types of reductions as we've been able to get so far. But with that being said, a lot of the supply chain challenges that also were a factor in increasing the price, not just because of the number of homes that were being built but still coming off all of the COVID disruptions continues to get better. So at least we don't have that in the mix. And so when we look at we're starting more homes and we're assuming that our competitors will be starting more homes. The supply chain overall is in better shape than it was last year regardless of the number of homes that are being built.

The next question comes from Michael Rehaut with JPMorgan.

This is Andrew Hassen on for Mike. I wanted to get a sense of if I can ask about pricing trends within the quarter. I'm not sure if you guys disclosed that but would love to get any color there.

I think generally, in terms of when we look at it, I mean, our incentives that we were offering in the fourth quarter were at peak levels. As we saw the -- our absorption starting to pick up and the demand to be better than what we saw at the end of last year, we certainly started pulling back on incentives. So as a result, as we look at it from the beginning of the quarter to the end of the quarter, our incentives were down over that period of time. And as we look into April, they're continuing to be down. So it's a process as we go forward but it's definitely based on the amount of demand that we see and the amount of absorptions that we're getting.

And then, I believe you said that there was a $20,000 cost reduction from the peak. With lumber relatively stable. Can you split out maybe how much of those cost savings are maybe lumber versus other inputs?

Okay. It's a variety of inputs. It's everything from here plumbing and HVAC and flooring and labor, there's a variety of components that obviously go into it. So we've been seeing cost release across the board. A couple of areas, the concrete appliances, you're not seeing as much cost relief but the rest of our kind of our direct cost stack, we've been seeing reductions and improvements in.

Operator, are there any further questions? With that, we'll turn it back over to Dale for some closing remarks.

I'd like to take this opportunity to once again thank all of our team members for their incredible work and continued dedication to our valued homebuyers. I'd also like to thank our investors for their time today. We appreciate your continued support and investment and look forward to speaking to you again next quarter.