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AV Homes, Inc. (NASDAQ:AVHI)

Q1 2013 Earnings Conference Call

May 9, 2013 08:30 ET

Executives

Ken Plonski - Investor Relations

Roger Cregg - President and Chief Executive Officer

Tina Johnston - Principal Financial and Accounting Officer

Analysts

Harsha Gowda - BlueShore

Operator

Good day, ladies and gentlemen, and welcome to the AV Homes’ Q1 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call maybe recorded.

I would now like to turn the call over to Ken Plonski. You may begin.

Ken Plonski - Investor Relations

Thank you, Latoya, and good morning everyone. Joining me today is Roger Cregg, President and Chief Executive Officer of AV Homes and Tina Johnston, Principal Financial and Accounting Officer for the company.

Before we begin, I would like to remind everyone that our discussion today may include forward-looking statements within the meaning of the U.S. federal securities laws. These forward-looking statements are based on the expectations, estimates, and projections of management as of today. The forward-looking statements are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them.

We refer all of you to our Annual Report on Form 10-K for the year ended December 31, 2012 and our other recent filings with the SEC for a more detailer discussion of the risks that might affect such forward-looking statements and that could impact the future operating results and financial conditions of AV Homes Incorporated. We disclaim any intention or obligation to update or revise any forward-looking statements to reflect subsequent events and circumstances except to the extent required by applicable laws.

I would like to now turn the call over to Roger Cregg.

Roger Cregg - President and Chief Executive Officer

Thank you, Ken. Good morning everyone, and welcome to the AV Homes’ first quarter conference call. I am pleased to report that we are continuing to see solid improvement in almost all aspects of our business. We are making measurable progress on many key initiatives that will improve our operating effectiveness and return AV Homes to profitability.

During the first quarter, we grew our orders by 27% year-over-year. Closings were up 29% and units and backlog grew 70% over the same period. These results are in part representative of the market recovery. They are also reflective of our operating strategy of being opportunistic in the short run by understanding the dynamics of our markets and deploying our assets accordingly. For example, we can look at the early success we are experiencing at Vitalia at Tradition in Port St. Lucie, Florida. The project was purchased at an attractive price in 2009 and the decision was made to stop our selling efforts until market conditions improved. We officially reintroduced the community in mid-February and it has posted 18 net sales in the first quarter.

We established a more efficient sales and construction model there and we anticipate that we will experience good margin performance with our closings. Indications are that the South Florida market is continuing to strengthen and we believe we are well positioned to capitalize on this trend. Near Orlando, we closed down Bellalago, our largest family oriented master planned community during the downturn in the market. Late last year, we believe that the move-up market had recovered sufficiently to consider re-launching Bellalago. We officially opened the community in mid-April and sold 10 homes the first weekend.

The amenities of this lifestyle community are in place and we have a large supply of developed lots. With our focus on value engineering, we again are experiencing good product acceptance and strong margin opportunities at Bellalago which will serve a higher-priced move-up customer. In the Phoenix market, which is making national headlines with its shrinking inventory and price appreciation, we repositioned our active adult community, CantaMia with impressive success. Last year, we sold a total of 63 homes at this community. In the first three months of 2013, we have already sold 37. By revamping our pricing strategy, we are able to improve our sales performance by 185% during the quarter and in unison with the reengineering of our product offering, we have been able to improve our margin performance here as well. These three communities has examples of our tactical efforts, we are employing to accelerate our return to profitability.

In Central Florida, we are fortunate to have an inventory of land assets with a low bases that puts us in a very competitive position in the market. We are seeing the inventory of actively selling communities continue to decline which will make our assets extremely valuable to our expansion activities in Central Florida. We are watching the market trends closely in an effort to make timely decisions that will maximize our opportunities with these assets.

In addition, we are also finding opportunities to efficiently market, sell, and build our homes in more cost effective ways. Our focus on reducing house costs through structure on design changes, future reductions and aggressively re-bidding has helped us realize some significant margin improvement on certain floor plans and house designs. But we’re encouraged with some of the early results associated with these activities, we believe we have opportunities to achieve additional cost savings in other areas of our operations.

As we look ahead into the remainder of 2013, we will be working in several areas to build a strong operational base for our future. In Central Florida, we have so got one of our most successful communities Bella Pointe, which served first time home buyers. That market remains strong and as a result we have decided to reopen the Isles of Bellalago. This provides us with more than 120 developed lots from which we can serve these buyers. In the Phoenix area we are experiencing a dramatic appreciation in land prices, which have made it more difficult to identify and acquire land parcels for our Joseph Carl Homes operation. We have sold out of all, but one of our active communities and may experience a lag in sales and future deliveries until we can acquire new communities which we are exploring on an ongoing basis today.

We are also continuing to planning entitlement processes with three new projects in Phoenix area. These projects are 900 unit active adult community in the new Eastmark master plan community in Mesa. A 45 units high-end community in North Scottsdale and our multi-family condominium project being planned at the site of Borgata retail center. All of these new projects are presently scheduled introduced for sale in either late 2014 or early 2015. We are also continuing to peruse our previously announced strategy to expand our geographic footprint into new markets. We are actively engaged in this process in North Carolina and examining other opportunities where we believe our Vitalia active adult brand can help us establish operations in high growth profitable markets.

At this time I would like to turn the call over to Tina Johnston who will discuss our financial results for the first quarter in more detail. Tina.

Tina Johnston - Principal Financial and Accounting Officer

Thank you, Roger and good morning everyone. For the quarter ended March 31, 2013, our revenues decreased slightly to $21.5 million compared to $26.7 million during the same period in 2012. We have reduced our loss from $8.5 million or $0.68 per diluted share for the period ended March 31, 2012 to $4.8 million or $0.38 per diluted share for the quarter ended March 31, 2013. In the first quarter, we closed 81homes generating $20.2 million of revenue, a 37% increase in revenue and a 29% increase in unit volume over the same period a year ago.

Our average price per unit from homes closed during the first quarter of 2013 rose 7% from the first quarter of 2012 to approximately $249,000. During the quarter the average closing price in our active adult segment was $262,000 per unit compared to $250,000 per unit in the first quarter of 2012. In our primary residential segment, the average closing price per unit rose to $237,000 from $216,000 from the first quarter of 2012. Both of these increases reflect the change in mix of homes closed and also our ability to raise prices during the past year we are working to offset cost increases from our suppliers and vendors.

We experience an increase in our pace of sales during the first quarter posting a 27% increase in net sales from 106 units in 2012 to 135 units in 2013. This increase in sales contributed to a 70% increase in our backlog of homes sold but not yet delivered. At March 31, 2013 our backlog was 239 units, 131 primary and 108 active adult with an aggregate contract value of $53.2 million compared to 141 units for the value of $30.1 million at March 31, 2012. Total revenues from our active adult segment for the quarter ended March 31, 2013 was $12 million, which includes $10.2 million from home closings and $1.8 million from our amenity and other operations compared to total revenues of $9.8 million for the quarter ended March 31, 2012, which included $8 million from home closings and $1.8 million from amenity and other operations.

Total revenues from our primary residential segment for the quarter ended March 31, 2013 were $10.5 million, which included $9.9 million from home closings and $600,000 from our amenity and other operations. This compares to the earlier quarter when we reported total revenues of $7.6 million, which included $6.7 million from home closing and $900,000 from amenity and other operations.

Our home building contribution margins excluding impairments for the quarter ended March 31, 2013, was 16% compared to 13% in the year earlier quarter. We continue to focus on margin improvements throughout our company and our pricing strategies and our product design despite cost increases that are now working their way into our operations and which could impact margins in subsequent quarter.

During the first quarter of 2013, the company reported $2.3 million in revenue from the sale of commercial, industrial and other land, which generated $1.4 million of net income to the company compared to $9.1 million in revenue and $3.1 million in net income during the first quarter of 2012. Although our portfolio of assets include land we hold for potential sale, these land sales are not core to our business and are unpredictable in terms of timing and amount. As of March 31, 2013, we have cash and cash equivalents of $71.1 million compared to $79.8 million at December 31, 2012. The decrease in cash is primarily attributable to our investments in our new and existing operations and our fixed costs which include overheads and interest payments. This is offset in part by cash generated from land sales.

Assuming that no significant adverse changes in our business occur, we anticipate the aggregate cash on hand, cash flow generated through home building and related operations and sales of commercial, industrial and other lands will provide sufficient liquidity to fund our ongoing business operations.

Ken I will turn that call back to you now.

Ken Plonski - Investor Relations

Thank you, Tina and Latoya we will entertain our question-and-answer session now. We would like to remind everyone that we will give you an opportunity to ask one question and one follow-up question, so that we can accommodate everyone during the call. If you have additional questions you are invited to jump back into the queue. So, Latoya if you would begin that process, we will continue.

Question-and-Answer Session

Operator

(Operator Instructions) First question is from Harsha Gowda of BlueShore. Your line is open.

Harsha Gowda - BlueShore

Good Morning.

Roger Cregg

Good Morning, Harsha.

Harsha Gowda - BlueShore

So, I just wanted to ask about the repurchase rights on the senior converts. If you incorporate the amount that is due on that if that repurchase right is exercised, you have about say $16 million in free cash, will that be sufficient to implement these expansion plans that you mentioned earlier the Borgata and Scottsdale project, the Mesa project, etcetera?

Roger Cregg

No, would not. We are actually working on that today for financing. We are chasing down a number of different avenues right now, but we are feeling very confident about two things one would be ability to get some financing and also to continue to make investments in the business going forward.

Harsha Gowda - BlueShore

Okay and just in light of that it’s more a question on just to view it seems that the financing markets are very open to home builders, so why has there been – any reasons why this is happening now is there any delays that you are facing that’s unusual, etcetera?

Roger Cregg

No, no delays, I think the process of going through not having the shelf, our shelf expired, so we had to re-put up a shelf as you saw we came through the year because the financials weren’t updated at that point, they were stale, so we had to wait till we filed our 10-K. And then by the time we get through the process with the filing with the SEC, now we are into the first quarter. So, it’s just really timing in getting our ducks in a row, but we are in pretty good shape right now to move forward.

Harsha Gowda - BlueShore

Okay, great and it’s a great progress on the contribution margin and uptick on home sales. So, thank you very much.

Roger Cregg

Thank you, Harsha.

Operator

Thank you. (Operator Instructions) We have a follow-up question from Harsha. Your line is open.

Harsha Gowda - BlueShore

It looks like I am alone on these questions, so I will ask you another one. So, the Poinciana Parkway project, it seems to be moving in good measure is that the case?

Roger Cregg

Yes. In all appearance, where we are today that seems to be moving along they are working on the financing, which ought to be this summer sometime. Indications are probably mid-summer timeframe, but it seems that, that project is moving forward as we discussed earlier this year.

Harsha Gowda - BlueShore

Okay, great. And it seems that is it still a lag that you are finding with the improvement in active adult, because I would imagine the Solivita project, especially with the hospital I am assuming is almost complete or is complete, that should be very attractive for active adult consumer, is that what you see?

Roger Cregg

Yeah, our trend has been that’s picking up, but the first time buyer definitely is not back in the market in a significant way. And so that’s created a lag effect, I mean, the industry overall, but we have seen some the traffic, we are seeing today is much more motivated buyers. So, we don’t just have people coming in the way we used to be for. It’s the very serious about it. They are well funded to be able to make their purchases. So, the traffic, quality of the traffic has improved significantly.

Harsha Gowda - BlueShore

Okay, great. And my last question is early late in 2011, Allen Anderson had mentioned how he didn’t see 2012 was being a profitable year and he gave that outlook, and he was correct. It looks like things have improved significantly this year and we are very close to profitability, especially if we look at the backlog. Can you give us an idea? Can you give us some outlook? Could you, I guess, putting to reach out a little bit and give a view on this year?

Roger Cregg

Well, I am not going to give a specific projection at this point, but we are making a lot of progress. You look at the numbers we had last year. We certainly have to have more volume. So, really our drive to profitability needs to be driven by more volume. We need to be able to leverage that with our overheads, which we begin to see today with increasing volume. We have also got to get more price and we have got to improve our costs structure. All those things we are working on to drive ourselves in that direction. Again, I can’t give a projection today, but we have got a lot to overcome for 2013, but we’ll watch that quarter-after-quarter. The key driver here is going to be the volume itself. That’s going to be what we need to really get us going in. The markets there we just got to make sure that our cost structure is in place and we can deliver the homes, but we have got a lot of efforts going on in the company initiatives to drive that. So, I think we are on the right path and hopefully sooner than later for profitability.

Harsha Gowda - BlueShore

Okay, great, I think so too. Thank you very much.

Roger Cregg

Thanks, Harsha.

Operator

Thank you. The next question comes from (indiscernible). Your line is open.

Unidentified Analyst

Question for you….

Operator

Jeff, your line is open.

Unidentified Analyst

Yeah. Can you hear me?

Roger Cregg

Yes.

Unidentified Analyst

What is your – in the cost structure of the homes are you starting to see vendor increases in any significant measures and which ones are driving the lead ship in terms of additional costs or price increase, primarily in raw material?

Roger Cregg

Yeah, excellent question, I think the lead on the raw materials is definitely in the lumber category. If you look at prices year-over-year, they are up roughly in the 50% to 60% range, and that’s the combination of things that when the market started to turn up pretty significantly, the mills weren’t in any position, lot of the mills were still closed. They began to open those up as demand came on. So, they are driving a lot of the price increase from that side and the cost side for builders. And I think labor is another one. And in certain markets where again lot of the vendors had gone out of business through the downturn, the ones that were staying, certainly didn’t have a robust workforce. And as the market picked up, everybody was looking for people. So, we have seen pressure on that side. The labor is a little bit on the price side or the cost side, if you will, in increases, but more about availability and in getting people. And there is just as a lot of people exited the market on lot of the trades, they haven’t come back as strong at this point. I think still people are looking from a hiring standpoint to see if the markets reel at this point to look on bringing on a lot of people. But from the cost side, we have been able to raise prices. So, we felt pretty good about that. We have done well in the Florida market. We have done well here in Arizona as well. Price appreciation is beginning to catch on to the consumer. And I think that’s also creating a little bit more of the demand in their minds that prices are going to continue to go up.

Unidentified Analyst

Great, okay, thank you.

Roger Cregg

Thank you, Joe.

Operator

Thank you. I am not showing any further questions at this time. I will turn the call back over for closing remarks.

Roger Cregg - President and Chief Executive Officer

Alright, I want to thank everybody again for joining us for the first quarter, and we look forward to speaking with you in the second quarter. So, have a great weekend. Thank you very much.

Operator

Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Good day.

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