AV Homes' (AVHI) CEO Roger Cregg on Q1 2016 Results - Earnings Call Transcript

| About: AV Homes, (AVHI)

AV Homes, Inc. (NASDAQ:AVHI)

Q1 2016 Results Earnings Conference Call

April 29, 2016, 08:30 AM ET

Executives

Roger Cregg - President and Chief Executive Officer

Mike Burnett - Chief Financial Officer

Analysts

Jay McCanless - Sterne Agee

Alex Barron - Housing Research

Operator

Good day, ladies and gentlemen and welcome to the AV Homes First Quarter 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 call is being recorded.

I would now like to introduce your host for today’s conference Mr. Mike Burnett, Chief Financial Officer. Sir, you may begin.

Mike Burnett

Thank you, Rania. Good morning and welcome to the AV Homes first quarter 2016 earnings call. With me on the call today is Roger Cregg, President and Chief Executive Officer of AV Homes.

This morning, we will discuss the operational and financial results for the first quarter ended March 31, 2016. In addition to the earnings release and data sheets that we filed yesterday, we also have posted supplemental slides to the Investor Relations section of our website at avhomesinc.com, highlighting our operating trends and to assist you in the analysis of our results.

This presentation includes certain non-GAAP financial measures. Reconciliations of those non-GAAP measures to the most directly comparable measures under GAAP can be found in the supplemental slides posted on our website.

One other item to note in this quarters presentation is that in our ongoing effort to continuously improve our disclosures the selling, general and administrative expenses related to homebuilding previously included in our homebuilding expenses line item on the statement of operations have been combined with the corporate general and administrative expenses and reclassified into a separate new line item called selling, general and administrative expenses.

To enhance the visibility to our core homebuilding operations and confirm with standard industry presentation. I will speak to both of these components in my remarks later in the call.

Before we begin let me remind you that this conference call and the webcast contain forward-looking statements within the meaning of the U.S. Federal Securities laws, which may include information regarding the plans, intentions, expectations, future financial performance or future operating performance of AV Homes. Forward-looking statements are based on the expectations, estimates or projections of management as of the date of this call and webcast.

Although management believes these expectations, estimates or projections to be reasonable as of the date of this call, forward-looking statements are inherently subject to significant business risks, economic and competitive uncertainties or other contingencies, which could cause our actual results or performance to differ materially from what may be expressed or implied in the forward-looking statements.

Important factors that could cause our actual results or performance to differ materially from our forward-looking statements, include those set forth in the Risk Factors section of our most current Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission, which are available online at sec.gov. AV Homes disclaims any intention or obligation to update or revise any forward-looking statements to reflect subsequent events, circumstances, except to the extent required by applicable law.

With that, I will now turn the call over to Roger Cregg for a discussion of the business results. Roger?

Roger Cregg

Thank you, Mike. Good morning, everyone. Welcome and thank you for joining our call this morning to review the first quarter 2016 results. Our continuing efforts to profitably grow the company is clearly reflected in the first quarter’s results compared to last year. This has been achieved through the acquisition of Bonterra Builders in Charlotte as well as growing our community accounts within existing markets which resulted in the increase in our closings, revenues and net new orders compared to the prior year quarter.

As our new markets and communities come online and continue to mature, we believe they will provide more topline revenue growth, improve margin contribution and leverage our overheads and profitability.

We continue to deliver on the improvements in our operating performance and we are again very pleased with the progress we are making. Mike will drill down to give us more specific detail on the numbers but here are some of the highlights.

For the first quarter, we achieved year-over-year growth in homes delivered, net new orders, home building revenues, overhead leverage and a growing backlog for the quarter. The first quarter was highlighted by an increase of 101% in homes delivered, 61% increase in net new orders on an increase of 41% in units and 127% growth in homebuilding revenue from home closings in the first quarter of 2016.

We continue to open new communities throughout last year in addition to the Bonterra Acquisition in support of our growth strategy increasing our selling communities to 60 from 36 and increasing our closing communities to 58 from 30 compared to the same period last year.

During the first quarter we achieved growth in net new orders in all segments as we begin to see a building momentum in our backlog of over 1000 units at the end of the quarter. In addition, new community openings throughout last year in our existing markets of Orlando, Raleigh, Charlotte, Jacksonville and Phoenix allowed us to capture additional net new orders in the first quarter while offsetting Phase out community closings.

Gross margins for the first quarter reflect an increase 190 basis points compared to the prior year quarter as a result of the mix associated with the Bonterra acquisition in addition to the increased volume and new communities coming online. Throughout last year and into 2016 we continue to look for opportunities to selectively increase product prices.

In addition, we’ve also begun to leverage our size and scale on various house cost components such as cabinets, roofing materials, lighting fixtures, HVAC equipment and plumbing fixtures to help improve margins or offset the impact of increasing industry cost pressures.

As we’ve increased the number of selling communities from last year, the start up and performance has been in line with our expectations for the quarter and our outlook for the business in 2016.

In the overhead expense area, we continue to gain leverage from the size and scale of the operations as a result of the increased revenues from quarter-to-quarter with our division homebuilding SG&A improving to 13.4% homebuilding revenues from homes closed in the quarter down from 18.2% in the prior year quarter or an improvement of 480 basis points.

Additionally, our corporate overheads improved to 3.4% of homebuilding revenues from homes closed in the quarter down from 6.8% in the prior year quarter or improving 350 basis points. While gaining leverage we continued to invest in the start up of additional communities within our operations.

While closing approximately 20% of our projected 2016 annual volume in the first quarter in what tend to be a seasonally weak quarter for closings, we anticipate additional leverage in many of these areas as the year progresses.

In summary, despite the choppy nature from time to time of the macro and micro market conditions, we remain confident that our business is well positioned to opportunistically benefit and capitalize on the market environment.

As I’ve mentioned previously, we expect to continue to improve our profitability by leveraging our diversification platform, increase community count, and operational efficiencies and performance. We remain focussed and confident in our long term strategy to deliver greater value to our shareholders.

At this time I like to turn the call back over to Mike who will discuss the financial results for the quarter in more detail. Mike?

Mike Burnett

Thanks, Roger. Our first quarter results reflect the continuation of a positive momentum we have established in the business as we achieved another quarter of profitable growth in what is our seasonally lowest performing quarter.

Total revenue increased to $124 million driven by homebuilding revenue which increased 127% compared to the same period in 2015. Net income in the first quarter improved to $800,000 from a loss of $5 million in the first quarter of 2015 and diluted earnings per share rose to $0.04 from a loss of $0.23 in the prior year period.

Adjusted EBTIDA also increased almost 500% to $7 million in the current quarter from $1.2 million in Q1 of 2015. Focusing on the homebuilding operating result, in the first quarter of 2016 we closed 428 homes generating $121.2 million of revenue. This represents a 101% increase in unit volume and 127% increase in revenue over the same period a year ago.

The unit growth was strong in each geographic segment of the business with Florida up 49% to 251 units, Arizona increasing 108% to 81 units and the Carolinas closing 96 units versus 5 a year ago primarily as a result of the acquisition of Bonterra Builders in July of last year as well as our organic growth in the start up region.

The average price per unit for homes closed in the current quarter increased by 13% to approximately $283,000 primarily due to the additional closings from Bonterra which have a higher ASP than our existing communities. However, in addition to that, we did experience increases in the average selling price of our homes in each of our three geographic segments.

Turning to a discussion of margins. Homebuilding gross margin for the quarter ended March 31, 2016 increased 190 basis points to 18.3% compared to the prior year period with solid increases in each geographic segments. Excluding the impact of capitalized interest in the quarter, our gross margins were 2.6% higher or 20.9%. This result is consistent with our expectations for the quarter and in line with our outlook for the full year.

Florida which accounted for over 50% of our revenue in the quarter saw gross margins increase 400 basis points to 21.4%. The increase was due to selective price increases at our communities with stronger absorption, the achievement of cost reductions on the supplier side and changes in the mix to homes closed.

Arizona's gross margins for the first quarter improved 130 basis points to 14.4% due to the addition of new higher-margin communities. In the Carolinas, we had minimal revenue in the first quarter of last year, we reported this quarter margins of 14.9% most of which came from Bonterra. The gross margin in this segment also includes the negative impact of approximately 150 basis points due to the Bonterra Builders purchase accounting impact of the whip [ph] write up in the current year period.

Moving on to selling, general and administrative expenses, including both homebuilding SG&A and corporate SG&A our SG&A margin improved 830 basis points to 16.8% in the first quarter of 2016 compared to 25.1% in the first quarter of 2015.

Homebuilding SG&A without COBRA G&A cost improved 480 basis points to 13.4% from 18.2%. Significant improvements in the overhead leverage due to continued revenue growth and cost containment were partially offset by higher COBRA percentages in the Florida and Arizona markets.

Our corporate general and administrative expenses improved to $4.1 million or 3.4% of homebuilding revenue compared to $3.7 million or 6.8% in the first quarter of 2015. This continues to demonstrate our ability to effectively control cost and leverage our existing cost structure while substantially growing revenues.

Interest expense decreased $2 million to $1.3 million in the first quarter compared to Q1 of 2015 due to more interest being capitalized on our land under development and homes under construction primarily due to the additional land and inventory associated with Bonterra.

The income tax provision for the first quarter of 2016 was $68,000 and is attributable to state income tax expense in the Carolinas where we do not have any remaining state NOLs as well as AMT at the federal level.

We continue to have a full valuation allowance on our federal deferred tax assets and state DTAs for Florida and Arizona in the amount of approximately $124 million. This represents almost $5.50 per share of book value and is fully reserved and not reflected as an asset in our balance sheet.

We continue to analyze positive and negative evidence in determining the continuing need for valuation allowance, and if current business trends continue including continued improvements in the homebuilding industry and we continue to build our track record of profitable quarters we believe that could be sufficient positive evident to support, reducing a significant portion of the valuation allowance in 2016.

Lastly earnings per share for the first quarter improved to $0.04 with the weighted average share count of approximately $22.6 million shares compared to a loss per share of $0.23 in the first quarter of 2015.

Moving on to a discussion of net new orders. The number of sales contracts signed net of cancellations during the first quarter increased over 40% to 682 units compared to the prior year.

Florida’s net new orders increased 5% to 380 while Arizona’s increased 19% to 128 units and the Carolinas added 174 units versus 14 a year ago. The increase was primarily driven by the expansion in the number of selling communities to 60 from 36 a year ago. Florida added four new communities, Arizona added one, and the Carolinas now have 25 selling communities, up from six last year.

On a dollar value basis, net new orders increased 61% to $210 million. This strong sales performance has increased our backlog to 153 units from 603 units at the end of the prior year period with the dollar value of $335 million, more then double to $165 million in backlog dollar value at the end of the first quarter of 2015.

On an average price per unit basis, our home prices continued to trend favorably due to selective price increases and improvements in the mix through the addition of higher-priced homes and communities. This translated into an average price per unit in the backlog of approximately $318,000.

Moving on to the balance sheet, consistent with the seasonal nature of the homebuilding business cash and cash equivalents, including restricted cash decreased to $16.9 billion from $73.8 million at December 31.

During the first quarter we repaid the remaining $47 million of our 7.5% senior convertible notes which matured in February and also drew $35 million on our credit facility to fund our working capital needs in the quarter. As such, our total debt balance declined to $309 million from $321 million at year end

From a credit statistics perspective, our net debt to net total capitalization was 49.1% and our asset coverage increased to 2.1 times. In summary, we had a solid start to the year and are producing positive results in line with our full year expectation.

With the good first quarter sales base across all our divisions and a strong backlog we feel confident in executing our business plan and continuing our trends of profitable growth.

With that, I'd like to turn the call back to the operator to open the lines for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from the line Jay McCanless from Sterne Agee. Your line is now open.

Jay McCanless

Good morning, guys. Thanks for taking my questions. The first question I had on the closing mix, this quarter hadn't much lower price system what we were looking for, could you talk about the mix and closings and what we maybe should expect for ASPs going through the rest of the year?

Mike Burnett

Jay, its Mike, I think the reason that your number was probably ahead of ours was our Carolinas division has a high ASP as we've discussed primarily due to the Bonterra acquisition. We have weather delays in late fourth quarter last year that push back some of the homes that we expected we're closing in the first quarter a bit, and that affected the mix a little bit. So I think we're still in line with our business plan. That mix I think you'll see change a little more heavily weighted in the Carolinas in those higher price points pulling that average sales price up throughout the year then.

Jay McCanless

Sure. And then the other question I had, could you guys talk, I know you don't breakout anymore, but we've heard a range of commentary about the active adult buyer. Could you tell us what you're seeing about your Florida and your Arizona communities from net buyer and how they are feeling about the active adult market right now?

Roger Cregg

Yes, Jay. This is Roger. When we look at the active adult that we had for the first quarter, we're actually up by about 14% over last year, although we look at just in the Orlando area, we were down there roughly about 13%, but that was 12 unit, so its not like we've got a massive base here that were coming off of, but we did see a pullback definitely in the active adult, so it was much slower.

We started our really in January, February little bit ahead, and then we did see a pullback come March which when we looked at what was going on in the equity market, even though the year started out like that, we didn't see a big pullback in the beginning of the year, quarter, but we definitely did as a quarter came on.

So, overall though, we had the added active adult communities here in the Phoenix we opened up earlier last year right around the March timeframe, and then towards the end of last year in October we open the Raleigh, Creekside active adult community. So we had two more communities coming on in 2016 relative to 2015.

Jay McCanless

And so the Phoenix and Raleigh communities help make up for some weakness in Florida, is that the right way to read it?

Roger Cregg

Yes. That's correct.

Jay McCanless

Okay. Thanks guys. Appreciate it.

Roger Cregg

Okay, Jay. Thank you.

Operator

And our next question comes from the line of Alex Barron from Housing Research. Your line is now open.

Alex Barron

Thanks. Good morning, guys.

Roger Cregg

Hi, Alex.

Alex Barron

Can you guys talk about active adult from a different perspective like roughly what percentage of your business is it right now and where do you see that kind of going over the next future years?

Mike Burnett

Yes, I think – again first quarter it’s a little difficult to compare, but our first quarter revenues probably roughly about 25% of the revenues for the quarter were active adult, and we would say that again we're trying to get into that sweet spot of about 60/40, 60% from our primary business and about 40% from the active adult. And that's really the focus and driver there. Again quarter-by-quarter it’s a little bit difference, but in the overall pace of the sales relative to primary and again some of that would get skewed based on community opening on the primary side.

And as said, we will have a full year of both new projects that came on last year. One again came on March and here in Phoenix in the Eastmark area, which on core. And in Creekside at Raleigh came on in the fourth quarter. So that will skew it a little bit, but overall we're looking about 40% of our business.

Alex Barron

Okay. And as far as the nature and makeup of these active adult communities, are they going to be similar to Eastmark in size and features, or are they are going to be smaller or how do you guys envision that, will they have golf courses that kind of thing?

Roger Cregg

Yes. So we're doing golf courses. We do have in Solivita which again a legacy project back from many years ago. We won't be doing those again. Our Eastmark, our Encore project here in Phoenix in the Southeast Valley, that's just a 900 loss and we have an Amenity [ph] center there. And then again the one in Creekside in Raleigh that's about 600 lots, 650 lots. So relatively smaller than what we would do in the Solivita. Canta Mia project was just around 1700 and [Indiscernible] Florida was about 1100.

So, it depends on land availability in the future, what we look at, so our sweet spot might be in the plus or minus 1000 certainly not much bigger than that. Again just based on the investment as you all know a lot of infrastructure has to go in, the amenity center that you put as to the size of the communities and that drives higher investment upfront which typically will stress the returns. So, our focus is definitely is on improving returns, but also making sure that we got project that have a life that perform as well.

Alex Barron

Okay, great. And as far as your outlook for gross margin and the direction of SG&A ratio what can you comment on that?

Roger Cregg

In our presentation on the website we did put and reiterated our guidance that we gave last quarter, so pretty much its right there for you as a same.

Alex Barron

Okay, great. Thanks a lot.

Roger Cregg

Okay. Thanks.

Operator

[Operator Instructions] And I'm not showing any further questions. I would now like to turn the call back to Mr. Roger Cregg, President and CEO for any further remark.

Roger Cregg

Thank you. Once again I would like to thank you for joining this morning’s call. We appreciate your time and interest in AV Homes, and we look forward to updating you on our progress in the second quarter conference call. Have a great day and a weekend everybody. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This conclude today’s program. You may all disconnect. Everyone have a wonderful day.

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