CalAtlantic Group, Inc. (NYSE:CAA) Q2 2016 Earnings Conference Call July 29, 2016 11:00 AM ET
Larry Nicholson - President & CEO
Jeff McCall - CFO
Alan Ratner - Zelman & Associates
Michael Rehaut - JPMorgan
Mike Dahl - Credit Suisse
Nishu Sood - Deutsche Bank
Bob Wetenhall - RBC Capital Markets
Susan Maklari - UBS
Megan McGrath - MKM Partners
John Lovallo - Bank of America Merrill Lynch
Patrick Kealey - FBR Capital Markets
Welcome to the CalAtlantic Group's 2016 Second Quarter Results Conference Call. Today's call is being recorded. Before we begin, I would like to direct your attention to Company's notice regarding forward-looking statements and remind you that this conference call contains forward-looking statements, including statements concerning future financial and operational performance.
Actual results may differ materially from those projected in the forward-looking statements. For additional information regarding factors that could cause actual results to differ materially from those contained in the forward-looking statements, please see the Company's SEC filings, including reports on Form 10-K and Form 10-Q under the heading, Risk Factors. A question-and-answer session will follow today's prepared remarks.
A recording of today's presentation will be available for replay a few hours after this call ends and will continue to be available on the Company's website for 30 days. At this time, I would like to turn the call over to Larry Nicholson, CalAtlantic Group's President and Chief Executive Officer. Please go ahead, sir.
Thank you, Catherine. Good morning, everyone. Joining me today on the call are Scott Stowell, our Executive Chairman; Jeff McCall, our Chief Financial Officer. Before we talk about our results, just a quick reminder, we completed our merger on October 1, 2015. As we have for the last few quarters, today, we will be providing pro forma comparisons to compare year-over-year. Performance for the entire merged business, as if it were -- had been operating as one business for the period presented. We caution you that we were not actually operating as one business during this time period and that if we had been operating as one business, results may have been different than those presented here.
For your information actual year-over-year comparisons were included in yesterday's press release and will be included in our report on Form 10-Q which we expect to file later today. We're pleased with our second quarter performance, with pro forma home sales revenue up 17% to $1.6 billion and pro forma earnings, up 22% to $190.5 million.
Strong year-over-year improvement has continued through the second quarter. We had 3,921 net new orders during the quarter with a value of those orders, up 5% as compared to the pro forma, Q2 2015. Second quarter new home deliveries were up 12% compared to the pro forma 2015 second quarter to 3,484 homes with an average selling price of $447,000, up 5% from pro forma Q2 2015.
Gross margins from home sales was 21.9% or 22.2%, excluding $5.9 million of purchase accounting adjustments. SG&A was 10.6% of home sales revenue, representing the second lowest quarter SG&A rate for either legacy Company in over 10 years and demonstrating that the synergies we expect to achieve from our merger are showing up in our business.
Adjusting for the impact of approximately $5 million of 2016 second quarter merger costs and a $5.9 million impact of purchase accounting, adjusted pre-tax income for Q2 2016 was up 22% to $190.5 million compared to pro forma $156.1 million in Q2 of 2015. Earnings per share increased 15% compared to second quarter of last year to $0.83 per share. We ended the quarter with 7,456 homes in backlog, up 11% in units and up 19% in value year over year.
Turning now to community count, we opened 52 new communities during the second quarter and ended the second quarter with 566 active selling communities. During the quarter, we averaged 567 active selling communities, up 4% when compared to pro forma Q2 2015. While the timing of new community openings and closings can often vary from projections, we continue to anticipate delivering mid-single-digit average community account growth in 2016. We spent approximately $395 million on land and land development in the second quarter and are targeting a full-year land and development spend of approximately $1.7 billion. With our strong near term land position, we're now looking at land for communities that will open in the first half of 2018 and beyond. As of the end of the quarter, we owned controlled virtually all of our expected average selling communities for 2016 and 2017.
If you turn to Slide 5, we provide a view of our second quarter order activity across our four regions. Net new orders for the second quarter decreased 1% Companywide on a pro forma basis but as you can see on the upper left-hand graph orders varied by region from up 25% in the North to down 24% in the Southwest. In the second quarter, the North showed strength in virtually all of their markets with year-over-year growth in excess of 40% in Baltimore, Philadelphia and Chicago. In contrast, the Southwest order slowed in all six markets, with the largest year-over-year declines in San Antonio and Austin.
Community count increased 4% across the Company led by the West and the North regions, turning in double digit year-over-year growth rates, partially offset by an 8% decline in community count in the Southwest. To get a better picture of the order performance across the regions it's important to factor in the change in community count and focus on the order absorption rate. Across the Company order absorption rate on a pro forma basis was down 5% over the prior year. It varied significantly by region from up 12% in the North to down 17% in the Southwest. The North exhibited double-digit absorption rate growth across five of their seven divisions led by Philadelphia, Baltimore and Chicago.
During the quarter, Chicago delivered an absorption rate well in excess of three per month so we look forward to meaningful price increases which we will likely see in faster absorbing communities. The Southwest experienced negative absorption growth rates against all six divisions, led by decreases in Dallas and San Antonio. Our order value was up 5% across the Company on a pro forma basis, ranging from up 23% and 21%, respectively, in the North and the West to down 20% in the Southwest, where strong gains in San Diego, Baltimore and the Bay Area were offset by declines in Austin, Colorado and San Antonio.
The average selling price of net new orders was up approximately 6% across the Company on a pro forma basis and ranges from up 12% in the West to down 2% in the North. Community mix was the main driver for the increase in ASP. I would now like to turn the call over to Jeff who will provide some more detailed information regarding our second quarter.
Thank you, Larry. On Slide 6, we dive a little deeper into our backlog. Our backlog value as of the end of the quarter was $3.4 billion. The dollar value in backlog was up 19% on a pro forma basis, driven primarily by 11% increase in units, coupled with a 6% increase in ASP. Our backlog gross margin currently stands at approximately 22.4%. Of the 7,456 units in backlog as of June 30, 3,644 scheduled to close in the third quarter. The units, scheduled to close the third quarter, have an estimated ASP of around $460,000, up approximately $13,000 from the $447,000 ASP of our second quarter deliveries. The homes sold and closed in the third quarter will impact reported result up or down from the backlog figures.
Typically, homes sold and closed in the quarter are more concentrated in communities with a lower ASP than homes in backlog. Excluding the extraordinary purchase accounting, the anticipated gross margin of homes in backlog that are expected to close in the third quarter is approximately 22%, consistent with our second quarter margins.
On Slide 7, we break down deliveries in a little more detail. As we mentioned earlier, deliveries in the second quarter were up 12% versus the pro forma prior year to 3,484 homes. The key drivers to deliveries are beginning backlog expected to close in the quarter, the amount of homes sold and closed in the quarter and the cancellations and/or changes to delivery dates of homes currently in backlog. These last two components can have a material impact on quarterly results, impacting not only the number of homes delivered, but also the ASP and the gross margin in the quarter. In the second quarter, both the homes sold and closed in the quarter and the cancellations and/or changes to delivery dates had a positive impact on our results.
Our homes sold and closed in the quarter were up 66 homes versus the first quarter at a higher gross margin than the homes in beginning backlog and a higher ASP. It's a positive sign when the homes sold and closed in the quarter which typically represent either finished specs or specs nearing completion, have an accretive effect on gross margin. This is not typically the case and can be impacted by mix but it is a positive sign that we're maintaining our pricing discipline, even on our finished specs.
Turning to our third quarter expectations, the 3,644 homes currently scheduled to close in the third quarter will get adjusted down due to cancellations and/or changes to the target closing dates of homes currently in backlog, partially offset by homes which we sell and close in the quarter. We currently expect a 97% to 105% backlog conversion on homes expected to close in the third quarter which equates to roughly a 47% to 51% conversion rate on the entire backlog as of June 30.
On Slide 8, we provide the pro forma SG&A trend over the past five quarters, including a breakout of the SG&A spent for the past three quarters. Please note for the pre-merger quarters, we assumed a 50 basis point pro forma increase to the historical Ryland SG&A to account for the re-class of certain personnel costs from cost of sales to SG&A in line with the CalAtlantic expense classifications. Q2 SG&A of 10.6% represent the lowest second quarter SG&A in over a decade and an 80 basis points improvement over the pro forma Q2 of 2015.
The second quarter SG&A improvement versus both the prior quarter and the prior year was positively impacted by the additional revenue in the quarter and the continued realization of our projected synergies. As we close out the third quarter following the merger, I would like to provide a final update on synergies. We have been very pleased with the great work of our 2015 functional teams that we -- that were tasked with identifying and delivering on our synergy expectations.
It's been a total team effort and our synergies were delivered on time and on budget. By the end of the second quarter, we've achieved an annual synergy run rate of approximately $80 million. Our entire synergy realization program is in place and the majority of the remaining targeted synergies are on the purchasing side and will flow through with future deliveries. The incremental purchasing synergies have been factored into the backlog gross margin and are part of our ongoing direct cost structure.
On Slide 9, we provide key balance sheet items as of the end of the second quarter and our 2015 year-end balance sheet. We ended the quarter with available liquidity of $893 million including approximately $637 million available under our unsecured revolving credit facility and $256 million of unrestricted home-building cash and cash equivalents.
Our inventory stood in excess of $6.4 billion and we have senior notes payable of approximately $3.7 million. During the quarter, we issued a $300 million of new 10-year senior notes at an interest rate of 5.25%, the proceeds from which will be partially used to pay off the next maturity of $280 million of 10.75% senior notes due in September of this year. We ended the quarter with approximately $4 billion of book equity or book value of $34 per share and a tangible book value of $26 per share. Our home-building debt to cap was 47.9% as of the end of the quarter. During the quarter, we opportunistically repurchased approximately 0.4 million shares of our common stock for a total second quarter stock repurchase expenditure of approximately $13 million.
As we announced in our press release last night, our Board of Directors has approved a new $500 million share repurchase facility which replaces the previous facility and provides for a net increase of $400 million in our share repurchase authorization. At this phase in the growth cycle, land acquisition remains our top priority of our capital allocation but as the recovery continues to unfolds, the return of additional capital to our shareholders will become an increasingly important component of our long term capital allocation plans.
On Slide 10, we provide an update on the other transaction-related items. We introduced this slide a few quarters ago and have updated for actual second quarter results and our current estimates for upcoming quarters. During the second quarter, we recognized extraordinary purchase accounting expense of approximately $5.9 million which ran through our cost of sale line on the P&L.
As of the end of the second quarter, we're through the extraordinary purchase accounting impact related to the acquired specs and the acquired backlog units. The remaining components of the extraordinary purchase accounting relates to acquired models. The remaining balance of $17.3 million is expected to be expensed quarterly over the next few years at a rough rate of $1 million to $2 million per quarter, as existing projects close out and acquired models are sold.
In addition to the goodwill and the write-up of the inventory values associated with the backlog specs and models, we also recognized other intangible assets of $7.3 million, in contrast to the goodwill which will remain on the balance sheet and be tested for impairment on an annual basis; the other intangible assets will amortize through the P&L.
Of the $2.7 million of other intangible assets on the balance sheet at the end of the first quarter, $1.5 million has been amortized and recognized as other expense in Q2. We anticipate recognizing the remainder of the expense related to other intangibles over the next two quarters. As it relates to transaction costs, we expensed $3.5 million of merger and other one-time costs in the second quarter and we're currently estimating approximately $1.5 million to $3 million in the third quarter of 2016. The bulk of these estimates relate to professional fees and lease and contract termination payments.
With that, I'd like to turn the presentation back to Larry before we open the call up for questions.
Thanks, Jeff. Before turning to your questions, I'd like to provide you a little bit of color on our CalAtlantic brand transition. I know some of you expressed your doubts about abandoning our two iconic brands and striking out with a new identity. While we remain confident that a one-brand strategy was the right one, we set out on a course to slowly transition the brands, not wanting to rattle our employees or customers as we made this significant change.
Somewhat to our surprise and certainly to our delight, it wasn't long after the transaction closed and we announced our new CalAtlantic name that we were deluged with requests from our people in the field asking about how and when they could begin transitioning our communities to the CalAtlantic flag. Recognizing that the field knows their markets best, our management team met quickly and decided to give our team the green light to proceed with this transition.
After receiving the okay, our teams moved fast and as of the end of the second quarter, nearly all of our open communities have now made a successful transition to the CalAtlantic brand. Thank you to our employees for this tremendous effort and for believing so strongly in our great new Company. We remain excited about the possibilities presented by the CalAtlantic and look forward to what we believe will be a solid second half of the year.
With that, I'd like to now open it up for questions. Catherine, first question, please.
[Operator Instructions]. Our first question will come from Alan Ratner with Zelman & Associates
I think the margins have obviously been very impressive and encouraging to see that strength continuing your backlog. I think the order number this quarter was a bit surprising to us just based on being up 6% in April off-the tough comp and ending down one for the quarter. Seems like you saw some deceleration for the quarter and obviously you highlighted the Southwest but was curious if there's any other color you can provide us that really drove that order deceleration through the quarter. Is it a price versus margin debate? Is it an issue of spec availability? Any additional color you might provide us just to help understand why you're seeing a trend well I think other builders have reported more stable trends for the quarter.
I think a couple of things one first is we would say we execution and get communities open. We’re a little late with some so that's a contributing factor. Specs is a factor, our spec availability in quite a few markets was less than we had hoped for and because of that we took the opportunity really a whole price and drive margin on those and I think you saw the results in the numbers.
And then you know lastly we had quite a few communities that were selling at a pace that we thought was too high that we raised prices and slow the pace down, so all that had some impact in it. Obviously the Southwest was the big change we've met with all 26 of our divisions over the last three weeks and went through their midyear business plans and we feel very comfortable about where we're position in the second half of the year.
We've given guidance for the next quarter on our margins. Our backlog margins are little bit better than that so we feel will comfortable where we're. We know it was a miss but I think that obviously the ASP continues to go up. If you look at on an pure absorption is only down a 10th from what we projected, so we're not overly concerned in what we see ahead of us is continued strong performance.
I think given a commentary just around the specs and the community count, as you sit here on July 29th, I'm curious if you look at your order pace and do you see opportunities to drive improvement in that in the back half either through increasing spec production I'm not sure where you’re in that process yet but you mentioned being caught a little bit short there. So is an effort going on to try to ramp-up that spec production? Have you seen community count growth catch-up? I know you've guiding from a single growth which would seem to imply pretty significant sequential growth rate in the next quarter [indiscernible] it just curious if you think this is the sales pace we should expect for year-end and maybe it's more of a margin versus a volume story or are there opportunities to close that gap a little bit?
Well I think there's opportunities to close the gap. We gave guidance for field guys about getting specs up and getting them going. Obviously people buy houses with to [indiscernible] we need to make sure we’re taking full care of our customer first. But we have given guidance as to increase their spec production. In some of those markets there are labor constrained. It's been difficult to get out in front of it such as a Dallas or a Phoenix or Colorado. So we're focused on that.
I think the other thing we're focused on is we talk about all the communities where slowing down because we’re above our absorption pace. We do have some communities that are below our accepted absorption pace. So we took a lot of time and step back and walk through all those and make sure we got the right pricing, we got the right product and we got the right people in place and I think those adjustments are ongoing. So yes I feel pretty good about where we're right now in the second half of the year.
Our next question comes from the line of Michael Rehaut with JPMorgan.
I just wanted to first question on sales pace again because I just wanted to make sure I my understanding some of the moving pieces and secondly on the more positive side the gross margins. And I think you’ve alluded obviously the relationship between the two, but really we just want to get a sense when you think about the Southwest in particular which obviously drove the majority of the weakness here and you mentioned that sales pace I believe was down across all six divisions.
Was there anything going on in terms of perhaps the underlying market fundamentals and in any of those markets you mentioned that Dallas and San Antonio led the drop in sales pace and we've heard so far at least largely through this year that Dallas has remained one of the strongest markets in the country. Just kind of curious if you think about that in particular and more broadly the Southwest. Is there any kind of underlying market weakness or is this just kind of as you alluded to before some other factors going on in terms of timing of communities, less spec, price versus pace? Any granularity there would be helpful.
Mike I will take a shot at this and then Larry can fill in with whatever else. Starting the focus on the Southwest, it's a different story by division and as always a different story by community. On the positive side, Las Vegas for us while it showed up roughly a 20% drop in orders, it was a 6% drop in absorption. It was still our second fastest absorbing community outside of California and frankly absorbing above our targeted rate. So we're looking for price increases there.
Colorado was absorbing really well through May and we saw some big price increases there and slow down to sub2 just in June. And we got the pace back down, new customers will come through and we expect to get that back up remains a very strong market.
Dallas in particular, Dallas with incredibly low resale inventory right now. I think our -- bit of a shortage of spec opportunity there, it hurt us a little bit and while we’re working on it that's a really tough labor market and it's hard for us to catch up both Dallas and Austin as well we're below our targeted finished spec count and in Dallas we're at half of our target.
That's an area but the fundamentals do remain strong we did an analysis by price point and we did not see in those markets a real particular change based on what price point we're looking at. We took all of our deliveries across all of our markets and divided them into bottom third, middle third and top third ASP and evaluated those absorption rates. You saw the drop in Dallas but it was relatively consistent across all of the price points. The one is the lower price point year-over-year was down the largest in Dallas, but that’s is partially because the prior comparison our lower third price point was absorbing very, very fast.
So it's a mix and we do go community by community to do it but I think we’re anxious to see how we rebound as always month to month and quarter to quarter there's a fair amount [indiscernible].
We will continue on to Mike Dahl with Credit Suisse.
Jeff, I wanted to ask another question about the gross margins. I think you called out overall margin 224 and one scheduled close is 22, so it's like 22.8 is kind of the implied fourth quarter number or at least fourth quarter and beyond number. I'm trying to get a sense of how much the improvement in this backlog margin is the purchase accounting or extraordinary purchase accounting roll off versus synergy versus pure price versus costs?
There is no impact, those are all pre-extraordinary purchase accounting, so there's no impact there because we’re looking at an apples to apples basis. We’re having success and some markets continue to push price and others we’re struggling to push price I think that is -- it's pretty consistent, our backlog has been in that area picked up slightly which has been a positive and something we focus on as we continue to thread through this recovery.
It's definitely our objective to take advantage of pricing opportunities when they are there acknowledging that the slower moving communities a lot of times you need to address that with some price as well. So it's something we balance all the time but it is a positive indicator as we move forward.
As it relates to the second quarter in particular, we benefited the specs that sold and closed in the quarter came in at a higher gross margin which was helpful, the other thing that helped our second quarter margins was the homes that got pushed into the third quarter at a lower gross margin. So you had double positive that hurt your ongoing backlog a little bit which drove your third quarter margins down from where they had been trending. Still, a positive upswing from where we sit today.
Just follow-on on that as you think about kind of the exit rate here and some of the as you get to the balance of 2016 and some of the initiatives that you and Larry just touched on in terms of potential changes to your spec strategies and certain markets understand that was positive impact on margins this quarter but sometimes not. When you blend it altogether mix of communities, mix of regions, the spec strategies, how should we think directionally about 2017 at this point from a margin standpoint?
We don't give specific forward margin guidance. The best indicator that we haven't had the time is our total backlog which is 22.5, we’re starting out as we guessed it [indiscernible] 2017 and it will continue to update people as that progresses but we don't do a lot of forward guidance on margins.
One other thing Mike on the comments about our spec strategy. I want to make it clear we have not changed our spec strategy. It is still the same as it's always been it's just in certain markets because of labor we just didn't have as many specs available as we would've liked. We think that would've had a positive impact on sales.
We will continue on to Nishu Sood with Deutsche Bank.
I first wanted to touch on community accounts. You touched a little bit in earlier question but Larry you reiterated some confident that you can hit mid-single-digit community account growth for this year despite the step backward and it sounds like some challenges out there. So what specifically are you seeing that gives you the confidence that you can get through some of the issues and delays in the second half of the year and still hit that mid-single digits growth rate roughly?
As I said, we met with all 26 of our operators over the last couple of weeks and we went through every community schedule when it is scheduled where is it in the lifecycle. So I think we feel pretty good at this point that everything that we believe is going to come on in the next two quarters will come on and obviously somethings did slide a little bit to the next year. They are not gone, they just slid to maybe the first quarter but we feel pretty good about where we're in the cycle with those communities that they should come on when they are expected now.
Just to give clarity. It's roughly 5% community count growth in the first quarter 4% in the second quarter third quarter's is going to be down from second quarter before bouncing back in the fourth quarter. So, third quarter year-over-year it's going to be lower than second quarter is what we're expecting right now.
And then second question, the share repurchase authorization, big move there upto $500 million. It's a big some, it's obviously a headlines in your press release but in your commentary you’re talking about land development still being the priority focus. So I'm just trying to reconcile those two. Are we looking at a program here? Is this more opportunistic? This shift from focusing on land expand to share repurchase? When should we expect that to happen? Obviously the share purchase in the second quarter sounded more opportunistic it's a 13 million, so what's the pace that we should be expecting out of this announcement?
The share repurchase is in the near term is more on the opportunistic basis. Our longer term plans and those authorizations can remain out for a period of time so right now we're focused on land and land developments and it's a top priority of our capital allocation as we progress through this cycle though you'll see increasing levels of activity there, but we’re not announcing a specific target amount per quarter or anything like that.
We will continue on to Bob Wetenhall with RBC Capital Markets
I kind of want to step back and go a little high level. You've done a great job since the completion of the merger extraction synergies which are coming ahead of your initial targets which is why your surpassing the $80 million which is a great tailwind. And that we look at second quarter and orders are well below consensus expectations and I'm trying to understand very discreetly is this because he just ran out of labor in certain markets and this issue is addressed and you'll reaccelerate in the second half of the year? Or is also because you are selling at too low a price and you tapped on the brakes in order to get better ASP performance? And if it's the second situation should we see an acceleration in ASP on a like for like basis in the back part of the year?
Bob, one thing I would say is our absorption pace increased basically normal seasonality if you look the first half. We were little bit faster than normal seasonality in the first quarter. A little slower than normal seasonality in the second quarter. But when you look at those in a combined basis, our first half seasonality versus second half of last year seasonality is basically right on historic norms. So I think people may have adjust a lot to the April comp which was up 6%. And as we always caution you one month definitely does not make a trend. So I think that may have been a bit of the guidance challenge.
Can you help me frame that? I understand and agree entirely one month certainly does make a trend. I'm on board with that. Give me a better way with a little bit more clarity to think about order growth and the back half of the year and they just want to ask my initial question. What is the split between labor constraints effectively that kind of labor constraints versus your desire to drive were sustained very good gross margin performance or tapping on the brakes to raise prices in your efforts to optimize pace first price. That's really what I'm trying to get a handle on.
On the labor side, I would tell you the labor issues probably are more limited to Texas, Colorado and Arizona today and not every Texas market Houston really doesn't have a labor problem so it's really Dallas, Austin maybe San Antonio but Colorado still extremely difficult. And Phoenix is difficult. And then throughout the pricing and you made a comment in the first part of the question about what we be selling it at a tool overprice I don't believe we would seller to lower price we just felt that demand was strong enough that we can continue to push price. And figures was a good example where there's still absorbing North of three and we have pushed price they are.
So every opportunity we have where we're at 2.5 to 3 depending on the price point we're going to raise pricing to we see that pace get back down right around 2.5 to 3 and take that opportunity. The other thing is opening some new communities that are lower price points throughout the country. Cost it would be a good example of that is as we open new communities over the next six months in Austin everything that will open there will be the lower ASP, currently are. We believe that will have a positive impact on orders going forward. And we have that situation in numerous other markets as well. There's not one answer I guess is the best way of putting it's going to be a mix of all of those and it's a market by market discussion.
We will continue on to Susan Maklari with UBS
As you sort of look further past the SG&A trends that you've seen over the last two quarters which of the really strong, how sustainable to think a lot of these benefits are and are there for so costs cutting efforts that we could see as you look kind of longer term?
We pride ourselves on trying to be remain always discipline on the cost side. So I know there are many team members on the phone better listening and nodding their head right now. So we remain focused on -- we'll get roughly 100 basis point improvement in our SG&A going from the blended 2015 two 2016. And then we're going to continue to look beyond that and see how we can drive back down even lower low tends and at some point in the future hopefully get someone started with a nine. Is something where continually focused on. And based on how we put the synergies in place and how those come through where not expecting a lot of cleavage back into those. Those a long term permanent savings part of her cost structure.
Larry somewhat alluded to this in his last answer, could you just talk a little bit about this transition to more entry-level product that you broader term kind of been working toward and how that's going and any markets where you really seeing more opportunities for that.
I would use the term entry-level. It's lower ASP so in Austin is an example. The communities we will be opening there will be more what I would consider first move up product. Not pure entry-level but it will drive areas be down and across the country you look at a lot of the different markets. We see opportunities where repositioning a little bit and we've seen good growth in the active adult side of our business as well that continues to grow and be very profitable.
So I think market by market what we've done over the last month is go through and see where there were opportunities. What was our land position where we were missing opportunities and make sure that where paying attention to all of those. And again I think we feel pretty good that were extremely well positioned but I think you will see and some of our markets you will see our it has become there. I mean Dallas is the opposite. Dallas' ASP deliveries this quarter was up about 50,000 ASP and backlogs about 80,000. So we have markets that are moving in the other direction as well.
And we will go to Megan McGrath with MKM Partners.
I'm trying to determine a different question because your stock is getting hit pretty hard here. Thinking about the Southwest as a large group and realizing there are differences by communities, how do you feel about the absorption pace now? It sounds like your kind of resigned to it being lower and are we just taking a one-time hit from a tough compare? Or are you proactively going to try to get those absorption pace is higher?
Obviously we always like to get higher that's always the focus but it will cost you get them higher. I think our guys in Dallas for like the market took a little bit of a pause in June. Prices have ramped up and they gave you an example of that. Austin is one of our highest margin markets lowest incentive market and we just see an opportunity that you know we can't replace our lots of just going to maximize that value. Houston I think were outperforming the market their general. Our guys feel like that over the last really 30, 45 days that market has slowed in more than it had the previous six months. San Antonio is that a huge part of our business. Where we position that product our average salesperson San Antonio A350 today when we were down toward the 300,000, 325,000 price, we’re in the process of working on that.
So I think we feel like this improvement opportunities all across all of those markets. Houston is going to continue to be challenged until the oil world settles down which I think everybody believes is starting to happen. But you look at what's going on in Dallas. There's too much of supply on the resi up at this too much on the new home there's plenty of opportunity in Dallas to improve our basis and Austin we talk about affordability and I think there is concerns in Austin that the prices have ramped up dramatically over the last couple of years of that's why would look at driving our ASP [indiscernible] which we would expect woodpecker absorption sub so I think we’re making all of the right moves. I think in my opinion the market is overreacting to this orders number.
It would be one thing if our orders were down, our margins down, our orders are basically breakeven and our margins are up 100 basis points. I think we've demonstrated a discipline on a pricing to run the business we just all feel this enough elasticity in the market that we have to give up too much to get a bunch of sales.
Maybe could you contrast what you're saying in the Southwest market with the strength that you saw in the northern markets, some of the market dynamics there that are driving the big improvements. We just bouncing off what has been pretty slow market source or anything specific you are saying to those that might be helpful as well.
I think in the North some the markets in the North were slower to respond coming out the downturn. Tavis in Chicago was one that was probably the last respond. We've had a great quarter in Chicago as we said from an absorption please pricing patient margins improved their but we also reposition the budget product in Philadelphia and Baltimore and we see the benefits of that today. Those numbers are up dramatically and they are coming off a smaller comparable so it does help but those markets are definitely we see them is getting healthier that Indianapolis continues to be one of our best markets if not probably one of her highest future markets one of them. We have a great business there.
Twin Cities continues to be very vibrant economy with unemployment in the 3% range. So we like what we see in all of those markets, we like our positions in those markets. We would expect to see those markets to continue to improve and in the mid-Atlantic as well.
And John Lovallo with Bank of America
The first question is, I think in the past you've given kind of a read on how orders are trended in the current month, do you’ve that available for July?
No we don't have -- we don't report monthly numbers until we have a complete month so right now July is trending with some normal seasonality. But the last three or four days makes a difference there. So what we did see monthly John, I think at least in the second quarter April was 14.29 May was 12.79 and June was 12.13. On a growth rate it was up six down one down eight.
Okay. How do the comps look year-over-year for July, August and September on a monthly basis?
Year-over-year July 2015 was up 6%. August 2015 was up 15% and September 2015 was up 18%.
I guess over the past couple of quarters it seems like you've spoken maybe little bit more cautiously about San Antonio. Is this a market that you see that you need to be in or is there an opportunity potentially to exit San Antonio and potentially some other markets?
Well we have been in San Antonio long time, I think it's a market that we continue to see opportunities in. It's not a huge part of our business but as I said earlier we’re kind of repositioned price there. We do see there is better opportunities at the lower price point, so we're focused on getting our price points down. We evaluate every market every six months when we have our meetings. And we just went through like I said in all those meetings and it's a market in Texas is not as vibrant as the other three. It's more what I consider blue-collar market, a good market, a lot of military retirement folks. There's opportunity there we need to reposition the division a bit there right now.
And we will go to Patrick Kealey with FBR
I guess I kind of focus on a little bit different region here. Taking a look at your West segments you guys did have your strongest average order price out of there. Do think community account growth but absorption's were down. So as we think about that moving forward are you still confident in your pricing power in that region and maybe there's a little bit of a community count timing within the quarter that drove that? Or when we think of kind of ASP growth moving forward probably a little bit less out of the West and with the other three regions kind of picking up the slack?
I think we look at the West as continued strength. The absorption pace was 33 versus 36 a year ago, so still above the Company average so again trying to push price a little bit more. Some of the master plans were in there. We’re definitely going to push price.
When you look across all of the different divisions, obviously San Diego is a very underserved market. We have a very good presence there so we would expect to see continued strength there. The Inland Empire has fully performed well and when you look out over the headlight I think that will be another we'll strong performer for us. The Bay Area over the next 12 months, we have a couple of really large nice communities that we’re opening which will contribute very positively to our growth.
And we see Sacramento getting better. It's definitely improved since last year, we're seeing the margins improve their, we’re seeing sales pace improve. In general, Phoenix we sold a lot of houses have in Phoenix, labors an issue in Phoenix right now and there is not a ton of pricing power in Phoenix right now. But I think overall when you roll that whole region up we would expect to see continued growth there and wouldn’t expect to see sales pace change much there and ASP could improve a little bit.
And then just circling back on the comments at this point in the cycle obviously still allocating capital toward land but transitioning towards shareholder returns a little bit longer term. So when we think about this capital allocation towards land, should we expect that to be relatively broad-based across your four regions or are there any specific regions where you’re seeing greater opportunity that you can take advantage of at this point in the cycle?
We've got land targets in each one of the markets but every market is in a different point in that cycle. Austin Bay area a couple of examples pretty far maybe pushing out of growth in the o maintenance, whether you've seen their over the past few years in Austin is our lot size, our community size has been coming down [indiscernible] land as we have moved through that cycle. On the flip side, Chicago and few of those the northern markets where you’re still very early in the growth phase. So those are some opportunities but I don't see a big capital shift in the land spend from where we're at. It's always a slight move as you move across.
And we have a follow-up from Michael Rehaut.
Just wanted to zero in on the gross margins a little bit and I know Jeff you talked about I believe 22% for the entire backlog excluding purchase accounting which at this point is basically de minimis. Sorry?
The entire backlog is that 22.4.
22.4 okay. So is that effectively when you came out of the last quarter I think talking about perhaps second-half gross margins in the low to mid-22's. At this point is that still kind of how you're thinking about the back half?
Our backlog gross margin is our best indicator and I think that 22.4 fall squarely in that low to mid 22's.
Okay. And then just lastly on the sales pace and I'm sorry to be a dead horse here but obviously it's kind of the area of focus so I just want to be clear. You’ve made changes, there's been a lot of different moving pieces. In the back half of 2015, you do have the typical seasonal downtick where last year you were under two a month in 3Q and under looks like under, right around 1.5 a month slightly above 1.5 a month for 4Q. Do you’ve have any sense of how we should be thinking about [indiscernible] against those type sales pace numbers given that Q2 2016 was a touch below the prior-year? Do you expect to match that or should we expected to be coming a little bit below as well?
We were not seeing anything that strikes us as materially different than more normal seasonality right now. So typically third quarter absorption rates are down compared to the second quarter and fourth quarter is down compared to the third. We've got a lot of people focused on trying to buck that trend, but as far as the market robustness we’re not see anything that is screaming to us that we’re going to materially buck seasonality.
Okay. In terms of the -- against the year ago -- again 3Q slightly below 2, 4Q plus or minus slightly below 1.5, does that seem at this point reasonable for 2H '16?
Last year fall was pretty normal seasonality.
We will take a follow-up from Bob Wetenhall with RBC Capital Markets
I'm just trying to get a little handle, is June more of an air pocket or kind of a blimp and I'm referencing your comments that one month don’t make a trend. And I'm just trying to understand, I know you always have volatility in monthly figures but just based on Jeff's comments about the strength of gross margin and backlog and it does seem like you hit had an air pocket in June. Any thoughts like -- can you see bounce back in Dallas and Houston in July that should we view June as anomaly and that things are kind of playing out with your initial expectations? Or has there been more of a change in the course of that you're anticipating?
Well, I think we said earlier Bob that the Houston guys feel like that market has gotten a little bit tougher over the list 30 to 60 days. So we'll wait to see how that one plays out. I think in Dallas, we do think we hit just what you air pocket in, that June was tougher than we had anticipated there and our guys felt like it was just because pricing had run up so quickly that everybody was just kind -- prices were moving every week, right?
So I do think that in some markets -- the overall when you look at the overall numbers for June both in the resale and new homes, I think both numbers were down. But I think we do expect normal seasonality. I think the good thing is we continue to see good quality traffic. That's the first gauge of what's walking into your store every day and I think we feel pretty good that the quality of the traffic is still there. It might be taking people a little longer to pull the trigger but again I think after going through all of the businesses the second half of the year we're excited about what we see.
So just to paraphrase, it's broadly in line with your expectations aside from the Houston market which was kind of having its own issues but Dallas is kind of -- do you feel comfortable with what's going on? This is not a radical departure from your expectations?
No, not at all.
I would like to go ahead and turn the floor back over to our speakers for any additional or closing remarks.
Thank you, Catherine. Thank you everyone for joining us today. We look forward to sharing our results with you again in a few months. Thank you.
Ladies and gentlemen, once again, that does conclude today's conference. Thank you all again for your participation.
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