Century Communities, Inc. (CCS) Q1 2025 Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to the Century Communities, Inc. First Quarter 2025 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. I would now like to turn the conference over to Tyler Langton, SVP of Investor Relations. Please go ahead.

Good afternoon. Thank you for joining us today for Century Community's earnings conference call for the first quarter of 2025. 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 under the heading, Risk Factors, in the company's latest 10K, as supplemented by our latest 10Q, 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 Francescan, Executive Chairman, Rob Francescan, Chief Executive Officer and President, and Scott Dixon, Chief Financial Officer. Following today's prepared remarks, we'll open up our minds for questions. With that, I'll turn the call over to Dan.

Thank you, Tyler, and good afternoon, everyone. Over the past few months, we have seen an increase in economic uncertainty, interest rate volatility, and eroding consumer confidence, which have contributed to a slower than typical spring selling season. Our absorption rate in the first quarter was weaker than we had expected heading into the year, as these economic concerns, coupled with constraints on affordability, have led to elongated sell cycles and caused some homebuyers to pause. That said, we still firmly believe there is underlying demand for affordable new homes supported by solid demographic trends. Despite the current headwinds, our deliveries of 2,284 homes were only 3% below year-ago levels while our average sales price declined by approximately 1% on a year-over-year basis. During the quarter, we focused on balancing pace and price while managing our direct construction costs and incentive levels. As a result, we were able to maintain relatively stable home building gross margins of 20.1%, excluding purchase price accounting in the first quarter, which eased by only 80 basis points on a sequential basis. Our first quarter net new contracts totaled 2,692 homes, a 6% decline versus the healthy levels we saw in the year-ago quarter, and a 33% increase over first quarter 2023 levels. Our absorption pace averaged 2.8 in the first quarter of 2025 and increased sequentially in both February and March, likely benefiting from both seasonality and the decline in mortgage rates over much of the first quarter. So far in April, our absorption rate is trending below first quarter 2025. As we mentioned last quarter, given our lot pipeline and community count, we have the ability to grow our deliveries by approximately 10% annually over the next several years. That said, we are not focused on growth for the sake of growth alone, and we'll look to balance pace and price at the community level to optimize our returns. We continue to target our sales efforts and incentives on monetizing, completing, and completing combs while matching our start pace with our current and anticipated sales pace to maintain an appropriate level of spec inventory within our communities. I also wanted to briefly address the topic of tariffs. While the situation is obviously fluid at this time, we are not expecting to see any meaningful increase in our direct costs in the near term. The majority of the products that we purchase are either made in the U.S. or are currently exempt from tariffs under the USMCA agreement. it. We also have price protection agreements with our preferred supplier partners for many of the non-commodity products that we purchase and believe that with our relationships, we will be able to work with our suppliers to mitigate the impact of any potential increased costs that could occur throughout their supply chains. In closing, I want to highlight that Century was recently selected to Newsweek's list of America's most trustworthy companies for the third year in a row. We believe our inclusion on this list is a testament to the dedication of our team members and trade partners, which allows us to execute on our mission of consistently delivering a home for every dream, and we want to thank them for their efforts. i'll now turn the call over to rob to discuss our operations and land position in more detail thank you dale and good afternoon everyone as expected our incentives on closed homes increased to approximately 900 basis points in the first quarter 2025 up from roughly 800 basis points in the fourth quarter 2024. our incentives on new orders in the first quarter also averaged

approximately 900 basis points. Looking forward, we continue to expect incentive levels to be the largest driver of changes to our gross margins in the near term and anticipate second quarter incentives to increase by up to another 200 basis points due to the current conditions that are weighing on order activity. We had continued success in controlling our costs in the first quarter with both our direct construction and finished lot costs on the homes we delivered roughly flat on a sequential basis. On a year-over-year basis, our direct construction costs declined by 4%. During the first quarter, our cycle times remained at approximately four months, and we have not seen any impacts from immigration reform on our labor base so far. While we are performing well on the cost side, we are still taking actions to further streamline our cost structure. Given the slower than expected spring selling season, in mid-April, we made the difficult decision to right-size our workforce, along with implementing other cost savings programs to lower our fixed costs. The savings from these initiatives will flow through cost of home sales, SG&A, and financial services, and we would expect to see more of a benefit in the third and fourth quarters of this year compared to the second quarter. We ended the first quarter with a community count of 318, up 26% on a year-over-year basis. While it is still early and also recognizing the 28% growth in our community count in 2024, four, we currently expect our year-end 2025 community count to further increase in the mid-single-digit percentage range, which will provide a strong base to execute from over the next couple of years. In the first quarter, we started 2,211 homes and, similar to last quarter, continued our focus on maintaining an appropriate level of spec home inventory. it turning to land we ended the first quarter with close to 80 000 owned and controlled lots with our controlled lots accounting for 55 percent of our total lot count both our owned and total lot count have remained consistent since the third quarter of last year and we have continued to be disciplined on the land front and underwrite deals to current market assumptions before turning the call over to Scott, I want to provide an overview of our land strategy. While we are involved in land banking agreements in a handful of our current communities, our low-risk land life business strategy is primarily based on what I would describe as more traditional option agreements with individual landowners and third-party land developers that require lowered levels of deposits and offer a greater transfer of risk. To highlight this point, at the end of the first quarter, our 43,000 controlled lots were secured by non-refundable deposits that totaled only $71 million. While there is clearly uncertainty in the market, we are proactively managing our costs, targeting incentives to drive incremental sales, remaining disciplined on starts at inventory levels, but still continuing to position the company for growth in the years ahead while mitigating risk. I'll now turn the call over to Scott to discuss our financial results in more detail.

Thank you, Rob. In the first quarter of 2025, pre-tax income was $53 million and net income was $39 million for $1.26 per diluted share. Adjusted net income was $42 million or $1.36 per diluted share. EBITDA for the quarter was $73 million and adjusted EBITDA was $76 million. Home sales revenues for the first quarter were $884 million, down 4% versus the prior year quarter on lower deliveries and average sales price. Our first quarter average sales price of $387,000 decreased by 1% on a year-over-year basis, primarily due to a higher level of incentives. Our deliveries of 2,284 homes in the first quarter declined by 3% on a year-over-year basis and were impacted by our decision to manage our starts at a lower level over the past two quarters, with elevated mortgage rates and economic uncertainty also weighing on order activity. For the second quarter of 2025, we expect our deliveries to range from 2,300 to 2,500 homes, assuming an absorption pace similar to first quarter 2025 levels of 2.8. Looking out to the back half of the year, we would expect further sequential increases in our deliveries in both the third and fourth quarters of 2025. At quarter end, our backlog of sold homes was 1,258 valued at 521 million, with an average price of 414,000. While the average price of our first quarter backlog was above the average sales price of our first quarter deliveries, this difference is largely due to the mix, including the percentages from your complete homes. In the first quarter, adjusted home building gross margin was 21.6 compared to 22.9 in the fourth quarter 2024, and gap home building gross margin was 19.9 versus 20.6 in the prior quarter. Additionally, purchase price accounting associated with our two acquisitions in 2024 reduced our first quarter 2025 gross margin by 20 basis points. We would expect purchase price accounting to have a similar impact on our home building gross margin in the second quarter of 2025. For the second quarter 2025, both our direct construction and finished lot costs should be roughly flat quarter over quarter as we continue to successfully manage our costs. However, we expect home building gross margin to ease on a sequential basis due to higher levels of incentives. SG&A as a percentage of home sales revenue was 13.7% in the first quarter. Assuming the midpoint of our full year home sales revenue guidance, which I'll detail shortly, we would expect our SG&A as a percent of home sales revenue to be roughly 12.5. Also, so that people can better model our SG&A, we would expect roughly 70% of our SG&A to be fixed and 30% variable for the full year 2025. For the second quarter 2025, we expect our SG&A as a percent of home sales revenue to be approximately 13.5%. Revenues from financial services were $18.5 million in the first quarter and the business generated pre-tax income of $2.4 million. We would expect a similar margin profile from our financial services business for the remaining three quarters of this year. Our tax rate was 25% in the first quarter of 2025. We continue to expect our full year tax rate for 2025 to be in the range of 25% to 26% with the increase over our full year 2024 tax rate of 24.1% primarily driven by a reduced number of homes expected to qualify for 45L credits. Our first quarter 2025 net home building debt to net capital ratio equaled 30.1% and compared to fourth quarter 2024 levels of 27.4. Our home building debt to capital ratio equaled 32.4% in the first quarter and compared to fourth quarter 2024 levels of 30.3%. During the quarter, we increased our quarterly cash dividend by 12% to $0.29 per share and have consistently grown our dividend on an annual basis since its initiation in 2021. In the first quarter, we also repurchased 753,000 shares of our common stock for $56 million at an average share price of $73.76 or a 13% discount for our book value per share of $84.41 as of the end of the first quarter. We ended the quarter with $2.6 billion in stockholders' equity and $788 million of Additionally, in mid-April, we increased the capacity of our senior unsecured credit facility to $1 billion from $900 million. We also have no senior debt maturities until June of 2027, providing us ample flexibility with our leverage management. Turning to guidance. With the ongoing economic uncertainty, interest rate volatility, and declining consumer confidence impacting our order activity, we are reducing our full-year home delivery guidance to be the range of 10,400 to 11,000 homes and home sales revenue to be in the range of 4 to 4.2 billion. Our full-year home delivery guidance assumes an average absorption rate of approximately 2.8 for the full year 2025. In closing, we are taking the necessary steps to address the headwinds facing the market, including reducing our costs, remaining disciplined on the land front, and maintaining an appropriate level of spec home inventory by matching our start with our sales. At the same time, subject to market demand, we have the ability to grow our deliveries by approximately 10% annually over the next several years, given our lot pipeline, community count, and strong balance sheet. With that, I'll open the line for questions. Operator?

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star 1 on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star 2. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Carl Reichard of BTIG. Your line is already open.

Great. Nice to talk to you. Thanks for taking the questions. Hi, Carl. So I'm looking at your absorption rate between communities and complete. And complete was up, I think if I got it right, 4%. But the core businesses, the regionals, were down 38% during the quarter. And I'm wondering if you'd like to talk about why that difference was so stark, if the macro has kind of impacted everything the same. Is that a function of the aggressiveness of some of your entry-level peers in their pricing and incentive structures? And if so, how do you combat that as you get further into the spring and into the summer?

Yeah, Carl, great question. I appreciate it. So a lot of dynamics that obviously are interplaying between our Century brand as well as our Century Complete. I think one of the benefits that we've always had on the Century Complete brand that I think you're seeing run through some of those numbers is just the fact that we are playing in some markets where there, quite frankly, is not as much direct competition from other builders, and I think that's really played itself through in a little bit more of a stable absorption profile here in the first quarter.

But more specifically, Carl, just real quick, when we look at it, though, on the community side, You know, Texas really had the lowest performance at 2.1 absorption, and, you know, part of that is some things that we're working on fixing, of course, but that was really one of the outliers that dropped things down as well.

Okay. And when you're thinking about moving product going forward just to maintain the pace that you've got, and I think you said April is slower than Q1 already. Are you looking more aggressively at direct price cuts on finished units or near finished units versus incentives or versus like interest rate buy-downs and other kinds of non-base price cut incentives? And maybe you can talk about if that mix is shifting. Thanks.

Well, homes that are complete, that are unsold, we're definitely moving both with interest rate buy-downs as well as price reduction. So, you know, that's why we've messaged here that our margins could be off in Q2 based on another 200, up to another 200 basis points and incentives to move that product. So, yes, those are being discounted higher if they're complete and unsold.

Great. I appreciate it. Thanks, fellas.

Your next question comes from Jay McCandless of Wedbush. Your line is already open.

Hey, guys. Thanks for taking my questions. So I'm just trying to walk through the closing guidance map here. 2285 closings, I think, for this quarter, and then you're talking roughly somewhere between 2400 for the second quarter, and then a pretty big jump, I guess, in your cadence in the back half of the year. I mean, normally you would see closings go up in the back half, but if you're seeing this much headwind, what makes you think that's going to happen? Is it going to be community growth or something else? I guess just kind of walk us through how you're thinking about the back half from a volume perspective.

Sure. Jay, I think you actually hit the nail on the head. The majority of our community growth will really come online here in the second and the third quarter from a sales perspective. That's when we're counting a new community come online, which will really support the higher closings in the back half of the year, even with kind of generally flat absorptions embedded within our guide.

And then did you, and I apologize if you said this already, but did you quantify what type of SG&A savings you think you might get from some of the layoffs that have happened?

So, the savings from the various cost reduction activities, which are, of course, not just specific to the reduction in force, will flow through a handful of different line items, including cost of sales, SG&A, as well as the financial services line items.

From an SG&A perspective, those cost savings are incorporated in the guide for the full year um um of sgna um that we provided and then um yes oh go ahead no go ahead jay sorry all right no i was just going to ask in terms of of pricing i guess any any help you can give us there in terms of of some of the level the price cuts you're having to make and um and also with the buy downs that you all are doing that you talked about i guess is it still five and a half to five

and three quarters is that kind of the the sweet spot or where people get interested are you having to buy it down even further right now just given some of the other affordability challenges that are out there so so generally generally speaking for the first quarter that that that average rate that we were buying down to has been pretty consistent in the mid fives um now as as we move as we move forward and obviously with the volatility that's occurred in rates here, that cost could obviously continue to increase. I think generally speaking from an incentive standpoint, you know, we've been running kind of, you know, 55 price, 45 incentive, or excuse me, mortgage. And I think you'll see that generally continue to play itself out over that additional 200 basis points that that we currently see um with with how april itself has played itself out okay great thanks so much thanks for taking my questions thanks jay your next question comes from alan ratner of zelman and associates your line is already open hey guys uh good afternoon thanks for taking my question hey um i was hoping just to better understand a little bit the timing

of the incentive increase, you mentioned second quarter kind of expecting it to be up about 200 basis points. On the other hand, it sounds like April has been a softer month from an order perspective. So were these incentives increases done kind of more recently in recent days in response to the continued softness in sales or were they done earlier in the month? And, you know, we still haven't seen, you know, a response, I guess, or at least an acceleration from that.

Yeah, Alan, I think the easiest way to kind of articulate it is obviously there's been a change here that we've seen in the consumer profile, at least at the volatility post-March, right, into early April post. It's certain that volatility that's been in the market has caused the consumer to pause. And so where we're at currently, we believe we're anticipating some additional incentives that we've recently put in place in order to achieve the absorptions that we're booking for into Q2.

Got it. So it's more of a prospective look based on kind of the continued volatility, I guess, in the market. So I guess that kind of somewhat answers my next question, but it sounds like for your full year absorption guide of 2.8, that's in line with your average in the first quarter, maybe even a bit above year to date if you include April's softness in there. So that's counter-seasonal. I mean, normally we would see absorptions a bit lower, certainly in the fourth quarter. So is that stability just based on your expectation or your, I guess, strategy, if you will, to do what you need to do from an incentive standpoint to kind of hit that type of absorption level?

Yeah, I think that is fair, Alan, yes.

Okay, perfect. All right. And then finally, just on the tariffs, I know you mentioned kind of no significant cost impact. I'm just curious, is there any potential or are you at all kind of concerned about the potential for some supply chain disruptions from all of this noise? just kind of thinking like if builders were to try to move around some of their suppliers to try to mitigate some of these potential cost headwinds, could that cause any stress on some domestic suppliers or distributors or any bottlenecks? Have you had any conversations with trades alluding to that at all?

Yeah, I mean, we've obviously been cognizant that that could be a result going forward. We haven't seen anything to date, of course, but, you know, we're fully aware that that could happen and working toward, if it did, you know, how we would mitigate that. But again, nothing today. It's still very fluid as things are moving around, but it is a possibility.

Of course. Understood. Thanks a lot. Appreciate it. Thank you. Absolutely.

Your next question comes from Michael Rehoud of JPMorgan. Your line is already open.

Hi, everyone. This is Andrew. I was the answer for Mike. I appreciate you taking my questions. Hey, Andrew. Hey, I'm not sure if you covered this. I joined a bit late, but if possible, I wanted to drill down a bit into the demand trends over the last couple of months within the quarter. Obviously, we know April was pretty volatile, but yeah.

Yeah. What we really saw in the first quarter was very typical seasonality, albeit muted from the very, very strong 2024 that we experienced in the first quarter. So sequentially, demand, absorption, traffic, et cetera, were up as we moved through the quarter, with March being a fairly typical March and kind of a three-and-a-half from an absorption standpoint. And really, the most recent change has been that we want to make sure is articulated here in the materials is certainly the volatility in April has caused our consumer to pause. But again, from a two-first-quarters orders perspective, very typical seasonality, albeit a little bit more muted than 2024, a little bit more on pace with 2023.

Got it. And then maybe a bigger picture question on kind of the long-term 10% growth. So what do you envision that to look like from a community count perspective versus, let's say, like a normalized sales pace when you give that number of 10 percent?

Yeah, you know, difficult to obviously foresee where absorptions are going to be. As we got into mid-last year with the two acquisitions that we did and the efforts that we provided on the land front, the focus was really getting on the additional store count from which to drive volume from. That really hasn't changed as we sit here today, so we anticipate year over year that we'll be up in the mid-single digits from a community count standpoint. So from positions from growth, I think we continue to be in a very good position to drive incremental leverage in G&A over the long term out of our community counts. We continue to review upcoming communities under today's market assumptions to ensure that they're underwriting with the environment that we're in. But, you know, we certainly feel optimistic about long-term demand with our consumer profile of the product that we're providing. And so I think we're very optimistic in achieving that growth over a longer period of time. Certainly, the market dynamics of the first quarter and then really recently here in April have slowed down on the absorption side, but we'll continue to work towards getting additional community council open to leverage the infrastructure that we have.

Really appreciate all the color. That's helpful. I'll pass it on. Thank you so much.

Thank you.

Your next question comes from Ken Zenner of Seaport Research Partners. Your line is already open.

Afternoon, everybody.

Good afternoon, Ken.

Appreciate the transparency around the delta and incentives. That's very useful. Now, did you see it occur, you know, if that's your general shift in incentives, did it occur more in the Century Complete product line, or was it more just kind of regional in nature, or is it a price point in nature? I'm trying to discern how the different buyers might be demanding incentives.

You know, a handful of dynamics that are running through the various different regions on incentives. I think from a mortgage incentive side, you see it very consistently across our buyer profile. Now, our Century Complete brand, as you're aware, is a little bit more of direct in terms of the pricing, not a ton of additional auctions that are available within the SPAC homes. And so you don't see as many just direct price reductions within that brand just as a normal course. within the regions of Century Brand. We are seeing a little bit of a higher incentive level within likely our Texas region as opposed to our other regions. I don't know that I would necessarily slice it between any other price point. In general, the West has probably held up the strongest amongst all of our regions. But as you know, we're pretty focused on the first-time homebuyers. So, generally speaking, the turns on incentives have been consistent across our regions.

Appreciate that. And then, from when you guys gave guidance at the end of January, obviously, a few things have happened, to put it mildly. But what I'm interested in is your kind of process of thinking about it. So, if it starts, I think you said 2,211 starts this quarter, and you did about 2,700 orders.

Build, order.

Operator, are you still there?

Yes, I think we lost the signals of Ken. I'll proceed to the next. Oh, hello.

Yeah, we couldn't, we heard just the first part of it and then apologies, we could not hear the rest of the question.

That's all right, I stopped talking, which is surprising. What I'm asking is you obviously decelerated starts. So if I match your, you know, starts to your orders, that gives us a fair indication about, you know, your closing range. But do you have to do any de-stocking? A home builder today mentioned that they're actually just going to be, right, lowering their inventory because they want to reduce their spec counts. Is that a situation where you are, or do you see kind of orders and starts in theory walking hand in hand through the rest of the year.

Yeah, Ken, if you were to go back a couple quarters into early last year, we were, as the market was more robust, you know, we certainly had a higher starts level.

Really since, you know, the back half of last year, third quarter, and really into the fourth quarter, we've moderated those starts such that we feel like we're in an appropriate position from an inventory level for which to move forward on okay good and like and i uh and i've asked this before but like many of the builders report inventory which would give us useful insight into that start number and inventory and stuff but thank you very much and uh i do appreciate your clarity thank you thank you your next question comes from alex barron of housing research center your line is already open thank you good afternoon gentlemen

Hi, Alex. Hi there. I wanted to understand how you guys are thinking about using cash flow that comes back as you close homes to buy incremental land versus stepping up on the share buyback given the discount to book value.

Yeah, Alex, great question. I think, you know, from a high level, from a capital allocation perspective, really, really no changes than kind of what we've previously discussed. um uh broadly over the last 18 months or so i think our our first priority um is to reinvest in the business while keeping our leverage uh generally where the wood you can see uh it run which you know call it 30 to 35 percent um at various different points by the end of the year likely down into that that 30 percent debt to cap range uh last year we did um over 100 million of returning capital to our shareholders, both through our dividends as well as through share repurchases. And certainly given the $55 million of share repurchases that we did here during the first quarter, we're certainly well on our pace to hit or exceed that number next year. As we certainly look at, you know, continue to look at our land pipeline and underwrite to the current market conditions, We certainly will be opportunistic when we think it makes sense to redeploy some of that capital to share buybacks.

And as far as the decision, you know, whether to increase rate buy down versus cut prices, maybe in response to what your competitors are doing, how are you guys making that decision? You know, what drives it?

I mean, it's really a balancing act, and it goes down to the individual. subdivision in-house, Alex. And, you know, a lot of it depends on that particular market, what some of the competitors are doing. And candidly, we're all doing a lot of the same thing in that regard. But it really just depends on the particular market and the subdivision within that market. It's not just general across the board that one size fits all.

Okay. Well, best of luck for this year. Thank you.

Thank you.

Ladies and gentlemen, as a reminder, if you have a question, please press star 1. There are no further questions at this time. I would hand over the call to Dale Francescan for closing remarks. Please go ahead.

Thank you, Operator. To everyone on the call, thank you for your time today and interest in Century communities. To our team members, thank you for your hard work, dedication to Century, and commitment to our valued home buyers.