Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- LGI Homes Inc (LGIH, Financial) delivered 1,655 homes at a record-breaking average sales price of $364,000, resulting in revenue of over $602 million.
- Gross margin improved significantly to 25%, up 300 basis points from last year, and adjusted gross margin rose to 27%, up 320 basis points.
- Pretax net income for the quarter was approximately $77 million, representing a pretax profit margin of 12.8%, a 170-basis-point improvement over last year.
- The company hit a new record of 130 communities in May and ended June with 128 communities, up 26% from the past year.
- Earnings per share increased by 10.2% compared to the same period last year, reaching $2.48.
Negative Points
- Constrained affordability remains the number one challenge for customers, limiting higher sales and closings.
- Selling expenses increased to $52.9 million or 8.8% of revenue, up from 7.6% last year, primarily due to higher advertising spend.
- General and administrative expenses rose to $30.5 million or 5.1% of revenue, compared to 4.3% last year, due to higher indirect overhead expenses.
- The cancellation rate for the quarter was 22.2%, indicating a significant number of customers backing out of their purchases.
- The company ended the quarter with $1.5 billion of debt outstanding, resulting in a debt-to-capital ratio of 43.8%.
Q & A Highlights
Q: Can you explain the drivers behind the sequential improvement in gross margin and how this might translate over the next quarter?
A: The main driver of the gross margin improvement is the value in the lots we own and the development we do. We are pricing our communities to market, capturing developer profit, and maintaining elevated gross margins. This is where we need to be, historically pre-pandemic, and the team is doing a fantastic job.
Q: How do you expect to manage your leverage metrics as you continue to grow?
A: We typically maintain a gross debt leverage of 35% to 45%. Currently, our focus is on continued land development and bringing new communities online. We also monitor share repurchases and M&A opportunities, though nothing especially compelling has come up recently.
Q: With your gross margin at pre-pandemic levels, when do you plan to push absorption levels up?
A: It's not as simple as reducing the price to increase absorption. Our strongest communities with the highest absorption rates also have the highest gross margins. We are focusing on mortgage buydowns and pricing to market. We are also seeing some relief on house costs, which could help with pace without lowering ASPs.
Q: Can you provide insights into your plans for store openings next year and when you expect your land and lot spend to flatten out?
A: We plan on growing community count in 2025 but are currently focused on reaching 150 communities this year. We are at 128 now and have hired 60 new sales reps. Regarding land spend, we have 54,000 owned lots, with 10,400 finished. We expect the development pace and acquisition pace to taper in the back half of this year and into the first quarter of next year.
Q: Can you level set us on current incentives and their impact on margins?
A: Incentives are case-by-case and vary by community and market. Generally, it costs about 1% to get a 0.25-point buydown in the rate. We have been able to raise prices and reduce costs to offset the current level of incentives.
Q: What is the spread you associate with self-development versus buying finished lots?
A: The typical spread is 300 to 500 basis points. We price communities to market, capturing greater margins through developer profit.
Q: What is a more normalized SG&A level once new communities are up and running?
A: Historically, we've been around 12% to 13%. Selling expenses, including commissions and advertising, are variable and should stay in the 8% to 9% range. G&A should trend down from 5% to around 4% as we grow and cover corporate-related costs.
Q: Why do you believe cutting prices wouldn't drive more volume for LGI Homes?
A: Cutting prices doesn't provide the same monthly payment benefit as mortgage incentives. Affordability is the main challenge, and mortgage incentives lead to a lower monthly payment. We are priced to market, and discounting houses below market value is generally not a good idea.
Q: What could cause gross margins to go down sequentially in the back half of the year?
A: The main risk is the cost of mortgage incentives needed to make homes affordable. We are not seeing much relief on costs, and new communities generally have higher costs than older ones. We need to raise prices to maintain margins.
Q: What percentage of your communities were you able to raise prices in this quarter?
A: More than half of our communities saw price increases due to strong demand and to offset cost increases.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
