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Edited Transcript of CCS earnings conference call or presentation 7-Feb-19 10:00pm GMT

Q4 2018 Century Communities Inc Earnings Call

GREENWOOD VILLAGE Feb 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Century Communities Inc earnings conference call or presentation Thursday, February 7, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dale Francescon

Century Communities, Inc. - Chairman & Co-CEO

* David L. Messenger

Century Communities, Inc. - Secretary & CFO

* John Scott Dixon

Century Communities, Inc. - CAO

* Robert J. Francescon

Century Communities, Inc. - President, Co-CEO & Director

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Conference Call Participants

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* Alex Barrón

Housing Research Center, LLC - Founder and Senior Research Analyst

* Alexander John Rygiel

B. Riley FBR, Inc., Research Division - Analyst

* James C McCanless

Wedbush Securities Inc., Research Division - SVP of Equity Research

* Michael Jason Rehaut

JP Morgan Chase & Co, Research Division - Senior Analyst

* Thomas Patrick Maguire

Zelman & Associates LLC - Senior Associate

* Timothy Ian Daley

Deutsche Bank AG, Research Division - Research Associate

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Presentation

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Operator [1]

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Greetings, and welcome to the Century Communities Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Scott Dixon, Chief Accounting Officer. Thank you, sir. You may begin.

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John Scott Dixon, Century Communities, Inc. - CAO [2]

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Good afternoon. We would like to thank you for joining us today for Century Communities' Fourth Quarter and Full Year 2018 Earnings Conference Call.

Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs 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 most recently filed annual report on Form 10-K as supplemented by our other SEC filings. Our SEC filings are available at www.sec.gov and on our website at www.centurycommunities.com. The company undertakes no duty to update any forward-looking statements that are made during this call.

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.

Management will be available after the call should you have any questions that did not get answered.

Hosting the call today are Dale Francescon, Chairman and Co-Chief Executive Officer; Rob Francescon, Co-Chief Executive Officer; and David Messenger, Chief Financial Officer.

With that, I will turn the call over to Dale.

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [3]

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Thank you, Scott. Today on the call, I will review our operating highlights and business updates. Rob will then discuss our business and markets in more detail. Afterwards, Dave will follow up with further information on our financial results, balance sheet and outlook. Following our prepared remarks, we will open the lines for questions.

2018 was another year of strong top line growth and earnings acceleration for Century, leading to our 16th consecutive year of profitability. For the year, we increased revenues 51% to $2.1 billion, grew our deliveries 68% to 6,099 homes, increased our net new contracts 48% to 5,657 homes, continued the expansion of our national footprint into additional attractive markets with the purchase of Wade Jurney Homes, increased adjusted EBITDA to $228 million and increased adjusted net income to a record $120 million or $3.94 per share. Assuming we had owned 100% of Wade Jurney Homes for all of 2018, we would have delivered 7,092 homes for the full year, and homebuilding revenues would have been $2.3 billion.

Despite a strong overall year for Century, our fourth quarter home deliveries and net new contracts were impacted by buyer hesitation to increased interest rates and tightening affordability, which has resulted in an industry-wide softening of homebuilding activity in the second half of 2018. However, we remain confident in long-term housing fundamentals given underlying job and population growth, along with overall positive economic conditions.

Despite the slower buyer activity, we generated solid growth in our key operating metrics during the fourth quarter, including home sales revenue up 24% and SG&A percentage improvement of 80 basis points. Our fourth quarter adjusted gross margin performance of 20.4% was in line with our expectations. And for the full year, we achieved an adjusted homebuilding gross margin of 21.6%, which improved by 20 basis points compared to 2017. This resulted in adjusted homebuilding gross profit dollars up 51% for the year. We were especially pleased with this full year accomplishment in light of higher construction costs, which continue to impact the industry.

We ended the fourth quarter up 65% in backlog to nearly 2,200 homes, equating to $670 million in backlog value, an increase of 17% compared to $573 million in the prior year quarter. This significant increase in backlog homes and value puts us in a good position for 2019.

We were pleased with the 2018 performance of our financial services group, which provides mortgage, title services and insurance to create a one-stop solution for Century's homebuyers. This business tripled its revenue to $31.7 million and delivered over 6x year-over-year growth in pretax income to $8.8 million, representing an attractive margin of approximately 28%. We have actively been providing our financial service offerings to our existing Century Communities buyers and have now expanded these offerings to include the Wade Jurney Homes buyers. We expect our financial services group will continue to produce substantial growth at attractive margins and meaningful profits in its ongoing expansion.

We remain confident in the strength and stability of our business given that our national footprint is diverse and comprised of attractive markets with strong economic fundamentals. We have a high concentration of homes at affordable price points, which we began investing in several years ago. We have a strong track record with experienced, cycle-tested corporate, regional and divisional management teams, along with our proven ability to source land, control costs and strategically deploy capital into sound investments.

During 2019, we will continue to carefully monitor the homebuilding climate in each of our markets and pursue our disciplined growth strategy while taking advantage of our diversified national scale to achieve additional improvements in our business.

I'd now like to turn the call over to Rob to discuss our markets and business in greater detail.

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Robert J. Francescon, Century Communities, Inc. - President, Co-CEO & Director [4]

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Thank you, Dale, and good afternoon, everyone. In 2018, we grew Century into a top 10 homebuilder through strategic positioning in attractive markets with a higher mix of home deliveries at lower price points. Our acquisition of Wade Jurney Homes was a significant catalyst to that end.

Overall, net new home contracts were up 48% year-over-year, with organic growth accounting for 22%, and we ended the quarter at 122 active Century Communities-branded selling communities.

Across our markets, we are seeing employment gains, which is a positive data point for local economic growth. Additionally, the average month supply across all of our markets is approximately 2.5 months. These economic indicators remain supportive of long-term growth throughout our national footprint. However, homebuyer demand may very well remain muted in the near term due to a variety of macro factors, including an adjustment period where buyers are adapting to higher mortgage rates and tightening affordability.

In regard to the specifics of our regions and starting with our Mountain region, our home sales revenues and deliveries increased 23% and 16%, respectively, year-over-year in the fourth quarter. New home prices have remained steady throughout the region despite adverse impacts of affordability.

Denver's economy remains strong, and the city has the second fastest-growing millennial population in the nation.

High-growth companies and affordably priced housing have drawn new employees to Salt Lake City.

Las Vegas is ranked fourth in the country of population growth and sixth in wage growth, supporting a robust sales environment for many homes priced under $350,000, where we are also seeing strong traction. This market strength led to a 30% increase in deliveries for our Las Vegas division.

Our Texas region's operations have improved substantially as we continue to strategically gear our products towards more affordable price points while improving margins. Fourth quarter new home contracts in this region improved 38% year-over-year while deliveries increased by 34%. The demand for entry-level product remains healthy throughout our Texas region where we have transitioned the lower price points, which have improved overall velocity and margins.

Our West region has been the most impacted by softening market conditions and tightening affordability, specifically the San Francisco Bay Area and Southern California, while inland areas have held up relatively well. Our West region's product offerings and communities target lower price points in their markets, and our planned opening of 6 communities in the first quarter of 2019 will improve our positioning to capture demand in this region.

In the Southeast region, home sales revenues and backlog dollar value for the fourth quarter increased by 9% and 25% year-over-year, respectively. The job growth outlook in Charlotte is promising, where several large corporations are currently planning to move their headquarters.

In Atlanta and Nashville, demand fundamentals are steady despite weaker affordability trends that have impacted new home sales in certain areas. Tech workers continue to fill the city in Atlanta with the city's tech village, boasting over 300 start-ups, which we view as a positive for longer-term growth.

Since completion of the Wade Jurney Homes acquisition in June of 2018, we have invested capital and other resources into the asset-light, entry-level business line to enable and support the significant growth that we expect. These initiatives include the following: the addition of experienced management personnel dedicated to this business sourced from both outside Century as well as transfers of people from within Century; implementation of enhanced systems, processes and procedures, including the start of the back-office conversion, which we anticipate will be largely completed by the end of the second quarter; expansion beyond the Southeast and into Alabama, Texas, Arizona, Indiana and Ohio, where we continue to expect these markets to generate closings in the first quarter of 2019.

We have also made a change to the sales approach for Wade Jurney Homes, whereby we are now selling homes later in the construction cycle. Homes are no longer being marketed prior to the start of construction. While this shift will impact near-term sales volume, we do not anticipate that it will materially impact the timing of closings in this spec-based business model, as evidenced by year-end finished, unsold homes being less than 3% of the region's total homes under construction.

For the 6.5 months of 2018 that we fully owned the business, Wade Jurney Homes delivered 1,377 homes for $210 million of revenue and generated $20,800,000 of pretax profits, excluding purchase price accounting.

Considering our national portfolio and despite challenging market conditions that continued into the fourth quarter of the year, we are pleased with the progress we made during 2018, including our increased entry-level exposure and dedication to improving the efficiency of our operations nationwide.

Strong local economies have assisted in mitigating softer market conditions such as healthy household formations, strong jobs and strong population numbers. We have increased our offering of incentives consistent with our expectations, and we'll continue to do so as necessary in markets where it makes sense.

As of year-end, we had approximately 38,000 owned and controlled lots that position us well through 2020. Into 2019, we will continue to focus on streamlining and creating even more efficient operations throughout our geographically diverse platform, maintaining consistent strength in our balance sheet, sourcing accretive investments and expanding Wade Jurney Homes into carefully selected areas.

I will now turn the call over to Dave, who will provide greater detail on our financial results and outlook.

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David L. Messenger, Century Communities, Inc. - Secretary & CFO [5]

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Thank you, Rob. In the fourth quarter of 2018, we continued to improve our revenues and made improvements across our key operating metrics. Our adjusted net income grew to $34.4 million or $1.11 per diluted share compared to $1.01 per diluted share in the prior year quarter.

Our full year adjusted net income was $119.9 million or $3.94 per share, an increase of 69% compared to $71.1 million or $2.87 per share in the prior year.

Net income for the quarter increased to $26.2 million or $0.85 per share, and net income for the full year nearly doubled to $96.5 million or $3.17 per share.

EBITDA in the fourth quarter increased by 13% to $54.4 million and 53% to $189.3 million for the full year 2018. Adjusted EBITDA in the fourth quarter of 2018 grew 10% to $64.2 million compared to $58.6 million in the prior year quarter. Adjusted EBITDA for the full year was $227.9 million, up 51% compared to $150.5 million in 2017.

Gross margin for the fourth quarter was 16.5% as a result of purchase price accounting adjustments, the use of incentives and the cost inflation trends during the first 3 quarters of 2018 when these homes were contracted. Adjusted homebuilding gross margin percentage was 20.4% compared to 21.7% in the prior year quarter. For the full year, homebuilding gross margin was 17.5% compared to 17.9% in 2017, and full year 2018 adjusted homebuilding gross margin increased 20 basis points to 21.6% compared to 21.4% in the full year 2017.

During the fourth quarter 2018, we incurred $9.7 million of purchase accounting charges, pertaining primarily to the Wade Jurney Homes acquisition. In the first quarter 2019, we expect to incur the remaining $2 million of purchase price accounting adjustments related to the Wade Jurney Homes acquisition.

SG&A as a percent of homebuilding revenues improved to 11.4% in the fourth quarter compared to 12.1% in the prior year quarter. The 80 basis point improvement was primarily due to process enhancements and overall disciplined cost controls and scale benefits derived from our homebuilding platform. Reducing our SG&A as a percent of homebuilding revenues will remain one of our primary focus items in 2019.

During 2018, we made significant progress in expanding our financial services subsidiary, which consists of mortgage, title services and insurance. In the fourth quarter 2018, the business contributed $3.3 million in pretax income with $10.4 million of revenue compared to $1.1 million of pretax income on $5.2 million of revenue in the prior year quarter. For the full year, financial services pretax income increased to $8.8 million compared to $1.2 million in 2017.

Now turning to our balance sheet and liquidity. During the fourth quarter of 2018, we initiated a 4.5 million share repurchase program, and we repurchased approximately 687,000 shares at a weighted average price of $17.99 per share. As of December 31, 2018, we had total debt of $1.1 billion with total liquidity of $445 million, including $57 million of cash and $388 million of availability on our unsecured revolver. With $859 million of stockholders' equity, our net homebuilding debt to net capital ratio stood at 52% at December 31, marking a 170 basis point improvement from 53.7% at the end of the third quarter.

As Dale and Rob have mentioned, we have a solid balance sheet with 38,000 lots spread across a diverse national portfolio with a focus on lower price point homes. We have invested in markets that still exhibit positive long-term fundamentals. However, due to the limited near-term visibility in the overall housing market, we will not be providing full year guidance until we see meaningful and predictable demand trends.

We would like to thank all of our employees for their hard work during 2018 as we look forward to delivering quality homes to our customers while driving additional value for all of our stakeholders in the quarters and years to come.

Operator, please open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Jay McCanless with Wedbush.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [2]

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Can you guys talk about January, what you saw from quarter trends in traffic and how the incentives trended since the end of 2018?

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [3]

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Sure. Jay, this is Dale. As we approached Q4 last year, we instituted additional incentives on specs that were scheduled to complete in the last quarter of the year. As we neared the end of this November, we began reducing those incentives. What we experienced was an increase in -- of year-over-year sales in both October and November. But with the reduced incentives, December sales declined year-over-year. This trend continued into January. However, towards the end of January and so far in February, we've really seen increased traffic in sales. And so when we look at what transpired in December and January or the first part of January, we're feeling a lot better as we sit here today than we did at that point.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [4]

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Got it. And then maybe if we could touch on the Southeast for a minute. It sounds like Atlanta is kind of a tale of 2 markets with some communities doing well and some not. Could you maybe dig down into that market a little further? And how much of the weakness year-over-year and the order growth was driven by Atlanta?

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [5]

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Unfortunately, right now in the markets, I don't know if I can tell you that it's a tale of 2 cities. It really -- across our portfolio, it's kind of a tale of subdivision by subdivision. And so when we look at it, some of our subdivisions are slower than we'd like, and some are certainly performing according to expectations. So I wouldn't isolate Atlanta and say it's any different than what we're experiencing in other markets.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [6]

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The next question I had, it looks -- based on the historical data you guys provided, when -- after the Wade Jurney acquisition closed, it looks like orders were down 10% for Wade in 3Q. It looks like they're down 34%, if I've got my math right, in 4Q. Can you talk to us about the shift in strategy? And what is weighing on order growth and presumably community growth for the Wade Jurney division right now?

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [7]

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Well, it's really order growth. And as we talked about in the prepared remarks, it's a shift that we made. When Wade Jurney Homes was a private company that had secured financing, one of the requirements that they had was that they couldn't have very many specs. So as a result, what was being done is homes were sold oftentimes before we ever started construction. And so what we did is we just pushed that layer into the construction cycle as supposed to marketing and selling homes before we start construction. Since this is a spec-based business model, we've just pushed it downstream. As we look at it, we're not anticipating that that's going to impact our closings, and we are -- we monitor our finished specs. And as we indicated in the prepared remarks, they're less than 3% of the homes that we have under construction in that business. So it's really -- it was really an intentional shift on the sales side.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [8]

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And then, Dave, could you maybe give some insight into where you think gross margin and SG&A margin are going to be for 1Q?

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David L. Messenger, Century Communities, Inc. - Secretary & CFO [9]

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I would say that for gross margin, we're not providing any guidance in terms of how that's going to shake out, and it really depends on the utilization of incentives and how that plays out. From an SG&A standpoint, you can see that we put a lot of things into place during 2018, and we saw Q4's SG&A as a percent of revenue go down. Not only was it down as a percent, but also, our actual dollars in the fixed side were down sequentially from Q3 to Q4. And so without putting a percentage on it, I would expect that we would still see progress being made in 2019. So SG&A, we would expect, would come in lower than it did in 2018.

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Operator [10]

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Our next question is from the line of Michael Rehaut with JPMorgan.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [11]

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First question, I guess, I just wanted to -- obviously, understandably, like many of your peers, withholding 2019 guidance at this time. I guess, I just wanted to perhaps get a little bit in terms of some basic goalposts, so -- also perhaps similar to your peers in terms of maybe how to think about things, one of which, if I heard you right, you ended 2018 with, did I hear that right, 122 Century Communities?

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [12]

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That's correct.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [13]

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And so I was just curious, obviously, let's say, it is all scenario based on current demand trends, but if you could kind of share, let's say, the market doesn't take another major step-down, it doesn't take a major step-up, if you could perhaps share what you're thinking in terms of where we see that 122, so by the end of the -- by the end of 2019, if you could give us any type of rough directional guidance. I think in the past you talked about your core business maybe growing 10% on or off. I don't know if that's a good place to start or if it should be a little lower given your greater size. Any thoughts there would be helpful.

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [14]

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We would expect -- we have a variety of communities that we have planned to open. And we would expect that at the end of '19, that our community count would be up slightly. Whether it's going to be up 10% or not, there's a lot of water that has to go under the bridge, but we would expect that we would have at least slightly positive community count growth during 2019.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [15]

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Okay. So up slightly for me read more like 0 to 5%. Is that fair? 10%, doesn't that sound [slight]?

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [16]

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It's -- when we look at it, if -- at 122, 10% is another 12 communities. We could easily be up that. But on the other hand, if we were up 6, then it's only 5%. But I don't think it's out of the question that we're up 10%. I think that we struggle with some of the same things that our peers do in that getting communities open sometimes takes longer than we anticipated it's going to do, either because of weather or labor constraints. But I think it's very possible that we could be at 10% as -- 10% up by the time we get to the end of the year.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [17]

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I appreciate that. I guess, secondly, just going back to the gross margin for a moment. Again, understanding not wanting to provide full year, but a lot of your peers have also kind of directionally pointed to the first quarter, notwithstanding Jay's question from before. But does this typical type of sequential decline in gross margins that we've come across from the other builders have been in and around -- I mean, it could range anywhere from 50 to as much as 150 or more type of a sequential gross margin decline from 4Q to 1Q. You noted that you've also, like other builders, have increased incentives during the fourth quarter, and I assume you're more or less matching the market. So I mean, is it reasonable to think that 100 bps of a sequential gross margin decline is kind of in the cards or could it be more or less?

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [18]

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You know what, that would not surprise me when we look at it. As I said earlier, we started backing off the concessions as we approach the beginning of December, and we haven't felt the need to bring them back to the same level that we had them. But a lot of that is going to depend on how traffic and sales continue going through. But I would expect that we would see some downward movement in Q1. And at that point, hopefully, it stabilizes and continues to build back up to more normal levels.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [19]

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Great. And then just one last one, if I could, just on the shift of Wade Jurney, just in terms of selling the homes more into the construction process. I just wanted to make sure I understand this right. Are you doing that shift -- I guess, there's 2 questions around this. One, are you doing that shift so you're trying to better match material cost and labor cost with the pricing that you're offering, number one? What's the rationale behind that? And number two, just to understand also that while this might kind of wreak havoc a little bit with the orders that you're reporting, you're not expecting any major changes from a closing standpoint in terms of the impact of this specific shift.

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [20]

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Both those comments are accurate, Mike. I mean, we're doing it because we want to make sure that when we sell a house, that we have that house priced. And in some cases, you can't do that with everything if you're selling it before you start the house. It also gives us better control over our backlog because we have the homebuyer under contract through shorter period of time. And then the last comment that I'll reiterate is what you said, is that is we do not expect that that's going to be impact our closings. So as a result, from our standpoint, it just makes complete sense without any real downside at all.

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Operator [21]

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Our next question is from the line of Thomas Maguire with Zelman & Associates.

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Thomas Patrick Maguire, Zelman & Associates LLC - Senior Associate [22]

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Just to take the Wade Jurney discussion one step further. I know we've been really focused on expanding into different markets with that business, and presumably, that's generating some volume. Can you just help us think about what's going on maybe in the legacy markets and what the magnitude of declines there is? And then just if we take a step back, can you just talk about how you feel about the entry level and just the demand for that product relative to other price points and how it's performing versus your expectation?

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [23]

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Well, taking the second part of the question first. I mean, we're very bullish on the entry-level homebuyer, and we started the transition several years ago to reduce our ASP. We're to the point now that we believe that about 75% of our business is priced below the FHA limits in the particular market. And so that is the area of our business that we are the most focused on continue to expand, whether that's in the Century Communities brand or the Wade Jurney Homes brand. And so we have seen over time that there's resilience in that market. We think there is more pricing power there over time, and that's where we have been heading and we continue to keep heading in that direction.

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Thomas Patrick Maguire, Zelman & Associates LLC - Senior Associate [24]

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Got it. And then can you maybe just talk about the comments you made on incentives and pulling them back through the quarter and that affecting demand. Just what's the kind of discussion that happens to get to that decision? Or maybe said another way, what would cause you guys to increase incentives to incrementally drive growth from today's levels, understanding January was down?

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [25]

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It's really a function of what we need to do to drive sales. As we looked at our incentives, we were -- had them primarily on homes that could close in Q4. So as we begin approaching December, the window started closing rather rapidly for homes that we could sell and still close. So we didn't feel the need to continue to incent them to the same level. Into January, we didn't add the incentives back on because January is a really tough time to sell homes, particularly when we looked at what was going on in the overall homebuilding market with the hesitation in buyers. And we candidly felt that markets would improve as the -- as we got into the springtime and the government opened back up and all these other things. And we just felt that in the long run, we could sell the number of homes that we needed to as they approach completion and salvage some margin as we went through.

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Operator [26]

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The next question is from the line of Nishu Sood with Deutsche Bank.

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Timothy Ian Daley, Deutsche Bank AG, Research Division - Research Associate [27]

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This is Tim Daley on for Nishu. So my first one is just quickly on Wade. Did you guys do any concessions on Wade products in the quarter? Just seeing the backlog down a little bit. And on the same kind of thread, is that due to the new markets you're mixing into or something to do with the kind of changing spec start schedule?

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [28]

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No, it's -- we did have some incentives on -- in that business as well, obviously, not the same magnitude just given the difference in price point. And the change in backlog was really driven by the change in the sales strategy with regard to the timing of when we were going to sell homes.

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Timothy Ian Daley, Deutsche Bank AG, Research Division - Research Associate [29]

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All right. So I guess, thinking -- moving on to the financial services. So good job rolling it out nationally and kind of getting into the -- even the Wade brand now. So now that the kind of pieces are in place, how should we think about growth in this segment next year? Maybe if you could kind of help us out with expected capture rate with how you ended in the fourth quarter or kind of any additional color would be really helpful.

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David L. Messenger, Century Communities, Inc. - Secretary & CFO [30]

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Tim, this is Dave. I think that from a financial services standpoint, we've been pleased with the growth that we were able to achieve in 2018. And as we've been rolling out, we rolled out middle of the year into the West Coast markets as we terminated some legacy relationships they had there and Inspire started taking over that. And just here in the fourth quarter, really, near the end of the year, we started up with the Wade Jurney brand, [still] rolling out there. So right now, we would say that we're probably still building in overall capture rate. Some of our legacy markets where we've been around 15, 16 months here in the Mountain region, you're probably more in the 60% to 70%, mid-70% range on a capture rate. The rest of the markets, we're still building up to what we would consider to be kind of a target of somewhere in that 60% to 75% range.

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Timothy Ian Daley, Deutsche Bank AG, Research Division - Research Associate [31]

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All right. That sounds very promising. So -- and then final question here is capital allocation. So you announced the buyback plan last quarter. You did some solid buybacks this quarter and, at the same time, got the leverage down. They're kind of more in line with historical levels. So now that you've got leverage kind of where it's been in the past, how are you thinking about capital allocation heading into '19, particularly kind of balancing any additional deleveraging, future buybacks and then, obviously, land investments?

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David L. Messenger, Century Communities, Inc. - Secretary & CFO [32]

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Yes, this is Dave. I think that we look at our balance sheet and always going to maintain it to be fairly solid and strong. We do have a long-term goal of 50% from a leverage perspective. And I think that as the investments we've made over the past 18 months, 2 years from UCP through Wade Jurney, as those continue to mature and generate returns, that will help us naturally delever. When it comes to the stock buybacks, obviously, we're successful in the fourth quarter and repurchasing nearly 700,000 shares. We'll look at that all the time as another way to drive value for our stockholders. And when it comes to capital allocation amongst the division, we think that our portfolio and the products that we're offering is diverse enough, that wherever we put the next dollar, we're going to be able to generate the greatest returns.

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Operator [33]

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The next question is from the line of Alex Rygiel with B. Riley.

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Alexander John Rygiel, B. Riley FBR, Inc., Research Division - Analyst [34]

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Coming back to the Wade Jurney business, it sounds like you're entering a number of new markets in the short term. How should we think about growth in that business category in 2019 versus 2018? Should it be on a state-by-state basis? Should it be on a community basis? How should we think about growth?

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David L. Messenger, Century Communities, Inc. - Secretary & CFO [35]

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I think it's a little bit -- it's going to be a combination of several things. Right now, as you're thinking about growth, I would look at probably our historical backlog conversion rates for some form of proxy for growth for this year. When it comes to sales, we will be providing further guidance for you on that, hopefully, later in the year as we get a little bit more visibility into what the homebuyers are going to be doing. And additionally, the new markets that we rolled out into last year, those didn't have a significant impact in 2018. We'd expect to see them play a little bit more of a role in 2019.

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Alexander John Rygiel, B. Riley FBR, Inc., Research Division - Analyst [36]

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But when we look -- think about that business, how many offices do you have now or sales centers do you have now versus premerger?

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David L. Messenger, Century Communities, Inc. - Secretary & CFO [37]

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We're at about 20, 25 different sales offices right now, and it's about static with where we were premerger. We've had some closed, and we've opened up a couple of new ones.

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Alexander John Rygiel, B. Riley FBR, Inc., Research Division - Analyst [38]

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That's helpful. And then any comment on how weather might have impacted customer traffic either in the fourth quarter or in the month of January?

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [39]

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It's -- when we look at it -- unfortunately, we're always at the mercy of weather. When we look at it, it's -- given just our national platform, somewhere, we're going to be impacted by weather. And so hopefully, we've got enough diversity now that it's not something that is going to be that detrimental to us in any 1 place unless it's something really unusual. But in general, it will impact us, but hopefully, we can overcome it with other geographies.

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Operator [40]

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Our next question is from the line of Alex Barrón with Housing Research Center.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [41]

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I was hoping you could comment on your various regions, just, in general, how you guys are thinking about how the year started off, which regions are looking more promising and which ones are still a little slower.

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Robert J. Francescon, Century Communities, Inc. - President, Co-CEO & Director [42]

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Well, ending the fourth quarter, the West region was the slowest on a year-over-year basis. That has actually picked up slightly this year. We feel a little bit encouraged with the West region based on where we finished last year at. So again, it's still too early to tell, but it's looking more promising than we may have thought. When we look at our Mountain region, that's continued to perform based on expectations. Our Texas region has been really one of the bright spots, Alex, and part of that is not just market-driven but our strategy to go to the lower price points within the Texas market. And that's starting to pay dividends as we're getting into those projects that can offer that true entry-level price point in a well-located project. And so that -- as you saw in the fourth quarter, that's really the 1 region that we were up on a year-over-year basis quite significantly. So again, we feel good about that. In the Southeast, again, as Dale mentioned, a lot of it is based on subdivision by subdivision, and we've got some that we're doing very well in and others that are more challenging and more [incentivized]. But again, it's still early in the year, but we're more encouraged now as we sit here in February than we were, obviously, a month ago even.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [43]

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Now when you talk about the different challenges community by community, especially in the Southeast, is that more having to do with price point or location?

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Robert J. Francescon, Century Communities, Inc. - President, Co-CEO & Director [44]

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Generally price points.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [45]

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Got it. And are your incentives also, I guess, more focused on those higher price points then?

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Robert J. Francescon, Century Communities, Inc. - President, Co-CEO & Director [46]

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Yes. Again, that's -- the incentives, as we've seen as a general statement, are commensurate with price points. And as Dale mentioned earlier, on the Wade Jurney model, we have had some incentives on that business model in the fourth quarter, but they were very small in comparison and it relates to the price point where we've have larger incentives on some of our highest -- higher price point offerings than our other regions. So it's really on a price point-driven basis.

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Operator [47]

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We do have a follow-up question from the line of Jay McCanless with Wedbush.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [48]

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Just a couple of quick ones. Number one, we've heard some of your competitors talk about lumber prices coming in and that potentially being a gross margin tailwind. How are you guys thinking about it? And if it is, when should we expect that to hit?

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Robert J. Francescon, Century Communities, Inc. - President, Co-CEO & Director [49]

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Yes. I mean, we're seeing the same thing. Some of the homes -- a lot of the homes, actually, that closed in Q4 were bought out previously at higher lumber numbers. Lumber's down, and again, depending on what component you're looking at, but as much as 25%. And that definitely is a tailwind. We see that coming into play, especially on the quicker build entry-level product that we can get up and close quickly. We see that coming into play the latter part of Q1 and certainly into Q2.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [50]

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And then just wondering, with some of the travels we've done, we've seen that there is maybe an excess in some communities or some markets and not just for Century but all the builders of steaming speculative inventory. How are you guys dealing about your finished specs right now? Do you feel like you need to be more aggressive on that? And is that something that may continue to weigh on the gross margin as you work on that number now?

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Robert J. Francescon, Century Communities, Inc. - President, Co-CEO & Director [51]

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From a consolidated basis for Century, both the Century brand and Wade Jurney brand, we don't have a lot of completed specs. With that said though, we are cautious on what specs we're starting, which communities we're doing that in, and we're just taking a much more conservative approach to that than maybe we would have done a year ago. But we're not seeing that from our business standpoint as a problem to gross margin headwinds.

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [52]

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And Jay, that's one of the reasons that we felt we could back off on the incentives in December because we were focused on homes that could close in Q4. And when we looked at what we had, we didn't have a lot of inventory that was complete or completing that we felt we had to continue to incent.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [53]

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Got it. And then on to-be-built, where are incentives running on those right now? And how does that compare to maybe a year ago and year-end?

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [54]

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On to-be-builts, the incentives are right now running generally less than what you'll see on a spec. And so when we look back a year ago, it's kind of hard to compare to that, but it's probably not a lot higher now than it was then.

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Operator [55]

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It appears there are no further questions at this time, so I would like to pass the floor back over to Dale Francescon for any additional concluding comments.

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [56]

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Thank you, operator, and thank you again to everyone for joining us on today's call. We look forward to speaking with you again next quarter.

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Operator [57]

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Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation, and you may disconnect your lines at this time.