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Edited Transcript of CCS earnings conference call or presentation 30-Jul-19 9:00pm GMT

Q2 2019 Century Communities Inc Earnings Call

GREENWOOD VILLAGE Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Century Communities Inc earnings conference call or presentation Tuesday, July 30, 2019 at 9:00:00pm 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. - CFO & Secretary

* 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 Research Associate

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Presentation

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Operator [1]

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Greetings, and welcome to the Century Communities Second Quarter 2019 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, Mr. Dixon. 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 Second Quarter 2019 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 and 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 further detail. Afterwards, Dave will follow up with further information on our financial results, balance sheet and improved outlook. Following our prepared remarks, we will open the lines for questions.

Our strong performance in the second quarter helped us achieve record levels of year-to-date home sales revenues, net new home contracts, deliveries and adjusted gross margin dollars, as we celebrate 5 years since becoming a public company. We took Century public in June 2014 as one of the top 5 fastest-growing homebuilders in the country. Since that time, we have continued to dramatically expand our scale and scope to become a top-10 homebuilder. And in May, we were especially pleased to be named the fastest-growing public homebuilder by Builder Magazine for the second year in a row.

So today, we would like to thank the entire Century team for their hard work and dedication to excellence, which is the basis for our continued success.

As the second quarter progressed, we experienced meaningful growth in net new contracts as lower interest rates and better affordability trends bolstered buyer activity across nearly all markets within our national platform. These lower rates have provided the housing market with momentum that did not exist at the beginning of the year. This improved sales environment, which has continued into July, coupled with the continued positive state of the U.S. economy as payrolls remain healthy, job growth remains strong and unemployment remains near all-time lows, gives us confidence in the longer-term housing story and our outlook.

Looking at our operating metrics, during the quarter, we grew net new home contracts by 41% to a record 2,182 homes, leaving us with a strong backlog of 2,591 homes at the end of the second quarter. Backlog dollar value of $784 million continued to trend down year-over-year, in line with our expectations as we continue to sell more entry-level product and transition more of our fast-turning Wade Jurney activity to a build-to-sell model.

Home sales revenues increased by 17% to a second quarter record, $609 million. This was driven by a 42% increase in deliveries to a second quarter record of 1,967 homes versus 1,384 a year ago. This success was primarily driven by our continued focus on penetration into lower price-point offerings through our Wade Jurney Homes and Century Communities branded businesses.

In regard to our second quarter SG&A, we experienced impacts from the costs associated with Wade Jurney Homes back-office conversion and enhancements, in addition to higher commissions from growth in deliveries. Despite these impacts, we were able to achieve a sequential improvement of 80 basis points, which as a percent of home sales revenues decreased to 12.4%, and expect to see continued improvement through the balance of the year as a result of our cost control initiatives.

Our team continues to focus on building and closing profitable homes on our substantial national lot position to generate further top and bottom line growth; driving greater efficiencies in our legacy and Wade Jurney Homes businesses to generate enhanced shareholder returns; improving our gross margin profile and reducing our SG&A; deepening our presence and gaining share within our current carefully selected markets across the country; evaluating accretive investments where it makes sense for our business; and maintaining consistent strength and liquidity in our balance sheet, while improving our debt leverage profile.

We believe the combination of these priorities will help us generate further core profitability and value for our shareholders as we build upon our past achievements. We have demonstrated success with our returns-focused business model, and we intend to continue that focus.

Our encouraging year-to-date performance, combined with increased visibility in the year-end, leaves us well situated to achieve our 2019 growth objectives.

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. We are encouraged by the recent uptick in buyer traffic and the strong absorption pace across our business during the second quarter. As Dale mentioned, the current state of the U.S. economy is positive, along with the local economies in our markets, which should continue to bode well for our business. This supports our confidence in homebuilding as we move into the back half of the year. Job growth, wage growth and overall economic growth, along with the reduced interest rate environment, influenced buyers to return to the housing market as the second quarter progressed, translating to improvement in buyer traffic and net contracts throughout our business, especially in June, with momentum continuing into July.

We are capitalizing on this market improvement as we open additional communities with appealing designs and amenities tailored to our local buyer preferences, especially at the entry level, which represents approximately 75% of our business.

During the second quarter, we continued to source additional attractive land parcels that meet our disciplined underwriting requirements. We ended the quarter with land inventory in excess of 37,000 lots in many of the most robust U.S. homebuilding markets. We continue to target owned and controlled lots close to a 50-50 split to accelerate our scale while preserving financial flexibility.

Now looking at our markets in further detail, starting with our West region. Year-over-year net new contracts increased by 77% and deliveries by 20%, driven by a 67% increase in community count. The impact of new communities has benefited this region the most out of all of our regions in recent months, and we have additional communities scheduled to open throughout the balance of the year. Although certain of our West markets are among the higher-priced areas within our geographic platform, we still generally focus on the entry-level buyer and offer homes at the lower end of the price spectrum in a particular market, which has resulted in a strong absorption pace.

Looking at our Mountain region, buyer demand in Denver, Las Vegas and Salt Lake City remains positive driven by healthy local economies. While a number of new communities opened late in the quarter, they will be contributing to results in the third and fourth quarters. Additionally, we expect to open 14 new communities throughout this region during the balance of the year, which will positively affect our net new contracts in the year-end.

In Texas, results continued to be extremely positive, driven primarily by strong performance in Austin and Houston, helping to generate a 26% improvement in net new contracts for the region and a 44% increase in our absorption pace. We recently closed out of several communities in this region, but expect to open 5 additional lower price-point communities in attractive locations in the third and fourth quarters.

In the Southeast region, Atlanta, Charlotte and Nashville, all continue to be attractive markets, especially at entry-level price points. Our sales and closings have slowed, primarily due to delayed community openings. However, we expect to open 8 new communities in this region in the third quarter, which will positively impact our upcoming quarters' results.

In our asset-light Wade Jurney Homes business, we experienced positive momentum during the quarter as we expanded operations into the states of Iowa and Michigan. As we mentioned last quarter, we continue to invest capital and resources into Wade Jurney Homes' asset-light, entry-level business line.

Our integration initiatives are progressing as planned, and we continue to anticipate that our office relocation from North Carolina to Atlanta and the implementation of enhanced systems, processes and procedures, including the back office conversion, will be largely completed by the end of the third quarter.

In summary, we are pleased with our overall progress during the second quarter and our go-forward position. We entered the second half of 2019 with positive market momentum, strong land positions, a solid balance sheet and confidence in the direction of our company.

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. - CFO & Secretary [5]

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Thank you, Rob. During the second quarter of 2019, our adjusted net income was $23.6 million or $0.77 per diluted share and net income for the quarter was $15.5 million or $0.51 per diluted share, with the difference being primarily due to the transaction costs associated with the refinancing of our long-term bonds, which I will discuss in more detail in a moment.

Home sales revenues for the second quarter were $608.6 million, an increase of 17% compared to $522.2 million in the prior year quarter. This improvement in revenues was mainly driven by a 42% increase in home deliveries to 1,967. Average selling prices of homes delivered for the second quarter of 2019 was $309,400 compared to $377,300 in the prior year quarter, consistent with our expectations as we continue to expand our offerings of entry-level homes.

Gross margin for the second quarter was 17.2%, primarily due to higher incentives and less favorable product mix compared to the prior year quarter. Adjusted homebuilding gross margin percentage was 19.6% compared to 22.3% in the prior year quarter. Looking at our second quarter 2019 closings, a significant majority of the homes were sold prior to March 31, a period when our incentives were their highest.

In our June 30 backlog of nearly 2,600 homes, we have an improved gross margin profile and continue to expect gross margins to trend upwards through the remainder of the year as the usage of incentives on new sales has declined.

SG&A as a percent of homebuilding revenues was 12.4% in the second quarter. While significantly better than the first quarter, SG&A was modestly higher compared to 12.2% in the prior year quarter, mainly due to certain onetime costs related to litigation settlements and the Wade Jurney Homes back-office conversion, relocation and other integration costs, which are still on track to be substantially completed by the end of the third quarter. We expect to incur costs related to the Wade Jurney Homes initiatives through the balance of the year. Reducing our SG&A as a percent of homebuilding revenues remains one of our primary focus items, and we continue to expect an improvement on a year-over-year basis, even with these onetime costs.

In the second quarter of 2019, our financial services businesses generated $9.9 million in revenue, up 24% year-over-year. The business contributed $2.2 million in pretax income compared to $2.6 million in the prior year quarter, with the difference driven by margin compression as a result of the declining rate environment.

Now turning to our balance sheet and liquidity. During the quarter, we refinanced our $385 million 2022 bonds with a $500 million issuance due 2027. The rate on the new bonds improved to 6.75% compared to 6.875% on the bonds being prepaid. In conjunction with the prepayment, we incurred $10.8 million of onetime charges related to the transaction.

As of June 30, 2019, we had total long-term debt of $1.1 billion with total liquidity of $486 million, including $58 million of cash and $428 million of capacity on our unsecured revolver.

With $897 million of stockholders' equity, our net homebuilding debt-to-net-capital ratio stood at 53.8% at June 30 due to the typical seasonal buildup of work in process and certain land investments. As Dale mentioned, improving our leverage profile is one of our key focus areas, and we continue to expect our net homebuilding debt-to-net-capital ratio to be in the upper 40% range by year-end.

Given our strong year-to-date performance and continued confidence in our strategy, we are increasing our full year 2019 outlook. We now expect deliveries to be in the range of 7,500 to 8,000 homes and home sales revenues to be in the range of $2.3 billion to $2.5 billion.

In regard to our tax rate for 2019, we continue to expect to incur an income tax rate of approximately 26.5% compared to 25% in 2018.

In closing, we are very pleased with the direction of our business across our diverse national footprint. We remain confident in our prospects for further growth and continue to expect another full year of earnings improvement by driving efficiencies through our national scale while expanding our Wade Jurney Homes business and deepening our current positions in legacy markets.

We look forward to updating you on our progress in coming quarters.

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 comes from the line of Michael Rehaut with JPMorgan.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Congrats on all the results. First question I had was a little bit on some of the guidance comments, specifically around gross margins, where I believe you kind of said directionally you expect it to improve, and in part that's based on your -- what you have in backlog. So just trying to get a sense of the degree of magnitude there. I mean most builders that have reported already have pointed to moderate -- let's say, moderate improvement, modest, something in the order of plus or minus anywhere from 20 to 50 basis points sequentially. Is that kind of a reasonable expectation for your business? And maybe given the level of incentives that have declined, I think it's also been positive, but relatively modest.

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David L. Messenger, Century Communities, Inc. - CFO & Secretary [3]

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Yes. Mike, this is Dave. I would say that in looking at our backlog and looking at where we are for the year, for the first half of the year, we're at 19.7% on an adjusted basis, and we're forecasting kind of a 20% to 21% range. So saying that we're going to see sequential improvement somewhere in those ranges you mentioned isn't out of line. You look at how the margin of our backlog is starting to shape up, we have less incentives than before, we think that the range of 20% to 21% is still good.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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To clarify on that, the 20% to 21% would be for the full year, or for the back half, specifically?

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

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That's for the full year.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [6]

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Okay. So that's also kind of a reiteration from before?

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David L. Messenger, Century Communities, Inc. - CFO & Secretary [7]

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Correct.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [8]

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Okay. I guess, just secondly, may be bigger picture, Rob or Dale. Love to hear your thoughts just taking a step back again from a geographic footprint. And you kind of referenced that as part of your priorities, you continue to evaluate different investments. And I assume part of that is on the M&A front. Obviously, your current footprint does continue to expand with Wade Jurney, and you have lot of regions that you didn't have a couple of years ago, and I'm sure you want to get bigger in your existing areas. I mean can you give us a sense of how M&A fits into your current thoughts? And would that M&A be more focused on deepening where you are or potentially expanding into even other areas?

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [9]

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Sure. Mike, this is Dale. Our focus is primarily on growing within our existing markets as well as growing within the existing and additional markets on Wade Jurney Homes. On the M&A side, I mean, we remain opportunistic. We continue to look at deals as they are presented. In terms of, I guess, if I could say how I would weight them, ones in our existing market would probably be more appealing than ones in a new market, but it all depends on each individual transaction. But in terms of our day-to-day focus, it's really on growing in our existing markets and growing our Wade Jurney Homes business. When you look at the markets that we're currently in, they're all performing well. We're happy with them. And we think that we have room to grow in all of them.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [10]

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And one last quick one, if I could. With Wade Jurney obviously expanding as rapidly as it has, how should we think about that segment a couple of years out from a size perspective, just given that you obviously, I would presume, are not going to double or triple your states and the operating areas that you are in? Off of today's base, if you look at the last 12 months, you've closed 2,500 homes. I mean how should we think about that number, let's say, in '20, '21, et cetera?

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [11]

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Well, part of what we've been doing, and as we indicated in our prepared remarks with some of the SG&A costs that we've incurred, we've spent a fair amount of money and quite a bit of time in terms of building some additional back-office support for Wade Jurney Homes. And the whole purpose of that is really to support the growth that we see. When we look at it, we think we have room to expand geographically as well as in each of the markets that we're already in. Historically, the Wade Jurney Homes model has been based on very small subdivisions, or even scattered lots in many cases. And so one of the changes that we've initiated is that we're now looking and we have purchased larger communities, still typically on rolling option basis. But it allows us to get more out of each subdivision and out of each market. And so that's a big part of the focus that we have on the Wade Jurney side.

In terms of giving you a number, I'm not prepared to do that because that's our focus. And we're just going to kind of have to see where the opportunities are as we go forward.

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Operator [12]

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Our next question comes from the line of Jay McCanless with Wedbush.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [13]

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The first question I had, could you maybe quantify what you all are seeing in July? And also talk about where incentives are trending for the second quarter into July.

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

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Sure. Jay, this is Dale. So in terms of just -- and backing up and talking about the quarter, I mean, we saw a significant improvement on sales in June. And when we look at the first 2 months of the quarter, they were slow. June rebounded pretty strongly. And July is really on the same trend. So when we look at the interest rates dropping, it seems like it's taken a little bit of time for that to kick in on the buyer side. But we're now seeing more traffic in the communities and more conversion into sales.

In terms of the incentives, it's really down to a subdivision-by-subdivision level in terms of where the incentives are. But in general, what I can tell you is that, sequentially over the year, they have come down. I think as we said on our call in February that we had backed off on our incentives in January. We probably did that a little too quickly and then we had to pick them up as we went into the spring selling season. And then we started tapering them down and, at this point, they're the lowest that they've been all year. They're still there, and we're looking at what we have to do in each case to get the velocity that we want, but they're trending in the right direction.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [15]

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Great to hear. Second question I had, in terms of pricing power. I don't know if you guys can quantify like a percentage of total communities or certain regions, but are you able to hold the line on pricing and even raise them in certain areas?

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

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In general, there is no market that we're in that I would say we have a broad ability to raise prices. It really is down to looking at individual subdivisions, depending on the competition that's there. If there is -- competitors have sold out and we still have product, then we have the ability to push prices there and/or reduce incentives even further. But across the board, there is no market that we have that I could tell you that we have pricing power on a broad basis.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [17]

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Got it. And then last one from me. Just thinking about legacy Century, what are your expectations for community growth this year? And any insight you could give us into '20 would be helpful.

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David L. Messenger, Century Communities, Inc. - CFO & Secretary [18]

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Yes. Jay, this is Dave. I think -- we don't provide any community count growth guidance. But right now, we've got 125 selling communities. That number has been a little bit stagnant over the past several quarters, but I think kind of how we look at that is that several years ago -- 3, 4 years ago, we were doing -- our average community size was approximately 100 lots. It's taken us about 3 years to work through them on a normal absorption pace. Today, our average community count size is about 165 lots. At today's absorption, it's taken about 4 years to work through them. So while our community count has been a little bit consistent, a little bit flat over the past several quarters, it's due to we brought on some bigger communities that were just taking a little bit longer to work through than we would have historically. But as Rob said in his prepared remarks, you've got about 14 coming online in the Mountain region, you got another 5 or so coming on in Texas. And we just opened some in the second quarter in the West Coast. So we feel good about where our community count is right now. And if development allows, we'll continue to open more communities as soon as we can.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [19]

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Got it. And just want to sneak one more in. I know you guys -- in the south, you're all having some development delays. Have those resolved and been resolved and what's going on there?

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Robert J. Francescon, Century Communities, Inc. - President, Co-CEO & Director [20]

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Yes. That's primarily been resolved. There were several communities that candidly should have opened earlier and didn't due to a variety of factors. That's really behind us now. They're in their infancy now of opening up, and so hopefully, that's going to be a meaningful driver on net sales going forward.

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Operator [21]

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Your next question comes from the line of Thomas Maguire with Zelman & Associates.

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

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Great job this quarter. Just on the demand and order side of the business, really strong results, and I think the thing that stood out to us was the resumption of growth in the Wade Jurney portion. And just to keep it there, are we at the point where the noise from the repositioning we saw over the last few quarters and just fixing where we're selling in the construction cycle is behind us? And then just qualitatively, I know the growth rates can get skewed from quarter-to-quarter, but how would you describe the demand for that product, both in the existing footprint and as you roll out to new geographies?

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

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Sure. So Thomas, this is Dale. So in terms of the change that we made with regard to the timing of the sales, it's continuing to still work through. As we indicated when we announced that, we didn't think it was going to impact our deliveries, but it would impact some of the sales numbers. And so since we haven't fully lapped ourselves yet on that change, we'll continue to have some of that as we go forward. But overall, at the price point that we are at with an average price point of around $150,000, I'm sure, as you can imagine, we have quite a bit of demand and so that's -- as we continue to manage that business and grow that business, it's an area of our business that we're particularly positive on.

But we're also very positive on the overall Century positioning. When we look at where we were on just the Century business, we were -- if you just -- if you break it out, we were basically flat year-over-year, but that's really a function of 2 markets. Every one of our divisions were up year-over-year with the exception of Atlanta and Las Vegas. And the only reason those 2 markets were down is not a reflection of market strength there, but a reflection of our community count.

And we had -- as Rob had just talked about, we've resolved a lot of the development issues that we had in the Southeast, but we still need to get more communities open. We've got quite a few that are opening here in the third quarter. Same thing happened in Las Vegas. We found ourselves in a position where we had closed out certain communities, and we didn't have new communities open. And one of the focuses that we've had is growing the size of the subdivisions that we're in so that we have a longer runway. And we've done that on the Century side and that's one of the positioning changes that we're also doing on the Wade Jurney Homes side.

So even though our community count may not grow as much as we would like, the number of selling opportunities that we have within a community and the length that we'll be in a community is going to be elongated.

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

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Got it. That's makes a ton of sense and it's really helpful. And then to just to go back to the prior M&A question, but may be take it higher level. Can you just talk about where you think we are in terms of just, I guess, the overall scale piece of the Century story? And I know this was a focus in getting to where the company needed to be and there were acquisitions that got us there, but are you still comfortable that we're already at a tipping point where we can consolidate share on an organic basis, the heavy lifting, so to say, is done and M&A would just be more of a land transaction in the normal course of business? And just what's been the biggest surprise, I guess, in terms of benefit of scale with where we are today?

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

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Well, it's still really opportunistic. And our focus when we went public 5 years ago was that we were going to grow primarily by acquisition, which we did. We -- with the exception of the Wade Jurney Homes transaction, all of those integrations are behind us. The Wade Jurney transaction will be fully integrated here shortly. Everything is going according to plan. We're very comfortable taking on a -- another acquisition. And it really is opportunistic. Even all the ones that we've done in the past, even though that was really a big part of our focus, we were still very opportunistic. The number of transactions that we've done are just a small fraction of the ones that we've looked at. And so we have pretty high standards in terms of what we're looking for in the attributes of an acquisition. But if one of those came along, we wouldn't hesitate to move forward on it.

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Operator [26]

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Our next question comes from the line of Alex Rygiel with B. Riley FBR.

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Alexander John Rygiel, B. Riley FBR, Inc., Research Division - Analyst [27]

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With the growth in Wade Jurney being so strong, do you see this continuing such that the mix of your business is going to continue to kind of transition even more so towards entry level?

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

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We do. And it's just -- when we look at our view of the homebuilding market, and I think most, affordability is a challenge for people. And that's really one of the challenges the overall industry faces. And so when we can deliver homes at the price point that we do on the Wade Jurney business model, we think that we have a tremendous opportunity to continue to grow that brand. And that's where we're spending a lot of our time, energy and resources.

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Alexander John Rygiel, B. Riley FBR, Inc., Research Division - Analyst [29]

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So with that playing out, should we think about ASPs over the next year or so trending down as well? Or are the higher-price homes going to hold their price points such that ASPs stay flattish over time?

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

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I think that if you look at our backlog right now, we're at $302,000 to $303,000 as an ASP. If it trended a couple of thousand dollars either direction, that wouldn't surprise us given the current mix of business. But I think having somewhere in -- having an ASP a year out from now around that $300,000 range is reasonable for us.

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Alexander John Rygiel, B. Riley FBR, Inc., Research Division - Analyst [31]

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And as it relates to your guidance, you obviously low -- raised the low end. I suspect it was due to sort of the strong performance in June and July. But maybe kind of benchmark or characterize, if we stayed at this pace of improvement for another quarter or 2, what might play out with that guidance?

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

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Well, I think that if we continue to see an improving homebuilding environment across our markets, and we're going to continue seeing strong demand into the fall, you would see us look at our guidance come the time we have our third quarter call, when we'd be looking at -- by that time we have that call, it'd be end of October, early November with 8 weeks left in the year. We'd be fine-tuning and adjusting it accordingly, but I think that we still have a little bit more water to go under the bridge to make those decisions.

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Alexander John Rygiel, B. Riley FBR, Inc., Research Division - Analyst [33]

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And lastly, any new pressure or relief in material cost or labor?

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David L. Messenger, Century Communities, Inc. - CFO & Secretary [34]

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Not necessarily right now. I think, as we look at our margin profile and what we've had in the second quarter, while we had some material increases, they seem to be fairly well offset with lumber pricing, but nothing is standing out that is raising a red flag right now.

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Operator [35]

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Our next question comes 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 [36]

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Congrats on the quarter. I wanted to focus in a little bit on Wade Jurney. So I'm kind of on your website here, and it looks like it operates out of 12 states. And am I wrong -- maybe I hadn't paid as much attention, but am I wrong that it was only in the Southeast just a year ago?

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [37]

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Yes. That's right, Alex. When we first did our joint venture with Wade Jurney Homes and then when we acquired the second half, during that -- which was June of last year, during that time frame, we were in the process of planning into going into additional areas. But at June of last year, when we acquired the balance of the business, we hadn't had any closings at that point outside of the Southeast. And then subsequent to that, we've -- we had expanded and had closings in Arizona, Texas, and now we're in various states in the Midwest. And when we look at it, those are all markets where it allows us to operate at this price point that we're very comfortable with for this business model.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [38]

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Yes. Actually, I was out in Phoenix a week ago, visiting many of these Wade Jurney communities, and it was pretty impressive to see the level of activity you guys got going on in those. But, I guess I didn't realize you were in so many other markets. So if this is such a great opportunity, are you guys basically operating out of kind of distressed lots that you're still finding out in the further-out areas? Or are you developing your own lots? Or how are you kind of keeping the cost low, I guess, to be able to offer homes at these low price points?

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

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It's really -- it's a combination of both. I mean there are -- in some cases, they are distressed lots. And in other markets, we have developers that are developing lots for us. So it's really a combination. As we go forward, we fully expect that a larger percentage of the lots will be developed for us. We don't develop them on our balance sheet in this business line. But there's -- in the markets that we're in, there's developers that are available to develop them for us.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [40]

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And at the end of the day, margins, I guess, are about the same as your company average?

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David L. Messenger, Century Communities, Inc. - CFO & Secretary [41]

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They're included in our numbers. We had a 19% -- we were over 19%, 19.7% for the first half of the year, and those margins will be included in the overall range for the year of 20% to 21% on an adjusted basis.

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Operator [42]

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Our next question is a follow-up question from Michael Rehaut with JPMorgan.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [43]

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Just wanted to circle back to a few -- or a couple of earlier questions and see if I could try and get a little more detail. First on the community count. Kind of working off your comments before about the fact that you are expecting a good amount of new community openings, I believe you said 14 and 5 in different regions, just trying to triangulate that in terms of getting any sense of where you might end at the end of the year. It seems like earlier, I think last quarter perhaps, you might have talked about holding at that 125 number. But it seems like we should be expecting some level of growth on a net basis. Given that type of number of openings, it kind of leads me to think you're not going to have a similar number of closings, particularly given the longer length of -- or the bigger lot size per community. So just wanted to make sure I'm thinking about that right, that there should be some growth in the back half off of the 125?

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David L. Messenger, Century Communities, Inc. - CFO & Secretary [44]

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Yes. Mike, this is Dave. I would say that it's difficult for us to forecast when we're going to close out of all the communities, but if you look at the second quarter, we're relatively flat on our community counts from March 31 to June 30. But inside that flat number, we're opening and closing about 20 communities throughout the country. So the portfolio ended up flat. So while we are talking about opening up new communities in the third and fourth quarters of this year, one thing that we aren't forecasting right now is the number that we're going to close out. So we will expect to close out some, but I can't tell you if we will close out of -- whatever number it's going to be.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [45]

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Right. Okay. I guess, secondly, just also a little bit -- hopefully, more detail on the comments around April, May, I believe you characterized as being slow, and then having that strong rebound in June. You did over 40% order growth in the second quarter. How should I think about that? Are we talking about 0 to up 20 or something much lower in the first couple of months, and then you just did a light-out type of number in June? Or maybe if you can give us a sense by region, if there are certain regions or the Wade Jurney that really kind of accelerated that number? Just trying to get a little bit more of degree of magnitude when you talk about slow versus rebounding strongly.

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Dale Francescon, Century Communities, Inc. - Chairman & Co-CEO [46]

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Well, when we look at April and May, there were -- in terms of year-over-year improvement, there wasn't much. So if, but as we got into June, it's really when we saw that the buyer started re-engaging, and we started having significant growth in terms of our sales. And it really came kind of across the board. It was certainly in our Wade Jurney Homes business, but it was also in all of our other regions, in terms of where we saw improvement. So it was really a reflection of, in our minds, the lower interest rates started resonating with homebuyers and they started coming back out to buy homes.

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Operator [47]

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Our next question is 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 wanted to ask with closings in 3Q and 4Q, are you guys expecting those to be fairly similar in number? Or how should we think about backlog absorption for the next couple of quarters?

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David L. Messenger, Century Communities, Inc. - CFO & Secretary [49]

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I think you can kind of look at what our historical -- what our backlog margin was last year to get a sense of what to model. Third quarter last year, we were somewhere around 60% number, and in the fourth quarter, it was, I think, somewhere around a 74%, 75% number.

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Operator [50]

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Our next question is a follow-up question 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 [51]

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So Dave, I heard you say the price point would be about $300,000 as time goes by. But if we exclude kind of Wade Jurney for a minute, how do you see the price point trending? And how is the product mix going to be changing? Are you guys kind of aiming to be "more affordable" within all the other markets? Or can you kind of elaborate on that?

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David L. Messenger, Century Communities, Inc. - CFO & Secretary [52]

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Yes. I think -- Alex, this is Dave. If you look at the Century average price point, I believe it's a tick under $400,000. And you look across the markets that we're in, we definitely try to be in the affordable price points in those markets, even in some of the higher price-point markets out on the West Coast. You look at our overall portfolio, 75% of it's qualifying for FHA loans, which typically would be your finance vehicle of choice for an entry-level buyer. And so while that price point is $400,000 versus $155,000 or $152,000 for Wade Jurney, you'll see Century continue to play in the entry-level price point in the markets that we're in.

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Operator [53]

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There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

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

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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 [55]

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Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.