Greetings. Welcome to the Century Communities Fourth Quarter 2019 Earnings Conference Call. [Operator instructions] Please note, this conference is being recorded. I will now turn the conference over to Hunter Wells, Vice President of Investor Relations for Century Communities. Thank you. You may begin.

Good afternoon. Thank you for joining us today for Century Communities fourth-quarter and fiscal-year 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 as supplemented by our other SEC filings. Our SEC filings are available at www.sec.gov and 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 Dave Messenger, Chief Financial Officer. Dale 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 2020 outlook. Following our prepared remarks, we will open the line-up for questions. With that, I will turn the call over to Dale.

Thanks, Hunter. We're very pleased with our strong finish to 2019 which resulted in record performance for the fourth quarter and full year as we continue to generate opportunities and efficiencies due to our scale, geographic scope and market positioning. In 2019, we achieved our 17th consecutive year of profitability, along with significant year-over-year improvement in virtually all metrics, including revenue, deliveries, sales, net income and shareholders' equity. Last year also represented our fifth anniversary of becoming a public company. Over this relatively short period, we transformed ourselves from a small regional homebuilder operating in three states, delivering less than 1,000 homes to one of the 10th largest homebuilders in the country delivering 8,000 homes in 17 states from coast to coast for 2.5 billion of revenue. Over this time, we've been almost exclusively focused on growth and select market expansion primarily through the acquisition of other homebuilders. In order to create a stable and scalable platform to support future growth, we deployed significant financial and human resources toward the integration and assimilation of these formerly independent businesses, as well as developing the people, processes, procedures, systems, and reporting required to properly manage an enterprise of this size. As we look to the future with these actions successfully accomplished, we're very pleased with the state of our business today and excited about our prospects for the future. In fact, we believe that our achievements over the next five years will meaningfully surpass our substantial accomplishments of the past given the significant strides we've already made in strengthening our business and improving our competitive positioning. Our efforts going forward will continue to be on driving growth with a primary emphasis on organic top line revenue expansion through increasing our depth within each market. However, we are equally focused on further executing…

Thanks, Dale, and good afternoon, everyone. As Dale mentioned, we generated strong performance across the board in the fourth quarter, including year-over-year improvements of 45% in net new contracts and 22% in closings. The strong sales momentum that we experienced in the fourth quarter has continued into 2020, with record January net new contracts up 67%, compared to the prior year. Given the January 2019 sales were depressed due to market conditions existing at that point, we are not projecting the same rate of year-over-year improvement for subsequent months. However, since our robust January sales results were consistent across our business and regions, we are extremely positive about the current homebuilding environment and our prospects for the balance of the year. With that perspective, I'll provide a brief overview of our recent performance and demand trends across each of our regions. In the fourth quarter, Texas achieved a 64% increase in net new home contracts and a 41% increase in home deliveries. We successfully lowered the ASP of homes by 8% and achieved a 30% increase in home sales revenues. In 2019, Austin was named America's fastest-growing large city, driven by population and job growth while San Antonio is on track to become the nation's sixth largest city by 2021. Over the next decade, Houston is projected to have the second-highest number of new residents for any metro area, with the addition of nearly 1.2 million people, an increase of approximately 17%. We are confident these positive trends will continue to strengthen the market in 2020, and believe Texas is an impressive example of a high-growth opportunity where we have significant potential to capture increased share given our product positioning. In our mountain region, we saw significant growth with net new contracts, up 35% year over year, reflecting an accelerated…

Thanks, Rob. During the fourth quarter of 2019, our net income increased more than 100% to a record 53.4 million, or $1.63 per diluted share. Home sales revenues for the fourth quarter were a record 775.7 million, an increase of 21%, compared to 640.2 million in the prior-year quarter. This improvement in revenues was mainly driven by a 22% increase in home deliveries to a record 2,479, as we saw home deliveries increased across all our regions. The average selling price of homes delivered for the fourth quarter of 2019 decreased to 312,900, compared to 315,700 in the prior-year quarter which is consistent with our plan to capture an increasing share of homebuyers at entry level price points. Adjusted homebuilding gross margin percentage increased 60 basis points to 21%, compared to 20.4% in the prior-year quarter, and up from 20.6%, sequentially, from the third quarter of this year. Homebuilding gross margin for the fourth quarter increased to 18.2%, compared to 16.5% in the prior-year quarter and 18.1% in the third quarter. Given the increased demand that we experienced in our markets, we were able to drive an outsized backlog conversion rate and still increase our gross margin both year over year and sequentially. Additionally, we recorded impairments of approximately $2 million on a handful of communities across our portfolio. At year end, our backlog of 2,070 homes has a gross margin profile that's consistent with our fourth-quarter deliveries, and we expect to deliver these homes in the next couple of quarters. Consistent with our year-long plans, we made solid progress in improving our SG&A leverage in the fourth quarter. SG&A as a percent of homebuilding revenues improved to 10.9% in the fourth quarter, compared to 11.4% in the prior year, and 12.7% in the third quarter. With our fourth-quarter SG&A…

[Operator instructions] Our first question is from Michael Rehaut, JP Morgan. Please proceed with your question.

Hi. Good morning, everyone, and congrats on the results. First question I had was kind of focused in around the growth outlined or expectations for fiscal 2020 in terms of the closings growth and the revenue growth, but in particular, the closings. Historically, I've always kind of thought of, you know, the core business, and as I've talked to you guys over the years, the goal has been maybe to kind of grow the core around 10%, and then, you know, whatever acquisitions add on top of that would be an additional amount. You know, maybe you could kind of walk through what the, you know, with the closings guidance up roughly 5 to 20%, so a little bit higher at the midpoint. What's driving that slightly more robust growth outlook? If there are certain markets that you're kind of looking at more aggressively if it's Century Complete, if that -- you continue to expect that to trend above kind of demonstrated an above-trend growth line. Any thoughts there would be helpful.

Mike, and this is Dale. I think part of it is we look at how the demand has started so quickly this year, and we look at where our markets are positioned and how they're performing. As we just look forward for the entirety of the year, we think that we're going to end up somewhere within that range. In terms of particular markets, if they're really across the board in terms of how they're performing. And so, you know, as we sit here today, we're really positive about homebuilding in general and our prospects in particular.

Just a follow-up on that before I ask a second, if it's possible. Given that the revenue growth be pretty similar in terms of the low and high-end to the closings growth, is it fair to assume that the Century Complete business would grow at a similar rate to the legacy Century business? Obviously, you guys have had a decent mix shift on average closings price over the last couple of years.

Well, you know, as we look at it, it's hard to project exactly how the mix is going to come out. But as we look at it, we would anticipate that on the Century Complete side, that we would get a higher growth rate than on the Century Community brand product.

Okay. I guess just --

But that being said, I mean, we're really seeing strength at all price points, and as I say, virtually, all markets.

Right. I guess just lastly, maybe a clarification on the gross margin side. Dave, you mentioned that, if I heard you right, that the backlog gross margin was consistent with the fourth quarter, and you'd expect that to persist over the next couple of quarters in terms of your results. Is that a comment on pre-interest in inventory impairments? And how should we think about interest amortization for the upcoming year?

Handling that second part first. I'd say, if you're looking at your interest amortization running through the cost of goods sold, good numbers, probably about two and a half percent, especially given that we brought our leverage down you should see two and a half percent be relatively flat throughout the balance of the year. And then, in terms of what I was making in terms of margin comments, on a GAAP basis, we're seeing about an 18.2% right now in our backlog. And adjusted for the fourth quarter, it was 21%. And those numbers are pretty consistent with where we look at our backlog as of 12/31. We would expect as those homes come through the pipeline in Q1, Q2 of next year, we ought to be seeing similar margins.

Our next question is from Thomas Maguire, Zelman and Associates. Please proceed with your question.

Hey, everyone. Congrats on a great quarter all the way around. On the overhead piece of the business, it was really a nice – exciting, rather, to see leverage start to come through in full force. And I know just thinking back, there were some integration issues and different things that have prevented that before that you touched on in the prepared remarks, and you alluded to it a little bit. But can you just talk about where all of that is right now? And then, as we think about moving forward, is there any outsized cost increases or items to be aware of moving into 2020 that would drive kind of the cost base meaningfully higher, or is it full speed ahead on continuing to show improvement into the new year with overhead leverage?

So in terms of the integration, I mean, it's 100% behind us. We have no more integration to do or cost to incur for any of the acquisitions that we've done. And then, as we look forward into 2020, we really don't see any outside cost that are going to come in that we haven't already incurred, and we really believe we can continue to create efficiencies and work those costs down as we get into 2020, and particularly, in the back half of the year.

Yeah. One thing I would add with that. Now that 2019 has come and gone, we have all our prior acquisitions integrated. 2019 was our lowest SG&A percentage on an annual basis in the last four years. As we look into 2020, and as Dale said, we've got an opportunity really to drive scale and drive some efficiencies out of this. I would expect to see our SG&A into 2020 be mid to high 11% range.

Got it. That makes sense. And then, just similar strong results on the gross margin side, but can you just talk about the moving pieces that drove that higher in the quarter and kind of the higher rate into 2020? Is there anything that you had cautioned on mix that's impacting that at all that wore off eventually? Or is it just more gradual improvement in a better selling environment and then some of the dynamics that you talked about on scale and maybe splitting those two out, if you can, just ballparking it and thinking about what's driving more than less?

Yeah. No, there is really no mix that was unusual. It really is a function of -- we're starting to see benefits of our direct costs from some of the strategic initiatives that we started last year, and that we'll continue to expand into 2020. That, coupled with the fact that as we look at the markets, as I said earlier, I mean, they're all performing very well. And so, we had -- obviously, Q4 had more incentives in some of those sales than in the sales that we're accomplishing today, but as we go forward, we really don't see anything that will hold our gross margin back from being where it currently is.

Our question is from Alex Barron, Housing Research Center. Please proceed with your question.

Yeah, thank you. Great job on the quarter and the year, gentlemen. I had a question about, I guess, the transition from Wade Jurney to Century Complete. Is there anything changing fundamentally besides the name?

No. It's the same business, the same business approach. It's strictly a name change to better align it with the entirety of the Century business. So, we just thought it made sense to make that change.

So, you guys are still going to be building specs, entry level, really affordable prices selling from shopping centers, etc.?

Absolutely.

It's the same business model.

It's all the same.

And I know you guys have launched into several markets over the last 12 months. Is there a plan to continue to expand in new markets at this point, or just to kind of gain greater depth in the existing markets?

So, first and foremost, Alex, we want to gain greater depth in our existing markets. With that said, being in the multiple markets that we are, we really think that there's a tremendous opportunity to do that. Secondly, though there are some strategic markets that we're looking at, they're just in their infancy. And the nice thing, especially on the Century Complete side, to expand into that area, the way we're structured, it's a very cost-effective way to get started, so it's not a typical start up that you would have on a homebuilder scenario with our plans, with our people, with our centralization. It just makes it much more efficient and less expensive to do that, so we like that aspect. But first and foremost, we want to continue to gain share within our existing markets.

Just to follow-up with that, Alex, for clarity, we are -- the geographic expansion that we're targeting is only in the Century Complete brand.

Correct. Now, what is the kind of current situation for that type of product in terms of land? Is there opportunities to buy finished deals, or do you guys have to engage in land development at this time?

We're still buying finished lots, 100% finished lots. We're still finding good opportunities to do that. With that said, though, there are sometimes situations where an outside developer will put the lots on the ground for us. But we're still, from our standpoint and our balance sheet, land light approach, we are only purchasing finished lots.

Okay, great. Well, best of luck to you, and thanks.

Our next question is from Jay McCanless, Wedbush. Please proceed with your question.

Hey, good afternoon. Thanks for taking my questions. The first question I had, so Wade Jurney of -- 2019 closings was roughly 35% of the closings. Do you all expect it to be in that range or a little bit higher in 2020?

I would think that you're probably going to see that increase by some factor in 2020. As we said, we've got an opportunity to grow that business a little bit quicker than we do, the Century business. And so, while we're expecting growth out of all of our markets, that percentage being 35% could increase over the course of 2020.

And then just, Dave, what should we use for tax rate this year?

About 24%, that would be inclusive of energy tax credits.

And then I apologize if I missed this, but have you all talked about what your plans are for community count growth outside of Century Complete?

No, you didn't miss it. We hadn't discussed it. But as we have on the docket, opening and closing a variety of communities throughout the course of 2020. Currently, we're forecasting community count growth to be somewhere between 5 and 10% at the end of year-end.

And any geographic focus on that community growth?

No, I say it's broad-based.

And then, the last one I had, just to -- and congrats on the 67% number for January. I was wondering if you could give us what the monthly comps were for February '19 and March '19, just so we can think about what the right order growth number should be for 1Q '20?

No, we haven't disclosed any monthly data other than just typically, we provide some color on the month following a quarter up to our call. So unfortunately, we're not going to be providing that in full right now.

Thank you. Great numbers.

Our next question is from Alex Rygiel, B. Riley FBR. Please proceed with your question.

Hi, good evening. This is actually Min for Alex. So, a couple of questions. I wanted to talk a little bit about your financial services business. If you could talk about kind of if it's being offered across all of your regions now? And just talk a little bit about the capture rate, what you expect it to kind of get to potentially in 2020?

This is Dave. I would say that from a capture rate perspective, the Century business has a higher capture rate than does our Wade Jurney business or our Century Complete business now as that was really being worked into the system, into our sales process during the course of 2019. And we expect 2020 to have a bit more of a breakout year as we should be able to capture it throughout the course of the second and third quarter more of that Century Complete business, and more of that home buyer which we have traditionally not done in that division of our business.

Okay. And are you expecting to add anything? Could you add anything else to this financial services business? Maybe insurance, or anything like that, to expand your sales opportunity? Or just kind of focused on what you're offering now?

Currently, we do offer mortgage title and insurance services, the insurance services we had started in 2019. Currently, a very small -- running at a very small loss for the balance of 2019. And we expect as people begin renewing home owners' insurance that we've offered, provided to them as they start to renew that in 2020, it becomes a little bit of a larger portion of that business over the next several years. But given that you're dealing on premiums off of homes being sold, I don't ever expect it to be a truly material part of that business.

Okay. And then, just with, you know, the homebuilding orders just across the board being very strong. At the end of the year and going into 2020, can you talk a little bit about kind of inflationary costs that you're seeing? I mean, do you think labor could be a barrier to growth in 2020?

We're really not seeing a lot of direct cost inflationary pressures. When we look at the material side, you know, certainly, there can be ebbs and flows, depending on the particular line item. But generally speaking, we're just not seeing that like we did several years ago. So that seems to have corrected itself. In terms of labor, there's always been a shortage of labor as we've come out of the recovery and as homebuilding is ramped up. And as companies continue to build both on a for-sale and for-rent side, there isn't enough labor. However, with that said, by being the size we are, we've been able to garner enough within our market. So that it keeps our cycle times where we want them and all of that. So it hasn't been an impediment to us, but there isn't robust labor in the market.

Thanks.

We will now turn the line back over to Dale for some brief closing remarks.

Thank you, operator. As we look ahead to 2020 and beyond, we're excited for the opportunities ahead and are confident in our ability to execute our strategic initiatives to deliver continued results. I'd like to thank our employees for their hard work and dedication. We wouldn't be where we are today without your passion for success. We'd also like to thank our valued shareholders for their continued support, and thank all of you for joining us on today's call, and we look forward to speaking with you again next quarter.

This concludes today's conference, you may disconnect your lines at this time, thank you for your participation.