Hello and welcome to the LGI Homes 2018 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. And now I would like to introduce your host for today’s call, Rachel Eaton, Chief Marketing Officer. You may begin.

Thank you. Welcome to the LGI Homes conference call discussing our results for the fourth quarter and full year 2018. Today’s conference call will contain forward-looking statements that include among other things, statements regarding LGI’s business strategy, outlook, plans, objectives and guidance for 2019. All such statements reflect current expectations. However, they do involve assumptions, estimates, and other risks and uncertainties that could cause our expectations to prove to be incorrect. You should review our filings with the SEC, including our risk factors and cautionary statement about forward-looking statement section for a discussion of the risks, uncertainties and other factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements. These forward-looking statements are not guarantees of future performance. You should consider these forward-looking statements in light of the related risks and you should not place undue reliance on these forward-looking statements which speak only as of the date of this conference call. Additionally, adjusted gross margin, a non-GAAP financial measure, will be discussed on this call. The 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. A reconciliation of adjusted gross margin to gross margin, the most comparable measure prepared in accordance with GAAP, is included in the earnings press release that we issued this morning and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 that we expect to file with the SEC later today. This filing will be accessible on the SEC’s website and in the Investors section of our website at lgihomes.com. Joining me today are Eric Lipar, LGI Homes’ Chief Executive Officer and Charles Merdian, the company’s Chief Financial Officer. With that, I will now turn the call over to Eric.

Thank you, Rachel and welcome to everyone on this call. We appreciate your continued interest in LGI Homes. During today’s call, I will share some highlights from 2018, then Charles will follow-up to discuss our financial results in more detail. After he is done, we will conclude with comments on what we are seeing this quarter and our expectations for 2019 before we open the call for questions. At the start of 2018, we provided guidance announcing our expectations to do the following: first, was to deliver more than 6,000 home closings; second, was to have 85 to 90 active communities by year end; and finally, to deliver basic earnings per share to our investors in the range of $6 to $7 all while maintaining our gross margin at or near industry leading levels between 24% and 26% and adjusted gross margin between 25.5% and 27.5%. Today, I am pleased to announce that for 2018 we met or exceeded this guidance in all areas. As a result, this not only marks our fifth full year as a public company, but highlights our fifth consecutive year of delivering strong results to the market reaching or exceeding our guidance in every metric. Our fourth quarter provided an impressive finish to 2018 with a record breaking 1,852 homes closed highlighted by our best month in LGI history with 884 homes closed in the month of December bringing us to a record-breaking total of 6,512 homes closed for the year. In 2018, we also achieved significant growth in home sales revenue generating $1.5 billion and ending the year with 88 active communities. These strong results enabled us to deliver basic earnings per share of $6.89, increasing basic EPS more than 31% over the prior year. When we went public in 2013, we had one…

Thanks, Eric. Home sales revenues for the quarter were $425.2 million based on 1,852 homes closed, which represents a 5% increase over the fourth quarter of 2017. Home sales revenues for the year totaled $1.5 billion, a 19.6% increase over the prior year. Our average sales price was $229,568 for the fourth quarter, a 4.5% year-over-year increase and a 3.4% decrease from the third quarter. During the fourth quarter our Central divisions which includes Texas, Oklahoma, and Minnesota closed 865 homes, a 9% increase over the 792 homes closed during the fourth quarter of 2017 at an average sales price of approximately $211,000. The 865 closings represented approximately 47% of overall closings for the quarter. Our Southeast division closed 445 homes this quarter at an average sales price of approximately $207,000 across 21 communities. Average communities were up 4 over the prior year quarter primarily due to the Wynn acquisition. Absorptions increased to 7.1 closings per community per month, up from 5.2 in the fourth quarter of 2017. Also during the fourth quarter, we closed 228 wholesale units, 12.3% of overall closings in 13 of our markets generating $49 million in revenue at an average price of approximately $213,000. And this past year, we closed a total of 466 wholesale units generating $110 million in revenues in our communities compared to 201 units and $41 million in revenue in the prior year. For the quarter, wholesale units impacted our overall gross margins by approximately 120 basis points and for the year by 80 basis points. We believe that our wholesale business is accretive to the overall business as operating margins are similar. Our expectation is that wholesale will be approximately 5% of our overall business in 2019. For the year, we closed 118 homes in our Terrata communities representing less…

Thanks, Charles. In summary, we had another impressive quarter and a phenomenal 2018. Let me provide some guidance and thoughts on what we are seeing for the upcoming year. The first quarter of 2019 is off to a solid start with 269 closings in January and we expect closings in February 2019 to be similar to last year’s February results, which totaled 368 closings. Based on our solid performance to-date and assuming a continuation of today’s housing market conditions for the remainder of this year, we offer the following guidance. As we previously announced in our January 4 press release, we expect to close between 6,900 and 7,800 homes in 2019. We believe throughout 2019 we will continue to grow our community count primarily by going deeper in our existing markets and end the year between 105 and 115 active selling communities. In addition to closings and community count guidance for 2019, we believe our average sales price for the year will continue to increase ending 2019 with an overall average sales price between $235,000 and $245,000. Guidance for gross margin will be in the range of 23.5% and 25.5%. We expect adjusted gross margin, which excludes the effects of interest and purchase accounting, will continue to be strong ending the year between 25.5% and 27.5%. This is the same adjusted gross margin that we guided to last year, which reflects our optimistic view of 2019. This also reflects our belief in the strength of our model and the ability to produce consistent margins. Given our home closing guidance along with an increase in average sales price, consistent gross margins and conversion of convertible notes, we believe our basic earnings per share for the full year 2019 will be in the range of $7 and $8 per share. In summary, we are very pleased with our results for the fourth quarter and the full year of 2018. We believe we are poised to take advantage of continued growth opportunities in existing and new markets and that we are well-positioned to continue to grow our revenues, community count, and earnings allowing LGI Homes to achieve our long-term goals, and objectives of market-leading returns for our shareholders and continuing toward our goal of becoming a top 5 builder. Now, we are happy to take your questions.

[Operator Instructions] Our first question comes from the line of Jay McCanless with Wedbush. Your line is open.

Hi. Good afternoon, everyone. So, my first question, you said February is looking roughly 368 closings. If I assume an 88, community count there, that puts you guys at roughly 6.3 homes per community, which is down again about 13%, 14%. And what right now is it a question of price, is it the weather that’s holding you guys back? What’s driving some of these negative comps that we’re seeing on the per community basis?

Yes, Jay. This is Eric. I can start with not the weather holding us back for sure. And on your math, we expect the community count not to be as high as 88. It was 83 last month, maybe add a community or two in February and I think that’s in line with our guidance. The last few years we’ve averaged 6.7 closings per community per month and that’s the highest it’s been as a public company and really strong absorption paces. And I think what we saw in the fourth quarter was good solid sales equivalent to the year before, but not quite as strong on a per community basis. So, it feels like our closing range is more six to seven closings a month annualized and that feels about where we are in January and February so similar results. And then as we add communities throughout the year and really drive that community count growth this year, we’re confident we will end up between 6,900 and 7,800 closings.

And then on the gross margin, good job there. When you think about how many homes you guys turn in a quarter, do you believe that you guys are seeing maybe some of the savings from lumber a little bit faster than some of your competitors and is that what drove the gross margin or was it more volume in 4Q versus just getting some savings on the construction cost?

Hi Jay. This is Charles. I’ll start and then Eric can add. So, I think there’s some impact that in quarters where we do have higher absorptions, we do see some benefit and certainly our cycle time is typically shorter and but we have visibility into our pricing about as quick as anybody that we would see because we’re building on a spec basis as well. What that allows us to do is help forecast out where our sales prices need to be, which is what we focus on in terms of how we’re managing expected gross margins.

And then the last question I had, are you guys seeing the land sellers start to take prices down a little bit and/or are you seeing some competitive and not just in 4Q, but even January, February, are you guys seeing some competitive discounting from some of the other builders out there and how are you guys responding to that?

Yes. Jay, it’s a good question. First of all, from the acquisition standpoint, I would say we haven’t seen a lot of discounting yet, maybe some easiness on terms. But certainly, also being focused on the entry level, there’s a lot of builders focused on the entry level segment right now. So, we don’t think the markets soft enough to have a huge discount from the land sellers yet. But certainly, in a softer market if that’s anyone’s projection, then that will be one of the benefits that we would have being at LGI. And what’s the second part of your question?

Just, what are you seeing from your competitors? Are you seeing more people cutting price to try and drive some volume and how is that impacting you guys?

Yes. I think it potentially could impact us on appraisals. If the other builders that are in the proximity of our communities certainly cut price, it can impact it through the appraisals and mortgage business. We don’t really focus on what the other builders, but certainly we’ve been hearing of that potential in a slower market and that’s really down to a market or a community-by-community basis that may have some impact. But other than that, we haven’t seen a lot of that.

Alright, great. Thanks for taking my questions.

Thank you. Our next question comes from the line of Nishu Sood with Deutsche Bank. Your line is open.

Thank you. First question on the gross margins, the wholesale business had an 80-basis point drag I think on gross margins in 2018. What are we thinking about for 2019? I can imagine that as that outlet becomes more attractive on a relative basis in 2019. Should we think about something like the 120-basis point drag that you had in 4Q or perhaps even something higher? Just trying to understand the drivers of the gross margins.

Sure. This is Charles. So, as we’ve since we’ve introduced wholesale, the percentage of wholesale business this quarter for example being roughly 12% of the business had 120 basis point impact and for the year it was roughly right around 7% to 8% of the overall business, which had an 80-basis point impact. So, I think we put it out there that we think wholesale is going to be around 5% so that would be a 50-basis point impact in kind of the general range of what we would expect.

Got it. Why would wholesale be a smaller part of the business in ‘19 versus ‘18? Is it just that you had some communities or phases that were more appropriate for wholesale in 2018 and have sold out? I would think given the market volatility, wholesale would continue to be an attractive outlet.

Yes, it is, Nishu. I mean certainly the demand from the wholesale buyers will be there. Last year it was between 7% and 8%, we said 5% but certainly it wouldn’t surprise us if it was a similar number to last year. And I also think something that is relevant to this question is we’re starting to see more interest from the companies buying from us to do more larger sections, do more communities, and certainly we can be a player in that; but that just gives us a longer lead time. So, more of a focus on 2020 closings and beyond and we are talking to some of the bigger opportunities that we’re looking at.

Got it. And my other question was about marketing, spend. In the past when there has been volatility in the market, you’ve had the option given your model your sales driven model of increasing your marketing expense to keep up volume. Your marketing as a percentage of sales was actually down year-over-year. So, I just wondering how are you able to achieve that, is the increase in marketing spend still yet to come or is it just more efficient these days with the internet and then perhaps we won’t see as much of an increase?

I think it’s a combination of both. I think our marketing team has done a great job. We’re more efficient than we’ve ever been, certainly growing community count and getting some national scale helps in that. In fact, we had more leads last week than we had in the history of the company. We went over 9,000 leads for the first time. So, that gives you an idea of how strong the demand is. Now certainly we have more communities than we’ve ever had, but just a data point and a great job by our marketing team driving leads to our communities and our salespeople. And then also, Nishu, that’s one of the things we talked about on the call. If the interest rates continue to go up or we needed to spend more money on marketing, that’s one of the triggers that we could pull to keep our absorption paces up, but that just hasn’t been the case right now. We’re seeing really efficient use of our marketing dollars. Last year in 2018, we generated over 360,000 leads. So, we haven’t had to increase that marketing spend, yet, but it’s certainly something we can do and would do if we saw demand starting to drop off.

Okay. Thank you.

You’re welcome.

Thank you. Our next question comes from the line of Michael Rehaut with JPMorgan. Your line is open.

Thanks. Good afternoon, everyone. The first question I had was on gross margins and obviously you’ve done a great job over the years of managing that to well above industry average levels. Just wanted to get a sense though as you look at from 2016 you were almost 28%, little bit of slippage in 20 over the past year or so. Just trying to get a sense of what in your mind was the bigger driver of that slippage and kind of what frames your thought process around maybe the midpoint being slightly less than 2018 certainly nowhere near the level of contraction relative to your peers, but what have kind of been the big pluses and minuses, puts and takes that have been driving that gross margin over the last couple of years, I am talking about on an adjusted basis and how you see those pluses and minuses, the puts and takes this upcoming year?

Right, yes, good question. So in 2016, you are right we were at 27.8% adjusted gross margin. In 2017 is when we introduced wholesale so that was certainly a function in 2017 where we introduced wholesale, which had an impact on overall gross margins, but a similar operating margin. So, I would say from ‘16 to ‘17 you had the introduction of wholesale. We also continue to expand outside our Central divisions and Texas primarily tends to still be our strongest market in terms of how we can generate gross margins. All of our regions are very similar in gross margins, but Texas generally tends to be the strongest which means as we expand geographically we have a slight dilutive effect overall that would have come into play as well. And then in ‘17, particularly we spent some time on some of our quarterly calls just talking about the rapid rise of inputs, both labor and materials, during ‘17 and our ramp up in production were two factors in ‘17. And then for 2018, we were just able to kind of stay consistent and come in at 27% based on just managing the cost and managing sales prices in order to meet our target.

And then as you see 2019 kind of in that similar type of range midpoint being 26.5%, what do you kind of see as the headwinds year-over-year and tailwinds if any?

Yes, this is Eric. I think when we are given our midpoint of the guidance and it’s really only 50 basis points higher, I think the headwinds to gross margin this year would be probably seeing what our competitors are doing and then there is also a mix component of that. We did tend to do a lot of development in Texas like Charles talked about. So, our gross margins are better in Texas than overall. Our growth this year and additive to community count is primarily going to be outside of Texas so just law of large numbers, if you will bring that average down. And then there is the mix component, we priced our lots differently if we are buying finished lots compared to developing ourselves to make sure we capture that developer margin as well. So, it’s going to vary a little by 50 basis points to 100 basis points just on the communities and whether we are developing are not. So we put a range on it, it’s probably a little bit conservative on our range, but we are comfortable we are going to be in that range.

Okay. So just so I understand the midpoint of the range being a little less than 2018, the primary drivers of that you would say would be a little bit of the pricing backdrop being maybe slightly more competitive as well as the geographic mix?

Correct.

Okay, great. Thanks very much.

You bet.

You are welcome.

And our next question comes from the line of Stephen East with Wells Fargo. Your line is open.

Thank you. Good morning, guys.

Good morning.

Eric, when you look at the tax refunds that are coming back slower and/or smaller, I guess I am wondering do you all see tax refunds drive your business in the spring? And if you typically do, are you seeing any change in what happened, what’s happening so far? And then if you look at interest rates, they moved up into the fall and now they have eased, did you see those rates affect negatively then and starting to affect positively now as you move through the spring?

Yes, great question, Stephen. On the tax refunds getting back, I am not sure if we have a good data point to gauge that other than it seems to be really strong demand in the field. So certainly it hasn’t been slower. So, I think that’s a positive in this type of the year, customers getting their tax refunds back to use for down payment, pay off that. I think that’s a positive for us. And I think what we saw in the fourth quarter when interest rates spiked, we still saw strong demand, the lease coming in, but I think people because of that monthly payment increase started selecting smaller plans and that was one of the things that we all thought might happen and one of the components that drove our average sales price down in the fourth quarter compared to the third quarter. So, that’s one of the things that we believe we noticed. It’s not very clear in the data exactly that people were picking smaller plans, but that’s what it suggests to us and probably not a coincidence that when interest rates went up in the quarter, our average sales price went down and that would be something that we would think continue to happen if interest rates went up in 2019.

Got it. Okay. And then historically you have talked a lot about preservation of margin so in essence more price over pace. As you have had a little bit of a slower dynamic and you have got more competitors out there as you look at ‘19, does your thought process change anywhere you maybe lean a bit more toward pace than maybe you would have in the past?

No, I think we are going to stay consistent with our business model. We would like to have both price versus pace. So, we plan on leading the industry again in pace on a closings per community basis and being north of that 6.0 closings per month and not reduced prices. We are not a fan of reducing prices on a community. Generally speaking, we think 2019 costs will continue to go up so we will have to raise prices gradually throughout our community to keep our gross margins consistent. But we won’t be reducing prices to generate more pace like some of the other builders are talking about.

Got it, okay. If I can sneak in one more, you did your first national promo in the fourth quarter, thoughts on how, when and whether this you would do it in 2019?

Yes, I think it went great. The feedback that we got, we drove a lot of extra leads to the field, didn’t spend a ton of money like we talked about earlier on the call. And just at our size and scale now, we have the ability to do promotions like that to really let the renters out there in the United States know that we have available inventory and it’s a good time to own. And I think that message is going to continue into 2019 and I am sure we will have some national events and really have a focus on sales and marketing as we always do.

Alright. Thank you.

You are welcome.

Our next question comes from the line of Carl Reichardt with BTIG. Your line is open.

Thanks. Hi, guys. Just wrapping up on a couple of these other questions, so when you look at the slowdown in sales per community over the last few months, is that more a function of traffic or conversion of traffic as you guys look at it?

Yes. Again it’s hard to say it’s about slowdown. So, we think it’s pretty good. It’s certainly slower than our historical averages and record-breaking months that we have had in the past, but the leads are strong. So, it’s more of a function in conversion. I mean one of the things that we are dealing with as a company certainly is affordability as everyone has and as our average sales prices continue to rise. It’s up $70,000 approximately over 5 years ago. Affordability is something that we have to be mindful of and not as many customers qualify as they did 5 years ago. Now, our absorptions last year did not get impacted by that, because I think of all of the other positive things in the economy. So, I think our range of closing guidance for the year is kind of that historical average of 6.0 on the low end of our range. At the high end of our range, it’s more like the last couple of years and I think we will fall somewhere in between.

Okay. Thanks, Eric. And then as you expanded your number of markets and there is I suppose an argument could be made while as you move to new places, you will need new floor plans right and to meet those individual markets. Are you finding you are able to export the floor plans that have been so successful for you in end-markets like Texas over time and move them because I would think if you could get some positive leverage on these plans that sell well that ought to be helpful to gross margin more quickly as you move into new markets?

Yes and no, so not exactly the floor plans necessarily, Carl, but we have seen in our new markets that our traditional 1,400 to 1,600 square foot three bedroom, two bath, two car garage, that’s laid out similarly is really the most popular plan and always has been and always will be. So I think when we go to a new market, we do a good job of not over-thinking the architecture and just build a nice quality home and that 1,300 to 1,600 square foot is always our best seller on a 45 or 50 foot lot and just get into that market quickly and get into sales and closings.

Okay, great. Thanks, Eric. Thanks, guys.

You’re welcome.

At this time, I would like to turn the call back over to Eric Lipar for closing remarks.

Thank you everyone for participating on the call and your interest in LGI Homes. We look forward to sharing our achievements for 2019 throughout the year. Have a great day. Thanks everybody.

Ladies and gentlemen that concludes today’s call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.