LGI-HOMES Earningcall Transcript Of Q2 of 2024

Charles Merdian, chief financial officer and treasurer. I'll now turn the call over to Eric. 

Eric Thomas Lipar -- Chair and Chief Executive Officer

Thanks, Josh. Good afternoon, and welcome to our earnings call. We're pleased to report the strong

operating results we delivered in the second quarter and to provide more details on the significant

progress  we've  made,  increasing  profitability  and  growing  community  count.  As  highlighted  in  our

press release this morning, we delivered 1,655 homes at a record-breaking average sales price of

$364,000, resulting in revenue of over $602 million.

During  the  quarter,  we  opened  more  self-developed  communities  underwritten  at  higher  margins

and  successfully  offset  the  impact  of  mortgage  buydown  incentives  and  cost  inflation  by  raising

prices in our higher-performing communities. Doing so allowed us to deliver a gross margin of 25%,

up 300 basis points from last year and adjusted gross margin of 27%, up 320 basis points from last

year.  These  are  noteworthy  increases  in  our  profitability  that  brings  today's  margins  in  line  with

pre-pandemic levels. Pretax net income for the quarter was approximately $77 million, representing

a pre-tax profit margin of 12.8%.

This  was  a  170  basis  point  improvement  over  last  year  and  like  gross  margins,  in  line  with  our

performance  prior  to  the  pandemic.  These  and  other  achievements  contributed  to  earnings  per

share of $2.48, an increase of 10.2% compared to the same period last year. In May, we hit a new

record  of  130  communities  and  ended  June  with  128  communities,  up  an  industry-leading  26%  in

the past year. And more communities are coming.

We just completed our July training class here in the Woodlands which included 60 new salespeople

who will be instrumental in helping us achieve our goal of 150 communities by year-end. During the

quarter,  we  averaged  4.3  closings  per  community  per  month.  Our  top  markets  on  a  closings  per

community basis were Charlotte with 8.6 closings per month, Las Vegas with 7.8, Mid-Atlantic with

6.9, Dallas/Fort Worth with 6.7 and Fort Pierce with 6.3 closings per month. Congratulations to the

teams in these markets and their outstanding results last quarter.

On May 9, we held our Annual Service Impact Day. Nationwide, our teams volunteered more than

9,000 hours working with 73 local charities that support the most critical needs of our communities.

We're grateful to our nonprofit partners for allowing us to support the transformative work they do,

and we thank our employees for making this year's service impact day a success. At a high level,

the  housing  market  remains  healthy  with  demand  supported  by  strong  fundamentals,  including

household formations and migration trends, years of underproduction and a lock-in effect limiting the

supply of resale homes.

Additionally,  we're  witnessing  a  resilient  labor  market  with  historically  low  unemployment.  On  the

other  side  of  this  equation,  it's  constrained  affordability,  which  remains  the  No.  1  challenge  for

customers  and  the  key  limitation  on  higher  sales  and  closings.  With  rising  land  and  input  costs,

compounded  by  higher  interest  rates  and  increased  cost  of  insurance  and  property  taxes,  today's

entry-level customer faces hard choices and has fewer options.

At LGI Homes, we're making those choices easier and creating meaningful value for our customers

by providing affordable sized but feature-rich homes and offering the mix of incentives that results in

the  most  attainable  monthly  payment  for  our  buyers.  Finding  the  effective  mix  of  each  of  these

levers: product type, size, amenities, ASP, and incentive levels presents a unique set of operational

challenges  in  every  market.  Our  performance  in  the  second  quarter  demonstrates  our  success  at

balancing  these  variables  while  still  delivering  outstanding  margins  that  reflect  our  commitment  to

increasing profitability and driving higher returns. Now, I'll invite Charles to provide additional details

on our financial results.

Charles Michael Merdian -- Chief Financial Officer and Treasurer

Thanks,  Eric.  As  noted  earlier,  revenue  in  the  second  quarter  was  $602.5  million  based  on  1,655

homes closed at an average sales price of $364,047, an increase of 4.6% compared to last year. Of

our  total  closings,  117  were  through  our  wholesale  channel,  representing  7.1%  of  total  closings

compared to 7.5% last year. Our second quarter gross margin was 25% and adjusted gross margin

was 27%.

As Eric mentioned, gross margin improved significantly, up 300 basis points year over year and 160

basis  points  sequentially  while  adjusted  gross  margins  improved  320  basis  points  year  over  year

and  170  basis  points  sequentially.  Adjusted  gross  margin  excluded  $10.6  million  of  capitalized

interest charged cost of sales and $1.2 million related to purchase accounting, together representing

200  basis  points  compared  to  180  basis  points  last  year.  The  increase  was  the  result  of  higher

borrowing  costs  coming  through  cost  of  goods  sold,  partially  offset  by  lower  purchase  accounting

adjustments.  Combined  selling,  general  and  administrative  expenses  for  the  second  quarter  were

$83.4 million or 13.8% of revenue.

Selling expenses were $52.9 million or 8.8% of revenue compared to 7.6% in the same period last

year. The increase, as a percentage of revenue, was primarily related to higher advertising spend

this year as compared to last. General and administrative expenses totaled $30.5 million or 5.1% of

revenue compared to 4.3% in the same period last year. The increase as a percentage of revenue

was  primarily  related  to  higher  indirect  overhead  expenses  related  to  community  count  expansion

that were allocated across lower overall closings.

We continue to expect our full year SG&A expense as a percentage of revenue to range between

13% and 14%. Pretax net income was $76.9 million or 12.8% of revenue compared to 11.1% last

year and 5.9% in the first quarter. The increase was the result of driving higher profitability in every

home sold, as well as $2.7 million related to the sale of lots and commercial land. Our effective tax

rate  was  23.8%  compared  to  25.6%  last  year,  and  we  expect  our  full  year  tax  rate  will  be  in  the

range between 24% and 25%.

Second  quarter  gross  orders  were  2,201,  net  orders  were  1,713,  and  our  cancellation  rate  was

22.2%.  We  ended  the  quarter  with  1,393  homes  in  our  backlog  valued  at  $553.6  million.  Of  those

homes, 181 or 13% of our total backlog were related to wholesale contracts with institutional buyers.

Turning to our land position.

On  June  30,  our  portfolio  consisted  of  69,904  owned  and  controlled  lots.  Of  those  lots,  54,362  or

77.8% were owned and 15,542 lots or 22.2% were controlled. Of our owned lots, 39,284 were either

raw land or land under development with approximately 31% of those lots in active development. Of

the  remaining  15,078  owned  lots,  10,407  were  finished  vacant  lots,  and  2,032  were  completed

homes, including our information centers.

During  the  quarter,  we  started  2,172  homes,  and  we  ended  the  quarter  with  2,639  homes  in

progress. With that, I'll turn the call over to Josh for a discussion of our capital position.

Josh Fattor -- Vice President, Investor Relations

Thank  you,  Charles.  We  ended  the  quarter  with  $1.5  billion  of  debt  outstanding,  including  $819.7

million drawn on our credit facility, resulting in a debt-to-capital ratio of 43.8% and net debt-to-capital

ratio of 43%. The sequential increase in the amount drawn on our revolver was commensurate with

the increase in our inventory as we started more homes in the second quarter. Total liquidity at the

end of the quarter was $405.9 million, including $51 million of cash and $354.8 million available to

borrow on our credit facility.

We repurchased 83,763 shares for $8 million during the quarter and have $193.5 million remaining

on our current authorization. Finally, at June 30, our stockholders' equity was $1.9 billion, and our

book  value  per  share  was  $81.86,  an  increase  of  11.3%  over  the  same  period  last  year.  At  this

point, I'll turn the call back over to Eric.

Eric Thomas Lipar -- Chair and Chief Executive Officer

Thanks,  Josh.  While  we  still  have  two  days  left  for  closings  in  July,  we  expect  to  report

approximately  550  homes  closed  this  month  and  a  similar  number  of  communities.  Based  on  our

performance  to  date,  current  backlog  and  a  view  of  the  inventory  available  to  sell  and  close  this

year, we are updating our guidance. We now expect to close between 6,400 and 7,200 homes this

year.

This new range reflects our current view of the market and implies the pace in the second half of the

year that is similar to the sales pace we saw in the second quarter. As we mentioned earlier, we've

been pleased with our ability to raise sales prices in most of our communities and especially in our

highest  performing  communities.  Based  on  the  contract  value  of  homes  in  our  backlog  and

continued outperformance compared to our original expectations, we're increasing our ASP guide to

a  range  between  $360,000  to  $370,000,  a  $10,000  increase  at  both  the  low  and  high  end  of  the

range. We expect to continue to raise prices as needed while remaining disciplined around the level

of incentives required to achieve our margin targets.

Based on our outperformance in the first half of the year, we are raising our gross margin guidance

to a range between 23.5% and 24.5% and adjusted gross margin to between 25.5% and 26.5%. I'll

conclude  by  saying  once  more  how  pleased  we  are  with  our  strong  second  quarter  performance.

These achievements are thanks to our teams around the country and their tireless execution of our

strategy. On the topic of our people, I'll share a final highlight.

For the second year in a row, the U.S. News and World Report recognize LGI Homes as one of the

best  companies  to  work  for  in  multiple  categories.  This  achievement  is  clear  evidence  that  we've

created  an  exciting  workplace  where  our  people  feel  valued,  inspired  and  positioned  for  long-term

success. To all of our employees, I say thank you for your dedication and the loyalty you continue to

show to our company.

We'll now open the call for questions.

Operator

Questions & Answers: