UHG - NASDAQ

Thank you for standing by. My name is Carly and I will be your conference operator today. At this time, I would like to welcome everyone to the United Home Group First Quarter 2025 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the call over to Erin Reese McGinnis, General Counsel. Please go ahead.

Good morning, and welcome to United Home Group's First Quarter of 2025 Earnings Call. Before the call begins, I would like to note that this call will include forward-looking statements within the meaning of the federal securities laws. United Homes Group cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. These risks and uncertainties include, but are not limited to, the risk factors described by United Homes Group in its filings with the Securities and Exchange Commission. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and you should not place undue reliance on these forward-looking statements. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures can be accessed through the company's website and in its SEC filings. Hosting the call today are United Homes Group's Interim Chief Executive Officer, Jamie Pirrello; President, Jack Micenko; and Chief Financial Officer, Keith Feldman. With that, I'd like to turn the call over to Jamie.

Thank you for joining us today as we go over our results for the first quarter of 2025 and provide an update on our operations. United Homes Group delivered 252 homes in the first quarter with an average sales price on production-built homes of $345,000, generating home sales revenue of $87 million. Home sales gross margins improved 20 basis points year-over-year, but remained depressed at 16.2% due to elevated incentive activity and our strategic decision to discount move spec inventory. Net new orders came in at 296 units. Our sales pace in January and the first half of February was disappointing and did not meet our expectations. As a result, we had fewer homes available to close during the second half of the first quarter. The slower sales pace had a material impact on our results. Like other builders, we saw improved sales in the second half of February. March met our expectations and April and the first part of May has been good. Overall, I'm pleased with the progress we made on a number of fronts and I'm encouraged by the operational momentum we carried into the second quarter. As we mentioned in the last quarter, we have undertaken a product refresh and a direct cost reduction initiative that should improve our competitive positioning and profitability. While we are still in the early stages of these initiatives, the initial results have been encouraging. Our newly designed homes have been well received by buyers and generated margins well in excess of the company's average in the first quarter of 2025. The 23 newly designed homes we closed during the first quarter had an average gross margin of approximately 24%. We closed 27 of these refreshed homes in April. As of Monday, May 12, we had 95 newly designed homes in backlog, carrying an average gross margin of approximately 24%. Every day, these homes are making up a bigger percentage of our closings in the future. In terms of our cost reduction plan, we have already identified over $3.5 million of direct construction cost savings for homes expected to be closed in 2025. We achieved this through the competitive rebidding of our agreements with subcontractors and material suppliers. We expect the effects of these cost-saving initiatives to begin on a small scale in the second quarter and ramp up through the third and fourth quarters. We have not completed this initiative, so we anticipate additional savings. Another initiative we've undertaken to place a greater emphasis on presold homes. In prior quarters, it made sense to carry a higher level of spec inventory given the extended cycle times resulting from the supply chain issues of years past and the entry-level buyers' preference for quick move-in homes. Now that cycle times have come down and move-up buyers have become more active in the market, we have made a strategic decision to shift away from a high-spec home strategy and look for a somewhat more balanced approach in our move-up product lines. Presales are currently producing much higher margins, especially when compared to the discounting we do on completed spec home inventory. This shift will allow us to capitalize on buyers who are willing and able to pay for what they want in a new home. This includes upgrades such as structural and interior option offerings and other upgrades that we sell at higher margins. It will also give us better visibility into our delivery outlook for the year and reduce the capital tied up in standing inventory. With presold homes and newly refreshed products expected to make up a higher percentage of our closings going forward, we are optimistic about the trajectory of our margins. We also remain optimistic about the long-term prospects for our markets. The Carolinas and Georgia continue to attract employers to the region due to their business-friendly economic climate and attractive quality of life. They also boast better housing affordability relative to most major markets. which has led to consistent in-migration from other parts of the country. We continue to see greater opportunities for long-term growth in these markets and others throughout the Southeast given these favorable housing fundamentals. As we turn our attention to the latter part of the spring selling season, we remain focused on maintaining a consistent level of new home sales while executing on the initiatives I discussed above. So far this quarter, demand has been fairly solid with April orders up 6% year-over-year. While incentives continue to run at a higher level than we would like, we believe our improved product design, presold home focus can offset some of that -- their margin impact. As a result, I believe united Homes Group is on the right path to achieve its long-term goals. With that, I'd like to turn the call over to Jack, who will provide more detail on our operational results this quarter.

Thanks, Jamie, and good morning, everyone. First quarter of 2025 was a tale of 2 halves for our company, the second half being materially better than the first. January started slowly due to normal seasonality and some abnormal snowfall, which impacted our sales efforts. We saw a bounce back in February, and that momentum carried into March. Our profitability also followed a similar trajectory with gross margins improving 400 basis points from the beginning of the quarter through the end. Jamie mentioned, April orders were up 6% year-over-year. Affordability continues to be an issue for buyers, which has necessitated the use financing incentives to get people to their desired monthly payment. Incentives have been a key selling tool for our industry and a distinct advantage over the resell market where it has come at a cost to our profitability. Financing incentive as a percentage of ASP was 4% for the quarter, which is consistent with the prior quarter. We expect incentive activity to remain elevated, we are optimistic that our shift to more presale homes and the appeal of our fresh product will dampen their effect, however, on our margins. We took 16 days out of our average cycle time in the first quarter as compared to last year. Part of the improvement was a result of labor and material availability returning to pre-COVID levels, but another factor has been our focus on becoming a more efficient builder with product rationalization and better build practices. This has been another key initiative for our company in addition to the product improvements, the cost containment measures we've undertaken. We are a returns-focused builder and our ability to build and close homes in a timely manner is an important aspect of that focus. Another important aspect of our strategy is to tie up land in a capital-efficient manner. At the end of the first quarter, we owned or controlled approximately 7,500 lots. We believe this asset-light strategy puts us in a great position to pursue our growth initiatives and a capital-efficient risk-averse manner. We are staying disciplined to our underwriting of new land deals given the uncertainty in the market today and we continue to work with our land partners on terms of our future lot takedowns. We expect to open 10 new communities in the second quarter and 18 communities in the third quarter, giving our sales efforts a boost. Most of these communities will feature our newly refreshed product, which have been selling well and carry higher margins. Given these new community rollouts and the way in which our company's performance improved over the first 4 months of the year, I'm excited about what's in store for the remainder of 2025. Now I'm going to turn the call over to Keith, who will provide more detail on our financial results for the quarter.

Thank you, Jack and Jamie, and good morning. For the first quarter of 2025, we reported net income of $18.2 million, which includes a fair value adjustment of $21.2 million primarily related to the accounting for the contingent liability, which fluctuates each quarter based on our ending stock price. The earn-out will be settled exclusively in common shares on reaching certain stock price hurdles and will never result in a cash expense for the company. As Jamie mentioned, revenue for the first quarter of 2025 was $87 million a decrease of $13.8 million or 13.7% from $100.8 million in the first quarter of 2024. The year-over-year decline was primarily driven by lower home closings, partially offset by an increase in average sales price. Home closings for the first quarter of 2025 totaled 252 homes, down from 311 homes in the prior year period. As we previously mentioned, the industry-wide slow start to the year and unusually poor weather in South Carolina negatively impacted our January. While our sales pace began to improve in the second half of February and into March, the slower activity in January impacted our quarterly closings as a large portion of our sales to be closed in the latter half of the quarter. The average sales price for production of homes during the quarter was approximately $345,000, a 2.9% increase compared to $335,000 in the first quarter of 2024. Due to the challenging environment previously discussed, net new orders for the first quarter was 296 homes, down from 384 homes in the prior year period. Backlog as of March 31, 2025, stood at 201 homes, representing approximately $75.3 million in value. Gross profit for the first quarter of 2025 was $14.1 million, down $2 million or 12.4% from $16.1 million in the prior year period. Gross margin improved slightly to 16.2% from 16%, driven by lower interest expense and cost of sales as a percentage of revenue, partially offset by elevated incentives and price discounting aimed at accelerating the sales of finished inventory. Adjusted gross margin was 18.8%, down from 20.4%, reflecting the elevated incentive cost and price reduction. We anticipate improvements in our margins throughout the year as our direct cost reduction efforts materialize into earnings savings and homes featuring our Fresh Floor plans start to comprise a larger share of our closings in future quarters. Selling, general and administrative expenses for the first quarter were $16.2 million, excluding approximately $2 million in noncash stock-based compensation expense, adjusted SG&A totaled $14.2 million or 16.3% of revenue. In December, we refinanced our standing convertible note debt, which reduced our total debt and lower our cash interest expense. The refinancing and lower balances on our Wells facility resulted in cash interest expense savings of approximately $1 million in Q1 compared to Q4 of last year. As of today, we have 50 active communities down from 63 a year ago. As Jack noted, the planned rollout of new communities in the second and third quarters is expected to provide a meaningful boost to our sales efforts. As of March 31, 2025, we controlled approximately 7,500 lots, which include a mix of owned, optioned and land banked assets, positioning us to drive future growth and capture market opportunities. We had approximately $86.9 million of liquidity and cash and availability on our credit facility as of Q1. As we look ahead, we remain focused on execution, while the spring selling season got off to a slower start, we're encouraged by the momentum exiting the quarter into April. We're adapting to shifting market dynamics, staying disciplined in our capital allocation and continuing to position UHG for long-term growth and value creation. That concludes our prepared remarks. Operator, please open up the line for questions.

Jack, Keith and I would like to thank all of you for joining us today. I want to thank our entire team for their commitment to our customers, our shareholders, our lenders and each other. We remain optimistic about the future of United Homes Group and look forward to updating you on our second quarter results later this summer. Thank you.