The Ryland Group's CEO Discusses Q2 2012 Results - Earnings Call Transcript

The Ryland Group Inc., (RYL)

Q2 2012 Earnings Call

July 26, 2012 12:00 pm ET

Executives

Drew Mackintosh - VP, IR

Larry Nicholson - CEO

Gordon Milne - EVP & CFO

Dave Fristoe - SVP & Controller

Analysts

Michael Rehaut - JPMorgan

Alan Ratner - Zelman & Associates

Adam Rudiger - Wells Fargo Securities

Joel Locker - FTN Securities

Anto Savarirajan - Goldman Sachs

Megan McGrath - MKM Partners

David Oppenheim - Credit Suisse

Nishu Sood - Deutsche Bank

David Goldberg - UBS

Alex Barron - Housing Research Center

Ken Zener - Key Bank

Paul Robusky - ISI Group

Buck Horne - Raymond James

Joshua Pollard - Goldman Sachs

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Ryland Group Second 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, today’s call is being recorded.

I would now like to turn the conference over to your host Mr. Drew Mackintosh. You may begin.

Drew Mackintosh

Thank you. Good morning and welcome to Ryland’s second quarter 2012 earnings call. Today’s call is being transmitted live over the Internet and can be accessed through Ryland’s Investor Relation section of the website at www.ryland.com.

In a moment I’ll be turning over the conference call to Larry Nicholson, Ryland’s Chief Executive Officer. Also joining us today are Gordon Milne, Executive Vice President and Chief Financial Officer; and Dave Fristoe, Senior Vice President and Controller.

Before we begin, please be aware certain statements in this conference call are forward-looking statements based on assumptions and uncertainties that include general economic, business and competitive factors as well as the factors set forth in the company’s press release. These factors and others may cause actual results to differ from the statements made in this conference call.

With that out of the way, I’ll now turn the call over to Larry Nicholson.

Larry Nicholson

Thanks Drew. Good morning and thank you for joining us today as we go over our results for the second quarter of 2012. yesterday afternoon we reported fully diluted earnings of $0.14 for the period ending June 30 making it the first time in six years that we reported a profit in the second quarter.

Given the operating results we posted this period we are excited about what lies ahead. Our sales pace accelerated in many of our markets resulting in a net order growth of 42%, homes in backlog rose by 47% giving us the confidence in the revenue and the closing results that we will report in the third and fourth quarter of this year.

With a view to the future of our company our land activity picked up significantly in the quarter, most notably we announced the purchase of the assets that were operations of Timberstone Homes in Charlotte and Raleigh.

Our cost of capital declined, thanks to a successful placement of $225 million in convertible senior notes. These accomplishments combined with the improvements we've seen in the broader housing market lay the foundation for better operizational results in the second half of 2012.

We continue to execute on our business model and emphasize return on capital, geographic diversity and a decentralized approach. We believe that this strategy will lead to above average returns for our company and our shareholders as the housing emerges from one of the worst downturns in history. We are excited about the direction in which the housing market and Ryland are headed.

With that here are the details for the quarter.

Revenues from Homebuilding segment came in at $285 million, a 39% increase over the second quarter of 2011. Our north, south and Texas regions each contributed around $80 million in revenues to the total while the west generated a little over $40 million. The west contribution to both revenues and profits should rise going forward, thanks to our reinvestment in the region and the recovery of several of the western markets have experienced over the last few months.

Unit closings increased 36% in the quarter to a total of 1115, and the average closing price grew 2.4% to $254,000. average homebuilding gross margins expanded 180 basis points to 18.7%, thanks primarily to the benefit of higher closing volume on the fixed portion of our cost of sales and the emergence of better pricing power in several markets. Sales incentives as a percent of homebuilding revenues were 10.4% compared to 11.6% for the same period in 2011.

We continue to raise prices and scale back incentives in communities with a sales base and traffic levels allow us to do so. However, the appraisal process oftentimes inhibits our ability to raise them as aggressively as we would like.

Revenue growth once again outpaced SG&A leading to another reduction in SG&A as a percent of sale ratio. Including corporate expense SG&A declined 140 basis points compared to last year coming in 16.3% of revenues. We expect that number to decline further as our closing volumes increase.

Net home sales for the quarter were 1398 homes, a 42% increase from the second quarter of 2011. We experienced robust sales growth in each of our regions with particularly strong growth in the west where orders rose 242%. Sales growth in the west region was added by a 28% increase in average community count as compared to last year. Excluding the west, sales in the remaining three regions averaged 26% over last year.

An overall improvement in the absorption rate to 2.2 per month was the main factor behind the pickup in sales as active community account only grew by 4%. Divisions that experienced above average absorption rates during the quarter were Las Vegas, Southern California, Washington DC, and the twin cities. The cancellation rate remained steady at 20% slightly lower than the 21% for the same period last year.

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