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Text: [Operator Instructions] For information on how to access the replay, please visit our website at mdcholdings.com.
These and other factors that could impact the company's actual performance are set forth in the company's second quarter 2020 Form 10-Q, which is expected to be filed with the SEC today.
It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures.
The combination of low interest rates, constrained existing home supply and a heightened interest in single-family home ownership has resulted in a very favorable environment for our industry.
Following a steep decline, marked by slower traffic and increased cancellations at the outset of the pandemic, we began to see order activity return to pre-COVID levels in May.
This momentum continued into June, with net orders eclipsing last year's June totals by 53%.
For the quarter, net orders were up 5%, given the uncertainties and sales obstacles we faced at the end of the first quarter.
The strong demand trends we experienced in the quarter were broad based, both from a buyer segment and a geographic standpoint.
The strongest part of the market continues to be at the more affordable price points, which has been a strategic focus of ours for some time now.
We're seeing an increased number of millennials who are entering their prime home-buying years, and this trend has only been accelerated by the pandemic.
The new home industry is also benefiting from market share gains versus the existing home market, as the combination of low existing supply and the increased preference for new construction has served as tailwinds.
Another driver of our order success has been our continued focus on a build-to-order model.
Even with a heightened sense of urgency to own a home, many homebuyers continue to prefer the flexibility of personalization that comes in a home built with their preferred finishes and selections.
We believe this is especially true for our core buyer demographic, who are looking not only for value but also a home that fits their needs.
The benefits of this strategy for MDC are that it allows for higher-margin revenues from our home galleries, reduced volatility in our results and proves a competitive advantage relative to spec-focused builders.
Our build-to-order operating model is also limits the need to use price discounts or heavy incentives.
In fact, in most markets, we have been actively raising prices and scaling back incentives due to the strong demand we've experienced.
Our homebuilding gross margin in the quarter increased to 20%, reflecting this pricing discipline.
In addition to maintaining price discipline, with respect to our homes, we also exercised cost discipline across our organization during the quarter, leading to a 90 basis points year-over-year improvement in our SG&A ratio.
This improvement can be attributed to the higher revenue we generated in the quarter, as well as certain cost reduction measures taken during this period of uncertainty.
In summary, I'm very pleased with our results this quarter, particularly in light of all that has transpired over the last four months.
Order activity improved as the quarter progressed, and we posted significant increases to both revenues and profits relative to last year.
Given these favorable market conditions, we are now targeting 8,000 home deliveries for the 2020 full year.
In addition, we ended the current quarter in great financial shape, giving us the financial flexibility to continue to invest in our business and pay the industry-leading dividend.
The current pandemic has far-reaching impact on how we live and work.
And I could not be more impressed on how our team members have adopted to and excelled in this new environment.
I am truly appreciative of all of their efforts.
Now I'd like to turn over to Bob Martin for more detail on the results of this quarter.
As you can tell from Larry's comments, we were pleased with our performance during the second quarter as the initial shock of the pandemic in March and April gave way to a renewed consumer interest in homeownership in May and June.
The combination of our diverse selection of affordable homes, combined with our increasingly distinct build-to-order business model, has proven to resonate with homebuyers.
Before getting into more detail on current market conditions and order trends experienced during the quarter, I would like to provide some commentary on what was ultimately a very resilient second quarter.
Net income increased 55% to $84.4 million or $1.31 per diluted share for the second quarter of 2020.
Both our homebuilding and financial services businesses contributed to these year-over-year improvements as pre-tax income from our homebuilding operations increased $23.3 million or 38%, and our financial services pre-tax income increased $14 million or 110%.
The increase in homebuilding pre-tax income was the result of a 21% increase in home sale revenues and a 160 basis point improvement to our homebuilding operating margins.
The increase in financial services pre-tax income was due to our mortgage business, which experienced higher interest rate lock volume, an increased capture rate and increased net interest income on loans originated during the quarter.
Our tax rate decreased from 26.6% to 24.4% for the 2020 second quarter.
The decrease in rate was primarily the result of a windfall benefit on equity awards as well as energy tax credits related to homes closed during the quarter.
For the third and fourth quarters, we currently estimate a 25% tax rate, excluding any discrete items.
Homes delivered increased 25% year-over-year to 1,900, driven by an increase in the number of homes we had in backlog to start the quarter.
The increase was slightly offset by a decrease in our backlog conversion rates due to construction delays in certain markets as a result of the pandemic.
The increase in units delivered was slightly offset by a 4% decrease in our average selling price to about $467,000.
This decrease was in line with our strategic focus on affordability as a percentage of our deliveries for more affordable product collections rose to 54% for the second quarter of 2020 versus 44% for the same period a year ago.
We are anticipating home deliveries for the third quarter of 2020 to be between 1,902 and 2,100.
Backlog conversion for the third quarter may be slightly lower than the third quarter of 2019 as a result of the significant increase in June orders compared to the prior year, which we are unlikely to deliver in the third quarter.
For the full year, we are estimating to deliver between 7,700 and 8,000 homes.
As previously mentioned, our gross margin from home sales improved by 70 basis points year-over-year to 20.2%.
Gross margins increased on both build-to-order and speculative home deliveries, driven by price increases implemented across the majority of our communities over the past 12 months.
It should be noted that during the second quarter of both 2020 and 2019, we recorded decreases to our warranty accrual, which positively impacted gross margins by 20 basis points in each period.
Gross margin from home sales for the 2020 third quarter is expected to again approximate 20%, excluding impairments and warranty adjustments, consistent with the 2020 second quarter.
We demonstrated solid operating leverage for the quarter as our SG&A expense as a percentage of home sale revenues decreased 90 basis points year-over-year to 10.4%.
Our total dollar SG&A expense for the 2020 second quarter was up $9.6 million year-over-year, mostly due to variable selling and marketing expenses that increased in line with the 21% increase in home sale revenues during the period.
Our general and administrative expense was up only modestly for the second quarter as increases in stock-based compensation and bonus expense, driven by strong operating results during the quarter, were partially offset by cost reduction measures implemented at the outset of the pandemic.
For the third and fourth quarter of 2020, we may see a significant increase to our general and administrative expense relative to the $40.4 million expense we just recognized in the second quarter.
This would be, in large part, related to an increase in stock-based compensation expense for performance share units, if market conditions and our performance remain strong.
We saw this type of increase in 2019 from the second to the third quarter based upon a significant acceleration in net order activity.
We may also see salaries and other compensation-related expenses rise based on additional headcount that may be necessary to facilitate growth.
The dollar value of our net orders increased 8% year-over-year to $1 billion.
Unit net orders increased by 5%, driven by a 2% increase in our monthly absorption rate to 4.2%, and a 2% year-over-year increase in average active subdivisions.
The average selling price of our net orders increased by 3% year-over-year, driven by price increases implemented over the past 12 months as well as a shift in mix to California, which has our highest average price.
On the next slide, we've provided some detailed information on the monthly pace of sales and cancellations during the second quarter.
As Larry noted earlier, we experienced a sharp rebound in order activity during the latter part of the second quarter, culminating with June net new home orders increasing 53% year-over-year.
We also saw the rate of cancellations decrease as the quarter progressed.
Some of the improvement is likely the result of pent-up demand after stay-at-home orders kept many buyers away from our communities.
However, other favorable demand drivers, such as low interest rates and constrained existing home supply, have played an equally important role.
We believe that these factors, combined with the recent migration away from expensive high-density urban areas, will continue to provide a tailwind for demand as we head into the second half of the year.
To that end, our third quarter sales have already started strong.
Based on the activity we've seen to date, we expect our July 2020 net orders to exceed our July 2019 orders by at least 50%.
We ended the quarter with an estimated sales value for our homes in backlog of $2.4 billion, which was up 23% year-over-year.
The average selling price of homes in backlog increased 3% due to price increases implemented over the past 12 months, decreased incentives and a shift in mix to California.
These factors were slightly offset by a shift in mix to lower-priced communities, consistent with our ongoing strategy of offering more affordable home plans.
With the uncertainty created by COVID-19, especially during the first half of the quarter, we approved only 1,244 lots for purchase during the second quarter of 2020.
This was a significant drop from each of the past four quarters.
However, even with the drop in lot approvals, our lot supply to end the quarter was 6% higher than at the same point in 2019.
Additionally, given the strong demand that we have seen in recent months, we have significantly accelerated our lot approval activity to start the third quarter.
We recognize that there are many uncertainties with regard to the pandemic and its ultimate impact on the U.S. economy, which have the potential to cause future disruption to our industry.
However, we believe that our strong balance sheet is built to counter such disruptions, if they do occur.
That said, we believe that MDC is well positioned for strong results in the second half of 2020, given an improved backlog, favorable industry trends and a strong strategic positioning.
Our build-to-order business model will remain a key fixture for our value proposition, providing a competitive advantage with homebuyers looking for a quality home, personalized to their unique preferences.
Most importantly, we remain committed to the safety of our employees, customers and subcontractors as we work to provide much-needed housing supply to families in the markets we serve.

user
compname announces q2 earnings per share $1.31.
q2 earnings per share $1.31.
qtrly home sale revenues increased 21% to $886.8 million.
qtrly average selling price of deliveries down 4% to $466,700.
qtrly dollar value of net new orders increased 8% to $1.04 billion.
sees home deliveries for 2020 q3 between 1,900 and 2,100.
sees full year 2020 home deliveries between 7,700 and 8,000.
qtrly dollar value of ending backlog up 23% to $2.37 billion.

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