With The Ryland Group's peers--at least the ones that have reported thus far--posting positive year-over-year order trends for their fiscal first quarters, CEO Larry Nicholson spent a lot of time during the company's earnings call Thursday explaining why his company's results ran countertrend. The California-based company's new orders slipped 13.4% during the quarter to 1,167 units from the same period a year ago, as new order dollars also fell 12.7% to $276.1 million, giving analysts reason enough to question whether the company would return to profitability in 2010. (For full earnings results, click here.)
Nicholson's response was simple: patience.
The first thing Nicholson noted as a driver of the company's relative order underperformance was a difficult set of comps from last year. He noted that last year's new order numbers were inflated by a large number of spec sales, which ultimately negatively affected margins. So, while the volumes from last year looked better, he considered them essentially lower-quality sales because they were less profitable.
Another reason for the order drop-off was the relative ineffectiveness of the tax credit. Contrary to expectations, the impending expiration of the extended federal home buyer tax credit April 30 did little to create urgency for buyers during the quarter, he said.
"The tax credit didn't translate into a particularly strong start to the selling season, as we had all hoped," said Nicholson.
However, Nicholson noted that of the business the company's divisions wrote during the quarter, most were in dirt sales rather than spec sales, which he said he considered a good thing. "It's positive in the fact that we don't think there'll be a big drop-off when the credit expires," he said.
The third big thing on which Nicholson pinned the company's order falloff was a 29.9% cut in actively selling communities from the prior year. With fewer stores open, the company struggled to maintain volume even as absorptions per community climbed from 1.7 homes per community per month in 1Q2009 to 2.2 homes in 1Q2010.
At quarter's end, the company counted 177 actively selling communities.
But that trend is in the process of reversing as the company is in total reload mode, putting more new lots in new communities under control in 1Q2010 than all of 2009.
During the quarter, the company opened 13 new communities and closed out 18 existing communities. Over the next two quarters, that activity will go into overdrive as management has plans to open 60 new communities. By the start of 2011, about half of the company's community count will be 2010 vintage communities, accounting for an expected 45% of sales. Currently, the company's newly opened communities account for about 10% of total sales.
Moreover, management stated that as new communities make up a larger portion of the community mix, the company's margins should be "incrementally up slightly" through the rest of 2010. At quarter's end, Ryland's margins were 13.9%, excluding charges, down sequentially from the previous quarter (although up year over year) and well below peers' margins.
This combination of lower sales volume and weaker margins led analysts to question both the company's pricing strategy and incentive programs.
Ryland's average selling price for the quarter was $245,000, relatively flat compared with 1Q2009 and up $8,000 from its fourth quarter. But when asked if the company's strategy to "hold the line," so to speak, on pricing negatively affected order volume, Nicholson said no.
"We don't think we lost that many sales because of price," he said.
More likely, the company's average price trends reflected both more price stability in the market and a greater number of sales coming from more expensive markets, particularly in the Northeast. Roughly 40% of the company's divisions reported year-over-year price increases while 80% saw sequential price increases from the fourth quarter.
As far as incentives are concerned, management said the company continued to pare back on that front. However, Nicholson was reluctant to say that the company would avoid upping incentive packages in the post-tax credit world.
"We'll let the market tell us what to do in the near term," he said.
But the question of when the company's earnings would cross the threshold between red and black remained top of mind for analysts, as they asked management for a so-called "break even" volume number, meaning the minimum number of homes the company would have to close, based on current margins, to essentially stop losing money.
Management declined to give a specific volume figure, but CFO Gordon Milne stressed that the company's return to profitability hinged on the rollout of new communities, which were yielding margins that were running, on average, 400 basis points higher than existing communities.
"With our SG&A, I think we can make money at our current volume with the new communities," he said.