United Homes Group - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue rose 15% year over year to $134.8M on 7% higher closings; diluted EPS was $0.01 vs $(1.38) in Q4 2023, aided by non-cash fair value movements and despite a predominantly non-cash $45.6M loss on debt extinguishment.
• Pricing pressure and elevated incentives weighed on profitability: gross margin fell to 16.2% (vs 18.5% LY) and adjusted gross margin to 18.1% (vs 21.8% LY); management cited mortgage buydowns costing ~5% of revenue in the quarter.
• Demand indicators strengthened: net new orders +19% YoY to 351; ASP of production-built homes was ~$324K (vs ~$320K LY) and backlog stood at 157 homes ($58.3M) at year-end.
• Balance sheet/cash flow catalyst: December refinancing is expected to reduce annual cash interest by ~$(4)M, convert debt to floating, and reduce dilution from the prior convert; adjusted book value was $96.7M at 12/31/24.
• No formal FY25 guidance; management highlighted cost-rebids and redesigned plans with gross margins “500+ bps” above trailing levels as potential margin inflection drivers through 2025; 11 new communities are planned in Q2’25 and 15 in Q3’25.

What Went Well and What Went Wrong

What Went Well

• Orders and deliveries accelerated for a second straight quarter: Q4 net new orders +19% YoY to 351; closings +7% YoY to 414; management emphasized competitive wins despite a challenging backdrop.
• Product refresh and cost actions: redesigned plans are producing gross margins “over 500 bps better” than trailing reported margin and comprised nearly all permitted starts since Nov 1, positioning for 2025 mix/pricing benefits.
• Capital structure improvement: December refinancing replaced 15% converts, cut subordinated debt by $10M to $70M, moved to SOFR+6.75–7.75% and is expected to lower cash interest by ~$4M/yr and reduce potential dilution.

What Went Wrong

• Margin compression: gross margin fell 230 bps YoY to 16.2% (adjusted GM down 370 bps to 18.1%) on elevated incentives, purchase accounting amortization, and seasonal competitive discounting.
• Incentive cost spike: mortgage buydown costs spiked after rate moves, with the 10-year jump pushing buydown costs to ~5% of revenue in Q4, pressuring unit economics.
• Starts and community count down: starts declined 26.5% YoY in Q4 as UHG paused to implement plan refresh; active communities fell to 46 at year-end (55 in Q3; 59 in Q2), creating near-term growth headwinds.

Transcript

Operator (participant)

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the United Homes Group Q4 2024 earnings call and webcast. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. At this time, I would like to turn the conference over to Erin Reeves McGinnis, General Counsel. Please go ahead.

Erin Reeves McGinnis (General Counsel)

Good morning and welcome to United Homes Group's Q4 of 2024 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 law. 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.

Jamie Pirrello (Interim CEO)

Thank you, Erin. Good morning, and thank you for joining us today as we review our results for the Q4 and full year of 2024. We will also highlight the strategic initiatives we're focusing on to enhance our financial and operational performance and scale our operations in key markets across the Southeast. I joined United Homes Group in the fall of 2024 and immediately set about determining what our company's strengths were and the areas in which we could improve. Over the last six months, I've learned that we have an incredible opportunity to build something great at United Homes Group.

We have many of the key elements in place for a successful production home building operation, namely a strong presence in several markets with great long-term housing fundamentals, a product focus that caters to the highest growth segments of the market, which are millennial and Gen Z buyers, and a land-light operating model that offloads much of the risk and upfront capital requirements associated with owning and developing land. These are essential building blocks for the kind of home builder we want to be: a high-growth, returns-focused builder with significant presence in the Southeast. One of the first things we did was to take a hard look at our existing product. After a thorough analysis of our sales pace, gross margins, and competitive environment, it became clear that our product had become stale or was missing the mark.

Beginning in the Q4, we set about updating our floor plans and refreshing our homes to be more in sync with the wants and needs of today's buyers. The initial response to our refreshed product has been very positive. We started permitting our refreshed product in November, and we have seen strong sales so far from these redesigned plans. We are selling a large number of refreshed plans as pre-sales, requiring significantly less discounting as we sell the homes before completion. As a result, we're seeing improved gross margins on our new plans as compared to our older product designs. Another area of opportunity was to improve our direct construction costs since our direct costs as a percentage of sales price were high compared to industry averages. We set about rebidding all of our direct cost categories with no less than three vendors for each.

To effectively compete and maximize gross margins, we must ensure we're getting the best price possible. This is an essential function for any business looking to keep costs down, improve profitability, and especially for an organization where familiarity and entrenched relationships can lead to costs drifting higher over time. Home building is a scaled business, and if you're not taking advantage of your size to lower costs, you're leaving money on the table. While we are still in the initial stages of this direct cost rebidding process, I can share that there have been significant wins due to this process. Our company and our industry face headwinds as we set about achieving our goals. We find the market to be competitive, with most builders sacrificing gross margin for volume. Persistently high mortgage rates continue to negatively impact affordability.

This has compelled us and the rest of the industry to use mortgage incentives to offset the higher financing costs and lower monthly mortgage payments. While this has proven an excellent sales tool when competing with the existing home market, it has also significantly affected our gross margins. Completed inventory continues to run high across the industry. Our competitors have been offering substantial price discounts to move completed inventory.

We are doing the same. We expect our rebidding process and new product designs to positively impact the pressure on gross margins from mortgage incentives and discounting. While there are a number of challenges causing uncertainty for our industry in the short term, we believe the long-term outlook for home building at United Homes Group remains positive. The supply of existing homes for sale remains below historical levels in our markets, while the shortage of new housing remains a positive for UHG.

We are in some of the best markets in the country in terms of job creation, immigration, and overall quality of life, all of which are critical factors that drive the need for new homes. To sum up, we are making progress on several initiatives that will drive revenue growth and improve gross margins, all leading to improved profitability. The market remains very competitive. 2025 is going to be a pivotal year for our company, and I'm excited about the opportunities ahead. With that, I'd like to turn the call over to Jack, who will go into more detail about our performance. Jack?

Jack Micenko (President)

Thank you, Jamie. Good morning to everyone. United Homes Group ended 2024 on a strong note, posting year-to-year growth of 7% for new home deliveries and 19% for net new home orders in the Q4. We successfully continued to reduce our inventory of H specs during the quarter, paving the way for a fresh start to the spring selling season and the further rollout of more of our refreshed product. Our teams did an excellent job closing homes in a timely manner. I want to thank them for their hard work and focus on getting people into their homes by year-end. New home starts declined 26% year-over-year in the Q4, partly as a result of our product redesign, but also as a result of a strategic shift back to a more balanced approach to our operations.

We believe the combination of improved cycle times and the opportunity to offer a degree of customization to our buyers has made the build-to-order model more attractive in today's market. While we've highlighted the improved gross margin profile of the refreshed product lineup to date, it's interesting to note that over half of the early sales of this refreshed product have come in the form of pre-sales, allowing us to build a backlog for coming periods. This should also have a positive impact on our margins going forward, given the stronger profitability associated with options and upgrades. Of course, we'll continue to have a number of specs in our communities for buyers looking for a quick move-in option.

Another highlight in the quarter was the capital markets transaction we executed in December, which refinanced the outstanding debt on our convertible notes, thereby reducing the company's leverage by $10 million and lowering our cash interest expense by 320 basis points. A potential dilution from the convertible note on our share count was also reduced by about 30%, and we gained a valuable strategic shareholder in Kennedy Lewis as a result of the transaction. We remain committed to improving our balance sheet, so we continue to execute on our long-term strategic initiatives. Our community count fell to 46 active communities at year-end. While we're happy to close out communities, we know our growth depends on increasing our community count going forward. Our sales pace, our sales per month per community, increased to 2.5 in the Q4.

We have 11 communities planned to open in the Q2 of 2025 and another 15 planned to open in the Q3. As for some preliminary commentary on the Q1 to date, consistent with what you've heard from others, our January net new orders were lower than last year. However, February bounced back, and the first week of March has been consistent with trends seen in the back part of February. Unusually heavy snow across all of our markets during the third week of January impacted traffic, which in turn impacted our sales activity. Unfortunately, with our high backlog conversion rate each quarter, a softer January will impact March closings. Overall, I'm pleased with the steps our company has taken to build on the foundations that are already in place and to address the areas where we can improve.

I agree with Jamie that United Homes Group is in a great position to capitalize on the strong housing fundamentals in our markets and really scale our operations throughout the Southeast. We're in an enviable position of having essentially all of our land controlled by option agreements and have set the course for better profitability through the redesign of our product, the cost savings initiatives we've implemented, and improvements to our capital structure. As a result, we're optimistic about the long-term outlook for our company. With that, I'd like to turn the call over to Keith, who will provide more detail on our financial results. Keith?

Keith Feldman (CFO)

Thank you, Jack and Jamie, and good morning. For the Q4 of 2024, net income was $0.7 million, which included a change in fair value of $38 million, primarily related to the accounting for potential earnout, which will fluctuate on our financial statements each quarter based on our ending stock price. The earnout will be settled exclusively in common shares upon reaching certain stock price hurdles and will never result in a cash expense for the company. Q4 net income also included a reported loss on the extinguishment of our convertible notes, totaling $45.6 million, which was predominantly non-cash in nature since the loss amount was settled in equity. The benefits include reduced balance sheet and cash flow leverage, converting our entire debt capital structure to floating rate, and lower cash interest expense of approximately $4 million per year based on current rates.

For the year-end of December 31, 2024, net income was $46.9 million, which included a loss on extinguishment of convertible notes of $45.6 million and a change in fair value of $88.7 million, predominantly related to the accounting for potential earnout liabilities. Revenue for the Q4 of 2024 was $134.8 million, compared to $116.8 million for the Q4 of 2023. Revenue for the full year of 2024 was $463.7 million, up from $421.5 million in 2023. Home closings during the Q4 of 2024 were 414, compared to 387 homes in the prior year's quarter. For the full year, home closings increased to 1,431 homes, up from 1,383 homes in 2023. Average sales price during the Q4 of 2024 was approximately $324,000 for 413 production-built homes, compared to approximately $320,000 in the prior year for 338 production-built homes.

Net new orders for the quarter were 351 homes, up from 294 homes in the prior year period. For the full year, net new orders increased to 1,399 homes, up from 1,296 homes in 2023. Backlog at the end of the Q4 stood at 157 homes, valued at approximately $58.3 million. Gross profit and gross profit margin for the Q4 of 2024 were $21.8 million and 16.2%, respectively, compared to $21.6 million and 18.5% in the prior year period. Adjusted gross profit margin was 18.1% for the quarter, down from 21.8% in Q4 2023. The decline reflects headwinds from a competitive pricing environment and the continuation of strategic sales incentives to drive volume and optimize inventory turns. For the full year, gross profit was $79.8 million compared to $79.7 million in 2023.

Gross profit margin declined to 17.2% from 18.9% due to higher cost of sales, reflecting elevated incentives and amortization of purchase price accounting adjustments. Adjusted gross profit margin for the full year was 19.9%, down from 21.4% in the prior year, as the company remained focused on maintaining competitive positioning in a dynamic market. SG&A expense in the Q4 of 2024 was $19.3 million. After adjusting for one-time transaction fees, severance expense, and non-cash stock-based compensation, adjusted SG&A was approximately $17.7 million, or 13.1% of revenue for the quarter. For the full year, SG&A expense was $74.7 million, and adjusted SG&A expense was $64.5 million, or 13.9% of revenue. As of today, we have 46 active communities, down from 61 at the end of 2023.

As of December 31, 2024, we control approximately 7,700 lots, which include a mix of owned, optioned and land banked assets, positioning us to drive future growth and capture market opportunities. We currently have approximately $60 million of liquidity in cash and availability on our credit facility. We remain focused on execution, adapting to evolving market conditions, and positioning United Homes Group for continued success in 2025 and beyond. That concludes our prepared remarks. Operator, please open up the line for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press Star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press Star 1 again. We'll pause just a moment. Again, that is Star 1 for questions. At this time, we have no questions in the queue. I would like to turn the conference over to Jamie Pirrello for closing remarks.

Jamie Pirrello (Interim CEO)

First of all, all of us at UHG would like to thank you for joining the call. We look forward to talking with you here at the end of the Q1, which is quickly approaching. We want to just, again, thank you for your support and for all the effort and the work of our hard people in what they're accomplishing today at UHG. Thank you and take care.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect.