Beazer Homes USA Q4 2023 Earnings Call Transcript

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November 16, 2023

There are 7 speakers on the call.

Operator

Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the 4th Quarter and Fiscal Year Ended September 30, 2020 3. Today's call is being recorded and a replay will be available on the company's website later today. In addition, presentation slides intended to accompany this call are available within the Investor Relations section of the company's website at www view. Beazer.com. At this point, I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.

Speaker 1

Thank you. Good afternoon, and welcome to the Beazer Homes conference call for our Q4 full year of fiscal 2023. Before we begin, you should be aware that during this call, we will be making forward looking statements. Such statements involve known and unknown risks, uncertainties and other factors described in our SEC filings, which may cause actual results to differ we do not undertake any obligation to update or revise any forward looking statements whether as a result of new information, future events or otherwise. New factors emerge from time to time and it is simply not possible to predict all such factors.

Speaker 1

Joining me is Alan Merrill, our Chairman and Chief Executive Officer. Today, Alan will discuss highlights from our fiscal 2023 results and update on our multiyear goals, how we are navigating the affordability challenges for homebuyers and our growth expectations for fiscal 2024. I'll then provide details on our fiscal 2023 full year results, updates on our cycle time and cost reduction initiatives, additional details on our expectations for the Q1 and full year and end with a look at our balance sheet and book value. We will conclude with a wrap up by Alan. After our prepared remarks, we will take

Speaker 2

Thank you, Dave, and thank you for joining us on our call today. I'm extremely proud of our team's efforts and results for fiscal 2023. We overcame difficult sales environment in the Q1 of last year, which allowed us to make significant progress against our balanced From an operational perspective, we positioned ourselves for growth by increasing our community count and controlled lot position. We We reclaimed more than 2 months of construction cycle time and we expanded our leadership in energy efficiency. We were also recognized as a top workplace reflecting our efforts to sustain an exceptional level of employee engagement.

Speaker 2

Against a very difficult interest rate and housing backdrop, FY2023 challenged us in many ways and we came through in very good shape. In the middle of fiscal 2023, we laid out 3 multi year goals intended to define and are centered around community count growth, balance sheet strength and the energy efficiency of our homes. As As it relates to our growth, we ended the year with 134 active communities, up 9% versus the prior year as we successfully activated 60 new communities. In FY 'twenty four, we expect year over year growth in our active community count each quarter. 26.

Speaker 2

As it relates to our balance sheet, we finished the year with our net debt to net capitalization ratio at 36%, representing a 9 point decline versus the prior year. Our profitability expectations for fiscal 2024 should allow us to 5. We remain the only public builder with a commitment to building 100 percent of our homes to the Department of Energy's 0 energy ready standard. Will meet the DOE standard, positioning us to have every home we start 0 energy ready by the end of 2025. We remain confident in the longer term supply and demand dynamics that underpin our strategy and our industry.

Speaker 2

But affordability has been, is and is likely to remain the central challenge for new home sales. Part of the challenge is consumer psychology with buyers daunted by monthly payments larger than they're accustomed to. But the other part is math. Many and closing costs, which often include buy downs. This allows different buyers to make different choices.

Speaker 2

Confirms this. As the 30 year mortgage rate moved from about 7% at the end of June to just over 8% in October, our contribution towards closing costs increased about one point on new sales. As part of our mortgage choice program, our lenders also contribute to closing costs and rate buy downs, which leverages our contributions. Of course, our mortgage strategy is about more than just buy downs. It's about choice.

Speaker 2

We have multiple choice lenders available to provide loan estimates to every buyer, which incentivizes our lenders to compete on loan programs, closing costs, buy downs and service levels in addition to rates. We have 2 other differentiators for homebuyers, both of which directly target affordability concerns. Surprising performance encompasses our construction quality and energy efficiency efforts with measurable monthly savings on utility bills for our buyers. Choice Plans enables buyers of to be built homes to select floorplan elements to match their lifestyle at no additional cost. We are laser focused on affordability and believe we have created a differentiated strategy to address it.

Speaker 2

While the year ahead undoubtedly holds both opportunities and challenges, we continue to expect growth on many fronts.

Speaker 1

3. Thanks, Alan. I'm going to focus my comments this afternoon on our annual results. You can find our detailed 4th quarter performance in our press release. For the full year, we generated an average pace of 2 point 26 sales per community per month with a cancellation rate of 20%.

Speaker 1

Homebuilding revenue was $2,200,000,000 Impairments and abandonments was 23.1%. This was the 2nd highest annual gross margin over the last 10 years. SG and A as a percentage of total revenue was 11.5% as we continued to invest in our growth. This all led to adjusted EBITDA of $272,000,000 Interest amortized as a percentage of homebuilding revenue was 3.1%, flat compared to the prior year. Our GAAP effective tax rate was 13.1 $2, as we benefited from energy efficiency tax credits.

Speaker 1

This led to net income of $159,000,000 We set forth cycle time and cost reduction objectives as we targeted regaining ground loss during COVID. I'm happy to report we made significant gains on both fronts during the year. In the 4th quarter, Cycle times on closings were down more than 2 months versus the prior year. In fiscal year 2024, we expect further improvements as we drive cycle times closer to pre Turning to cost reductions, we are pleased with our ability to recognize significant savings in the back half of the year, primarily through lower lumber costs. This contributed to gross margins increasing sequentially from Q2 through Q4 on an average sales price that was declining primarily due to product and feature changes implemented to address affordability.

Speaker 1

Looking forward to the fiscal Q1, quarter to date sales are up year over year Since today, it does not assume this will translate into a meaningful improvement in sales pace this quarter. We are currently expecting at least 650 sales, which we up more than 30% off last year's very low base. Our ending active community count should be flat sequentially and up 10% year over year. On the income statement, transformer issues are likely to adversely impact our conversion rate as we anticipate having about 50 finished homes awaiting power at quarter end. We still expect percent.

Speaker 1

We have a conversion ratio above 45% as we benefit from improved cycle times resulting in year over year revenue growth. Our ASP should be around $510,000 We expect adjusted homebuilding gross margin to be 23% or higher. Our absolute dollars spent on SG and A should be up approximately $2,000,000 versus the same quarter last year. We expect this to result in adjusted EBITDA around $40,000,000 Interest amortized as a percentage of homebuilding revenue should be in the low 3s and our effective tax rate should be approximately 11% as we continue to benefit from energy efficiency tax credits. 5, we expect to spend at least $700,000,000 on land acquisition and development as we position for future growth.

Speaker 1

We are targeting double digit growth in community count by year end. Revenue growth will be a result of higher community count and year over year gains in backlog conversions. This should more than offset a decline in our ASP, which we anticipate to average $500,000 for the full year. We expect to generate adjusted homebuilding gross margins in the range of 22% to 23% with a large share of new communities in 3. Our effective tax rate should be near the midpoint of the 15% to 20% range we provided during last quarter's call.

Speaker 1

Taken together, we expect to generate double digit returns and continue to grow book value significantly. Achieving our target for double digit returns would lead our book value per share over $40 by the end of the fiscal year. The chart on Slide 15 shows the progress we've made thus far in growing our stockholders' equity, having more than doubled our book value since the end of fiscal year 19. At the same time, the quality of our book has improved as our DTA as a percentage of book has gone from about 40% 3 years ago to nearly 10% at the end of this year and will continue to decline. Reducing our net debt to net cap translated into net debt to LTM adjusted EBITDA of 2.3 times.

Speaker 1

Our 2025 senior notes represent our nearest maturity and we anticipate using a combination of repayment and refinancing to address it. Subsequent to the end of the quarter, there were 3 noteworthy developments. First, we expanded our revolver commitments to $300,000,000 2nd, Moody's Investor Services increased our rating from B2 to B1. And finally, we repurchased $4,000,000 of our 2025 senior notes bringing the total outstanding principal below 200,000,000 3. With that, I'll turn the call back over to Alan.

Speaker 2

Thank you, Dave. 2023 was a highly successful year for the company. We overcame the challenges associated with much higher mortgage rates and delivered excellent financial and operational results. Equally important, we for growth across most financial metrics. Looking beyond this year, we have provided investors with 3 specific multiyear goals to track our Progress, growing our community count, strengthening our balance sheet and extending our leadership in building energy efficient homes.

Speaker 2

I'm confident that we have the team and the resources to create growing and durable value for our stakeholders in the years ahead. And with that, I will turn the call over to the operator to take us into Q and A.

Operator

Thank you. We would now like to begin the question and answer portion of today's conference. Our first question comes from Julio Romero from Sidoti and Company. Please go ahead.

Speaker 3

Thanks. Hey, good afternoon, Alan and David.

Speaker 1

Hey, Alim. Hey, Alim.

Speaker 3

Hey. So, it was impressive to see that 42% year over year jump in land investment in the 4th quarter. You talked about the full year expectation, I believe about $700,000,000 Just how do you expect that to trend from a cadence perspective throughout the year? And how much does the reduced construction cycle times you've achieved to free up some free cash flow for that increased land spend?

Speaker 1

Julio, I think we'll probably avoid talking about the cadence on land spend at this point in the year. It's still a little bit early. Obviously, we've got our pipeline in front of us and we talked about kind of what we expect to spend for the full year. I would tell you the increase in The cash flow, frankly, does help, but we have plenty of liquidity on the balance sheet. You can see we ended the year with more than $600,000,000 of liquidity.

Speaker 1

So I think the other thing, Julio, we're looking at now and you can kind of look at what we did in 2023. The The spend in 23 was relatively back loaded to the 4th quarter and we talked about that on previous calls. We spent time early in Q1 renegotiating land deals and the impact of that was better terms and better deals in many cases, but it also pushed land spend largely into Q4 and you 2. To the acceleration that we had. That shouldn't frankly be the case in 2024.

Speaker 1

We should have land spend more evenly distributed quarter to quarter. But I don't want to get too far into the

Speaker 3

That's fair. And I appreciate the color you gave there for sure. And then just Maybe if you could speak to you obviously have your expectation for community count ramp up. Maybe can you speak Speak to the confidence in that community count ramp you've outlined, and that path for growth. And while certainly mortgage rates will have an effect, Maybe just talk about how Beazer might be on a relative basis a little bit less affected than others?

Speaker 2

Well, sure. I'll take a stab at it and Dave will fix it up, Julio, I think that during 2024, we feel very confident about the ramp. Those are deals that are locked and loaded, under development And they're going to get to the market this year kind of regardless of where rates are. A lot of 25 4. Clearly, we've got some discretion.

Speaker 2

If we decided that things were really tough, we could slow 4? Slow up a little bit, but we've got the owned and controlled lot position to have multiple years of community count growth. So what we committed to last year, we're still on that track. In In terms of being in a little different position and look, sales this week, this month, this quarter, this 6 months has an influence on land activity. But you know there's a 2 year or so latency between buying a deal and activating a deal.

Speaker 2

And so those things are always going to be a little bit, asynchronous. From a sales perspective, our view is pretty clearly that having mortgage choice and surprising performance and Choice Plans gives us ways of meeting the customer where they are from an affordability standpoint and trying to find ways that they can get into the home as opposed to having to compromise. But that's a little different context than the cadence of community count growth Because the community count growth for 24 decisions we made in 2021, 2022 and 2023.

Speaker 3

Very good. I'll pass it on. Thanks very much.

Speaker 4

Thank you, Liam.

Operator

Next, we'll go to the line of Alan Ratner from Zelman and Associates. Please go ahead.

Speaker 5

Hey, guys. Good afternoon. Good afternoon, Alex. Congrats on all the progress this year.

Speaker 2

So would love to drill in first on just kind of

Speaker 5

some The more recent commentary you had, which I appreciate the color there. So if I look at the guidance and I fully appreciate You're extrapolating out maybe a tougher few weeks here, but 650 orders would be down about 35 sequentially, that's much, much more severe than you guys typically see in your fiscal Q1. And you mentioned 100 basis point increase, I believe, in incentives for October. We've heard things from other builders kind of similar trajectory there. So how are you thinking about that interplay between kind of the between kind of the current incentive environment, maybe what some of your competitors are doing versus the order side, because that seems like it's a pretty significant drop off.

Speaker 5

My interpretation is maybe you guys are taking a bit of a back seat towards the calendar year end companies that might be a bit more aggressive in the near term.

Speaker 2

Well, there's a lot in that question, Alan, and you're right on just about every front. For sure, this is a strange Time of year, dealing with November December year end companies that have big spec positions and And they're trying to make not just sales, but closings in a relatively compressed period of time. And we typically lay a little bit lower during what is our fiscal first quarter and try not to get caught up in it. So that is the case, but that's the case every year. It is the case this year.

Speaker 2

I think It's also true that there's just been so much volatility in mortgage rates in the last 60 days. I mean that run up to 8% and then the easing, There is no question that run up to 8 affected traffic and it affected sales. Mid October into the early part of November 4. It wasn't great. But it's also true that what's happened in the last 10 days has definitely stimulated a level of We weren't seeing 3 or 4 weeks ago.

Speaker 2

So we find ourselves at sort of an awkward point for the earnings call because I could feel really good 7 days where I can look at the last month or 2 and say, well, it's sort of mixed. Or as you did, you can look at it over years and look at, well, What's the normal sort of progression? So I think we've given a fairly cautious estimate of where 20. Sales may land in the Q1. And it's influenced a little bit by what you said.

Speaker 2

I don't think we're in a where we feel like we have to go chase unit activity right now. We've got compressing cycle 20 times working in our favor. We've got a rock solid balance sheet. We've got a lot of runway left in the fiscal year. So this just doesn't feel like a window where we needed to win the day, win the week in order to set ourselves up for the year.

Speaker 2

So I've touched on 3 or 4 different ideas there, but I mean each of them sort of come back to we are definitely not giving a guide on orders It's super ambitious. We're giving a guide that's very rooted in some of the tougher weeks of the last 2 months.

Speaker 5

You answered every part of my multipart question, Alan. So thank you for that. Bren that you guys have, there's a lot of focus being spent on mortgage rate buy downs right now across the industry. Other homebuilders devoted a lot of time on their calls talking to their national programs they're offering, what the exact rate is. And I know your situation is different.

Speaker 5

So is there any way

Speaker 3

for you to give us

Speaker 5

a little bit of data or insight into kind of what the average Into a rate buy down, just to kind of give us a little bit of a comparison point to where you guys stack up versus the rest of the industry?

Speaker 2

Yes, I can give you a little bit of color. I can't give you the same granular data because obviously we don't have a mortgage company. But Couple of interesting things, I think. First of all, we are obviously well aware that many Competitors offer on a finite number of home for a short period of time, a specific incentive in their mortgage rate. We We can operate a little bit differently, which is the community in the home.

Speaker 2

Now let's talk to 2 or 3 of our choice 20. And what's fascinating is talking to our sales consultants and actually personally talking to some of our buyers, they go through a fairly elaborate and it's maybe an elongated sales cycle, but they go through a long process Really thinking about, hey, do I want the 321? Do I want a permanent buy down? How do I feel about where rates are going to be in the future? Importantly, can I qualify at the fully indexed rate?

Speaker 2

So a temporary buy down is really the focus I want to save the cash or am I more interested in the permanent. And I think seeing different programs And different offerings from different lenders and each lender knows that other lenders are also talking to that buyer. It isn't as simple as, hey, we have an X percent rate on this home for that price. It is more dynamic than that. But what ends up happening as a result is I think we get customers feeling a little bit more comfortable that they're not getting jammed and they're not missing something.

Speaker 2

It's not like, gosh, there was an obvious trick to the whole thing that we didn't understand because they're getting that transparency across multiple lenders. 5? I can tell you that more of our buyers opt for permanent buydowns than temporary buydowns, a larger share 2, but I can also tell you that in that October time period as rates pushed up 2 and through 8, we actually saw that start to move more toward For the temporary buy downs from which I can surmise that buyers had a more higher degree of confidence that this is a little bit of a It's not a top, it's a high watermark or a higher watermark and there's a higher probability I'm going to be able to refinance this rate. And So the temporary makes more sense than the permanent buy down. But I mean that's kind of the type of thing I can tell you getting Into specific rates, I mean for sure, I mean we can we've got rate sheets from all of our lenders and we can talk about what a quarter point on a permanent buy down Relates to, but then what's the credit characteristic of that buyer?

Speaker 2

What's the loan to value? I mean there's just too many variables to get into it at that granular So, Levol, I will just tell you, I am so happy every day to know that every one of our buyers is seeing multiple proposals And they go back and forth. Hey, show me your 321s. All right. Show me your 1 by 3.

Speaker 2

Show me your 1 by 2s. Show me what your permanent would be. Well, hey, I got a Better permanent over here. Can you match this permanent? That dynamic is awesome in an environment like this.

Speaker 5

Excellent detail. Thank you for the time as always. Appreciate it. Thanks, Alan.

Operator

Next, we'll go to the line of Alex Rygiel from B. Riley. Please go ahead.

Speaker 4

Thank you and good evening gentlemen. Very nice quarter. Thanks, Alex. Your ASPs have been Trending right around this $510,000,000 level. Appreciate the thoughts about the Q1.

Speaker 4

But as we look beyond that, is there any thought For commentary that you can add to directionally where that ASP could go a little bit further out based upon the new communities That you're bringing on and whether or not there could be a mix shift there?

Speaker 1

Alex, it's Dave. I don't really want to go beyond 2024 and 5. I have initial conversation that we've had on that. But I remind you in the prepared remarks we talked about kind of a full year ASP. And frankly that's down from where it is right now, around $500,000 Really a lot of that is kind of choices we're making, right?

Speaker 1

It's what we're offering. It's community product choice, it's included features. So it's not the same assumption as you would imagine on price declines or lower prices, but rather choices we're making to address 4. Affordability and still keep value high for the buyer.

Speaker 4

That's very helpful. And then you talked about in the past 3. Some certain geographies that maybe you had an interest in accelerating growth in, I think Florida might In one of the states. Can you give us a little bit of an update there?

Speaker 2

Sure. First of all, we love our footprint. We can grow in Every single market that we're in, I don't think people love it when I say dump taxes, but I say it anyway. We paid them in a That would be where the jobs are. Jobs are in Florida, jobs are in Atlanta, jobs are in the Carolinas, jobs are in Nashville, jobs are in Indy.

Speaker 2

I mean those are places that we see See great growth opportunities. And then of course, the West has been very good to us. Phoenix is obviously a little It's a bit more challenging. It's a tough land market. There are water issues.

Speaker 2

I don't think that's going to be a big growth engine. I do think our business will become a bit bigger there. But I I think the larger amount of growth for us is going to be in Texas. Our recently acquired San Antonio business will play a big Roll on that Florida and up the East Coast.

Speaker 4

Very helpful. Thank you very much.

Speaker 1

Thanks, Alex.

Operator

Thank you. And currently our last question in queue is from Jay McCanless from Wedbush. Please go ahead.

Speaker 6

Hey, guys. Thanks for taking my question. So when I look at the fiscal 2024 guidance On Page 14, it looks like the adjusted gross margin range, you all are thinking it's going to be down anywhere from 50 to 110 points versus what you put up in fiscal 'twenty three. I guess, could you talk about, 1, what type of mortgage rate assumptions are built into that? And then maybe 2, is that a function of some of the discounting and price cuts that we're seeing from some of your competitors right now?

Speaker 2

So a few things going on there, Jay, and I think Dave and I both have things to say. The first thing is it assumes and Dave's comments made this point. We assume that rates are roughly in the range where they are now. Call it a quarter of a point, 3 eighths of a point either way. We don't assume that they're falling.

Speaker 2

We don't assume that they're going to be sustainably over 8%. So that's kind of the framing for how we thought about our full year guidance. If you You think about the margin, it's actually got less to do with discounting and it has more to do with mix shift. I think either Dave or I said in our comments, we opened 60 communities In 2023. We're going to open a bunch of communities in 'twenty four.

Speaker 2

So the mix of communities that we have generating closings in 'twenty 20 4 is going to be tilted to a very young vintage and it's been our experience and I think you can channel check this across the industry. You're typically not getting your highest gross margins out of a community in the 1st 3, 6, 9 months. So I think that's a significant factor In the margin guide, it does reflect a little bit of the increase that we've had since June in the financing costs, but it's not like we've leaned into that and assume that that gets worse. It's more kind of a normalized at the current level mortgage rate and it's a mix issue are really driven by that mix of new communities. And I have to say, I'm really excited to have a bunch of new communities that were tied up, renegotiated, brought to the market in a much For interest rate environment than when they were originally envisioned able to generate margins that are above our 10 year average.

Speaker 2

Like that's a pretty good place to be.

Speaker 6

Absolutely. I guess the second question I For homes that you're selling now that still need to get finished or even just a straight up to be built, I guess what's the range of delivery times that you're giving out now? And I know you said cycle times are down 2 months In the Q4, I guess, from what you're selling now, where do those cycle times compare to where they were pre COVID?

Speaker 2

We're still probably 30 days wide of the pre COVID, and I'd like to get about half that back this year. I don't I don't know that we'll get it all back because I think there's some structural delays built into the municipal processes. They haven't staffed back up. The flip side is there's not a lot of multifamily or commercial start activity. So I think on the trade Number of crews, quality of crews, I think that's where the opportunity is.

Speaker 2

But targeting to get back at least a couple of weeks this year.

Speaker 6

Okay. That sounds good. Thanks for taking my questions.

Speaker 2

Thanks, Jay.

Operator

Thank you. And our final question in queue comes from Alex Barron from Housing Research Center. Please go ahead.

Speaker 4

Yes, thank you. Yes, I wanted to ask about the The DTA and expected tax rate, maybe Dave, Do you still expect it will take a few more years before you completely use this up? In other words, I'm trying to figure out if the The tax rate is going to stay low for another 2, 3 years before it resets back up.

Speaker 1

So Alex, good question. We do have Slide in the presentation in the appendix that kind of go over GAAP tax expectations and cash tax payments for some detail. But I would tell you, Yes, we think we're going to be using our tax benefits for 2024, 2025 and potentially into 2026. And then what What you'll see as you get into 'twenty six, we'll start to use the tax benefits that we're generating for energy efficiency tax credits as we're closing the home. So So it'll be much more simultaneous like most builders.

Speaker 1

So yes, I think we'll have a lower tax rate. We talked about the midpoint of the 15% to 20% range in 2024. And quite Frankly, I think from a statutory perspective on an ongoing basis, we'll be below kind of normal statutory levels because we're generating tax credits and using them in 'twenty six kind of real time.

Speaker 4

Got it. And then hoping you could comment on thoughts around share buybacks given your stock still trading below one funds book?

Speaker 1

Absolutely, Jay. I would tell you and we've kind of talked about this before. We're confident in our balanced growth strategy and the ability to generate sufficient liquidity to really support our growth aspirations and continue to delever our 5. As it relates to share repurchase, I would tell you share repurchases are clearly an attractive use of capital depending on share price. Right now, our highest priority is clearly growth and debt repurchasing.

Speaker 4

Got it. All right. Thanks and best of luck.

Speaker 6

Thanks. Thanks, Alex.

Operator

And currently, I'm showing no other questions in queue.

Speaker 1

Okay. I want to thank everybody for joining us on our fiscal 4th quarter call and look forward to talking to everybody in 3 months on our Q1 call. Thank you very much for your time this evening.

Operator

Thank you all for Fading in today's conference, you may disconnect your line and enjoy the rest of your day.

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Beazer Homes USA Q4 2023
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