Beazer Homes USA Q2 2023 Earnings Call Transcript

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Provided by Quartr
April 27, 2023

There are 6 speakers on the call.

Operator

Afternoon, and welcome to the Beazer Homes Earnings Conference Call for the Second Quarter Ended March 31, 2023. Today's call is being recorded and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company's website atwww.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 Discussing our results for the Q2 of fiscal 2023. Before we begin, you should be aware that during this 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 materially from our projections. Any forward looking statement speaks only as of the date this statement is made.

Speaker 1

We do not undertake any obligation to update or revise any forward looking statement 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. Joining me is Alan Merrill, our Chairman and Chief Executive Officer. On our call today, Alan will discuss highlights from our Q2, the current environment for new home sales and an update on our company's strategy and the primary goals we have for the future. I'll then provide details on our 2nd quarter results, expectations for the Q3 and full year, updates on our cycle time and cost reduction initiatives and end with a look at our balance sheet and capital allocation priorities.

Speaker 1

We will conclude with a wrap up by Alan. After our prepared remarks, we will take questions and the time remaining. I'll now turn the call over to Alan. Thank you, Dave, and thank you for joining us

Speaker 2

on our call this afternoon. Our team delivered strong operational performance in the 2nd quarter, which allowed us to exceed the expectations we outlined in January. On sales, we generated a pace of 3.2 homes per community per month as a strong start The spring selling season enabled us to more than double the pace we saw in the Q1. And on profitability, adjusted EBITDA was over $62,000,000 with better than expected operating margins and closings lifting results. We also celebrated an important balance sheet milestone.

Speaker 2

For the first time since 2,005, the dollar value of our total shareholders' equity exceeded our outstanding debt at the end of the quarter, with book value now in excess of $32 per share. During the Q2, we were also pleased to be recognized for the homes we deliver And the culture we have created among customers and employees. For the 8th straight year, we received the Sustained Excellence Award from the U. S. Department of Energy and the EPA.

Speaker 2

This is their highest honor among ENERGY STAR Awards granted for delivering homes that exceed their stringent requirements. For the 2nd consecutive year, We were named by Newsweek as one of America's Most Trustworthy Companies as determined through extensive polling of employees, customers and investors. And for the first time, we were recognized as a 2023 Top 100 Workplace by EnerGage. These awards speak to the commitment we've made to delivering exceptional homes, building trust with our customers and becoming an employer of choice. Those are all outcomes It should contribute to growing shareholder value in the years ahead.

Speaker 2

Turning to the new home sales environment. The momentum we experienced in January continued through the quarter. In fact, I was a bit surprised by the strength of demand during the quarter, especially because affordability remains quite challenging. While I know our team did a terrific job marketing and selling our homes, There were clearly some other macro factors that helped. First, the economy has weathered the rapid increase in rates better than many feared.

Speaker 2

Employment remains strong and wages have continued to grow. With home prices modestly lower and incentives somewhat higher than this time last year, wage gains have contributed to an improvement in affordability. 2nd, Homebuyers seem to be adjusting to higher mortgage rates, particularly as they consider the costs of renting. They may buy a smaller home or one with fewer design options, but buying a home still represents a way to cap a family's housing costs in an inflationary environment. And 3rd, the supply of existing homes for sale is incredibly constrained because owners with low mortgage Rates have little incentive to trade in or trade up.

Speaker 2

This has led to share gains for new homes compared to existing homes this spring with no signs of excess inventory in any of our markets. The structural housing shortage in this country is very real. So even as we acknowledge that it is a challenge for many consumers to attain homeownership, we are confident in the durability of demand for well priced new homes. To that end, we remain committed to our balanced growth strategy. This strategy is designed to deliver profitable growth from an efficient and less leveraged balance sheet resulting in returns above our cost of capital over a housing cycle.

Speaker 2

Of course, doing these things in a competitive environment isn't easy, which is why we created and have embraced 3 pillars to differentiate our homes and home buying experience. During the Q2, we commissioned an investor perception study to help us better understand what investors and analysts thought about our strategy and how we can improve our investor communication. We were encouraged that there was broad support for both growing our business and improving our balance sheet, a clear validation of balanced growth. But we also heard that we could do a better job describing our longer term goals. So today, we'll outline 3 multiyear goals that should help investors Track our progress.

Speaker 2

As it relates to growth, starting in the Q4, we expect a double digit annual growth rate in our community count for the next several years with a target of exceeding 200 active communities by the end of 2026. The growth in our lot position, particularly through options, provides early evidence we're on this path. As it relates to our balance sheet, We will continue to reduce leverage and we're targeting a net debt to net cap ratio below 30% by the end of 2026. Investors noted the significant progress we've made reducing this ratio in the past several years and should take comfort that we intend to continue this journey. And finally, as it relates to the homes we build.

Speaker 2

We are the only national homebuilder who is fully committed to the Department of Energy's net zero energy ready program. More specifically, in our EASG report, we pledged that by the end of 2025, Every home we start will meet this DOE standard. In Q2, 4% of our starts were net 0 energy ready and we expect this to ramp quickly in the years ahead. In fact, we now have net zero energy ready homes under production in 14 of our 16 markets. While there are technical and financial challenges associated with attaining this goal, we are well on our way.

Speaker 2

The fact is we are building tomorrow's home today and we are excited to explain the benefits of our homes to buyers. As the past few years have clearly demonstrated, It is hard to predict market dynamics and even harder to translate those kinds of predictions into precise financial guidance. Which remained constant is our commitment to improving our profitability, our balance sheet and our returns. As I've outlined today, We believe we have this strategy that will allow us to make further progress in the years ahead. With that, I'll turn the

Speaker 1

call over to Dave. Thanks, Alan. For the Q2 of fiscal 2023, we closed 10 63 homes, generating homebuilding revenue of $542,000,000 with an average sales price of about $510,000 Gross margin excluding amortized interest, impairments and abandonments was 22%. SG and A as a percentage of total revenue was 11.2% for the quarter and below 11% on an LTM basis. Adjusted EBITDA was $62,100,000 Interest amortized as a percentage of homebuilding revenue was 3.2%.

Speaker 1

GAAP tax expense was $5,100,000 for an effective tax rate of 12.8 percent reflecting the benefit of energy efficiency tax credits from homes closed in the current quarter and prior years. As a reminder, broadly speaking, we don't currently pay cash taxes as we continue to utilize our deferred tax assets. Net income was $34,700,000 or $1.13 per share. Looking forward to the Q3, we're providing the following expectations. We anticipate a sales pace approaching 3 sales per community per month.

Speaker 1

Average community count is expected to be relatively flat year over year. We expect to close around 1,000 homes, reflecting a backlog conversion ratio between 50% 55%, up around 20 points versus the same period last year. Average sales price should remain around $510,000 We expect gross margin, excluding interest, to be in the 21% to 22% range. SG and A as a percentage of revenue should be relatively flat versus the same quarter last year. We expect this to lead to adjusted EBITDA above $50,000,000 Interest amortized as a percentage of homebuilding revenue should be in the low 3s and our effective tax rate should be at or below 2nd quarter levels as we continue to realize the benefit of our energy efficiency tax credits.

Speaker 1

Finally, we expect diluted earnings per share of approximately $0.90 Last quarter, we outlined our expectation for delivering at least 4,000 homes and generating revenue in excess of $2,000,000,000 this fiscal year. The initial strength of the spring selling season underscores our confidence in achieving these targets. With the visibility provided from our backlog, we now expect to earn approximately $4 per share in fiscal 2023 based on an effective tax rate of approximately 14% for the full year. I'd also like to provide an update on our cycle time and cost reduction initiatives. Over the last 2 years, supply chain challenges extended our average cycle times by nearly 4 months.

Speaker 1

This pushed our starts cut off date from April back into January. At the beginning of the year, we projected we'd be able to recover at least 30 of those days in fiscal 2023. Thanks to a tremendous effort by our field operations teams, we've been able to recapture about 90 days on average. This means that in many of our markets, we will be able to close homes by September that started in April, allowing us to offset some of the sales weakness from the Q1. We also had success reducing direct construction costs in the Q2.

Speaker 1

We expect to see more meaningful benefits in the 4th quarter when the mix of closings will more heavily reflect homes started with these lower costs. On to the balance sheet. We ended the quarter with more than $500,000,000 of liquidity. Our net debt to net cap was 42.7 percent And our net debt to LTM EBITDA was 2.2 times. Our shareholders' equity now exceeds our total debt and we have no maturities until March 2025.

Speaker 1

As we think about capital allocation, we are committed to investing for organic growth And further deleveraging. Deleveraging will occur through growth in retained earnings and debt repurchases with the goal of bringing our net debt to net capitalization below 30% by the end of 2026. With the work we've done over the past several years, We have the flexibility to achieve both of these objectives. We continue to grow both the quantity and quality of our book value. We ended the quarter with a book value per share over $32 up more than $6 from the prior year.

Speaker 1

Despite near term challenges, we expect to grow book value and generate returns above our cost of capital through the cycle. With that, I'll turn the call back over to Alan.

Speaker 2

Thanks again, Dave. The Q2 reflected strong operational performance in an improving sales and production environment. Despite our ongoing affordability concerns, we did what we said we were going to do and are now well positioned to have a solidly profitable fiscal year. Looking further out, we remain confident in the durability of demand for new homes and committed to both growth and balance sheet improvements. And we believe our 3 pillars, particularly our leadership in energy efficiency have created a compelling opportunity for us with homebuyers.

Speaker 2

With this differentiated value proposition and a dedicated and highly engaged team, I remain confident we have the ingredients to create growing and durable value shareholders in the years ahead. And today, we've provided a road map for investors to measure exactly where we're going and how fast we're getting there. With that, I'll turn the call over to the operator to take us into Q and A.

Operator

Thank you. We will now begin the question and answer session. One moment please while we wait for questions to come in. And our first question is from Julio Romero with Sidoti and Company, you may go ahead.

Speaker 3

Thanks. Hey, good afternoon, Alan and Dave. Maybe to start on the April trends, can you speak to that at all? I know there point where mortgage rates dipped for a short period and then kind of inflected back upward. I'm just curious if you saw that play out at all in terms of buyer traffic, website clicks, overall activity?

Speaker 2

Really nothing that Drew, attention. A given day, a given week, there can be a little bit of volatility, but I have to say that the buyer has been more resilient To the puts and takes with mortgage rates over the last couple of months than I expected that they would be and that includes in April.

Speaker 3

Okay. That's helpful. And then on your quarterly results, The cancellation rate of 18% is pretty improved from the 37% in the December quarter. Can you maybe speak to how that Greatest trend in April at least directionally?

Speaker 2

Yes. I mean we're not to the end of the month yet. So I really don't have like an Intramont number, but there's no pattern that we see that is troubling or concerning. That first quarter was super tough, right? That was Buyer concerns were prevalent.

Speaker 2

There was a big backlog number and we struggled a little bit we talked a lot about it. It's why we provided and talked about the cancellations as a percentage of sales and the backlog In that quarter, they sort of put it in some context, but things have normalized and we're really not seeing unusual cancellation activities anywhere.

Speaker 3

Got it. And then just last one for me is, very exciting on the multiyear GOL announcement and the rollout here. Just thinking about the capital allocation portion of that, I know last quarter you talked about wanting to maintain Flexibility, has market conditions kind of changed that approach in the near term at all, like in terms of how much financial flexibility you want to keep in the near term?

Speaker 1

Julio, I wouldn't say that it's Change the amount of flexibility that we have and we talked about the importance of balancing both growth in business, organic growth in business and reinvestment with debt repurchases. We're definitely going to remain very focused on flexibility. I guess what has probably changed, there's been some more stability in the market, which helps when you try to underwrite deals. And I think you'll see some growth Land position in the back half of the year accordingly. But look there's still a very clear focus on flexibility maintaining very strong liquidity As we move forward, so no change from that perspective.

Speaker 3

Helpful. I'll hop back into queue. Thanks very much.

Speaker 2

Thanks, Will.

Operator

Thank you. The next question is from Alan Ratner with Zelman and Associates. You may go ahead.

Speaker 4

Hey guys, good evening, I guess now and great quarter and appreciate Longer term visibility there in terms of the targets. So that's where I want to start the question. So 200 communities, the last time you guys were there was about 13, 14 years ago, obviously, a much different time. But at that point, You controlled about 30,000 lots, maybe a little bit north of that. And I'm just curious, is that kind of the number in mind that we should Keith, as far as where the lot count needs to go over the next year or 2 to achieve that target?

Speaker 4

And if so, what does that look like from a cash Flow perspective, I mean even if you option a good chunk of those lots, I would imagine there's still a decent amount of cash that needs to be invested to drive that type of growth.

Speaker 2

Yes. And I think we feel pretty good about the cash generation in the business and the profitability in the business to be able to do that. And you've done this a long time, Alan. So you know it's very difficult as you think about future deals exactly what size They'll be what deal structure they'll be. I think your 30,000 number is in the right neighborhood.

Speaker 2

I wouldn't say I think it's crazy high or crazy low. In terms of the capital between the profitability that we're generating and frankly the recycling of the capital that we have in the business, I think we feel very comfortable that we can do both the things that we said. We can control and own enough land to deliver homes from 200 communities and Through as Dave said both the growth in retained earnings and some selective debt repurchases we can drive that leverage down below 30%. So yes, we're very focused on the capital side, but I feel very confident that we've got the resources to get there.

Speaker 4

All right, perfect. Second question on pricing. So a few of your competitors have indicated given the strong Spring, they've started to either dial back incentives or even raise base prices. And Alan, I know you kind of share our view as far as the affordability Challenges right now and obviously we've also been surprised at how strong the demand has been in spite of that. But I'm curious if you could talk a little bit about what you guys are doing The pricing side right now and how much runway do you think there is to drive growth if we don't meaningfully Fix the affordability equation either through lower rates or significantly higher wages or lower home prices.

Speaker 1

So gosh,

Speaker 2

I wish I had a great crystal ball on this, Alan. I think the thing that is The most difficult to appreciate in the affordability calculation and it's the thing I struggle with is the latency in certain of the data elements. We know that there has been decent wage growth across most aspects of the economy in the last year. Just in the information that we pull that's based on publicly available data and sort of the chart that we do and there are lots of ways to do affordability charts. We're not capturing any of that wage growth that's occurred in the last year.

Speaker 2

So I do think that the Continuation of wage growth is certainly one thing that's helping. I think it's also the case that broadly and for us Prices have stabilized. And frankly, our prices are lower than they were a year ago. And I think those two things together have contributed. Now how much runway there is to go and what the exact magic number is, I think if you tell me that unemployment remains under control There is a structural gap between the new mortgage rate and the mortgage rates that existing homeowners have, which Puts real pressure on the resale supply.

Speaker 2

I feel pretty good. I mean demographics and life events We're going to continue to create a need for housing. Then I think you've got a group of those voluntary renters. And when we talk just a little bit about this in the script Who are realizing they're at a point where you got

Speaker 1

to buy the house and date the rate,

Speaker 2

fix Your occupancy cost today by being an owner and if rates roll over, there'll be an opportunity to refinance. And I think that is also part of the psychology that is assisting on the demand side. But look, I think we haven't gotten into 2024 forecasting. I'm pretty confident our ASPs next year will be lower than they are this year and that will largely be driven by intentional Mix shifts and I think a little bit by consumers opting for smaller plans. So I think that's the other thing is if you consume a little bit less house And you've had some wage growth and home prices are flat.

Speaker 2

I think maybe there is just incremental improvement in the affordability picture. Certainly, other things could happen, but from where I sit right now that seems to be a reasonable trajectory.

Speaker 4

I think that makes a lot of sense. And I'm wondering based on your comments about the disincentive to give up that low rate. Are you seeing stronger activity on a relative basis at your lower price point entry level, however you kind of classify it versus move up at this point?

Speaker 2

We are, but we don't do a lot of move up business. So It's challenging for me to think that what we see is a great read through to broader trends. I can Tell you that the active adult buyers who have either no mortgage or very low principal amounts, they have been quite active this Spring as well. So it isn't just that first time buyer and maybe a first time buyer who is deferred to home purchase, But there are also empty nesters that form a good chunk of the business, both in age restricted and in non age restricted context. In some of our markets like Indianapolis that empty nester is a really meaningful part of our buyer profile.

Speaker 4

Got it. And I'll just wrap up with a comment more than a question, but kudos on the SG and A leverage because I know in this inflationary environment, it's tough to Keep those costs under control and a lot of your competitors I think have kind of moved in the opposite direction there. So nice job with the leverage there.

Speaker 1

Okay. Thank

Speaker 2

you, Alan. Thanks, Alan.

Operator

Thank you. Our next question is from Alex Barron with Housing Research Center. You may go ahead.

Speaker 5

Yes. Thanks, guys. Nice job on the quarter. David, I wanted to ask about the margin guidance. I think I heard 21% to 22%.

Speaker 5

Was that for next quarter? And was that Before interest or after interest?

Speaker 1

That was excluding interest, was the guy's same. I know it was a little bumpy on the as we were reading, but it's 21% to 20 Excluding the interest.

Speaker 5

Got it. Okay. And then I wanted to ask about share buybacks. Do you guys have an authorization in place? And if so, how much?

Speaker 5

And what are the general thoughts around buying back the share kind of given the disconnect between Your equity and where the market is pricing?

Speaker 1

Well, look, Alex, we do have an authorization. It's in the $30,000,000 remaining To do, I can tell you that our view on share repurchases, it clearly can be an attractive use of our capital depending on the share price. Right now, and I think we've made it pretty clear in the script, the focus is clearly on growing the business and doing some modest deleveraging as Alan mentioned. And of course, we're always focused on risk adjusted maximizing risk adjusted returns in the business and positioning the business for future growth. So we watch it very, very carefully as you'd imagine.

Speaker 1

And there are times when it's extremely appropriate.

Speaker 5

Okay. And in terms of growing the business and I heard you say you planned double digit community count growth. Does that require you to get more active on the land front right now? Or do you feel like you already have enough Runway to achieve those goals with the land you already control?

Speaker 2

We're in great shape for 20 24 and well into 20 25. So that we're engaged in right now is to sustain that growth rate into 2026 and beyond. And The good news is with the control of lots that we've got and accumulated over the last 3 years, We're not having to be in a particular panic to chase deals that can open next year. We know what deals are going to open The next year, so we're really being quite selective about opportunities for 2025 and 2026. I think there is a little bit of a frenzy around finished lots out there and folks trying to Capitalize in a better environment than anticipated.

Speaker 2

And I would say we've looked at some deals and it was kind of silly season pricing. I'm happier with where we are with the Growth in the land position over the last few years creating a runway for our near term community count growth allowing us to be more strategic in deploying capital for a couple of years out.

Speaker 5

And given that several builders Cancel deals and stuff like that in the last 2, 3 quarters. Have you found anything in that that's attractive or not really or not yet?

Speaker 2

A little bit. What really happened over the last 9 months and it started last summer through the fall, I mean, we were very transparent about the fact that we were renegotiating everything and relooking, reunderwriting everything. We didn't walk on very many deals, but we were quite successful in reducing either deposits or pricing or timing or risk Shifting. We'll close at a further stage of entitlement rather than an earlier stage. So I mean we did a number of things across the deals We were working on and I'm really proud of what we did.

Speaker 2

I think the truth is a number of our competitors were doing similar things and that's why there weren't that many deals that fell out. There are some and we have tied up a few. But I want to be clear, it's not as if in the last 6 months we found Some magic solution to community count growth with other deals that got dropped. We've added a few here and there that way. But Most of what we will be opening into 2024 are deals that we started circling in 2020 2021 And not things that we've identified in the last 6 or 9 months.

Speaker 5

Okay, great. Well, best of luck with the new goals. Thanks.

Speaker 1

Thanks, Alex. Thanks.

Operator

Thank you. And at this time, there are no further questions.

Speaker 1

Okay. I want to thank everybody for dialing into our Q2 earnings call. And this concludes today's call. Thank you for your time. And we'll see you for our Q3's call.

Operator

Thank you. That does conclude today's conference. Thank you

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