Beazer Homes USA Q3 2023 Earnings Call Transcript

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July 27, 2023

There are 8 speakers on the call.

Operator

Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the Fiscal Third Quarter Ended June 30, 2023. 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.beazer. 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 Q3 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 materially from our projections. Any forward looking statement speaks only as of the date the 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. Today, Alan will discuss highlights from our Q3, the current environment for new home sales and an update on our strategy and the goals we have for the future. I'll provide details on the Q3, Expectations for future results, updates on our cycle times and cost reduction initiatives and end with a look at our balance We will conclude with a wrap up by Alan.

Speaker 1

After our prepared remarks, we will take questions during the time remaining. I will now turn the call over to Alan.

Speaker 2

Thank you, Dave, Thank you for joining us this afternoon. We had a very productive Q3, highlighted by continued strength in new home orders and further recovery in our construction cycle times. These factors and the great work of our team allowed us to exceed the expectations we outlined in April. On new home orders, we generated a pace of 3.2 homes per community per month, up nearly 30% from the prior year. The resurgence in demand we experienced starting in January continued through the spring with buyers interested in both to be built and move in ready homes.

Speaker 2

Closings exceeded our expectations, both from improvements in cycle times and higher than anticipated sales of move in ready homes. Homebuilding gross margins were also better than anticipated as we needed fewer incentives to secure our backlog and to make new sales. Higher closings and gross margins allowed us to generate adjusted EBITDA of nearly $73,000,000 and net income of just under $44,000,000 From a balance sheet perspective, we celebrated yet another important milestone with shareholders' equity exceeding $1,000,000,000 or nearly $34 per share. Just over a year ago, mortgage rates began to move sharply higher, pushing mortgage payments as a percentage of income substantially above their long term average. Predictably, this lack of affordability led to a big drop in new and used home sales that persisted through the end of 2022.

Speaker 2

During this time period, home prices reversed direction and wage growth continued, which slightly improved the picture. Then in January, Demand returned to more normal levels even though affordability was still strained. On a macro level, we attribute this strength to 2 primary factors. First, there are both long term and short term housing deficits. In prior calls, we have noted the structural shortage of housing, potentially as great as 4,000,000 homes.

Speaker 2

I think of this as a long term deficit and believe it will underpin demand for new homes for many years. But right now, we're seeing a different deficit And that's a shortage of used homes listed for sale. While this is likely more of a short term issue, homeowners may remain reluctant to list their home for sale until interest rates are substantially lower. 2nd, the overall economy remains quite strong. Unemployment levels remain very low with job growth and wage gains continuing through the quarter.

Speaker 2

Over time, one of the most reliable indicators of housing demand has been employment and wage Both are in a pretty good place right now. But we're not just relying on these macro dynamics to address affordability. As a company, We have positioned ourselves to compete in an affordability challenged environment. We are invested in markets with demonstrated new home demand. We have targeted the largest homebuyer segments and we've developed 3 valuable differentiators, Mortgage Choice, Surprising performance and choice plans.

Speaker 2

Taken together, these efforts allow us to deliver extraordinary value at an affordable price to new homebuyers. For shareholders, we remain committed to a long term strategy we call balanced growth. It is characterized by growing profitability, improving balance sheet efficiency and generating returns above our cost of capital. We're proud of the progress we've made so far We expect to do even more in the years ahead. Last quarter, we provided a roadmap for our longer term goals, specifically those related to growth, leverage and the energy efficiency of our homes.

Speaker 2

As it relates to our growth, We expect to have more than 200 active communities by the end of 2026 with excellent visibility into year over year growth in each quarter for at least the next 18 months. As it relates to our balance sheet, we expect to reduce our net debt to net cap ratio to below 30% over the next 3 years, a measured pace that will allow us plenty of flexibility to invest in our business. And finally, as it relates to the homes we build, by the end of 2025, we expect that every home we start will meet the Department of Energy's 0 energy ready standard. In December of 2020, we became the 1st and still today the only public builder to commit to achieve that standard. In Q3, 11% of our starts were 0 energy ready and included homes in every one of our divisions.

Speaker 2

Overall, I'm very proud of what we were able to accomplish in the Q3 and I'm excited about where we're going. With that, I'll turn the call over to Dave.

Speaker 1

Thanks, Alan. For the Q3 of fiscal year 2023, we closed 11 17 new homes, generating homebuilding revenue of $570,000,000 with an average sales price of about $511,000 Gross margin, excluding amortized interest, impairments and abandonments was 23.4%. As Alan mentioned, our margin came in higher than anticipated, which was the result of lower construction costs and better than anticipated profitability on homes we sold and closed during the quarter. SG and A as a percent of total revenue was 11.5% for the quarter, down 30 basis points year over year as we benefited from improved leverage. Taken together, higher closings and improved margin led to adjusted EBITDA of $72,800,000 Interest amortized as a percentage of homebuilding revenue was 3.1%.

Speaker 1

Our GAAP tax expense was $6,200,000 for an effective tax rate of 12.5 percent as we realized approximately $5,700,000 of Energy efficiency tax credits related to closings in both the current quarter and from prior years. Net income was $43,800,000 or 1 point and $0.42 per share. Looking forward to the fiscal Q4, we're providing the following We anticipate our sales pace to be approximately 2.7 homes per community per month or up about 40% compared to the prior year. Ending active community count is expected to be up about 10% year over year. We expect to close roughly 1200 homes, reflecting a backlog conversion ratio exceeding 60%, up more than 8 points versus the same period last year.

Speaker 1

Our average sales price should be around $520,000 We expect gross margin, excluding interest, to be roughly 23%. Our absolute dollars spent on SG and A should be relatively flat versus the same quarter last year. We expect this to result adjusted EBITDA of approximately $75,000,000 Interest amortized as a percentage of homebuilding revenue should be in the low 3s and our effective tax Finally, we expect land spend to be up sequentially and year over year. With our performance in the fiscal Q3, We now expect to generate more than $250,000,000 of EBITDA and diluted earnings per share in excess of 4.6 $0 for fiscal year 2023. Our book value should top $35 a share and our net debt to net capitalization is likely to fall below 40%.

Speaker 1

While we don't plan to provide specific metrics For our fiscal year 2024 expectations until next quarter, we can share some directional visibility at this time. In FY 2024, we expect healthy community count growth to lead to increases in closings, revenue, profitability and book value per share, even as we anticipate full year ASPs to be around $500,000 from a more affordable mix of communities. Relative to our other multiyear goals, we expect improvements in our leverage ratio and a sizable increase in the percentage of our starts that meet the 0 As we enter the final quarter of our fiscal year, I want to update you on the operational objectives we set forth Back in October, in prior calls, we've highlighted the improvements we've generated in cycle times on new starts, which has allowed us to consistently push our cutoff date for In the Q3, these improvements materialize in the cycle times of our closings, which were down about 40 days versus last quarter. Looking forward, we remain focused on getting cycle times back to where they were before COVID disruptions. On the cost savings side, it is more of a mixed picture.

Speaker 1

While we've been pleased with the reduction in lumber costs, Our expectations for significant savings from other categories have been tempered somewhat. That's because the stronger sales and pricing environment has caused housing starts to bounce back this spring. The good news is that some of the most constrained product categories like appliances and garage doors are back to normal delivery times, which removes some of the cost risk we faced over the past several years. We have heard from investors that they don't fully understand our tax position. And that's understandable because things like deferred tax assets and energy efficiency tax credits are not intuitive.

Speaker 1

So today, we're going to provide a framework that we believe will simplify estimating our future GAAP and cash taxes. Because the homes we build meet stringent energy efficiency criteria, We are eligible to claim energy efficiency tax credits. These credits reduce our GAAP tax rate in the period they are claimed, even if they are not used from a cash perspective in that year, today, all of our homes meet the Energy Star standard and a growing percentage meet the 0 energy ready standard. Based on our expectations for claiming credits from prior years as well as credits earned from homes that closed this year, We expect our effective annual GAAP tax rate to be below 15% in fiscal year 2023. This will rise somewhere between 15% 20% moving forward once we have fully claimed the credits related to prior years.

Speaker 1

From a cash perspective, we don't expect to pay cash taxes for fiscal 2023, fiscal 2024 and a portion of fiscal 2025 As we utilize our NOLs, which are included in our deferred tax assets and then apply the energy efficiency tax credits we have accumulated from prior years, which are also included in our deferred tax assets. As we move into fiscal 2026 and beyond, our cash tax rate should align with our GAAP rate as newly earned energy efficiency tax credits are utilized in the year they are generated. Onto the balance sheet. Total liquidity at the end of the quarter was $541,000,000 comprised of $276,000,000 of unrestricted cash $265,000,000 available on our fully undrawn revolver. Our net debt to net cap decreased to 40.3 percent and our net debt to LTM adjusted EBITDA was 2.2 times.

Speaker 1

Our 2025 senior notes represent our nearest maturity and we anticipate using a combination of repayment and refinancing to address it. While we have no immediate plans to be in the market, We do expect to renew our shelf registration statement in the next couple of weeks. With that, I'll turn the call back over to Alan.

Speaker 2

Thank you, Dave. The Q3 was highly successful on two fronts. Financially, we generated excellent results, driven by a strong sales pace and improvements in backlog conversion. And operationally, we made demonstrable progress toward our multi year Growth, balance sheet and energy efficiency goals. With a dedicated operating team, a growing community count And a more efficient and less leverage balance sheet, we have the team, the land and the financial resources to create durable value for our stakeholders in the years ahead.

Speaker 2

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 portion of today's call. Our first question comes from the line of Alan Ratner from Bellman and Associates. Please go ahead.

Speaker 3

Hey, guys. Good afternoon. Congrats on all the great progress this year so far. First question on the gross margin and I guess the inputs that go into that. So nice upside this quarter.

Speaker 3

The guidance for 4Q implies kind of flattish, maybe even down a touch and that could be rounding. But It seems like from your comments, Alan, like you're pulling back a bit on incentives. You might have a little bit of pricing power. The cost environment Yes, it seems pretty stable at this point. It could certainly re inflect higher again if the trades get stretched.

Speaker 3

But I guess my question is why at least for the near term wouldn't margins be on an upward trajectory given the flow through of I would imagine lower incentives coming through?

Speaker 2

Yes. I mean the mix of closings in the Q4 is going to continue to be heavily weighted toward homes that were sold early in the calendar year. So it really the sales activity in the 3rd quarter really won't be in the 4th quarter results to any great extent. So it's mix and it's Frankly, just a little bit of uncertainty, Alan, but I think you characterized that it's very flattish. But I think as we've looked at within backlog and when it was sold, a lot of that as we pointed out was sold at the end of last year, beginning of this year from a calendar That's where it falls.

Speaker 3

Got it. Okay. I appreciate that. Second, on the community count ramp that you guys expect over the A handful of years and I apologize if you've kind of given this detail. When I look at your lot counts, it's been Barely steady over the last handful of years and yet going from 125 up to 200 communities is a very significant ramp.

Speaker 3

So I'm just curious how much land, how much lot growth do we need to see over, call it, the next 12 months So to support that type of ramp. And I guess more broadly, how are you feeling about the land market these days in terms of pricing and availability, etcetera?

Speaker 1

Well, Alan, I would have you look back a little bit. We had a pretty significant growth in the land position over the last 3 or 4 years, which is what's Really fueling the growth in community count that you're seeing. We were in the 18,000 lot range and now we're up obviously in the 22,000 lot. So it's taken some time to go through LD on those lots, especially during COVID given some of the disruptions we've had. But it's really that increase that you've seen that's really driving the community count growth that we're And in 2024, as to the second part of your question, look, we kind of mentioned during the script that we have good visibility Community count growth for the next 18 months.

Speaker 1

And as we go forward and as we kind of go quarter to quarter, we'll continue to update what we see from a community count perspective. But we have our eyesight on getting over 200 by the end of 2026, that's the guidance. And we're finding land deals frankly that pencil and pencil well for us to go out and grow the community count. Alan, I'll just I'll add

Speaker 2

a comment on the land market and it's something I'm sure you're familiar with because I know you pay a lot of attention to the private builders. What's happened in the financing market with bank finance has changed the equation a little bit for builders that were, let's just say project or revolver based. And so there's still plenty of competition for land deals, but there are a group of builders that are a little less, let's just say expansive Than they used to be and that's been constructive.

Speaker 3

Understood. I appreciate that. And Dave, just to kind of circle back, I appreciate the ramp over the last few years. I guess what I was looking at just in terms of the numbers, if I go back to say 2018, your lot count at that time was Pretty similar to where it is today, just in absolute terms. And you never really got close to 200 communities.

Speaker 3

I know that number tails off, obviously, so Probably apples and oranges to some extent, but I think you probably peaked at it somewhere around 160, 170 communities. That's really what I was getting at, like how much higher does that lot count need to go To kind of support a ramp 200.

Speaker 2

You should expect our lot count over the next couple of years will get to 30,000 and beyond. And in fact, I think we'll be up in the Q4 year over year, which is going to put it above 25% this year. So that's not a big Stretch, remember in some of those older periods or those long ago days, a lot of that lot count was land held for future development. Yes. And those were some big chunky assets that they counted as lots.

Speaker 2

They were lots. They eventually became closings, But there were some 300, 400, 500, 600 lot positions mixed in there that weren't terribly efficient in terms of generating community count.

Speaker 3

Understood. Good Thank you, Alan. Thanks a lot, guys.

Speaker 1

Thanks, Alan.

Operator

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

Speaker 4

Thank you. Good afternoon, gentlemen. Very nice quarter. As it relates to G and A, Is there a need to add overhead given the meaningful growth in key account, just so you might lose a little bit of leverage?

Speaker 1

Well, I wouldn't say Alex that we're going to lose leverage. I think we're running a little bit higher on the overhead side now because we're planning for the Unity count growth that we have visibility into. Look, I think we've done a real good job over the last 4 or 5 years really managing the absolute level of G and A from Our perspective, but we lost a little bit of leverage kind of this year as we've kind of been thinking about how we're going to grow and getting ready for the community count growth. So I don't necessarily think there's negative leverage in the future, But we're probably not at a number today that we would be as we're kind of setting up for the community count growth.

Speaker 4

Very helpful. And then could you also talk to the higher backlog conversion year over year and where this trend could go several quarters out?

Speaker 1

Look, I don't want to pontificate or make estimates while it's going to happen several quarters out. But the real key is, and we've talked about this, Alex, we've It's up about 3 months of cycle time on starts. We're starting to see that flow through on our closings. We talked about getting 40 days back. And clearly the goal for us is to go out and get 30 days more and really work our way from there back towards where we were before pre COVID disruption.

Speaker 1

So That's driving higher conversion rates, right, because cycle times are coming down and the idea is to continue to go claw back what we've lost and we've made really good progress on starts and that should come through on closings over time. Super helpful. Thank you very much. Well, thanks, Alex.

Operator

Next, we'll go to the line of Jay McCanless from Wedbush. Please go ahead.

Speaker 5

Hey, good afternoon. Thanks for taking my questions. Dave, I wanted to follow on what you were saying for fiscal 2024 With a 500,000 ASP, I mean, it's not that much different from what you all printed this quarter, but is it going to be a fast ramp down? Or is it something You get to by the end of the year where maybe you have a fore handle on that price by the end of the year, is it going to be pretty flat you think?

Speaker 1

It is a ramp down, Jay. We haven't given specifics about 2024, but it is a bit of a ramp down. And it's just like we said in the prepared remarks, there's Some mix in that from a community perspective. So as you get some of our more affordable communities coming online as we move through the year and you get some closings from those communities, you'll see that gradually go down. And Jay, just one

Speaker 2

point, you'll see in our Q4 guidance that we talked about something like 520. And we're a little concerned that's a mix issue. It relates as I told the prior question or answered in the prior question, It relates to homes that were sold 6 or 9 months ago. We didn't want folks trending off that 5 20 into next year. So I think it will trend down, but we expect the average For the full year, we'll be right around that $500,000,000 level.

Speaker 6

Okay. Got

Speaker 5

it. And then Could you talk about pricing power during the Q3, whether percentage or areas you were able to take price? Any color you could give us on that?

Speaker 2

Yes, I mean, I look at incentives and between discounts and closing cost contributions and those kinds of things. And I think On sales that we were making, which was not very many of the closings that we had, there was the benefit of a couple of points. Now I always get a little nervous talking about this, not because I'm giving away some state secret, but if you change your base price By the dollar amount that you previously provided as an incentive, it's sometimes hard to see that when you look over time, right? You could say, well, gee, we didn't give any incentives. Well, yes, because your base prices were a lot lower.

Speaker 2

So I just caution you Jay, as you think about that, picking up a couple of percentage points on incentives is terrific And I believe it was, but there's also this ongoing dialogue about what are the included features and what is the base price That really best competes in the marketplace. And I do think it's an area that on the External side is not super well understood. There's a lot of, I think, undue confidence in measuring incentives given the number of moving parts that are both related to price and features. So I would say there was a little bit of pricing power, not a ton, and we saw it in those different levers. And I know that's not a super helpful answer.

Speaker 2

I'm not trying to be evasive. It's just it doesn't really lend itself to it was Three points. It was one point because there are these other components to that equation.

Speaker 5

Okay. Got it. And then the last question I had, I guess the wouldn't you it was going to be another incentive question, but I'll ask something different.

Speaker 2

I'm sorry, I wore you out. It's

Speaker 6

all right.

Speaker 5

No, no. So the move higher that we've seen in cash lumber over the last 8 or 9 weeks, When if this continues, when do you think this will show up in your gross margins Like mid-twenty 24 or when should we expect to see maybe a little headwind from higher lumber in addition to higher everything else?

Speaker 2

Yes. It is sometime in 2024. It's hard for me to say. I mean, we've been pretty effective this spring having 90 and 120 day and a couple of 180 day lock that I'm aware of. So we have some resiliency.

Speaker 2

If rates If lumber moves higher and stays higher, we'll certainly feel that, but we won't feel it for a couple of quarters at this point.

Operator

Okay. All

Speaker 5

right. Sounds good. Thanks for taking my question.

Speaker 1

Thanks, Jay.

Operator

Next, we'll go to the line of Julio Romero from Sidoti. Please go ahead.

Speaker 7

Thanks. Hey, good afternoon. Wanted to ask a little bit more about the directional visibility for fiscal 2024. You talked about ASPs being Around $500,000 due to the more affordable mix. I was just hoping you could expand on that.

Speaker 7

Do you expect maybe the geographies to change? Do you expect Maybe smaller homes or lesser amenities, just anything more you can give us on the mix would be helpful.

Speaker 2

So, Julio, what's And of course, you know this last fall, last summer, as rates were moving higher, we and everybody else were looking at what are the features that Can be removed from homes to help address affordability, what's the right way to approach pricing versus incentives. But many of those effects For us, it didn't really affect our fiscal 2023 because so much of fiscal 2023's closings was carried into the fiscal year from 2022. So the very largest component of what you're seeing is the effect of adjustments that we've made in the last This year that will have really that will be in the mix for the full year. And that's Probably the lion's share. The rest of it is at the edges changing the plan lineup in a community.

Speaker 2

If we had a 2,200, a 2,400, a 2,800 and a 3,200,000 2 100, a 2,400, a 2,800 and a 3,200 foot plan. We may have eliminated the 3,200 foot plan and that's Easy to do. Taking a 2,400 lit home and downsizing it by 90 square feet, that's really hard to do. So the Plan lineup is an area where we got after it. And frankly, we do have some townhome communities joining the community count In 2024, not a hugely higher percentage, but there will be a slightly higher percentage of attached product for us, which again has been part of a multi year strategy to make sure we stay affordable.

Speaker 2

So those are the bigger buckets. Is that helpful?

Speaker 7

It is. I appreciate that. And then my second question would be, I guess, so one thing that isn't changing is obviously your plan to be Net 0 energy ready. Do you have a target for maybe the percentage of starts next year that You're looking to have net zero energy ready?

Speaker 2

Nice try. I don't blame you for asking. It's an upward like I was I really we spent a lot of looking at that chart. We're going to get to 100% by the end of fiscal 2025. We will make a significant jump in 2024.

Speaker 2

I want to be a little careful, but boy, we went from 2% 2 quarters ago to 11% this quarter. It is going to be A much higher percentage in the coming quarters.

Speaker 7

I'll take it. Thanks very much for taking the questions.

Operator

And our final question showing in queue is from Alex Barron from Housing Research Center. Please go ahead.

Speaker 6

Yes. Thanks, guys. I noticed the $5,000,000 debt repurchase. I was curious, is there are you constrained as to how much you're able to do? And also, Is there any update on thoughts around share buyback given you're still trading below book value?

Speaker 1

Yes. So let's start, Alex, with the bonds. There is no limitation. And look, we mentioned in the script that we expect to deal with the 25 for the Combination of refinancing and repayment, but we have the liquidity and the capacity to go pay off the maturity if we wanted to completely. We believe there's the market conditions are going to give us an ability to do some of that refinancing to do the mix that we talked about.

Speaker 1

But what we won't do is really get kind of put in a position where we have to do a We have to do a financing at a price or at a yield that we're not happy with. So we have a lot of flexibility Certainly from a covenant perspective and what we can do perspective and from a liquidity perspective, really no issue there at all. In terms of share repurchases, I would tell you right now, given our growth aspirations, it's kind of a low priority for us. It is something that we do think about and there are times for it. But right now, we have aspirations to grow the business and that's the highest risk adjusted returns for us to go out and invest

Speaker 6

Okay. And sorry if I missed it, but I think maybe you mentioned Did you guys comment anything on guidance for what kind of closings do

Speaker 1

you think you'll be able

Speaker 6

to do for the year or next quarter?

Speaker 1

We gave closings of 1200 closings next quarter, Alex, and then you can kind of sum to the year from there.

Speaker 6

Got it. All right, guys. Thanks and good luck and great job. Thank you.

Speaker 1

Thank you. Thanks, Alex.

Operator

And we have no further questions at this time.

Speaker 1

Okay. I want to thank everybody for joining us on our Q3 conference call. We'll be back in a quarter to wrap up the year. We appreciate your interest in Beazer and we'll talk soon.

Operator

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

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Earnings Conference Call
Beazer Homes USA Q3 2023
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