Beazer Homes USA Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2024

There are 8 speakers on the call.

Operator

Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the 2nd Quarter Ended March 31, 2024. 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 at www.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 2024. 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 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 today 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, some details on our operational strategy this spring and an update on the progress we're making towards our multi year goals. I'll then provide details on our Q2 results, our forward expectations, a review of our balance sheet and land spending and then conclude with a review of our book value per share and the framework we employ in considering capital allocation.

Speaker 1

We will conclude with a wrap up by Alan. After our prepared remarks, we will take questions in the time remaining. I will now turn the call over to Alan.

Speaker 2

Thank you, Dave, and thank you for joining us on our call this afternoon. Our team delivered another successful quarter, highlighted by solid sales results and excellent profitability from a growing community count. We also invested for the future and enhanced our capital structure. In more detailed terms, new orders were up 10% from the prior year as we generated a page just over 3 sales per community per month. This provides us with the backlog to modestly increase our expectations for full year deliveries.

Speaker 2

EBITDA was over $58,000,000 driven by slightly better than anticipated gross margins and careful management of overheads. We ended the quarter with 145 active communities, up from 136 at the end of December and 121 a year ago. Land spend was nearly $200,000,000 bringing our total 12 month spending over 740,000,000 dollars And finally, with our senior note issue and an extension of our revolver, we strengthened our balance sheet enabling the consideration of a broad range of capital allocation priorities. In addition, we were recognized for both our culture and the energy efficiency of our We also held our annual fundraiser for our national charity partner Fisher House, which generated nearly $2,000,000 We remain very confident in the multiyear strength of the housing sector supply and demand factors. Shortfalls in new home production over the past decade and the lock in effect of higher mortgage rates both contribute to very tight supply.

Speaker 2

In an economy characterized by low unemployment, wage growth and attractive demographics for potential homebuyers provides clarity on the sources for current and future demand. Last quarter, I outlined our view that over the balance of the fiscal year, our sales pace and to some extent, the mix and gross margins on those sales was likely to be closely related to mortgage rates due to strained affordability. We articulated 3 scenarios defined by the direction of rates and this framework proved to be quite accurate in the Q2. During the Q2, mortgage rates moved around, ultimately rising about 20 basis points. This fell inside our base case and as such, we were able to exceed our sales goals, though with a slightly larger share of spec home sales.

Speaker 2

Since the end of the quarter, rates have moved nearly 50 basis points, further straining affordability. If these rates persist, it's likely we will continue to see a stronger preference for specs. As we have talked about for several years, we are in the midst of transitioning to 0 energy ready homes in all new and longer lasting communities. We call these our ready series homes. While we've committed that 100% of our starts will be ready series by the end of next year, we are substantially ahead of schedule with more than 3 quarters of our starts being built to this standard last quarter.

Speaker 2

Given the importance we've placed on developing and delivering our Ready Series Homes, I am pleased to report that despite having somewhat higher construction costs, these homes are generating higher margins than our prior series. So this spring, to accelerate our transition to the Ready series, we've been encouraging our teams to be very competitive with pricing and incentives on our earlier Star and Plus series homes. This will allow us to close out of older communities more quickly and simplify our production and sales efforts around the Ready series. We can prove that these are the best built homes in our markets and the sooner we are solely focused on building and selling them, the better. While this acceleration makes sense, there is a short term financial consequence, which will be apparent in the 3rd quarter.

Speaker 2

Margins will be down sequentially, partially as a result of a higher share of specs, but more so from our efforts to move through our older series homes. With that said, we expect margins to rise in the Q4 as our mix of closings shifts strongly toward ready series homes. And for the full year, our EBITDA net income expectations remain within the range of our prior outlook as but I but I wanted to explain why we chose to impact the mix and pricing of our sales this spring. Finally, let me update you on our progress toward our multiyear goals. As it relates to our goal to have more than 200 active communities by the end of fiscal 20 6.

Speaker 2

As I mentioned, we closed the quarter with 145 active communities, up nearly 20% versus the prior year. We expect to end the fiscal year with more than 155 communities, representing year over year growth of about 15%, which also happens to be a good benchmark for projecting year end community counts in 2025 and 2026. As it relates to our balance sheet goal of having a net debt to net cap ratio below 30% by the end of fiscal 2026, we completed the quarter with a ratio at 43.4%, up a little bit versus the prior year. This is simply a function of the seasonality and timing of our land spend. By the end of this year, we expect this ratio to be in the mid to low 30s, positioning us to be comfortably under 30% by the end of fiscal 20 26.

Speaker 2

And finally, as it relates to our goal to have 100% of our starts, 0 energy ready by the end of calendar 2025, I'm very pleased that we reached 77% ready series starts in the Q2. With our acceleration, we are in excellent shape to reach our stated goal, perhaps even early. As we get closer to fiscal 2025, I'm excited to see the impact of community count growth, reduced leverage and a truly differentiated product will make to our financial performance. And with that, I'll turn the call back to Dave.

Speaker 1

Thanks, Alan. For the Q2 of fiscal year 2024, new home orders were 1299, up 10% compared to the prior year, driven by a 14% increase in average active community count. This translated to a sales pace of 3.1 sales per community per month, slightly above our guidance. We closed 10 44 homes, generating homebuilding revenue of $539,000,000 with an average sales price of about $516,000 Gross margin excluding amortized interest, impairments and abandonments was 21.7 percent. SG and A was 11.5 percent of total revenue as we continue to prudently invest for our rapidly growing community count.

Speaker 1

Adjusted EBITDA was $58,800,000 Interest amortized as a percent for homebuilding revenue was 3.0%. Our GAAP tax expense was $6,700,000 for an effective tax rate of 14.7%. Net income was $39,200,000 or $1.26 per share. This included an $8,600,000 pretax gain or $0.28 per share of EPS from the sale of our investment in Build Our Homesight, a technology company specializing Our Q3 expectations contemplate mortgage rates staying about where they are now with the economy remaining generally supportive. In this environment, we expect to sell at least 3 homes per community per month and end the period with approximately 150 communities.

Speaker 1

We expect to close 1150 to 1200 homes, up modestly versus the prior year with an ASP of roughly $505,000 Gross margins in the quarter will likely be about 20% as we work through sales arising from our acceleration to the Ready series. SG and A as a percentage of total revenue should be approximately flat compared to the prior year. Together, these results should generate adjusted EBITDA above $50,000,000 Interest amortized as a percentage of homebuilding revenue should remain in the low 3s and our effective tax rates be less than 12% as we continue to benefit from energy efficiency tax credits leading to diluted earnings per share above $0.80

Speaker 2

$0

Speaker 1

reflecting more than 10% annual growth and an ASP of about $510,000 Based on our Q3 margin guidance, we expect our full year gross margin to be above 21% implying a good recovery in the 4th quarter for more Ready Series Homes. SG and A as a percentage of revenue should be around 11% as we continue to carefully manage overheads. Achieving these results would lead to adjusted EBITDA greater than $260,000,000 and diluted earnings per share of at least 4 point $5 based on an effective tax rate of 15%. At this level, we'll generate double digit returns this year while positioning the business for significant growth in fiscal 2025 and beyond. Speaking of 2025, while it's still a little early to give specific guidance, I want to offer some initial thoughts on revenue, gross margin and returns.

Speaker 1

Revenue should be significantly higher year over year driven by our community count growth. We expect gross margin to improve in fiscal 2025 in part because of the mix shift Alan described. In fact, over time margins on our Ready Series Homes should continue to improve as we work with our trades to reduce their build costs. It's also worth noting that every zero energy ready home we deliver qualifies for a $5,000 tax credit, which would translate to about another point of margin if it weren't buried in our tax expense. Ultimately, higher revenue and improved gross margin from an increasing number of communities should lead to greater profitability and higher returns next fiscal year.

Speaker 1

Turning to our balance sheet. In March, we refinanced our 2025 senior notes with a new note due in 2,031 leaving us with no maturities until 2027. We also extended our revolver expiration to March of 2028. We ended the quarter with total liquidity of $433,000,000 providing plenty of firepower for our growth ambitions. Pivoting to our investment in land, we spent nearly $200,000,000 in the quarter, driving our year to date spending to just under $400,000,000 We remain on track for full fiscal year spending of at least $750,000,000 with the ability to invest more as opportunities arise.

Speaker 1

Even as we have increased land spending, we remain focused on balance sheet efficiency to drive attractive returns. More than half of our total lots are controlled through options, a ratio we expect to sustain. Finally, as it relates to our community count, we already control all the land we need to hit our fiscal 2025 growth goals and most of what we need to hit our 200 community count goal by 2026. Achieving our profitability will lead to a book value per share of $40 or higher by the end of the fiscal year. The chart on Slide 18 shows the progress we've made thus far in growing our stockholders' equity, having more than doubled our book value per share in just the past 4 years.

Speaker 1

In recent years, we've generated growth in our share price, but it has remained below our book value even as the composition has dramatically improved. Last year, we conducted a comprehensive investor survey to get to the root cause of that disconnect. The result of that survey was clear. Shareholders told us they wanted to see a robust and sustainable growth trajectory and a less leverage balance sheet. Those results led us to introduce our multiyear goals, which include ambitious growth and deleveraging objectives.

Speaker 1

These multiyear goals form the foundation of our approach to capital allocation because we agree with our shareholders. Generating growth and balance sheet strength are essential to creating shareholder value. Today, we have excellent visibility into achieving these goals. This is allowing us to contemplate alternatives for our excess capital. In practical terms, that means we are weighing the return and risk characteristics of additional land investments against the value created through share repurchases.

Speaker 1

Given our valuation in relation to current and future book value, we believe share repurchases are likely to represent an attractive additional use of capital. We have $41,000,000 remaining in our previously authorized share repurchase program. With that, I'll turn the call back over to Alan.

Speaker 2

Thanks again, Dave. We're pleased with the results we generated in the Q2. We delivered solid orders and profitability from a growing community count and we positioned our company for the future with significant growth in our lot pipeline. Perhaps more importantly, we're excited about where we're headed. We have a clear path to reaching each of our multiyear goals.

Speaker 2

They represent substantial growth in the business, a resilient and flexible balance sheet and an innovative and differentiated product offering. We are confident we can create significant shareholder value from these results. To close, I'd like to acknowledge my colleagues here at Beazer. We have a truly exceptional team, all of whom creating value for our customers, for our partners, for our shareholders and for each other. I could not be more proud to represent them.

Speaker 2

With that, I'll turn the call over to the operator to take us into Q and A.

Operator

Our first question comes from Julio Romero from Sidoti and Company. Please go ahead.

Speaker 3

Hey, good afternoon. Hey guys, thanks for all the color on the product mix next quarter and the accelerated closeout Star and Plus Series Homes and kind of the strategic rationale behind it. I guess just my question is, how confident are you that the financial impact is only centered around the Q3 and maybe talk about the scenario if that leaks into the Q4?

Speaker 2

Yes, I'll jump in first, for the question. I think we're very confident that the margins in the Ready Series homes are higher, both on the specs and 2B belts that we've sold than on our Plus and Star. And we're going to run out of Plus and Star homes. That was sort of the point. So confidence into the 4th quarter is very good.

Speaker 2

Now look, there's an overlay on any of this. If the rate environment is radically different, substantially higher rates over the next 3 or 4 months than what we've experienced, there may be other things going on, but it's not going to be the fault of the product mix.

Speaker 3

Very helpful. And then any way to kind of parse out the margin impact between for next quarter between greater specs versus the accelerated close out of the Star and Plus homes?

Speaker 2

The thing is, look, we anticipate the question, appreciate the question. It's a really tough one. It's not an easy thing because a lot of the specs are also star or plus. So is the effect because they were specs or is the effect because they were star or plus. Our sense is this more significant impact, more than half is related to intentionality on our part to get beyond star and plus and the minor portion relates to a slightly higher mix of specs in the quarter.

Speaker 2

But as I've said, the two things kind of overlap because getting through Star and Plus that's what most of our specs were.

Speaker 3

Yes. I got you. That makes sense. And very good. Thanks for all the color and thanks for the color on the community count growth and I'll pass it on.

Speaker 1

Thanks, William.

Operator

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

Speaker 4

Thank you very much. Nice quarter, gentlemen. Can you talk about the cadence of new order activity throughout the quarter and into the month of April?

Speaker 2

It was it built. January wasn't great. February was a little better and March was better than February. I don't have final April numbers honestly. We closed the month yesterday.

Speaker 2

I would say April was choppy. It was similar to March. It didn't really differentiate itself significantly. Some markets a little better, some markets a little weaker, but we don't release monthly order numbers because I just think at our side it's very hard to draw conclusions from a month. But I don't see anything fundamentally different in April than we saw in March.

Speaker 4

And then your implied full year closings guidance suggests a very strong step up in the fiscal Q4, maybe one of the best on record. I suspect you've got that visibility in your backlog at this time, but maybe you can comment on that.

Speaker 1

Yes. Look, Alex, it's Dave. I would comment that we feel pretty comfortable given the production universe that we have. And you can see in the Q the number of units we have under production between the backlog and our specs are under construction. We feel real comfortable with the full year guide and increasing the guide as we did in the quarter.

Speaker 1

But frankly, you're right, there is still work to do for the Q4 and we're out doing the work. So I think your assumptions are correct and the math you're doing is right, but we feel real comfortable given the size of the backlog in the product universe.

Speaker 2

And let me just add one other frame on that. It's not perfect, but I know it's a bit of an industry convention to look at backlog and do a conversion ratio of what will backlog be at June 30th and what percentage of that will close in the Q4. It's a much higher 4th quarter backlog conversion than the last couple of years, but that's also a function of the fact that cycle times are dramatically different than they were over the last couple of years. So we won't be back to the kinds of backlog conversion that we had pre COVID. So yes, it's a big step up.

Speaker 2

When you sort of put it in the pre and post COVID context, with the production universe that we've got, we feel very good about it. Thank you.

Operator

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

Speaker 5

Hey, guys. Good afternoon. Nice quarter and thanks for all the detail. Alan, first, I apologize if you've given this detail in the past, but I was hoping you could just go into a little bit more detail on exactly kind of what the primary differences are between Ready Series and the older series. I'm not sure if they're drastically different in terms of floor plans or anything else that would kind of contribute to that margin lift that you're citing here?

Speaker 2

So there are a number of things and in fact I have to admit Alan I was really hoping for this question and in fact anticipating it. So there is a slide in the appendix that has both the homeowner benefits and some of the building science features that make these homes different. The envelope is different, the way it's wrapped is different, the way it's insulated is different. It has what's called an ERV or an energy recovery ventilator. The thing that a consumer would immediately notice is typically 2x6 walls.

Speaker 2

They'd also notice that the ducts are all in conditioned spaces, which kind of makes sense to people. They're like, gosh, running a bunch of ducts in an unconditioned attic where I'm losing a lot of heat or I'm gaining a lot of heat depending on the season is a problem. And then as we talk to people, we can really put mathematics with 3rd party validated testing on it relative to what's called a HERS score, but maybe even more importantly, the air exchanges per hour. Now I know that a large portion of our buyer population doesn't walk into a new home community saying I'm shopping Hers or I'm shopping ACH. So for us, a big opportunity is to explain to people the value that that represents for them.

Speaker 2

And then when they say, okay, well, that all sounds good, but everybody sort of talks about green, where's the proof? And that's where the 3rd party validation, the testing and the metrics are. And then frankly, they can't unsee what they've seen. They go into another community and they ask to see somebody's HERS scores. And our homes are pulling 30s and low 40s.

Speaker 2

They're going

Speaker 1

to go see

Speaker 2

70s and people are bragging about them. So those are some of the characteristics that are different. I don't know if that totally answers your question. If we go a lot deeper, I want my building science people to get into it. But I will tell you, I've highlighted the features in this exhibit so that you can see very clearly the things that a buyer sees and understands if we do our job.

Speaker 2

This just makes it a better home.

Speaker 5

Got you. So on that point though, I mean, is the better margin, would you say more of a cost savings or it sounds almost from what you're describing, you almost get more of a price premium given all of these features in the home. So is it more of is it more of a price versus a cost savings standpoint?

Speaker 2

Yes, it's definitely a price issue because the cost to build these homes are higher than the cost to build our prior series homes. And Dave talked a little bit about 25 and I mean it's obviously early, but the thing that we have seen every community or every division started with 1 community with 0 energy ready and 1 home. And then it was the whole community and then it was 2 communities. And this ball rolling downhill in terms of building momentum, what's really starting to happen is the trades get it. They are seeing benefits in cycle time.

Speaker 2

For example, our HVAC contractors are able to take a couple of days out of the install with the advanced duct install with our homes. They didn't know that at first. They were charging us a premium. They're like, we don't know what this is. We haven't used these products.

Speaker 2

We don't understand it. We don't really want to do it. You're going to have to pay extra to get us to do it. Now they look at it and say, wow, this home is actually going to be much better from a warranty standpoint. It was faster for us to build.

Speaker 2

Yes, we'll do that again, please. And we haven't I don't think really scratched the surface and clawing back some of those savings. So today it is the fact that these homes are more expensive to build. And I don't want to in any way diminish our efforts to date, but I still don't think we've really scratched the surface on truly connecting buyers with realizing this is a home they cannot buy anywhere else. And I have done this personally in markets when I travel.

Speaker 2

Let's go look at a $2,000,000 home and let's see what their HERS score, what their ACH score is. Let's ask questions like to create a comparator to the kind of home that we're buying or building. We've got an opportunity to get better and better at explaining that. And that's why I think the revenue side is an opportunity as much as the cost side is.

Speaker 5

Great. Thank you for all of that detail, Alan. And I'm not surprised you had the slide prepared for us. Thank you for that as well. Second question, if I could.

Speaker 5

You mentioned the slide in your Q1 deck that kind of had the 3 scenarios and I happen to pull it up. And the downside scenario in that deck is an environment with rates in the high 7s, which we're kind of pushing back up against today. I'm sure that's not what you and everybody expected 3 months ago. But on that slide, you also said, and I guess in that environment, you would expect the sales pace to be sluggish and incentives to be higher. It doesn't sound like from your comments, you're really seeing that effect from the move in rate.

Speaker 5

So I'm just curious if you could maybe just talk through what you are seeing in response to higher rates. Has the consumer been largely agnostic to it? Are you incentivizing more to buy down the rate or do other things to improve the affordability equation given the move higher?

Speaker 2

We haven't seen a dramatic shift in incentives, particularly financial incentives. We have seen a migration and that overstates it. We've seen a move toward more temporaries than permanents as rates have moved up. Obviously, you get pretty good bang for the buck on a 21 or a 321. And in a higher rate environment, I think some buyers are analyzing that and saying, well, it's unfortunate, but with the temp, I am going to get a lower pay rate for a few years and I will have an opportunity to refinance.

Speaker 2

I'm always at pains to point out, I don't know why I feel so strongly about it, that of course when buyers use temporary buydowns, they do qualify at the full pre buy down rate. So this is not creating a different kind of a housing problem. And those of us who've been around the industry a long time want to always be very clear about this isn't like some previous period. But we are seeing a little more interest in the temporary buy downs. And the other thing that we saw and we saw in the Q2 and I think we're going to see it in the Q3 and frankly it's going to help us a little bit is I think a heightened interest in specs.

Speaker 2

I think that's the other thing that happens and given that I'd really like our remaining spec or Star and Plus series to go away in the Q3, I'm okay with that.

Speaker 5

Got it. All right. Thanks as always. I appreciate it.

Speaker 2

Thanks,

Operator

Alan. Our next question comes from Alex Barron from Housing Research Center. Please go ahead.

Speaker 6

I'm sorry. Thank you, gentlemen. Yes, I wanted to focus it on share buybacks. I heard you mentioned it a little bit at the end, but I was just curious what would it take at this point given the valuation for you guys to step up and buy start to buy some given the big discount to book value?

Speaker 1

Well, Alex, we tried to make it pretty clear in the prepared remarks. We have a framework that we use. It's a consistent framework that looks at risk versus reward. And I would tell you we have a $40,000,000 authorization that's currently outstanding. And given where the stock is currently trading, not just from where the book is today, but where we see and have visibility on where it's going to be over time.

Speaker 1

It looks like a much more attractive use of our capital on a go forward basis from a risk and return perspective. I won't get too detailed beyond that, but clearly we're looking at it and evaluating it all the time on a real time basis.

Speaker 2

I'll go a little further. I think we will be in the market executing against some share buyback. What we're not going to do, Alex, is just say, hey, at any price, it's the right thing to do. But in the current context of the share price, I do think that we will be participating in share buybacks when our window opens this quarter.

Speaker 6

Yes. No, I'm not saying at any price, but when it's trading at a 30% discount to book, it seems almost like a no brainer. But anyway, good to hear that. What about similar thoughts on dividends? Maybe you're not quite there yet, but other builders have started to launch more consistent dividends.

Speaker 6

Just your thoughts around that.

Speaker 1

I would tell you, Alex, it feels a little premature to have that conversation. I think, Alex, I think we've tried to make it pretty clear kind of what the considerations in the market and frankly, the purchase program, as Alan said, seems to make a lot of sense, given where we are. So

Speaker 2

Yes. And we want to execute our multiyear goals. Yes. Like we've got we are going to grow the community count. We are going to have net debt to net cap below 30% when we said we would.

Speaker 2

And we think we can do that and accommodate in these this range of share price and buybacks. But I think to go beyond that in terms of returning capital to shareholders, we need to get a little further along.

Speaker 6

Okay, great. And if I could ask one more on the orders, the Southeast region orders were down 30% and is that just mainly because you're experiencing strong demand and communities are selling out faster than you're replacing them or what's going on there?

Speaker 2

Yes.

Speaker 1

Excuse me. A lot

Speaker 2

of our Southeast divisions do not have very large community counts. And one of the things that happens to us occasionally in the Southeast is that we'll gap out, because we don't run a big, big spec program. So we can get caught between phases a little bit. I don't think anyone should infer from a quarter a particular narrative around the Southeast. Our Southeast markets are pretty good.

Speaker 2

We are happy to be in them and frankly we're growing community count in every one of them.

Speaker 6

Okay, great. Well, best of luck. Thank you.

Speaker 2

Thank you,

Operator

Alex. Thank you. Currently, our last question in queue is from Jay McCanless from Wedbush. Please go ahead.

Speaker 7

Hey, good afternoon everyone. So I wanted to ask also on the orders with both Southeast and the East down pretty significantly relative to where the West was. The cynic in me says some of this move to the Ready Plus Homes has moved some inventory, generate some cash flow in a very competitive environment. Is that the right way to think about this? Or is there really a push to get some of these newer homes out there?

Speaker 2

We really want to get the newer homes out there. You are familiar with our balance sheet. There isn't really a generate cash focal point. We're really trying to maximize the value of every community. We've got some communities that have been in the Star and Plus series where we've been able to introduce Ready.

Speaker 2

We want to accelerate that. We've got some communities that are not going to be converted or transitioned to Ready. I'd like to build out of them. And in the communities where we are in all new communities are only ready, we definitely want to get some sticks in the air. So we are seeding as we always do those communities with some specs.

Speaker 2

But the focal point is really around the sooner we have clarity, certainty and the simplicity of we sell ready homes, they're better built and they perform better. I think the happier we'll be, our buyers will be and our shareholders will be.

Speaker 1

Jay, I would tell you in the East, the sales pace was very much in line with the overall company average. It was a little bit of a tough comp from last year, but there's really nothing freed into there.

Speaker 7

Okay. And then I wanted to ask, I'm looking for the slide in the deck where you said that, okay, I think it's Slide 14, where you say that the gross margins when you transition to already homes or mostly ready homes is going to be improved versus the second half of fiscal twenty twenty four. But when I'm looking at the numbers you gave right now, it looks like 20% adjusted gross margin for the Q3, probably something in line and maybe a little bit better for the Q4. I mean that's a pretty easy bar to say you're going to be higher than where are these margins going to compare to where they were in the first half where you guys had pretty good set of gross margin in the first half of this year?

Speaker 1

Well Jay, just for a quick correction on the question, the words in the script were pretty clear. If you look at the full year gross margin guide, it suggests a pretty significant pickup in the Q4. So it's not going to be around 20%, we said it's a number better than that.

Speaker 2

And we got into above 21% for the full year. The only way you're going to get there with Q3 at 20 is a good lift in Q4. Exactly.

Speaker 7

Okay. But then still the question is how does the margins under these new homes compare to what you were doing in the front half? Is it going to be equal, slightly less as you get the build issues worked out? What should we expect from

Speaker 2

that? Well, I guess I would say is we think that margins in 2025 will be higher than margins in 2024. And that's because these are homes that command, I think that kind of value and because think we can keep working on getting our build costs down. So, it's hard to make a comparison of one period to another period is which periods and which homes, but at a higher level what we've said is 25 will be above 24.

Speaker 1

Okay.

Speaker 7

And then the last one I had just on the specs, it looks like your specs and process were up sequentially from Q1 to second quarter. Could you talk about what's driving that?

Speaker 2

Community count growth.

Speaker 1

Jay, if you look at our slide, we actually show on a per community basis and it's really not dissimilar on a per community basis. It's just that we have the community count growth coming online and that's driving some incremental specs.

Speaker 7

Okay. And then, actually did have one more. What was the incentive percentage in the quarter and what was it in the prior year?

Speaker 1

Let me grab it for you one second, I don't have it in front of me right now. I can tell you Jay, the number hasn't moved too significantly in the Q2. It's been a pretty minimal change. I can follow-up with the exact number, but we look at it pretty closely on a quarter by quarter, week by week basis to see what's happening and it really didn't move much in the Q2.

Speaker 7

Okay, great. Thanks for taking my questions.

Speaker 2

Yes, you bet, Jay. Thank you.

Operator

And I am showing no further questions.

Speaker 1

Okay. I want to thank everybody for dialing into our Q2 call. We look forward to Tom Brady in next quarter as we move toward the end of the year. Thanks so much and have a good night.

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 Q2 2024
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