Q1 2020 Earnings Call
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Good afternoon, and welcome to the Beazer homes earnings Conference call for the quarter ended December 31st 2019, 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 Dot These are dot com.
At this point I will turn the call over to David Goldberg, Vice President and Treasurer.
Thank you good afternoon, and welcome to the Beazer homes conference call discussing our results for the first quarter fiscal 2020.
Before we begin you should be aware that during this call will be making forward looking statements.
Such statements involve known and unknown risks uncertainties and other factors, which are described in our FCC filings, including our Form 10-Q , which may cause actual results to differ materially from our projections any forward looking statements speak only as of the date. The statement is made and 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 you factor. Some work from time to time and it is simply not possible to predict all such factors.
Joining me today around with Merrill Lynch, Chairman and Chief Executive Officer, Bob Solomon, Our executive Vice President and Chief Financial Officer.
Our call today.
I want you Highwoods when the first quarter, and then discuss our progress towards our goals for fiscal 2020.
Bob will cover our first quarter results in greater depth as long as our expectations for the second quarter.
Well then come back to provide an update of our balance sheet and more detail about our land spend far by wrap up by Alan.
After our prepared remarks, we'll take questions in the time remaining I'll now turn the call over Dallas.
Thanks, David [noise] and thank you for joining us on our call. This afternoon.
Got a productive first quarter as we met or exceeded our expectations on each of our core metrics.
First quarter orders were the highest they've been in a decade up nearly 30% year over year.
As we benefited from both a healthy demand environment and community count growth.
And importantly, gross margins ticked up reflecting the improvement efforts, we adopted last year once demand stabilized.
This strong performance drove a large increase in our backlog.
Dancing, our visibility and adding to our confidence for the full year.
It's fair to acknowledge that sales comparisons with the prior year relatively easy in the first quarter.
But that doesn't diminish the fact that they're both market and company specific factors supporting our expectations for future improvement.
At the market level fundamentals remained strong across the board continued wage growth low unemployment and high consumer confidence all support robust demand and the supply of both new and used homes remains quite low.
Of course, sustaining affordability remains a challenge, but the reduction in interest rates over the last year as directly benefited homebuyers.
Inside the company, we are using the strong economic backdrop to reduce incentives is one part of our effort to drive gross margins back into the Twentys.
The first quarter reflected early results of these efforts with higher margins in backlog, providing further evidence of the opportunity in front of us.
With absorption rates at current levels, we are laser focused on delivering year over year margin improvement in each quarter. This year.
At the beginning of the fiscal year, we outlined three main goals for 2020.
These goals arise from our long standing balanced growth strategy, which targets a double digit return on assets by growing EBITDA faster than revenue.
From a more efficient and less leveraged balance sheet.
In the first quarter, we made progress on all of these goals.
First EBITDA was up 9.4%, marking the first year over year improvement, we generated in five quarters and providing momentum toward our full year goal of more than 10% EBITDA growth.
Second strong sales and improving margins together with the continued monetization of previously non earning assets are pushing us toward our double digit our away goal by year end.
And finally growth in closings and profitability will generate sufficient cash flow to allow us to retire more than $50 million of debt, while we invest for future growth. This should allow us to achieve a net debt to EBITDA ratio below five times.
Achieving these goals will lead to higher earnings per share growth in book value and further growth in our return on equity all from a less leveraged balance sheet with that I'll turn the call over to Bob.
Thanks, Alan and good afternoon, everyone.
Looking at our first quarter results compared to last year.
New home orders increased over 28% to 1200 51.
As our average community count rose, 5% and our sales pace rose more than 20%.
Pace was 2.5 sales per community per month, the highest first quarter level, we generated in the last 10 years.
Homebuilding revenue increased 4% to $417 million, driven by 3% increase in closings and a 1% increase in or Asap.
Our gross margins, excluding amortized interest impairments and abandonments was up 10 basis points year over year, driven by our ongoing efforts to reduce incentives and simplify our product offerings.
As we've previously noted avoiding a significant drop off in gross margins sequentially from the fourth quarter should bode well for the year as our first quarter gross margins, that's typically been well below the prior quarter.
As DNA as a percentage of total revenue was 13.3% down 20 basis points.
This led to adjusted EBITDA of $29.4 million up over 9% versus the prior year.
Total GAAP interest expense was up around 3.5.
However, our cash interest expense was actually down $3.3 million due to our debt retirements and refinancing activity.
We recorded an income tax benefit of $200000 in the quarter. This was driven by energy efficiency tax credits of $700000, which compared to $5.3 billion of credits in the prior year.
And finally net income from continuing operations was $2.8 million.
Before we move onto our second quarter expectations I wanted to provide additional details on the difference between our GAAP and cash interest expense on slide seven you can see the relationship between the two measures over the past several years.
As we've explained on prior calls the amount of interest that we amortized through cost of goods sold is a function of both our capitalized interest and or inventory turnover, while our cash interest expense reflects what we are actually pain.
In line with our balance growth strategy, we are improving our return on assets with a less leveraged balance sheet by successfully growing our EBITDA faster than our assets, which is leading to higher inventory turnover, but by doing so we're also accelerating the expensing of previously capitalized interest this.
As occurred even as we have dramatically reduced our cash interest expense.
Over time, we expected our GAAP interest expense will converge with our cash interest expense, which will fall further as we pay off additional debt.
Turning now to our expectations for the second quarter fiscal 2020.
Relative to the same quarter last year, we are targeting the sales pace comparable to last year, and we expect our community count growth slightly.
Taken together this show modest increase in orders as we are prioritized driving higher gross margins.
Gross margin should be up at least 20 basis points year over year back above 20%.
We expect our backlog conversion ratio to be around 70%.
Our hsp should be in the high three seventies.
We expect desk DNA as a percent of total revenue to be roughly flat with last year.
Total GAAP interest expense should be around $23 million.
Prices both interest included in cost of sales indirect interest expense.
Cash interest expense will be approximately $21 million down $4 million compared to last year.
Our annualized effective income tax rate for the full year is expected to be about 26% that we may experience fluctuations on a quarterly basis.
Finally, the cash component of land spend should be around $135.
At this point I'll turn it over to David Thanks, Bob.
Reflecting the goals of our balance growth strategy, we have structure balancing the way that allows us to invest in our business, while continuing to reduce borrowings toward our goal, bringing debt below $1 billion with our defined de leveraging past without any significant maturities until 2025, we have substantial runway to focus on operations growing the business.
In the first quarter, we spent $146 million on land and development in line with our expectations.
Looking forward, we continue to expect land spending for the full year to be significantly higher than the prior year.
At the end of the first quarter, we owned or controlled nearly 19000 active lots representing the freely half year supply of land based on our fiscal 2019 closings.
This level supports our growth goals as we continue to invest in our business.
Cable in the right side of slide 10 details our expectations for future community openings in close outs.
Finally, we continue to allocate a component of our land spend the rollout of gatherings across our footprint.
As of the first quarter, we're open for sale in Orlando in Dallas, We are under construction in Nashville, and expect to start selling soon.
And later this spring, we expect to break ground in Houston.
Finally, we own approve the acquisition of additional sites in Atlanta, Charleston, Dallas, Maryland, and Orlando.
On Slide 11, you can see the success, we've had in executing our balanced growth strategy over the last few years as our first quarter EBITDA has grown by 80% or assets have declined by 13%.
And we believe we can drive additional balance sheet efficiency as you focus on buying shorter duration deals increasing our use of options and generating cash from assets that were previously inactive.
Our improved balance sheet efficiency has enabled us to grow our business, while substantially reducing debt and decreasing our cash interest expense.
This is reflected on the right hand side of the slide when we compare the improvement in our first quarter EBITDA versus the reduction in first quarter cash interest expense over the last five years.
Given our expectation for further debt reduction we expect this trend to continue moving forward.
With that let me turn the call back over down for his conclusion.
Thank you David.
The first quarter fiscal 2020 was very productive for beazer as we exceeded our sales targets improve margins and invested for future growth.
These results gave us momentum heading into the spring providing confidence in our efforts to reach our goals for this year and positioning us for higher earnings and improved returns in the years ahead.
I want to thank our team for their ongoing efforts I'm confident that we have the people the strategy and the resources to execute our plans over the coming years and with that I'll turn the call over to the operator to take us into Q1 day.
Thank you we will now begin to question and answer session to ask a question. Please press star one on mute your phone and record your name clearly if you need to withdraw your question Press Star too.
Ken to ask a question. Please press star one it will take a few moments for questions to come through please standby.
Our first question comes from Alan Ratner with Zelman and Associates. Your line is open.
Hey, guys good afternoon nice quarter congrats.
Thanks.
First question.
On this the Twoq guide on orders, obviously really strong order growth this quarter and it looks like you expect that to pull back quite a bit in twoq you just up modestly year over year I'm, just curious kind of how you're thinking about that because it looks like the comp is fairly similar and leased up to this point. It seems like the read on January from from other builders has been.
Pretty positive so is there something specific that might be driving that that pullback in rough.
Well and it's a this is Alan Merrill.
Couple of things going on there I mean last year in our second quarter, we actually had a pretty good number and this year, we'd like to do that again.
But with better margins and that's really the focus for US I think it is certainly possible. The environment is constructive and I think the opportunity or is there to do better, but we really focus this year and driving margins back into the Twentys and that has a has an effect on our enthusiasm for leaning into the.
Absorption rate.
That's helpful Alan and I guess just on that point.
You talk a little bit about what's getting you there on them on the margin I mean have you been actively raising prices over the last several weeks I mean, given the strong order activity is that why you're so confident on the margin and at the same time do you expect to see that pullback in growth or is there something else driving that costs or anything.
If you levers I mean, we Bob talked in the script, a little bit about reducing incentives and I really if we pivot back to last June once it became clear that the market had regained footing and we competed aggressively at this time last year to make home sales, we started removing incentives and you talked a lot about simplification and that.
Takes a little bit of time, but we've been working simplification strategy is through our product line up while adjusting incentives and raising prices, where we can and it's really a combination of those activities that give us the visibility into not just this next quarter, but a real belief that we can we can have year over year increases in gross margin all year.
Got it appreciate that thanks guys.
Thanks.
As a reminder, if he would like to ask a question at this time you can press star one on your phone and record your name when prompted.
Next we will hear from Alex let Ron with housing is research Center. Your line is open.
Yes, thanks, guys.
I appreciate the comments on the interest expense versus.
Interest going through cost of goods sold and I was just curious if you would expect that.
The interest going through the CNL for the whole you will be similar to last year's amount.
Well, we haven't given the full year guidance, but I think what we're trying to do Alex's to give.
You know a guide towards what the expense will be in total.
On a go forward basis, and I think if you looked at the percentage of revenue in this quarter I think you'll see that percentage of revenue tick down as we get through the periods, where we have.
Much higher closing velocity and we'll get some leverage out of the interest expense number in Cogs.
Okay, Yes, I guess, that's what I was kind of getting that and then I guess you know it's I think the.
Order growth has been a much stronger probably for yourselves and everybody then.
Probably when everybody was thinking and.
Seems like the euro is off to a great start so I'm just trying that kind of.
I understand your priorities you know you had mentioned before focusing on debt reduction, but what is your appetite.
Growing versus kind of.
Maintaining generating cash not growing as much to focus on the debt reduction what what's the kind of a greater priority at this point.
Well, we've taken a I think a balanced approach to that we're going to pay off at least 50 million. This year. It's the right way that we set up our term loan last year to give US a graduated path to really clearly show what debt reduction would look like but that leaves us plenty of firepower to grow the land bank.
As in where appropriate.
You know just because we can doesn't mean, we should so we want to be careful in our underwriting and we will be but I think your point is right. The market's quite constructive we're seeing opportunities to put money to work and I think we can devote I think we can grow our lot count and at least pay off 50 million and we'll see overtime.
This year that balance may increase a little bit, but but we've really committed to a minimum debt reduction this year.
Frankly, Alex that's really the hallmark of balance growth, it's the ability to pay down debt and grow the business that we've been doing for a while we will continue to do at the market is warranted and the opportunities are there as Alan said.
Okay, Great and then if I could ask one last one.
Can you give us a sense of where where you think with talks rate is going to fall. This year and also are you guys able to take advantage of this energy products grow the.
We know older extension.
Yeah, Alex our effective tax rate is going to be about 26%.
Yes, we're looking at opportunities to take advantage of the tax rate or the efficiency tax credit renewal as well just like we havent in prior years.
Okay, great. Thanks.
Good luck for this year.
Thanks out sucks.
Thank you. Our next question comes from Jay Mccanless with Wedbush. Your line is open.
Hey, guys. Thanks for taking my questions.
Just wanted to ask on spec homes versus to be built how's the gross margin spread what's going on that right now.
Well, Jay they've always been constructive environment, we've had they been narrowing.
And we're pretty positive bought down I think you've seen with the increase in margin and increasing margin guide going forward that were pretty constructive about that margin differential.
And then on.
The flattish order growth I guess, just a function of common how much all brought in and orders in the first quarter.
Maybe could you all talk little bit about the strength out west and was it some new openings was it just better demand than what you're seeing last year, just a little more behind the scenes would be helpful.
Sure.
So certainly last year.
The west was more adversely affected than other markets, California. In particular was really really tough last year in the fiscal first quarter. So that is certainly part of the year over year improvement, but it is the kits that we had strong results in all three of our reporting segments and.
In essentially all of our divisions, so and it built during the quarter December was better than November on a year over year basis, which was better than October so with that that was actually quite strong, but yes, California certainly played a role.
If we if we got kind of go back to the guide and I addressed this a bit before you know last year.
I think we were 3.3 sales per community per month, which was on the high end of the average for the second quarter. So it was a pretty good number, but we achieved that number by being competitive.
You may choose a different euphemism, but we were competitive we wanted to make home sales, but third and to be bills or end to end specs and this year I think we can be in that range.
But we are very focused on achieving what we call and.
We want that pace and we want to see the margin improvement.
And then just on on slide 10 on.
If the community count is going to be slightly for twoq versus last year.
The amount of beauty is you'll have closing remarks 12 months should we expect maybe a flat to slightly down community count for the back half of the year or what's the what's the cadence going to be as you guys.
Jay Jay It's David it's too early for us to give you a prediction on what the back half of the year is going to look like we try to give you. The table. He makes sense to kind of whats in the pipeline.
But hasn't moved through the year, we'll talk about kind of how community count cadence is going to go.
Not much more to say that I've, then modest media account growth in Q2, as we talked about before.
Hi, Jay I'll, just give you one other comment on that I think is you think about the spring.
We simply don't know.
Exactly which communities are going to sell it which paces and in a context, where we are trying to do and not just pace. It just adds a enough uncertainty as to the rate at which those 55% to 75 communities will close out but it makes it very hard to figure out if the new openings, which are coming and the closeouts will be.
And we've got good visibility into March and that's what we've spoken to you can see in the aggregate. We've got the firepower of communities to still have some can be community count growth that trying to be precise in Q3 and four at this point before we have our biggest selling quarters of the year, It's just too tough.
And then any I know you also the January it sounds like January was has started off well.
Any quantitative number or any quantitative.
Description you'd like to give that just the number in the west are so big would love to hear anything you'd like say further about January .
Yeah, we're not going to give a monthly number we're not even reporting internally January yet it's still January so it would be it would be tough yet it is certainly Ben.
A good January .
And we like to look at the business over quarters not days and weeks.
But but we continue to see strength in the market across the footprint.
That's a trial. Thank you guys appreciate it thanks Jay.
Next we have a follow up question from Alex Let Ron with housing Research Center. Your line is open.
Yes. Thank you.
I was curious if you guys are seeing any noticeable changes and the.
Commissions that you're paying off to brokers.
One question the question was.
What are your thoughts or appetite as far as share buybacks at this point.
Yeah I'll be have take both on the commission side, there hasn't really been a change and what we've seen in terms of realtor behavior or payouts on the share repurchase side look we've always been opportunistic with our capital.
The key is kind of.
We think about returns within what returns and risk in our capital allocation.
And if theres opportunities by the stock back to this return that makes sense, we certainly have some firepower to do it so.
So the answer is all everything's open for business and we'll see where we go.
Okay awesome. Thanks.
We are showing no further questions at this time.
Alright, Thank you very much already for out for joining us on our call and we will talk given three months.
Includes this call.
Thank you that does conclude today's conference. Thank you for participating you may disconnect at this time.