Q2 2020 Earnings Call

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Good afternoon, and welcome to the Beazer homes, earning conference call for the quarter ended March 31st 2020, today's call is being recorded.

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 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 discussion our results for the second quarter fiscal 2020.

You should be where that turn this call we wouldn't 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 statement, including any statement expressing confidence regarding future outcomes speaks only as of the data statement is made and except as required by law, we do not her to any obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.

New factors emerge from time to time and is simply not impossible to predict all such factors.

Joining me today around Merrell, Cheryl Chairman and Chief Executive Officer, and Bob Solomon or Executive Vice President and Chief Financial Officer, I'll now turn the call overt Alan.

Thanks, David and thank you for joining us on our call. This afternoon.

Before we get started we want to express our sympathy to those who have been personally impacted by the cobot 19 pandemic.

We recognize that there has been a profound lots of life and many Americans are still fighting the illness in health care facilities and at home.

We also sincerely appreciate all the first responders in a central workers, who are supporting the country. During this challenging time.

As most of you have probably anticipated this is going to be a very different earnings call.

In light of the extraordinary environment and taking into account recent FCC guidance about earnings calls, we've substantially modified the format and content of this quarter's call.

First we will give a very brief summary of the results we reported today.

You'll find our traditional operational and financial slides included in the appendix to the presentation.

Then we will describe our immediate and ongoing response to the crisis, both operationally and financially. This will include a discussion of April activity that we obviously don't have final numbers for the month yet.

Having reviewed our efforts to date will discuss the primary risks, we see moving forward and how we're approaching these risks.

After our prepared remarks, we will take questions in the time remaining.

Given the uncertainty in the economy today, we're withdrawing any goals or guidance, we offered in our earlier public comments and we will not be giving any guidance for the next quarter or the full year.

So turning to our second quarter results.

Despite the challenges that emerged in the final weeks of March we had a successful second quarter.

Specifically, new home orders increased 4% to 1600 61.

Spec sales per community per month of 3.3.

Prior to the onset of the crisis, we were on pace for the highest level of second quarter orders in the past 10 years.

We grew our topline by 16% as we benefited from both increased home closings and the higher ASP.

Homebuilding gross margin, excluding amortized interest impairments and abandonments was up 100 basis points to 20.8%.

Electing both the strength of the market pre crisis and the success of our product simplification initiatives.

Yes, DNA as a percentage of total revenue was down 70 basis points versus the prior year.

Together these results drove adjusted EBITDA up 35% year over year, and led to $10.6 million and net income for the quarter.

In a normal environment, we would be enthused by these results since we achieved or exceeded all of our quarterly expectations and we would be discussing the balance of the year with a lot of optimism.

But of course these are not normal times.

In early March it became clear to us that the cobot 19 pandemic was going to be disruptive to the economy and to our business.

While we Didnt know exactly how disruptive we began a process of modifying but their business practices and our spending.

I'll describe our operational response than Bob will discuss the decisive steps we are taking to manage our liquidity.

Safety has long been are highest priority appeaser. Our initial response was to help protect our employees customers and trade partners by closely following CDC and state health.

Already guidelines. This is taken several different forms across our company.

In our communities and our design studios, our employees are practicing social distancing and using enhanced cleaning procedures.

Our sales teams have shifted to an appointment only home sale process in both they and our designers are leveraging virtual sales tools to connect with our customers.

On our job sites, we're acquiring that our builders and trades, where appropriate protective equipment and we've adjusted vendor schedules to allow for the necessary social distancing.

We have also reached out to existing homeowners and neighbors asking them to report to us any observations of unsafe job site practices.

For our customer care teams.

So we've had to suspend in home visits we're still committed to driving high levels of buyer satisfaction.

To accomplish this we're increasing communication and resolving issues remotely wherever possible.

At our offices, we were early to adopt a mandatory work from home policy and have been pleased with the sturdiness of our IP infrastructure to provide remote access to our various software applications and tools.

Finally, we adopted illness and testing tracking to allow us to react to any reported symptoms and koby test results with detailed operational cleaning in quarantine rules for various scenarios.

Once we address the health aspects of the pandemic. Our next highest operational priority was delivering homes to our buyers is close to on schedule as possible.

The onset of the crisis caused significant logistical disruptions in finishing and closing homes and we changed our processes accordingly.

By working through these hurdles, we met our buyers expectations for March helping to bolster our liquidity.

Well, we focused on closing homes. We also took a hard look at all of our operational and administrative processes to see what else needed to change in this new environment.

By the first of April we were able to rollout comprehensive operating instructions for every department in the company organized around some key priorities.

Including protecting health and safety generating cash flow and reducing cash expenditures.

Tomorrow, we will update these operating instructions, adding plans for the gradual reopening of our offices and sales centers as conditions permit.

The strong sales we experienced in January and February carried over into early March.

But by mid month, our pace it weakened considerably and our ability to anticipate demand essentially disappeared.

With rapidly changing federal state and local rules about which activities were allowable for essential there was significant turmoil in each of our markets.

It has continued into early April.

Since the first week of April However, we've seen sequential improvements in our gross sales activity each week.

While gross sales remained below the prior year the gap has narrowed.

To be clear, we're not reading too much into this improvement yet even in normal times, we wouldn't recommend extrapolating a trend from a few weeks of data, which is why we don't typically report weekly sales results. In fact, we're still anticipating and preparing for home sales below normal seasonal levels for the foreseeable future.

Turning to cancellations, while they remain a very low percentage of our backlog they are running above historical levels.

In the first three weeks of April last year, we experienced 65 cancellations, which represented approximately 3% of the March backlog.

In the same time period. This year, we've recorded 82 cancellations were about 4% of the March backlog.

And although we've seen a reduction in weekly cancellations since the peak at the end of March we expect to experience a higher than normal cancellation rate until conditions in the broader economy stabilized.

Finally, as it relates to pricing and margins.

Havent yet seen a notable increase in price discounting in our markets and consequently margins have held up despite the slowdown in sales.

Price cutting remains a threat, but across our footprint low levels of finished new home inventory a slowdown in new starts and consumer concerns about visiting resale properties may mitigate some of this risk.

As we've all had to adapt to a more virtual or online environment. It might be useful to take a step back and look at the top end of our sales funnel.

Which are the leads we receive from consumers from our various online marketing activities.

Many of you may not recall that I joined Beazer after spending seven years and the online real estate space essentially creating leads for realtors homebuilders and apartment communities. So this is a particular area of interest for me.

Last summer, we made changes to our online marketing efforts to improve the quality of the leads we were receiving rather than just emphasizing the quantity.

This was done to ensure that every lead deserved and received an immediate and personal response from someone trained to assist in the home search process.

These changes were expected to reduce lead volumes, but increase quality without a material change to our online budgets and that is exactly what happened.

Looking at online lead activity. This calendar year, you can see that leads were down each month, even as we were generating robust sales activity.

But here is something that might prove to be important.

Late March our lead activity started to surge.

We have confirmed with a broader search sites that it wasn't just our leads.

Entire category of online search activity for new homes has picked up materially.

Of course, this has something to do with consumers spending more time at home and online during the crisis and we realize no amount of search for lead activity can take the place of a job or functional mortgage market.

But even if our ability to convert these leads to sales is more difficult. We're pleased to have a larger group of consumers to work with.

With that I'll turn the call over to Bob the highlight our financial response to the pandemic.

Thanks, Alan and good afternoon, everyone.

It's Alan discussed earlier at the onset of the crisis, we took decisive actions to generate and preserve liquidity.

Fully drew on our $250 million revolver in mid March and put new processes in place to ensure that we could continue to come close homes.

We also deferred several land purchases.

As we have previously reported these actions led to total liquidity of $294 million up over $70 million from that same time last year.

Looking forward.

Liquidity as a key financial objective, because we do not want to be beholden to the capital markets in times like this.

So let me describe the balance sheet and income statement aspects of our efforts to preserve and expand our liquidity in the quarters ahead.

On the balance sheet, our two largest categories of investment our with inland.

At March 31st our balance was approximately $100 million higher than in the prior year.

By higher backlog and specs under construction.

We expect this balance to decline, creating additional liquidity.

We also expect to generate liquidity by managing our land spending.

Over 70% of our Atlanta zone, allowing us to generate significant cash flow from closes, particularly while we slow land spend.

We are working with land sellers in each market to restructure reduce or defer spending.

We have paused much of our land development spending.

During the slower sales pace and seeking improved terms from land development trades.

In terms of the income statement, we've also taken steps to improve liquidity.

We are working with our construction trades to reduce our direct costs across the board and not just for reduce labor costs.

These efforts have shown immediate progress with most divisions targeting at least 3% savings and hard costs.

We've also reduced operating expenses and most departments by among other things instituting a hiring freeze in delaying some significant but discretionary spending.

Finally, our senior leadership has taken a 20% reduction in salaries, who at least the under this fiscal year.

We believe the actions, we're taking put us in position to operate through the coming quarters without needing to access to capital markets, either with substantially lower demand and higher cancellations in more of them.

Now I'll turn it back over down.

Thanks, Bob.

We've identified three primary near term risks that our company and our industry are facing.

First is reduced demand for new homes.

While conditions will vary by market were higher unemployment persists it will lead to lower housing demand and potentially put pressure on home prices.

Second is constrained mortgage availability.

The mortgage market is facing a variety of challenges, including reduced liquidity among mortgage originators and tightening of credit standards for borrowers.

Well, we don't do a substantial amount of business at the lowest levels of credit worthiness any contraction in mortgage credit or the elimination of certain loan types will enter new home sales.

And third the remains the potential for restrictions on our ability to operate including the construction and closing of our homes.

Currently residential construction has been deemed an essential business across our markets, but this could change, especially if we see a reacceleration in diagnosed cases.

We don't know how these risks will play out, but we do know we won't be immune to their impacts.

To help us managed through them, we're focusing on two key priorities.

First just to rely on our existing business model.

Our long standing operating philosophy has been to limit risk by focusing on existing markets products and buyer segments and to compete for buyers by differentiating ourselves through the value we offer not just the price.

In a volatile market continuing this simple value driven approach should serve as well.

In addition, we expect our mortgage choice program to be an even greater differentiator in this market.

Connecting our buyers with a curated group of lenders who are competing with each other results in more access to credit and more choices for our buyers, which is certainly also good for us.

Our second priority is to protect our financial flexibility.

We have worked hard over the last decade to dramatically improve our balance sheet.

We substantially reduce debt and lowered our annual cash interest expense by nearly $50 million.

We have also termed out our maturities eliminated maintenance covenants from our bonds and expanded our secured debt capacity as we work through this challenging environment, we want to preserve flexibility to position us to return to our balanced growth approach.

When market conditions permit.

In closing.

I want to thank our employees for their ongoing efforts through these challenging times.

Under extraordinary circumstances, we have lived up to our cultural aspirations with attitudes that define focus grit and accountability.

Im confident that we have the people the strategy and the resources to whether the current storm and come out a stronger company.

With that I'll turn the call over to the operator to take us into Q1 day.

It is now time for the question and answer session of today's call.

Ask the question. Please press star one on your phone. Please make sure that your phone is muted and record your name clearly when prompted if you wish to withdraw your question you can press star to.

Please allow moment for questions to comment from me to get the names.

Thank you first question comes from Alan Ratner Your line is open.

Hey, guys. Good afternoon. Thanks for taking my question and then help everyone is doing well.

On your end, but I'm glad to hear that you guys and good there so.

Alan My first question and maybe this is for Bob as well.

I appreciate you walk into the levers on the liquidity that you you're pulling right now to maximize cash flow.

I think one interesting point that seems to be an area or where maybe some builders are deferring is that kind of thinking about the at the spec side of the business and I know you're not a huge spec builder, but it seems like right now in this environment, just given how tight resale and inventory is and given all the various uncertainty about what.

The market in the economy might look like 369 months from now that spec inventory seems to be more desirable I know a lot of builders that are reported over the last couple of days that are more spec heavy builders seems to be putting up slightly better April numbers.

And then builders that are more to be built and on one hand, you don't want to put more money into the ground that that might be at risk in the future Ben on the other hand, if that's where the stronger demand is today, certainly that's an easier way to generate some some sales and cash flow. So just curious how that that thinking has evolved over the last five or six weeks from you guys how.

Much. This year is your start production down year over year and have you maybe started to add to put the pedal down a bit on in terms of starting new spec inventory.

Well, Okay, well first of all island, let me just say thank you for your comments and very much hope the same thing for you your family Your company.

Community, if they're selling specs, they're getting more specs, so we're not seized up and and stopping but we're not trying to pivot in dramatically change our model either you know the the thing about having a mix of communities and buyer profiles is some communities and our company have been heavier spec some are definitely more.

To be built and you know we want to be in the market and competitive at each location. So we've we've tried to avoid swinging the the the gate all one way or all the other way kind of across all communities, we like our position, but but I don't disagree with you specs right now are quite attractive and we are not restricting <unk>.

That we're selling in in the communities, where we're having success.

That's how file and I I appreciate that.

Second question shifting gears, a little bit to your comments on the mortgage side I think this is an area where depending on who you talk to you get much different answers on exactly how impactful to tightening has been in the industry and I know builders that have their own mortgage subs are joint venture programs. One of the things that are kind of touting his inability to sell direct to <unk>.

Fannie Freddie and Fannie Mae in there for some of the overlaid is that that originators. Our instituting you know, they're able to kind of get around them a little bit by yeah, avoiding that that part of the market, whereas you're dealing with obviously banks and nonbank lenders I presume in your mortgage choice programs. So can you just kind of walk through a little bit what the.

The current standards that your mortgage partners are are offering buyers what is the tightening been whether it's bayko D.T.I. any overlays that they're putting in place that that you're dealing with today.

You know or model has use the word curated yes, you don't need to use such a foot fussy word, but we have multiple lenders in each community that are competing for our customers business and that is very carefully controlled and designed not just of the division level, but at the community level, because we want to have lenders who want that business.

And and obviously it makes it difficult then to talk broadly that I will tell you that having competition has been a really good thing there have been some lenders who have raised their five goes scores and other lenders who have not there have been some who have had overlays others, who have been you know less concerned.

So one of the I think one of the great advantages of having a competitive environment is the people who want the business or in the business and so we're not beholden to a particular lender a particular program and I think that's that's proven to be very very effective here and you made a good point, we have both bank and nonbank lenders.

And there are you know brands that are well known I'm not sure really want to get into naming them, but I mean, it's it's big money Center banks are part of our program and so I feel like we've got ready access.

To the G.S.A.T.'s F.A.J. Jenny programs I I think our customers are finding that having eliminated the middleman in a builder captive they've actually got lower rates.

Then they would have if they were working with one of our competitors and I think this environment is is proving not just the pricing advantage, but also the access to capital advantage.

So it doesn't sound like you think there's a big piece of the business that has evaporated in terms of your ability to get those loans done today.

I do not there are certainly challenges in the jumbo market, that's not a big part of our business. There is certainly more difficulty any investor a market again, not a big part of our business. So you know macro why's those have been categories that have been more hurt, but you know we have not seen and.

I'm certainly aware of this from my industry perspective that some of the nonbank lenders and the servicing area. It's backed up into liquidity problem on the origination side, we have not been affected by that.

Right. Okay. Thanks, a lot good luck and stay safe.

Thanks to.

Thank you next question comes from James.

Bus open.

Good afternoon, Thanks for taking my questions.

The first one I have on it and I appreciate you guys, putting the cancellation numbers out there.

Just tell us what April orders, two months or compared to April sometime last year.

Oh, I've got a a nice graph here for them j., but not the exact numbers in front of me I would tell you I think we started the month, we were down more than 50 per cent and the most recent week in today's the last week that of the month and I don't have this week's number we were down while under 50 per cent. So I I think.

The month as a whole it'll be under 50 by the time, we get done this week, but it was certainly worse than that the first 710 days of the month.

What about incentives, whether it's incentives to the buyers or <unk>, maybe higher coworker fees, what what is.

What are you seeing from your competition right now.

There's so little.

Supply that we have seen very little in a way of of change in aggregate incentives. We have we have changed a little bit packaging you know that we're always doing that and I wouldn't really say that that's as much covert related as it is just normal evolution that we have not had.

I change and incentives any magnitude in our company and I'm not aware of our competitors a specific pricing strategies, but I haven't heard a lot of chatter about that either I think you know as the prior question you know got to specs right now that are finished ready to to move in they're pretty valuable.

And I think we're finding.

Not having a big need to to change incentives.

And then on the community count.

Guys are not giving guidance, but if I look at the schedule on page 13 of the slides it looks like you're still going to be.

Down.

Just assuming natural attrition.

I guess the thing about that sharp as you know J. and you followed us for a long time and I. Thank you for that but to the thing you know about that chart is the pluses and minuses are kind of hidden in plain sight that right there, but it is never been harder for us to guess the timing I mean, the pace of clothes outs in a robust market you tend to close out faster and a softer and.

Garment, we may close out more slowly to the extent land development has done and we've got a community to open we're not going to hold it back, though I I think that there is more uncertainty as to the timing mix of clothes out some startups I'm I'm pretty pleased with the fact that we've got nearly 45 communities either open.

And the next six months Ractically Underdevelop. Another 30, plus that are are approved I really couldn't tell you. If I wanted to what I think the exact pace at the close outs is going to be but you know their arm at least as many in with the plus sign in front of them as there are with the minus sign but the timing is really tricky.

Well and that's that's where I was going with the question is is not necessarily wanting the guidance, but if you guys are going to go a little bit heavier on specs.

You have what you have is active communities right now.

Lend themselves.

To flexing up the spec count and maybe closing out a little bit quicker.

Oh, I don't want numbers I, just one true yeah like I I. There is not a we haven't made a command decision that hey, if you've got 10 laughed go put 10 specs on the ground, we try and make community specific decisions. If it's a market in a community where specs had been a big part, we're certainly not restricting starting specs, but we've got some some communities that are stalwarts that.

Been great to be build communities throwing a bunch of specs in the ground for that buyer profile. If it hasn't historically proven to be very effective if it's not kind of the characteristic of competition in that sub market I don't want to override the judgment of our division by telling them they've got to go starts backs.

Nice improvement in the backlog what how much is that backlog is subject to a contingency where the buyer has to sell their current home or or anything of that nature, we needed to be thinking about with the with the backlog.

Yeah, we don't have a big move up business as you know and so we have a very small percentage of that I don't know the exact number j. and certainly contingencies are always in the backlog, but it is for us a very small percentage I mean, clearly the thing that we are more concerned about than that is.

Lost a job you know if if you've got someone who's qualified who's in backlog and then has an interruption in their employment you know that's the thing that that you and we are are are very focused on.

And and I'm I'm really pleased with the way our team is engaged in and connected with our buyers and talking to them about their situations and you know one of the things it's kinda subtle, but one of the things I was actually pretty pleased with as we were pulling or materials together was to look at the the cadence of tans kind of by week and we're not going.

To be in the habit of doing things weekly but.

Things you see is we deal with reality in real time, we've got a situation where something in backlogged needs to be canned. That's the week, we take it there isn't a a kind of well we'll wait until the end of the month or the quarter and see if if maybe we get lucky thing. So I think we've been dealing with reality in real time, and we'll we'll continue to do.

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Agree things taking my questions.

That j., they say say said.

Thank you and again, if you would like to ask a question. Please press Darwan and please make sure that your phone is I'm you did.

Prompted next question commas trying to <unk> zinc Research Center your line is open.

Hey, guys. Thanks for.

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Hope, you're all well I want to tell US you you've noticed any big difference in the performance of your entry level product versus mobile versus gatherings.

You know [laughter] Eh I know you don't Alex meanness in in in any kind of a tricky way, but it's it's a little bit hard to react to that question. Then let me just explain why entry level.

Is is sort of all whereas often kind of overlaid with first time buyers and when I think about our first time buyer business. It's been very good but our first time by or business does not tend to tilt.

The lowest price points.

We are affordable.

And we're very competitive on the basis of value as opposed to exclusively on the basis of price. So I make that distinction because I couldn't in in a in a faraway comment on more price driven part of the market in the extent to which it has been or not been affected by the current.

<unk>, our first time buyer and first move up by or business has been pretty good.

I I would say on the gathering side, it's still relatively small for us, but there is definitely.

Some effect from traffic waiting until it safer to come and visit the community. So I would say that's an area, where we won't be surprised to have a little slower sales cycle, but I will tell you in terms of leads engagement.

We feel great about that business I, just think we have to be a little bit patient about the stay at home orders being removed an older population being last at risk and I think they're an awful lot of people that will be excited to being a gatherings community.

But as it relates to would you characterized as entry level I would say, our first time and first <unk> move up businesses are performing quite well all things considered.

Okay in great and.

In terms of the Bill times are you guys, noticing any extensions, because or social distancing or permitting or anything like that.

Yeah, it's a little less on the permitting side, but it is definitely a function of not double stacking trades, we are maintaining really close control over the sides and not having you know multiple trades in multiple cruise in a house I can't give you at this moment a number of days delay, but I am totally.

Certain that we will have a slower cycle time in production certainly through April and May and probably extending beyond that somewhat but you know we want to be say first and foremost.

Yeah of course and then.

The markets that are starting to reopen a little bit sooner or you guys noticing you know more activity or or interest or or something like that picking up than other states that are maybe going to take longer to reopen.

Yeah. It's a really good question, we we have moved across the company to a appointment only sales environment and we have been able to be compliant with all local requirements for the stay at home orders, a an essential workers and still had a small appointments you know one or two people tour.

And the model in each of our markets and that that hasn't changed yet in any of our markets were still for example in Georgia on a on a scheduled appointment. So I I wouldn't tell you that I've seen a big difference between those markets that have made tentative early steps to open and those that haven't done it yet, but I can tell you.

<unk> every market that online lead activity that I referred to is up pretty significantly.

Okay, well, great best of luck in space <unk>. Thank thank.

Thank you.

Thank you we are showing no further questions at this time.

One of the thanks for joining the call today, and we will talk in next quarter. Thank you very much concludes today's call.

Stay safe and thank you for doing us.

That concludes today's conference you may disconnect. It this time and thank you for joining.