Q3 2020 Beazer Homes USA Inc Earnings Call
Good afternoon, and welcome to the Beazer homes earnings conference call for the quarter ended June Thirtyth 2020.
This 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.
On the Investor Relations section of the company's website.
Ww Dot dot com.
I'll turn the call over to David Goldberg, Vice President and Treasurer. Thank you Sir you may begin.
Thank you missing.
Good afternoon, and welcome to the Beazer homes conference call discussing our results for the third quarter fiscal 2020.
You should be worried at during this call, making forward looking statements such statements involve known and unknown risks uncertainties and other factors, what you're describing 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 data statement is made and.
We did not undertake any obligation to update or revise any forward looking statement, whether as a result of new information future events or otherwise.
Factors emerged from time to time, and it's simply not possible to predict all such factors.
Joining me today are Allen Merrell, our chairman and Chief Executive Officer, and Bob Solomon, Our Executive Vice President and Chief Financial Officer.
Our call today.
I will review highlights from the third quarter, our response to the pandemic and the strength of the new home market and then recap our strategic objectives for the coming quarters.
Well I will cover our third quarter results in greater detail as well as our expectations for the fourth quarter and the full year.
I will then come back to provide an update on our land spending and balance sheet, followed by a rabbit by Alan.
After our prepared remarks, we'll take questions and the time remaining I'll now turn the call over down.
Thanks, David and thank you for joining us on our call. This afternoon.
We generated very strong financial results in the third quarter with increases in both home closings and gross margins leading to nearly 40% growth in adjusted EBITDA.
We also reported are highest third quarter net income in over 10 years.
From a sales perspective after weathering a very difficult environment in April we experienced improved demand in may which accelerated in June leading to the best June sales pace, we have generated in a decade.
Together. These results are positioned us for a strong finish to our fiscal year.
As David outlined the balance of by comments. This afternoon organized around three topics are ongoing and evolving response to the pandemic.
The environment for new home demand.
In a quick review of our strategic objectives.
Last quarter, we outlined our initial response to the pandemic.
Highlighted by the priority we place on the health and safety of our employees customers and trade partners. This continues to be our highest priority with ongoing implications for every aspect of our business.
In addition to our safety protocols over the course of the third quarter, we reviewed and revised numerous operational and financial practices.
Three primary outcomes from these adjustments.
First we preserve liquidity by maintaining a full draw on our revolver until the ended the quarter.
All this increased interest expense in the quarter. It ensured that we had substantial cash to deal with any potential disruption and closings.
With strong sales and greater clarity around the operational environment, we fully repaid the revolver and do not currently intend to habit draw on other than for seasonal liquidity needs.
Second we paused land spending to apply new kobin related risk criteria to our underwriting.
Temporarily slowing land spending contributed to an increase in liquidity during the quarter, but more importantly, it allowed us to review every proposed transaction against new risks to employment household income and supply.
Well I review resulted in us exiting a handful positions in the vast majority of cases, we were able to validate renegotiate pending transactions going forward. We're confident we have a lot pipeline supports our growth ambitions.
And third we improved the cost structure of the business.
As we adapted to a new working environment, we realize there were opportunities for us to improve our cost structure without reducing our ability to sell and build a growing number of homes in the quarters ahead that was important to us because we saw the demand was rebounding quite quickly.
Prior to the Cobot 19 pandemic, the new low market was very strong supported by wage growth low unemployment low mortgage rates low housing supply and high consumer confidence.
In late March that momentum gateway to the pandemic and an April industrywide demand plummeted, but as you've heard and Red housing demand began recovering very quickly and by June was arguably better than prior to the pandemic.
For you and for us that raises to crucial questions.
Where did the surge in demand come from and is it sustainable.
Only time will reveal the answers, but here is what we think is driving it and why it may last.
First little mortgage rates have gotten even lower.
This is a real plus for buyers as it improves affordability, increasing access to new homes for all buyer segments, especially first time buyers.
Second working from home schooling from.
I have led to a massive reappraisal shelter needs.
Our buyers are telling us that new homes offer crucial advantages over most departments and used homes, including more space more flexible floor plans and better outdoor living features plus they're moving ready and don't require costly cleaning or time consuming improvements.
Third the shift to remote work appears to be durable.
Despite some challenges posed by remote work both employees and employers have experienced an enormous booster productivity arising from the elimination of commutes.
Knowledge workers in particular are capable of working from completely different places, which can only benefit demand for new homes.
And fourth this may be the tipping point demographers had predicted for a decade, reflecting the moment that ownership reluctant millennials embrace the inevitability and desirability of homeownership.
This is our most speculative observation, but millennials represent about a quarter of U.S. population. So their housing preferences has to be watched very closely.
Despite the many challenges presented by the pandemic, we see no reason to deviate from our longer term balance 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.
As we monetize our longer term assets and increase the share of lots controlled by option, we will generate plenty of liquidity to both grow the business and remain on course to reduce our long term debt below $1 billion.
Finally, I want to express our corporate support for the elimination of prejudice discrimination and injustice in our country.
We have shared on social media letter I wrote to our employees expressing both my personal views and our corporate commitment to addressing these issues in our company and our communities.
Hi, I'm extraordinarily pleased with the enthusiasm our team has shown to learn about and honestly discuss these issues.
We are taking steps that will allow us to share the benefits of greater inclusion and diversity with our employees customers trade partners and shareholders I know our efforts can make a difference.
With that I'm going to turn the call over to Bob.
Thanks, Alan and good afternoon, everyone.
As Alan highlighted earlier adjusted EBITDA in the quarter was up nearly 40% versus the prior year to $54 million. This performance was driven by strong results across our core metrics, specifically compared to last year, we grew homebuilding revenue by 10% to $532.5 million.
As we benefited from an 8% increase in closing combined with a 3% increase and areas.
Our gross margin, excluding amortized interest Interments and abandonments was up approximately 180 basis points to 21.2% driven by increased margins on spec homes, and our ongoing efforts to simplify product and reduce incentives.
This margin excludes impairments and abandonments associated with our re underwriting process totaling $2.3 million.
SGN as a percentage of total revenue was 11.7% down 50 basis points, even with $1.4 million onetime charges associated with improving our ongoing cost structure.
Total GAAP interest expense was up around $2.1 million, primarily due to our decision to carry a fully drawn revolver through nearly the entire quarter for liquidity purposes.
Even with that however, our cash interest expense was down $3.7 million as a result of our prior debt retirements and refinancing activities.
Our tax expense in the quarter was about $5 million for an average tax rate of 24%.
Taken together, we owned $15.3 million of net income from continuing operations are 51 cents EPS this quarter up $3.6 million versus the prior year.
As clarity into market conditions has improved we are comfortable offering the following guidance into our expectations for the full year and the fourth quarter.
For the full year fiscal 2020, we expect adjusted EBITDA to be up 5% to 10% compared to last year with the big improvement in gross margin more than offsetting the impact of fewer home closings.
This would represent the second highest level of EBITDA, we produced in a decade.
For the fourth quarter, the pandemic has impacted a variety of our operational metrics, particularly timing.
For example are beginning backlog is essentially flat to a level, we had last year, but the stage of completion is very different.
The togut outbreak impact to the timing of those orders and spec starts during the quarter such that a larger than usual share of this backlog will deliver on the first quarter fiscal 2001, rather than the fourth quarter. This year.
Accordingly, we expect our backlog conversion ratio will be in a low 70% range rather than the high eightys like last year.
Our margin expectations reflect the strengthened demand that occurred during the third quarter and our cost improvement efforts, specifically, we expect gross margins will be up at least 100 basis points to around 21%.
Today will be down more than 5% on an absolute dollar basis.
Finally, with our re underwriting complete the cash component of land spend will accelerate likely exceeded $100 million at this point I'll turn it over to David Thanks, Bob.
At the beginning of a third quarter, we owned or controlled more than the three year supply of land based on our trailing 12 month closings.
This position allowed us to pause land spending assessed the demand environment and we underwrite land deals that were in process.
This process resulted in modest land acquisition and development spending during the quarter totaling just under $56 million.
With our re underwriting process is complete and demand improvements evident we have resumed our regular land acquisition and development activity and expect to return to more normalized spending levels in our fiscal fourth quarter and into fiscal 2021.
Of course looks like a disciplined approach given the ongoing spread the krona virus and the long term impacts the pandemic may have on the economy.
Strategically we expect to sustain a lot position representing at least three year supply with a growing share controlled by options, allowing us to better leverage our spend improve return on assets and reduce risk.
We ended the third quarter with over $400 million that liquidity more than double this point last year.
This reflected more than $150 million of unrestricted cash and no outstanding on our revolver with adorable business model that mix is to be built and spec homes and a growing land positions supported by a larger share of options, we expect to generate sufficient liquidity to both reduced borrowings and grow our business in the years ahead.
We have no significant maturities until 2025 and are clearly defined de leveraging path includes 50 million dollar term loan repayments in each of the next three years.
After upcoming September repayment, we will have just over $100 million remaining on our goal of bringing our total debt below $1 billion.
With that let me turn the call back over down for his conclusion.
Thanks, David.
The third quarter fiscal 2020 was very successful, we increased closings and improve margins driving both revenue and profitability growth.
We also took steps to improve our business and ongoing cost structure.
These results coupled with a tremendous sales momentum that we experienced in the back half of the quarter position us to realize the objectives of our balanced growth strategy.
While there have been and we'll continue to be many challenges associated with operating during the pandemic.
I'm very proud of our team for taking decisive steps to improve long term shareholder value.
It is because of them that I'm confident we have the people the strategy and the resources to navigate this fluid environment and execute our plan over the coming years.
With that let me turn the call over to the operator to take us into Q1 day.
Thank you we will now begin the question and answer session of today's call.
I'd like to ask your question. Please press star one on your device make sure that your phone is muted and record your name and prompted.
Your question.
I wish to withdraw your question you can press star to please allow me or names to comment.
First question comes from Alan Ratner from Zelman and Associates. Your line is open Sir.
Hi, guys. Good afternoon first off congrats to to Bob on the upcoming retirement into David on the promotion great to see both the good luck.
So yes. The on the first question I guess I'd love to just a drilling a little bit on on slide 10 of your your deck here on community count.
If I'm reading this right it looks like a community count is probably going to pull back fairly meaningfully over the next couple of quarters and first I'd love to just get a little bit of a better understanding of exactly what the cadence of that looks like how quickly that might occur based on obviously this the strong sales environment right now and I guess more broadly is there a.
There any way to accelerate community count growth offset those declines have you looked at into potential M&A in this environment similar to the deal you did in Atlanta couple of years ago, just thinking if there is a way to prevent that magnitude drop off in the next few quarters.
Alan It's Dave Let me, let me try to address it. So if you look on slide 10, you can see the in the aggregate you know I would say you you have enough openings enough communities in the pipeline to offset the closeouts and get to a more neutral number but I think you're right in saying that we're going to have some community count decline now the magnitude, we're not guiding to the magnitude and talking about the specifics as.
You know, it's quite difficult to predict the timing, but I think you are correct to think that theres going to be some companies, where we have down community count.
But look I think the plus side of it isn't what and what we really wanted to focus on there's a lot of levers to pull in the business Theres as margin their sales pace right. There's a lot of theres. The deleveraging that we're doing driving profitability. So it's not just the community count that we're looking at.
But certainly you've identified to try and we are out there trying to figure it out so.
I don't know if he wants out what the.
I'm happy to talk about M&A. The answer is kind of the seemingly toward M&A M&A for a while right. We've we look at all the deals that come through we think of them as they are probably more likely to not going to be in our existing existing markets. We think of Atlanta acquisition and as we did a previously we find deals that make sense and pencil from that perspective, we're always interested in looking so.
So I look we were very focused on community count, but again, there's a lot of levers to pull to drive profitability and drive higher EBITDA and that certainly is our focus with our balanced growth strategy.
Got it and that's helpful. Dave.
And then I guess I'm, sorry, if I missed it but any commentary you can give us on July how that's been tracking and I guess more broadly.
Tying it back to the prior question how are you thinking about the the pace versus price dynamic here with a with all those communities approaching close.
And it's a it's Alan you know the the acceleration that we saw through the last quarter was really remarkable and I mean, we were up almost 50% in pace in June.
July has been up year over year in pace, but not by the same amount.
It's felt very good, but I think or a few reasons for that and you put your finger on the mainland which is margin.
I think we have clearly been emphasizing in all of our markets.
I call at the end or what pace and margin and not one or the other and so that's that's very much in our mind and that's.
Definitely playing a role that the other thing is that the.
Areas, where the price or where the volume action has been the greatest are really price only or price driven buyers in the in the value area, where we play I think we have a better opportunity to do both right get some pace and margin.
Got it alright, thanks, a lot good luck.
Okay.
Thank you next question comes from Susan Mcclary from Goldman Sachs. Your line is open.
Thank you and congratulations to both Bob and gain.
Very exciting news.
Thanks, Phil.
First question is what we've seen over the last you mentioned that does have a really focused on spec seem to have outperformed given their ability to close buyers quickly are you thinking about any changes in terms of your inventory position or strategy as it relates to spec given that how are you thinking about the sustainability maybe.
That trend.
So we've been in the 60 40, 50 545 range over the last couple of years and I think as we look out into the next year, that's probably where we're going to be.
In a given quarter it may oscillate, a little bit, but I think.
We really have a and equation in our mind for the value that we provide not just the number of units and so I don't think just an extent extravagant increase in specs is really on on strategy for us in particular, because I think we're going to see some.
Some competitive response in the marketplace, we're already starting to see it where there is going to be a fair bit of that happening and I think we want to make sure that we protect our value proposition and we don't wait into a knife fight.
In certain submarkets, so I I like our position is really we've always said this it's at the community level. Some communities operate with a spec heavier model. Some operate really almost exclusively on a to be built basis, but our blend in that slight preference or slight majority to twob builds I think is pretty durable.
Okay. Thanks for that Alan.
You know you made some comments earlier about some of the long term tailwinds that seem to be moving in housing stable.
Low rates and some of the work from home trends and such.
On slide in the near term, we have pulled forward demand or do you think that this is Dan this growth we've seen over the last few months has been more a sense of maybe some pent up demand that's now coming through and that we should still see some pretty nice growth levels over the next few quarters.
So I think during this third quarter, our fiscal third quarter.
We saw.
Two different things happen I was pretty convinced in May and ended June that as good as it felt we were likely just catching up on what had been pent up from March and April.
The time, we got further deeper into June and certainly into July my thinking shifted a little bit you know as we talk to our sales teams I think what's happened is that the.
The band that we were going to have.
Is there and.
I don't think about it is pulling forward I think about it is kind of awakening the sleeping giant.
Cohort of people, who have been dissatisfied with their housing who say gosh now what really matters less time in the car or less time in the office more time in the house or apartment and I got to go.
And I look at the aggregate occupancy in apartments in our markets over the last five or six years and if we had seen the normal bleed off of those folks into the new homes space. We would have had a much bigger industry over the last few years I think weve awaken that giant and I think there's a group of occupancy news terms as well. So we're looking at the opportunities presented by.
By having more space more flexible space. So I wanted to be a little careful I was very intentional and my comments that you know whether or not this is the proverbial tipping point in that millennial kind of awaken the sleeping giant not absolutely sure, but I don't feel like we're just robbing next quarter I mean, we look at the trends in our markets, we talk to the buyer.
There's.
They have been thinking about this for awhile, but but the pandemic as really started that up and I I feel pretty optimistic that the environment over the next in a number of quarters.
Is it is very constructive.
I do want to say and this is the other side of it we can't for a long be disconnected from the macro economy and I saw the GDP numbers today, we know what the temporary unemployment is we need to get those people back to work right for for this to be sustainable with this kind of enthusiasm we need to see.
The employment numbers continue to improve.
And so that's that's clearly an overhang, but I think when we look at total aggregate demand that is latent in our society for new homes, we havent begun gun to serve that for nearly a decade and I think that's in front of us now.
All right good down that's very encouraging best of luck with everything.
Thanks.
Thank you next question comes from Jay Mccanless from Wedbush. Your line is open.
Good afternoon, everyone routes, Dave and Bob.
Good news.
Thanks, Jeff Jeff first question.
First question I had what was your spec channel at the end of the quarter, how does that compare to last year.
Yeah, Jay we had 714 specs at the end of the quarter and it was about a couple of hundred almost 300.
Less than last year.
And.
It looks like.
Sales absorption the monthly sales was down year over year.
I know the community count was down but was that also a function of you guys trying to give more prices were war on or are there some things on needs to do to address that shortfall versus last year.
Well the pace.
For the quarter was 2.7, which was a little off of last year, which was three but what happened over the course of the quarter was pretty remarkable I think we've talked about having the highest June pace. We've had in order to history I don't know it 10 years, we were over four in June So I think the paces in pretty good shape and and frankly it was into that kind.
Out of a number that we were very confident on the price side.
Jay I would tell you want to spec side. The original question. There was nothing to that it was just some timing in March and April specs them in the slowdown that we had theres no deliberate hey, let's think specs I think as Alan kind of mentioned earlier, we will be a pretty similar kind of specs to to be built company on a go forward basis, there's just some timing given how.
Strong demand was respects.
And frankly again some of the March and April slowing down some spend and seeing how the environment wasnt assessing the situation.
And then on the can rate I mean, it's not surprising so given everything that's happening, but can you talk about how they can.
Progress through the quarter I'm, just wondering if April.
Skewing the number the 21.1% a lot higher than it really was it absolutely is Jay I can tell you by the time that we got to June, especially with the strong gross sales rate in June the numbers were pretty flat to last year. It even down a little bit. So you had a little bit from the April and the gross sales number being down in April but by June things were.
Pretty normalized even a better than usual.
Sounds great. Thanks for taking my questions.
Absolutely thanks to it.
Again, if you would like to ask a question. Please press star one and please make sure that your phone is on muted and record. Your name. When prompted next question comes from Alex Barron from housing Research Center. Your line is open Sir.
Thank you.
Congratulations again also on the retirement than the promotion.
I wanted to focus I guess, a little bit on the sleeping giant you talked about and just kind of wondering if you can remind us again, what what percentage of your.
Sales this quarter, I guess, where to first timeline entry level buyers.
Where do you see that going next year, if current trends kind of persist.
Yeah, it's always a tricky thing to try and be exactly precise about first time buyers, but if you look at our product portfolio, the width and the square Footages and the price points that we serve which clearly skew low within our peer group.
It is.
Within the realm of sort of the they're the right range Alex to think about.
Probably about half of our businesses in that first time buyer and then you've got to other components that are competing for the other half and that's that first move up buyer for home a little more square footage is important but they're not.
At the mill mansion level, and then we've got the move down buyer and the in the last category and that move down buyer is typically either buying or ranch plan single storey living three bedrooms kind of around 2000, 2100 square feet or they are buying a gatherings unit. So that's kind of the distribution of our business and as we've talked about its really about aging boomers.
And millennials.
Obviously give a follow up question.
There are no further questions in queue at this time.
Okay.
Well look when the thanks for joining us on the call. We'll we'll talk again in three months the on them at the end of the fiscal year. Thank you very much real time and this concludes todays call.
That concludes today's conference you may disconnect at this time and thank you for joining ever really know how to answer. The first time question, because we don't really know yet.
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