Q4 2020 Beazer Homes USA Inc Earnings Call
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Good afternoon, and welcome to the Beazer homes earnings conference call for the quarter.
Fiscal year ended September 30, 2020, today's call is being recorded and a replay will be available on the company's website later today.
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.
And treasurer.
Thank you good afternoon, and welcome to the Beazer homes conference call discussing our results for the fourth quarter and full year fiscal 2020.
Before we begin you should be aware that during this call well be making forward looking statements.
Our state.
It's involve known and unknown risks uncertainties and other factors, which are described in our SEC filings, including our form 10-K, which may cause actual results to differ materially from our projections.
Any forward looking statement speaks only as the date. The statement is made and not undertake any obligation to update or revise any.
Looking 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 are Allan Merrill, our chairman and Chief Executive Officer, and Bob Wahlman, Our executive Vice President and Chief Financial Officer.
On our call.
Anything I will review highlights from our fiscal 2020, and then discuss what 2021 will be an important inflection year for the company.
Bob will cover our fourth quarter results in greater depth.
And then I will then come back to provide our expectations for the first quarter fiscal 2021, and provide an update on our balance sheet liquidity and land spending.
He will support our growth objectives for 2021 and beyond my comments will then be followed by wrap up by Allan.
After our prepared remarks, we'll take questions at the time remaining.
I'll now turn the call over to Alan.
Thanks, David and thank you for joining us on our call. This afternoon.
In the beginning of our fiscal year, we laid out three strict.
All the key goals for 2020.
At that time, we had no idea the global economy would be turned upside down by a pandemic, but we have an exceptionally talented group of employees, who had the creativity and the grid to reinvent many of our business processes to deal with this new environment.
And it is because of them that I can tell you.
We exceeded every one of our strategic goals.
First we grew our adjusted EBITDA by more than 10% as gross margins expanded to reflect the benefits of product simplification and the price improvements we achieved.
Second we generated a return on assets above 10% up about a point from the prior year.
We continue to grow EBITDA at a faster rate than our assets.
And finally, we achieved a net debt to EBITDA below five times as we simultaneously retire debt and added to our already strong liquidity position.
Of course, some of the success can be attributed to the low mortgage rates and a big reassessment of living arrangements during the.
Pandemic.
But these results would not have been possible without the resiliency of our team.
We entered the new year with the dollar value of our backlog up an astounding, 50%, giving us both visibility and confidence moving forward, but.
But it's more than just our backlog that gives us confidence as many of the facts.
Others that contributed to sales strength last year remain in place.
While demand likely won't remain as torrid as it has been the last several months, we're optimistic that new home demand will remain strong.
By historical standards, we've built far fewer new homes in the last decade, and population growth household formation or job.
Growth would have predicted and those families have been living somewhere now.
Now with remote work demonstrating long lasting appeal. These deferred homebuyers are on our website visiting our communities and buying or homes. They.
They are finding that low rates have given them surprising purchasing power, but supply is highly constrained and prices are rising as we work.
Back to offset higher land labor and material costs.
With this supportive backdrop 2021 will be an important inflection year for the company.
Over the last 10 years as we've executed our balanced growth strategy, we've translated incremental gains in operating metrics into more than 200 million.
Work in dollars of improvement in adjusted EBITDA.
At the same time, we've actually reduced our operating assets by about 10%.
These efforts have led to big increases in profitability and returns that.
But very little new order growth in.
In fact that has been attention at the heart of our balanced growth strategy to him.
Improved profitability and returns while reducing debt at the same time.
Over the last five years, we spent nearly $2.3 billion on land and land development activity, that's a big sounding number but it was about $270 million less than the cash we generated from the land related to our home closings.
So what did we do with that extra cash.
We paid off debt.
In fact over.
Over that same time period, we spent about $450 million retiring or refinancing debt.
Other than modest share repurchases nearly all of the cash we generated was used to retire debt and build liquidity.
That Alex.
Patient of capital Wasnt focused on topline growth.
But it was the necessary and prudent course of action. It has radically reduce financial risk lowered interest expense and accelerated our ability to use our deferred tax assets.
The exciting news.
Is that this year is different.
Entering 2021.
On our liquidity and anticipated profitability are such that we expect to achieve the last leg of our debt retirement objective.
Which is to get total debt below $1 billion by the end of 2022.
Using only a portion of our future profits.
This means we can reinvest all of the cash generated.
Alec operations as well as the balance of our profitability for growth.
Our balance sheet and lot position will not continue shrinking.
That is a fundamental change in our capital allocation posture.
After many years of hard work, we can now tilt our balanced growth strategy towards growth while.
While we have operational momentum and a supportive macro environment.
Investors may wonder about the time lag between increasing investment in generating growth.
Well, it's true that land purchase this year is unlikely to contribute to this year's financial results.
But our efforts to grow profit.
Profitability will deliver results this year for.
For 2021, we're focused on achieving the following objectives.
First we expect to generate slightly higher EBITDA and double digit earnings per share growth.
Starting with a much larger backlog will help us overcome the reduction in community count we will experience this year.
At the same time, we expect to increase our operating margin by delivering higher margin homes and maximizing our overhead leverage.
Earnings per share will benefit from significantly lower interest expense.
Second we expect to grow our total lot position.
We'll achieve this through higher land spending and an even greater use of options positioning.
For community count growth.
And third we will continue to retire debt as we approach our de leveraging goal.
Looking beyond this year, we are positioning our company for ongoing profitable growth characterized by improving returns and funded with a less leveraged balance sheet.
With that I will.
On the call over to Bob to walk through the results for the quarter in more detail.
Thanks, Alan and good afternoon, everyone.
Looking at the fourth quarter compared to the prior year we.
We will orders increased nearly 40% to 2009, driven by the highest fourth quarter sales pace, we've achieved in the last decade.
Our homebuilding revenue decreased 12% to $679 million, primarily driven by a 14% decrease in closings related to the impact of the pandemic on order and construction timing.
Our gross margin, excluding amortized interest impairments and abandonments was 21.7% up a profit.
Approximately 180 basis points.
SDMA was relatively flat on an absolute basis, but rose as a percentage of total revenue to 11.1%, reflecting the decrease in revenue.
This led to adjusted EBITDA of $77.1 million in the quarter down slightly in dollar terms.
But up over 70 basis points as a percentage of revenue to 11.2%.
Total GAAP interest expense was down nearly 16% or $6 million.
Our tax expense for the quarter was about $9 million for an average annual tax rate of 25%.
Finally.
These components taken together led to $24.6 million of net income from continuing operations or 82 cents per share in earnings this quarter.
Rather than recapping the full year.
We refer investors to our press release, where the results from our successful fiscal year 2020, our detailed.
At this point and for the last time I will turn it over to David Thanks, Bob.
Let's start with the review of our operational and financial expectations for the first quarter of fiscal 21 2021 compared to the prior year.
Orders are expected to be essentially flat, despite an approximately 15% decline in community count.
Closings.
You should be roughly flat versus the prior year although.
Although our backlog is up significantly heading into this year. This was largely driven by sales in August and September which will close in our second quarter.
Additionally, we remain focused on delivering an exceptional customer experience and in light of anticipated labor and material constraints, we are planning for slightly longer cycle.
Times.
Our ASP is expected to be approximately $380000.
We expect gross margin to be up more than 150 basis points around 21.5%.
Although we experienced higher lumber prices last quarter. This wont materially impact Q1 performance, but will be a modest headwind in Q2.
SG and as a percentage of total revenues to be down about 50 basis points, reflecting the benefit of our continued focus on controlling costs.
We expect EBITDA to be up more than 20%.
Interest amortized as a percentage of home building revenue should be in the low fours supporting our goal of double digit net income growth.
Our tax rate is expected to be.
About 25%.
And this should all lead to earnings per share above 30 cents up significantly versus the prior year.
We ended the fourth quarter with $578 million of liquidity up more than $200 million versus the prior year. This reflected about $328 million of understated cash and nothing.
Standing on our revolver.
We are positioned to emphasize growth even with the commitment to retire more than $50 million of debt. This year.
At the end of the fourth quarter, we owned or controlled a three year supply of land based on trailing 12 month closings.
Fourth quarter land spending of $116 million, but our full year total expenses to four.
I $141 million, which was about $100 million below the amount we generated from the land related to home closings, reflecting the deliberate pause in spending we undertook at the onset of the cobot pandemic.
We expect to recapture this activity in 2021, which is likely to result in land spend approaching $600 million.
On the table on the right hand side of slide 11, we depict our expectations for near term community count, which we anticipate will likely trough in the 100 twentys in the fourth quarter.
Community count growth will be evident in fiscal 2022, as we benefit from our increased land spend and a greater use of options.
With the strength in the Newell.
Uhhuh market land prices are somewhat frothy across our footprint. However, we are confident that we can achieve this increase in our land acquisition activity without materially changing our risk profile for three reasons.
First we have already contracted for or approved the majority of our land acquisition activity for the coming year, giving us confidence.
Our ability to fulfill our acquisition targets without chasing low margin sites.
Second we are increasingly controlling lots are options, allowing us to better leverage our incremental spend and manage risk as a matter of and we grew our option lot as a percentage of active lots by six points to 35% last quarter last year and expect to see.
Similar improvements this year.
And finally, our underwriting process and financial thresholds have not changed we continue to include no price appreciation in our modeling and our required rate our card return and profitable metrics are unchanged with.
With that let me turn the call back over to Alan for his conclusion.
Thank you David.
Yes.
Fiscal 2020 was a challenging year, but with our teams resiliency, we rose to the occasion and generated very strong results, we improved profitability and returns increased sales paces to close the year and grew our backlog significantly, giving us confidence heading into fiscal 21 importantly.
Importantly, we also position the company.
To adopt a more consistently growth oriented allocation of capital.
Of course, our highest priority remains the safety of our employees customers and trade partners and we will continue to adapt our activities to that end.
As I say every quarter I'm confident we have the people the strategy and the resources to create value over.
For the coming years.
Before I turn the call over to the operator I would like to acknowledge this is bobs last earnings call I.
I Didnt, let them see this part of the script, so we squirming a little bit right now.
As we announced this summer Bob is stepping down as CFO. This week and I thought a moment of recognition was warranted.
Bob joined me here 12.
To go at a very difficult time in our Companys history and was integral in our turnaround.
Since then as he has been deeply involved in every aspect of our business. He has been my partner and mentor to our corporate and operational leaders for his entire tenure.
In fact, all of our constituents are indebted to him for his many contributions.
I didn't want to sign off today without adding a public. Thank you for his service and his friendship the Bob Thank you.
Going forward our management team is in great shape, Dave is ready to take the next step in his career and he and I will ensure that this is a seamless transition.
Congratulations Dave now, let's get to work.
Operator, please open.
I'd line for Q and a.
Thank you we will now begin the question and answer session. If you would like 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 two again to ask a question. Please press star one.
It will take a few moments for.
Questions to come through please standby.
Our first question will come from Alan Ratner with Zelman and Associates. Your line is open.
Hey, guys. Good afternoon, congrats on the strong results and Bob Best Best of luck in the next endeavor Oh look forward to.
To.
To hearing from you at some point in the future on the other side, but yeah.
I guess my first my first question here, just thinking about the the first quarter guidance on the the order is roughly flattish obviously that that would be an impressive result on on a down 15 community but.
Your absorption rate this.
Quarter was up over 50% so it implies a fairly meaningful deceleration in growth there and I'm just curious how and if maybe you could talk a little bit about what's what's the key driver on that is that an intentional slowing on your part to prevent and even further gap out of communities or is it the market may be responding to the price increases that you.
Guys have implemented over the course of the quarter and any color you can give on that would be helpful.
Sure. So I think it is a variety of things [noise] Alan one of the one of the things that I didn't say in the script and is worth noting as we had a really good November and December last year. So thats also part of that comparison that I want to point out we.
He ended up with.
I've forgotten just off the top of my head what the monthly sales pace was in November and December last year, but it was really really good so matching that and being down and community count I agree with you is a strong result, I think there are thinking about this has been not that we are masters such that we can control what the market will do but.
To pursue what I call, the hand get pace and margin and so there is a there is clearly attention there and we have I think found some success in where we can get price we get price that can have an effect on on pace.
Every community is different and it's very difficult to say that.
But we've got some overriding rule that is going to control the absolute absorption rate. So I think for us it's a balance trying to get pace and margin and I think if if.
We're wrong, we may be wrong to the low side, because things have been very very strong, but I just don't know that we can.
Expect to sustain this level of enthusiasm in the markets and rather than assuming that I think we've we've assumed that the effect of our price actions and the comparisons with last year, we'd be real happy with being roughly flat.
I think that that certainly prudent and makes a lot of sense.
Second question.
<unk>.
On the pricing you mentioned.
Where you can you're getting price I was I was hoping you might be able to quantify kind of what price increases have been running at over the last several months and you also made that comment about the land market being frothy I am curious what level of inflation, you've seen as a result of the kind of the frenzy to replaced.
Given all of these closing communities.
Yes, So let me let me talk about the land market for a second and.
Dave will have to remind me the first part of the question, but on the land market side.
We were proud of the fact in April that we showed a lot of discretion at the height of the Cobi crisis that we pulled back significant profit.
So significantly from land spend but it was pretty clear by the time, we got to June that this recovery was going to have good legs and we got very active in June we were able to re contract for a few of the deals that we had walked away from we repriced a few deals. So we were very very busy in that June Joel.
And by August September time period, getting locked up for a pretty big land spend year in 2021. So when we talk about the frothiness I'm really talking about deals that were just now investigating that may or may not come to fruition and I think we've put ourselves in a pretty good spot where almost all I mean, a big chunk of the activity in two.
21 is contracted for already approved so the things that we're looking at now and we will do some more deals are really to allow us to have a continuing continued and consistent growth trajectory out of 22 into 23 now allows us to be a little bit more selective.
And I realize it's more of a qualitative answer but in terms of what we.
This summer to get set up for the land spend this year I just wanted to explain that a little bit because I don't I don't feel the pressure to go Chase right now we're out just a little bit and I think that gives us a little bit more control.
And you know this is Alan I mean, you've done this a long time. The fact is in almost every market there there would be multiple bidders on.
Did any site and so we're we're really focused is what are we good at what products do we have expertise in what buyer profile, what submarket and making sure that we're winning the deals where we've got that competitive advantage and trying really hard not to be too adventuresome in new sub markets, new price points, new product types, where we may not.
Not be the natural are the logical buyer and that's that's kind of how we're dealing with with the frothiness that we see in the land market I'd be making numbers up to give you percentage changes because on any one deal it would be a good number but on five other deals that may not be but there is upward pressure on land prices kind of across the board.
And as I said I think by the time, we got done answering that question I would have forgotten. The first half of the question on price appreciation price appreciate how much pressure on the home side.
Yes. So it's a good question in fact that sort of interesting for us, we're actually going to because of product decisions that we've made over the last year to make sure we're really focused on having extraordinary.
Very value at an affordable price, we use the acronym events I will.
We'll actually have a lower ASP because of product decisions that we've made and that's masking. The fact that within on a like for like basis, we are seeing 345%.
And in some cases more sort of run rate price increase.
Over the last six months or so.
Certainly there is some communities that are outliers to that but but there's there's good mid digit mid single digit price appreciation, but as a portfolio, we're actually managing to a total ASV that will be a little bit lower.
Got to 21 comment that your ASP will be lower.
Yes, Okay got it I appreciate that all right guys well, thanks, a lot and Dave sorry, I neglected to say good luck to you in your new role as well so thanks.
Thanks, Alan Thanks Bill.
Thank you.
Next question will come from Jay Mccanless with Wedbush. Your line is open.
Hey, good afternoon, thanks for taking my questions.
Routes to Bob and Dave.
In your new life.
I guess.
New new a new adventures to come right.
So my first question on the DTA box could you talk about where that is now.
On what kind of progress are made on it this year.
Yeah, well right now it's about two in a quarter.
Which is down.
Almost $9 million year over year.
And as the companies continue to be profitable they'll continue to decline.
Great.
Thanks, and then you.
Your spec count for the quarter was down about 25% versus the same time last year I guess could you talk a little bit about the balance between reloading that spec count versus.
Going out and doing some land deals where were you all thinking about that right now.
Would you add.
I'd tell you it's Dave I'd tell you we have the capital certainly to do both in the salary ended from a liquidity perspective. The reason the spec count is down and we have a comp a page on it in the appendix in the slide deck is because demand has been so strong.
We keep start and that's because there is demand out there and we've talked about it before you know it also.
Onto the Cfos office, so we still very closely managed to spec count, but the reason, it's not it's not because it started to because of demand in the market today.
And I guess any thought towards increasing the amount of specs on average that you're carrying it given community.
Or.
Bringing that down a little bit.
And then also.
Any focus in terms of where you guys are buying the land trying to trying to build up the community count again.
Jay Let me, let me answer both of those or give a perspective on both of those on the spec side.
And I think one of the things that Dave said in his part of the script is we're really focused on delivering a spectacular customer experience.
And there are clearly some risks in this next quarter around starts a lot of our peers have talked about that I want to make sure that we are taking care of the customers that we've gotten backlog.
So thats priority one I think we will have spec starts as we always do but the priority is going to be to make sure that we're starting our backlog.
And in terms of.
Overall company strategy issue, we've been 60, 40 kind of a builder between to be built in specs and I think we're still comfortable.
Roughly in that range of course at a community level that mask and look a little different but overall, we're not trying to be something different.
On the land side. The fact is it's nice to have a footprint that is as broad as ours. So.
So that we've got lots of opportunities in different places and we're not locked into having to be in one.
One place.
We're seeing sales strength across the breadth of the footprint I.
I would tell you the key for US in land acquisition is sticking to our knitting lot with product types sub markets that we know where we've got competitive advantage, where we've got throughput where we've got trade relations. That's what we that's where we want to win.
And that's where we want to deploy capital.
And then the last question for me just the.
Cycle Times, you said they are starting to get out there a little bit could you talk about maybe days now versus days last year or.
However, you want to measure that metric.
Yeah.
And I don't think we want to get into specific number of days I think we want to be kind of careful on that what I would tell you is what I would point you to more is the commentary in the script, which is more about anticipation right.
It's all about and Alan talked about delivering an exceptional customer experience. That's what we're really focused on we think there is a likelihood for labor and material constraints and so were planning.
For a little bit of elongation on cycle times. So what I would tell you is that you've seen a little bit now we think we could get a little bit more constrained, but the key for us is really about delivering exceptional customer experience and making sure that we built a great house, which we think its long term industrial business.
Okay. Thanks, Jim claim of course.
You got it.
Thank you.
Next question will come from Alex Barron with housing Research Center.
Yes, thanks, and good job on the quarter guys.
Thanks, I was wondering to see if you could comment on the order trends by month and.
How how did October look for you.
One second I got it right here out so I would tell you when we talked about it in the script about in terms of months, we had a pretty significant acceleration in August and September July was a very strong month, but frankly August and September were even better on a year over year basis. So very strong frankly as you move through.
For the quarter in terms of October specifically, we're not going to give our numbers other than to say that things remain pretty strong in October and you can see our guidance. We're very confident that things are going to continue to remain strong.
Okay, and I'm not sure I caught your guidance for closings for the next quarter can you repeat that again. Please we talk yeah, we talked about flat closings and we talked about.
Frankly, Alex the backlog a lot of what's in the backlog an increase in the backlog was August and September sales, which are going to close in Q2 Q2 predominantly so.
A flat closings, even with the bigger backlog, but but expectations that we'll see a lot of that back while delivering Q2.
Okay got it and then in terms.
As of the land that you guys are buying.
Is there a big mix shift towards more affordable homes or more of the active adult homes or is it pretty much the same as it's been in the last year.
Very similar very.
Very very similar Alex sticking to our knitting little.
Little bit of adjustment in some markets where we.
We are.
Prices ran maybe call. It 380, 390, and we're we're reloading on something Thats 370 380.
But we are trying to stick very closely to our strengths.
Okay, and if I could ask one last one is there any appetite to do share buyback given where the stock is that.
I would tell you Alex Weve done share buybacks, historically bought 10% of the companies that about half book when we did the deal that comes out of the company about half book and I would tell you. We're capital Allocators, we focused on risk adjusted returns and what makes the most sense and if we sign a stock price that made sense, we have some dry powder to go do that.
But predominantly and Alan mentioned.
And I mentioned in the script, we are focused on growth in the business and land is that.
Not to deter us from share repurchases, but.
It's a risk adjusted return perspective that we're taking in allocating our capital.
Okay, Great best of luck. Thanks.
Thanks, Alex.
Thank you once again, if you would.
A question.
Press Star one on your phone and record your name when prompted.
Yeah.
Our next question comes from Julio Romero with Sidoti and company. Your line is open.
Hi, good afternoon, thanks for taking the question.
Hi, Julio Florida.
I'm. Good. Thanks, So I think I heard you called out six.
Good million of expected land spend in fiscal 21 can you just talk about the cadence of land spend throughout the year I mean.
Would you expect that to be more front loaded or more evenly spread throughout the year.
I think it's going to be relatively even evenly spread Julio you know, we don't like to get tied down to closely to specific numbers, but given what we have kind of in the pipeline.
What we see I think a relatively even spread is a good expectation.
Okay understood and Alan point about you know a lot of land that when purchasing the stuff that we kind of picked up in June and kind of put in the pipeline, we've got a pretty good spread through the year.
Got it and you said you expect your percentage of lots under option to grow at a similar.
Final amount to what that percentage grew in fiscal 2000.
Yes, the six points that we referenced in the script, we think we can achieve something similar to that in 2021.
Got it and I guess just last one for me is you know very strong order growth in the fourth quarter.
And I think you may have touched on it earlier, but you know what parts.
So the value prop aside from price have been resonating well with customers and and.
Do you see that part of the value proposition driving above market growth and 21.
Hi, This is Alan I.
But there's a there's an inherently promotional part of answering this question when we talk about our value proposition, but I would tell.
I think one of the main things that is happening in the housing right now is you've got a bunch of millennials.
Who deferred home.
Home purchases.
And they're pretty selective right and so having value not just price at the core of our offering I think is valuable I think our choice.
Your plans and are surprising performance I mean, it's not a stripped down a lowest possible price value proposition and I think that is perfectly positioned for the buyer profile in the market right. Now. So I think we are in exactly the right spot.
That's great. Thanks for taking the questions I appreciate it thank you.
You got it.
Thank you.
No further questions at this time.
Okay, well, thank you already for jumping on the call. We'll talk again next quarter and we appreciate your participation and we'll talk soon thank you.
That does conclude.
Today's conference. Thank you for participating you may disconnect at this time.