Q1 2021 Beazer Homes USA Inc Earnings Call
And welcome to the Beazer homes, earning conference call for the quarter ended December 31, 'twenty 'twenty 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 that'd be easier dot com at this point I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.
Thank you good afternoon, and welcome to the Beazer homes conference call discussing our results for the first quarter of fiscal 2021.
Before we begin you should be aware that during this call we will be making forward looking statements.
Such statements involve known and unknown risks uncertainties. Other factors, which are described in our SEC filings, which may cause actual results to differ materially from our projections.
Any forward looking statement speaks 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.
New factors emerge from time to time and it is simply not possible to predict all such factors.
Joining me today is Allan Merrill, our chairman and Chief Executive Officer.
On our call today.
Alan will review highlights from the first quarter explain the basis of our confidence in the new home market and.
And discuss our improving expectations for fiscal 2021.
He will also describe two significant commitments, we recently made as part of our ESG strategy.
I will cover our first quarter or is that really results in greater depth and provide detailed expectations for the second quarter and full year of fiscal 2021.
I'll then update our expectation for continued growth on our land position followed by a wrap up by Allan.
After our prepared remarks, we will take questions at the time remaining I will now turn the call over to Alan.
Thank you, Dave and thank you for joining us on our call. This afternoon.
With an acute focus on health and safety, we generated outstanding operational and financial results in the first quarter opt.
Operationally orders were up more than 15% year over year, driven by our sales pace that was up more than 40 per cent.
In fact, both orders and our sales pace reached their highest first quarter levels in more than a decade, even as we intentionally slowed sales with price increases.
We also expanded our lot supply, creating a path for future growth.
Ali we delivered big improvements in gross margin adjusted EBITDA and net income.
The strength in demand for new homes has exceeded our expectation over the past six months.
We have known that pent up demand was building based on the disconnect between demographics and strong affordability on the one hand and anemic housing starts for most of the last decade on the other what.
While we did not anticipate was that a pandemic would be a catalyst for that demand to begin to materialize.
Many consumers are now focused on improving their living situation.
Whether their motivation is more space better space outdoor space or an entirely new location demand for housing has been excellent.
The question on on everyone's mind is how.
How long will the strength last.
Well, we believe it's likely to persist for some time.
From a supply perspective, our industry has delivered far fewer homes in the last 10 years, then job growth and household formation would have predicted.
We think this cumulative deficit is conservatively well above 1 million homes, which means that a few good quarters are unlikely to exhaust the need for new homes.
So what about the durability of demand.
Well to buy a home prospective homeowners typically need two things income security in the form of a job and homes for sale that they can afford.
With vaccines at hand, we are optimistic that economic and job growth may resume as soon as this spring.
In that case the concern about the day.
Our ability of demand maybe better seen as a question about affordability.
Affordability, ultimately boils down to mortgage rates on home prices.
Although the fed is on record as supporting low rates for an extended period. We know we have to work hard to keep home prices within the reach of most buyers and that is exactly why our positioning is so important.
We believe we are in the right markets with the best job growth, we're targeting the largest buyer segments baby boomers and millennials.
And we focus on delivering exceptional value at an affordable price not competing primarily on price.
Ultimately this position and gives us confidence that our pivot toward growth will allow us to fully participate in a strong housing market over the next several years.
As we entered this spring's selling season, we have an unusually high degree of visibility and therefore confidence in our likely full year results.
That's because the dollar value of our backlog is up nearly 60% compared to last year.
So today, we are increasing our expectations for each of the objectives, we outlined for fiscal 2021.
Dave will provide more precise figures in his comments, but we now expect higher earnings and increased land activity. This year, while exceeding earlier debt repayment objectives.
In summary, we're going to make significant progress on our balanced growth strategy, which is designed to grow profitability faster than assets and revenue from a more efficient and less leveraged balance sheet.
Although ESG is receiving increased attention it isn't something new at beazer.
We have been addressing all three facets of ESG for years, because we see it is fundamental to fulfilling our purpose statement, which we've included on slide seven.
Today I'd like to draw your attention to the significant commitment we announced in our most recent proxy statement that will result in a reduction in greenhouse gas emissions.
In short we have committed debt by the end of 2025 every home we build will be net zero energy ready.
In numeric terms it means all of our homes will achieve a home energy rating system, where hers rating of 45 or less.
Which is an energy conservation standard that is far beyond most existing building and energy codes.
At this level, our homes will generate as much energy as they consume by attaching a properly sized alternative energy system.
Underscoring this commitment we're a proud builder partner of the department of Energy's Zero energy ready homes program and were the first national production builder to commit to building, 100% of our homes in accordance with the program.
Improving energy efficiency is so important that we've made it a part of our long term compensation plans as well.
Before turning the call back over to Dave I want to talk about one more aspect of our ESG strategy, namely our commitment to social responsibility.
We have a long standing relationship with Fisher House Foundation, an organization that builds homes, where military and veteran families can stay free of charge, while a loved one is in the hospital.
Our work with Fisher House has had a profound impact on our employees, our customers and our partners and it's caused us to want to do more.
To fund this ambition last year, we started a title insurance agency called charity title that will donate 100% of its profits to charity.
By creating an innovative dedicated funding source for our philanthropic efforts, we expect to be able to expand both our contribution levels and the number of organizations we can support.
We encourage you to review the ESG materials contained in our proxy statement and 2020 annual report, which are available on the Investor Relations section of our website.
With that I'll turn the call over to Dave Thanks Allan.
Looking at the first quarter compared to the prior year, New home orders increased 15% to 1442, despite a lower community count sales.
Sales pace was up over 40% to three five sales per community per month.
Homebuilding revenue increased about 2% to $424 million on flat closings.
Our gross margin, excluding amortized interest impairments and abandonments was 22, 1% up approximately 230 basis points.
SG&A was down approximately 60 basis points as a percentage of total revenue to 12, 7% driven by controlling overhead expenses.
This led to adjusted EBITDA of $43 $6 million in the quarter up nearly 50% and exceeding 10% of revenue.
Total GAAP interest expense was down about 3%.
Our tax expense for the quarter was about $4 1 million for an effective tax rate of 25, 5%.
As a reminder, on a cash basis, our deferred tax assets offset substantially all of our tax expense.
Taken together this led to $12 million of net income from continuing operations from <unk> 40 per share up over three times versus the same period last year.
Looking at the second quarter, we expect the following versus the prior year.
New homeowners should be down slightly.
While we expect sales pace to be up we do not expected to fully offset our reduced community count as we focus on increasing margin and returns.
Closings are likely to be up 10% to 15%.
There are a couple of factors impacting our expectation for closings next quarter.
Given the strength in demand, we have fewer spec homes to sell and close this quarter.
And second we are balancing cycle time pressures with our commitment to delivering exceptional customer experience.
Our ASP is expected to be approximately $390000 we.
We note that the change in our ASP isn't reflective of our pricing power or margin opportunity as we are constantly adjusting features and product mix retain affordability.
In fact, this quarter, we had two segments with lower Asps.
And substantially higher margins.
As we described last quarter increases in lumber prices in September and October would create a modest headwind on gross margin for the second quarter.
Despite this we expect gross margin to be up slightly versus the same quarter last year.
SG&A as a percentage of total revenue should be down at least 50 basis points, reflecting the benefit from top line leverage.
We expect EBITDA to be up more than 20%.
Interest amortized as a percentage of homebuilding revenue should be in the low fours.
Our tax rate is expected to be about 25%.
When combined this should drive net income and earnings per share up more than 60%.
At the start of our fiscal year, we provide our expectation for our full year results given our first quarter performance as well as our positive outlook. We are now able to increase each of those expectations.
We previously expected EBITDA to be up slightly versus the prior year.
We now expect EBITDA to grow at a double digit rate to over $220 million much faster than the growth in assets or revenue.
This improvement is largely driven by increased profitability as we expect gross margin to be up at least 50 basis points versus the prior year in the second half of fiscal 2021.
Second.
We targeted double digit earnings per share growth on our last call at the low end. This would have represented EPS of less than $2 per share.
We now expect earnings per share of at least $2 50.
And finally, we committed to reduce debt by more than $50 million last quarter, we now intend for that to be closer to $75 million.
We expect to end fiscal 2021, with a book value per share in excess of $22.
Our expected level of profitability on return on average equity for the full year should be approximately 12% and if you exclude our deferred tax assets, which don't generate profits on ROE should be over 17%.
During the quarter, we spent $110 million on land acquisition and development and ended with nearly $500 million of liquidity up more than $200 million versus the prior year.
We expect land spending to accelerate in the remaining quarters of 2021, ultimately exceeding the $600 million. We initially anticipated funded by our cash from this liquidity and cash from operations.
On slide 12, we depict our expectations for near term community count, which we still anticipate will likely trough in the 100 Twenty's later this year.
We expect community count growth will be evident in fiscal 2022, as we benefit from our increased land spending.
Last quarter, we said 'twenty 'twenty, one would be an important inflection year as we allocated more capital to growth and expanded our use of options.
The initial results of this effort were evident in the first quarter as we grew our active lots by about 8% to over 18000.
And importantly, we controlled 42% of our active lot through options at quarter end, a seven point sequential increase.
Given our current pipeline of deals we expect to continue to grow our land position as you move through the remainder of the year.
With that let me turn the call back over to Allan for his conclusion.
Thank you Dave.
The first quarter of fiscal 2021 was very productive for beazer as we increased our sales pace grew our backlog and improved both gross margins and SG&A, while expanding our lot position in a highly efficient manner, even better we expect this operational momentum to persist through the fiscal year in the new home market characterized by healthy.
Amanda and constrained supply.
In November we described fiscal 2021 is an inflection year, where we expected to modestly improve profitability, while investing for future growth. In fact, it is shaping up to be much more than that allowing us to raise our expectations for profitability investment and debt reduction ultimately 2021 should demonstrate our.
<unk> to improve shareholder returns from a balanced growth and ESG strategies.
I want to thank our team again for their ongoing efforts I am confident that we have the people the strategy and the resources to create durable value over the coming years with that I'll turn the call over to the operator to take us into Q&A.
Thank you we will now begin the question and answer session.
I would like to ask a question. Please press star one if you need to withdraw your question Press Star two.
It does take a few moments for the questions to come through on standby.
And our first question will be from Jay Mccanless with Wedbush. Your line is open.
Hey, good morning, or good afternoon, thanks for taking my questions.
The first question I had I like to see the that Youre getting a little more aggressive on the debt repayment.
But with the run that you've seen in the stock. This year is there any thought to maybe raising some equity and attacking what you've got for 'twenty, one and 'twenty two to repay.
Jay I would tell you we are and you know us pretty well from a capital allocation perspective, we're always considering every opportunity. That's in the market stopped has certainly had a good run on we're paying attention to it on.
And we will let you know if we do anything but.
Nothing unplanned right now and frankly, we will just keep it sooner on options and leave them open.
Okay.
And then in terms of the community count glad to see that it's it's still looking like the end of this year when the when that bottoms out.
Any geographic preference or or a little bit more biased to one geography over another.
You know a J good afternoon, it's Allan.
Not really I mean, I got to tell you I'm pretty excited about the pipeline across all of our geographies, where we're finding things to do everywhere.
We went through a hard process of rationalizing markets.
You know over the last you know 510 years and so we're kind of in places that we know we can grow and I am saying a path in each of those markets.
On any given quarter deal flow, it's just the vagaries of the way deals become available and how they move through our process, but I think if you look at it over a year or two you're going to see is bigger in every one of our markets.
Got it and then.
And the West order growth was a little bit slower than the other two regions was that a function of just community timing or anything to point out are or no. There were talk about there.
No I think we talked a little bit in the script about using price in part to control demand and we did have some exposure or some experience with that in a few of our western markets. So that was part of it as well I mean, we've got such a big backlog and some of those markets. We wanted to be careful about adding to that back.
Log so that we could in a in a appropriate way get the starts out there and keep that customer experience. So I would say it was probably more on the.
Near term side sales side than it was a community as it related to the change in the order growth.
Okay.
So all I had thank you for taking my questions.
Thanks Jay.
Our next question comes from Alan Ratner with Zelman and Associates. Your line is open.
Hey, guys. Good afternoon, congrats on the strong performance and thanks for the update on the ESG initiatives that says certainly noteworthy and congratulations on on the efforts there.
My first question.
It relates to the land market I think a common theme. We're hearing from a lot of builders is that the industries picking up the pace of land acquisition pretty sharply over the last three to six months and you guys are obviously in the mix there.
Some builders are talking about doing certain things to remain kind of a competitive and avoid some of the inflation net and that's going on in the market whether that means buying larger deals whether that means maybe going a little bit further out to reduce slot costs. So I'm curious you know a can you talk a little bit about the inflation, you're seeing and B have you changed.
Either your underwriting standards or kind of at the targeted land at all to you know to deal with the competitive nature of the market today.
Well and Youre, absolutely right that the markets are very competitive.
I'll give you an over simplification and we could maybe go a little deeper but.
On where we're seeing particular enthusiasm I mean, it at and the way I've described it as think of a bar Bell you know very small kind of bespoke deals that private builders can be all over our super aggressively priced and deals where there are 200 or more lots that are in there.
The.
Obvious submarkets, where there are currently a lot of permits those are incredibly highly priced where we have have kind of found success and really a good footprint for us is 50 to 150 lots in most of our markets, where if somebody is due in 2000 units in a market they kind of can't waste time on 75.
Or 80 lot deals they'd have to do 30 of them in a year.
And so we find that there is a bit of a window in many of our markets for that.
So the deal size is really the thing that we kind of target and we ask ourselves why did we get so lucky why are we.
I'm able to be successful in this location and is it you know just economics, we paid the most or do we have an ability to extract more value from that site. So the other part of the strategy is we're not very adventuresome I mean, when we know a submarket when we've got the trades in the realtor relationships in an area I feel like that's an opportunity for us.
To know what that price is and make sure that we're not letting somebody else into our kitchen, where you start getting into new Submarkets, new buyer profiles, you always have to be very cautious because you know I tell our team. The other team gets paid too and we ended up in in kind of a new area, new Submarket and we could find ourselves paying the dumb tax.
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I referred to so we are definitely not changing our underwriting numeric we havent eased up at all and if anything I think we've been pretty effective with our option strategy, but really the key for US is sticking to what we know and finding deals that are meaningful for us, but frankly or maybe a bit smaller.
On some of the very biggest builders would pursue.
Got it that's really helpful color there so I appreciate that.
Second question.
Love your thoughts on single family rental you know I know you dipped your toe in the water there a few years ago and and as far as on on where Youre not really active in the space today, but you.
You know a lot of builders are aggressively either raising capital for that that initiative or are acting as a G. C for for operators and your comment earlier about the million starts threshold or under building so to speak.
I've heard different opinions on how to think about single family rental on out of cash in that equation, because clearly there's a lot a lot of single family homes being built for that purpose.
And I'm curious a are you seeing any competitive pressure from that yet, it's probably a little bit early on but do you view that as competition for your communities. If you see a development across the street or do you view that more as kind of just shifting from apartment demand today.
Boy.
Yeah, that's a that's a big topic.
Yeah, and I guess, you're right and I didn't want to establish both their credential and our humility I mean, we were early in this in 2010, when we started our pre owned rental homes company.
We simply didn't at that time had the capital even with our partners to scale. It fast enough and I think we did the right thing we created value for our partners on ourselves and we sold it to one of the big public REIT and they've done very well with that portfolio. So I'm respectful of the degree of difficulty of actually operating a business in that space being a landlord.
Is a different business and.
I think we were we're humble about the degree of difficulty but to your question about being competitive.
It plays at a few different levels. It plays on the land market and it is absolutely the case that there are some.
Scenarios, where we've been outbid for a and asset by someone whose intent to turn it into a rental community. So yes that is a source of demand for land and so it's competitive in that way I think for a lot of our buyers they've made a decision to become homeowners and so they're not as and.
I'm sure that this is not universally true, but I don't sense that the issue is you know standard in the morning, I'm kind of betwixt and between them I, a renter I'm an owner they've decided they cross the threshold, it's time to become an owner their value in and value creation and wealth building and autonomy that come with it.
<unk> and owner.
So I really do view that rental option is competing with other rental options primarily.
But it's a great option I would say I think there are a lot of renters, who rather than being a in a poorly constructed out of date old used home are much better served in a newly built homes.
But I also know that the cost of production of those homes the cost of land for those homes mean that the monthly rent create a an important.
Yard stick for us to be measuring our monthly payments against and if anything I've been pleased to see the rental rates that those communities require because in virtually every instance, the pretax P. I T. I ends up being below that rental rate, that's a pretty good case for us to make about wise.
This is still a really attractive time to be a homeowner.
It's a major factor we take it seriously we have sold lots to rental operators. We have bought lots that were originally intended for rental operations that they decided we're better for ownership operations. So I would say, we're pretty close to it but those are those are my thoughts about it I don't feel any urge to get back in to go to.
Ray and start a new business, we're awfully excited about growing our own business.
I really appreciate your thoughts on that and that it'll be interesting to watch on fold over the next few years. So thank you.
Hey, Greg.
Thank you and the next question comes from Julio Romero with Sidoti and company. Your line is open.
Hey, good afternoon, everyone.
If oil.
So you mentioned you expect margins to be up slightly from quarter, even with those headwinds can.
Can you just talk about that is that a.
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Yup.
Mix or maybe vs.
If lumber or any other costs.
Additionally.
Yes, I think you broke up a little bit on the question I think the question was about second quarter gross margin and our expectation on when we talked about in the script lumber on timing on lumber price increases in September and October and the way that would impact margins in terms of having a year over year increase we've still got good pricing in the market we had the price in.
The market and given the visibility we have from our backlog were pretty comparable in terms of the price and costs are matched that we can get margin increases in second quarter.
Understood I'll hop back into queue. Thank you.
I think it's important to point out Dave that you know, we will do better in the second quarter than we did last year, but it won't be like the first quarter.
And that headwind is there and so we'll be up but by a lot less.
Our next question comes from Alex Barron with housing Research Center. Your line is open.
Thank you good afternoon, guys great job on the quarter.
I have a question about the interest expense or margin I guess on related to the interest expense on I'm guessing your comments around margins going up 15 basis points is that outside of the impact of.
Paul you know your interest capitalization on all of that.
So just to be clear Alex to comment very clearly was slight increase on a year over year basis on the gross margin in Q2 and up more than 50 basis points on the back half of the year and yeah. That's excluding the interest.
Okay.
Now typically focus on the interest that's running through cost of goods sold.
Obviously, the events have been paying down debt.
And last year.
Interest that ran through cost of goods sold was higher than the interest incurred.
Should we expect the interest in cost of goods sold to start kind of narrowing a little bit more interest incurred this year.
Yeah, Alex we've talked about as low before remember the interest is amortized through cost of goods sold it's a function of the capitalized balance on our inventory turnover and so as the capitalized balance starts to kind of move its way down youll see those two numbers converge, it's going to take some time, it's not going to be right away, but you'll eventually get get to that point, where you see some convergence.
And I think to be more precise I would expect the interest in cost of goods sold will exceed our interest incurred again this year yes.
Okay.
Got it but the general trend I guess is moving in that direction, which is they're going to migrate over time, you should expect that convergence, but it won't be in 2021, it will narrow.
There is a little different so I mean, the good news is our cash interest expense is lower than our book interest in so it effectively understates the earnings power of the business because we're running through.
Debt GAAP interest expense, but that's just extra liquidity, we've got to put into land.
Right.
Now on your comments about the orders being flattish and I'm guessing you can correct me if I'm wrong I'm getting that has more to do with the drop in community counts. So two questions. One is you know where do you see any inflection point per community counts going up and net.
That's not the reason or you guys. Just you know limiting sales at this point because it starts or some other factor.
Well Youre, 100% right, we expect our pace will be stronger in Q2, this year than Q2 last year, but.
Very unlikely we will let that get high enough that it will offset what.
While we know the reduction in community Count is which is why we won't probably match last year's total orders and absolutely. We are being very careful at the community level about releases not because we're so much trying to manage the community count we're trying to maximize the value of every asset and given the scarcity of Av homes in our markets.
Selling a little bit slower and the pricing power that is associated with that to us in this environment makes a lot of sense.
So that's that is the thought process you can appreciate that every community in each market has a slightly different set of issues, but the the macro.
The approach that we're taking is definitely slowing the sales pace with price.
Which is having the effect of dampening that pace a little bit.
In terms of when the inflection point is going to occur we found at least I found in my experience here that.
Making projections about community count a couple of quarters out is really bullish because of the vagaries of land development we know.
Know that we will trough in the 100 Twenty's mid to late this year and we know that next year, we will have a higher community count, but trying to be precise enough to tell you what day, what week, that's going to happen I'm, sorry, Alex just can't do that.
Okay got it thanks a lot.
Thanks.
There are currently no other questions.
Okay I want to thank everybody for joining us for our first quarter call and we're seeing for our second quarter call. This concludes today's conference call. Thank you very much.
Thank you and that does conclude today's call. We appreciate your participation today and you may disconnect. Thank you.