Q2 2021 Beazer Homes USA Inc Earnings Call
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Good afternoon and.
Welcome to the Beazer homes earnings conference call for the quarter ended March 31, 2021.
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 and the investors relations section of the company's website at Www Dot Beazer dotcom.
Now I will turn over the conference call to David Goldberg.
Senior Vice President and Chief Financial Officer. Thank you.
Thank you good afternoon, and welcome to the Beazer homes conference call discussing our results for the second quarter of fiscal 'twenty one.
Before we begin you should be aware that during this call we will be making forward looking statements and such.
Statements involve known and unknown risks uncertainties and other factors described in our SEC filings, which may cause actual results to differ materially from our projections.
Any forward looking statements speaks only as of the date. The statement is made we.
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 Allan will review highlights from the second quarter and discuss the supportive macro environment. He will then provide a preview for the remainder of the year and outline our expectations for growth and fiscal 'twenty two.
I will then provide more details on our results projections and balance sheet, we will conclude with a wrap up by Allan.
After our prepared remarks, we will take questions and the time remaining I will now turn the call over to Alan.
Thanks, Dave and thank you for joining us on our call. This afternoon.
We had an extraordinary quarter highlighted by an unprecedented increase and our sales pace and significant growth and our gross margin EBITDA and net income.
And at the same time, we invested for the future grew our share of lots and controlled by options and continue to reduce debt.
And so we had on nearly perfect balance growth quarter with profitability growing faster than revenue, while operating from a less leveraged and more efficient balance sheet.
Perhaps the best news is that our team is poised to translate continuing strength and market conditions and to even better results and the quarters ahead.
As I'm sure you've heard the strength and new home demand has contributed to those longer cycle times and higher construction costs today.
To date, we have successfully adapted to this environment by raising prices limiting sales paces and extending delivery dates unsold homes.
As we work through these issues our objectives remain the same we.
We expect to create value for customers partners employees and shareholders by delivering great homes on time and at the margin. We intended when we made the sale.
Our commitment to creating value for our stakeholders can also be seen and our recent accomplishments and goals on the ESG and front as summarized on slide five.
This quarter's highlights included being named and energy Star partner of the year for the sixth consecutive year, representing another significant step toward our goal of having every home we build net zero energy ready by 2025.
We believe the strength in the housing market will prove to be pretty durable and.
And the reasons are simple and strong demographic demand exceptionally limited supply and a recovering economy.
On the demand side, we expect many of the COVID-19 housing norms to be persistent namely.
Namely the desire for more space better space and outdoor space.
Even as we return to offices and schools are homes have clearly taken on new roles and our lives.
Couple that with a great awakening of millennials to the benefits of homeownership and the desire of many boomers to simplify and you have a recipe for depth and breadth of demand that isn't likely to disappear anytime soon.
On the supply side the shortage of owner occupied homes. We described on our call in January and turns out to be even more acute and we suggested on.
On that call, we conservatively estimated that the deficit was more than 1 million homes.
In recent weeks.
Freddie Mac published a deeply research report, which demonstrated the housing shortage is closer to 4 million homes. There is simply no way for our industry to accelerate entitlement development and construction to make a serious dent and that number anytime soon.
Finally on the economy.
While there are still many COVID-19 related challenges there is ample evidence about job growth and wage growth, which bode well for consumer spending and housing.
And so on.
Our industry is in a highly advantageous position with demographically driven demand and a recovering economy faced with seriously constrained supply beyond 2021.
Turning now to our expectations.
With our sold and already started backlog up more than 50% and continuing strength and lead and traffic trends, our visibility and confidence in fiscal 'twenty. One results is quite high.
And Dave will provide details on our outlook for the third quarter and full year, but I'm happy to share that we are raising our expectations again.
Headline is that we now expect full year earnings per share to be above $3.
Looking beyond this year, our balanced growth strategy is a longer term approach to generating shareholder value while carefully managing risk.
Over the past several years, our strategy has yielded a big jump and profitability, even bigger improvements and our returns and a meaningful reduction in debt and we're not done.
And while it's too early for us to give any type of detailed guidance for next year. There are three factors that give us confidence that we can again improve profitability and returns and fiscal 'twenty two.
First our current backlog already contains nearly 700 homes scheduled to close and the first quarter of next year.
And that's more than half of our typical first quarter closings.
And with our normal cycle times most of these homes would've closed this year.
These aren't normal times. So instead, we have a great start on next year.
Second community count growth is coming.
Incredibly strong sales over the past six months and the dip and our community count arrived a little sooner than we previously anticipated, but next year the positive progression and our community count will be evident.
And remember these communities were tied up six to 12 months ago before the recent run up and home prices.
And third we will finally see real interest savings we have.
<unk> Deleveraged, our balance sheet in recent years, but haven't really benefited from a reduction in interest expense and our earnings.
Because of the timing difference between the immediate cash benefit of much lower interest costs and the non cash GAAP expense that arises from previously capitalized interest.
Next year, we expect to realize a multimillion dollar reduction and our GAAP interest expense based on actions we have already taken.
These factors and our confidence and the industry supply and demand equation should yield another successful year for our balanced growth strategy.
Before closing I would like to again express our appreciation for the scientists doctors first responders and essential workers.
And <unk> through what appears to be the worst of the pandemic and are positioned our country to begin to recover.
And that I will turn the call over to Dave Thanks Allan.
Looking at the second quarter compared to the prior year, New home orders increased approximately 12% to 1854 as our sales pace was up more than 40% to four seven sales per community per month.
Homebuilding revenue increased about 12% to $547 million on 9% higher closings.
Our gross margin, excluding amortized interest impairments and abandonments was 22, 2% up approximately 140 basis points.
SG&A was down 100 basis points as a percentage of total revenue to 11% as we benefited from improved overhead leverage.
Adjusted EBITDA was $64 $2 million over 45%, our EBITDA margin was 11, 7% the highest second quarter level and the past 10 years.
Interest amortize as a percentage of homebuilding revenue was four 4% down 20 basis points and that led to net income from continuing operations of $24 6 million yielding earnings per share of <unk> 81.
More than double the same period last year.
With the strength of our current backlog and positive macro outlook, we are and are positioned to once again increase our financial expectations for fiscal 'twenty one.
We now expect EBITDA to be up over 20, 20% or more versus the prior year, a significant increase from the previous guidance.
This level of improvement implies EBITDA growth of more than 10% and the second half of this year with greater year over year growth expected in the third quarter.
Our full year EBITDA guidance equates to earnings per share above $3 up from last quarter's guidance of at least $2 50.
We now expect our return on average equity for the full year to be approximately 14%.
If you exclude our deferred tax asset, which doesn't generate profit our ROE will be over 20%.
The current production environment is going to impact both sales and closings and the third quarter.
As the second quarter progressed in the face of elongated cycle times, we deliberately slowed home sales to provide a better experience for customers and increase the value of our communities. Many.
Many of these restrictions remain in place and as such we anticipate new home orders to be down 10% to 20%.
On the closing side because of the challenging production environment. It is difficult for us to predict the timing and mix of closings between the third and fourth quarter of this year. We are focused on delivering great homes, not maximizing third quarter closings, even with this caution we still expect closings to be up and the high single digits and the third quarter year over year.
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Our ASP should be above $400000 for the first time ever.
Gross margin should be up over 100 basis points.
SG&A as a percentage of total revenue should be down at least 20 basis points.
And our interest amortized as a percentage of homebuilding revenue should be around 4% and our tax rate will be about 25% cash.
Combined this should drive a sequential increase in quarterly earnings per share.
We ended the second quarter with over $600 million and liquidity more than double this point last year with unrestricted cash and excess of $350 million and no outstanding draws on our revolver.
During the quarter, we retired approximately $10 million of our senior notes and with two remaining term loan repayments were on a clear path to achieve our goal of bringing our total debt below $1 billion by the end of fiscal 'twenty two.
During the quarter, we spent almost $100 million on land acquisition and development.
Based on our land pipeline and approvals, we expect our land spend to accelerate and the remaining quarters of fiscal 'twenty, one resulting in over $600 million of total land spend for the year.
We also increased our option percentage and the second quarter and now control more than 45% of our active work through options up from less than 30% and the same period last year.
Still anticipate community count trough and around 120 later this year, but we expect it to grow steadily from there and fiscal 2022 as we benefit from our increased land spending.
I'll now turn the call old Allan for his conclusion.
David.
The second quarter of fiscal 'twenty, one was very successful for us as we maintain the momentum of the last several quarters highlighted by very strong new home orders and substantially improve margins, while also improving the efficiency of our balance sheet.
These results and continued strength and the market have enabled us to raise our expectations for the year.
Perhaps more importantly, our performance should help investors understand the longer term opportunity for value creation embedded and our balanced growth strategy and our ESG leadership.
I want to thank our team 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 and with that I'll turn the call over to the operator to take us into Q&A.
Thank you I'd like to ask a question you May press Star one and you will be prompted to record your name clearly for question and introduction.
Again, if you'd like to ask a question. Please press star one.
One moment, please on we gather questions.
Our first question will come from Allan Ratner from Zelman and Associates. Your line is now open.
Allan.
So.
Heard from a lot of builders over the last couple of days and the and it seems.
There's two somewhat differing views on the best way to approach the market. These days you know you've got some builders that.
Are you sticking to a kind of a to be built strategy and feel like that's what the consumer really is desiring today to kind of design and take their perfect Dream home and then you've got other builders that for a multitude of reasons to feel like it makes more sense to wait until the home is started and kind of further along on the construction.
Process, perhaps two to sell and I think at least those builders and the near term are probably seeing a little bit of a greater lift gross margin benefiting from those extra months of pricing power as well as maybe some increased visibility on there and on their cost structure and I know you guys kind of have a balance sales approach at least kind of historically so I'm curious if you have a view.
One way or another or if you've kind of shifted your sales strategy.
One way or another to reflect kind of all the various trends and dynamics and the market today on certainty on cost pricing significant price appreciation et cetera.
And it says.
Great question, Alan I think.
My starting position on on that is in an environment, where you have near absolute cost certainty.
Our value proposition for buyers tilts towards a larger share of our sales being to be builds.
But in the current environment, we are doing a couple of things because of pockets of uncertainty around costs, either slowing the rate of those to be billed sales or.
Starting homes, so that we have that certainty on cost and then selling them. So.
Unfortunately, I don't have a M.
Red or blue and yes, or no answer for you, but it's it's a it's and navigating through but the pivot for US is where we have cost certainty we have more confidence and therefore the to be built model allows us we think to be paid for our for our pillars for our choice plans for our surprising performance but.
And I totally understand the point that it's tough to sell a home that and what your costs are locked the price and then ended up with costs that you didn't anticipate and so we're managing that problem.
And our community level.
Got it.
Your response Allan It makes a lot of sense and is helpful and I guess on that note.
It seems like at this point really the only and limitation on sales or our production and you know maybe for your guys and your community count is a factor as well, but what is your production pace look like right now how do you know how many homes are you starting per month per community. If you look at it that way or on an annualized basis, how many homes do you feel like Youre production machine is.
Capable of starting and is there any flex point on that where you can potentially drive that higher assuming demand continues to be as robust as it is if not if not accelerate even further.
I think it can go up over time, but it's not the capacity to throughput can either sales flip switch to flip to make that capacity go up and the next 30 60 90 days and that's why you saw.
And I was talking about a meaningful part of our backlog delivering in Q1.
We looked at the capacity for our throughput, where we could have price certainty and deliver the right home.
The way, we wanted and and realized that the reality of that production environment is that we won't have the backlog conversion that we've historically had and the third and the fourth quarter.
It is going to get better I think in terms of the production capacity for us and for the industry because I think that this whether it's $4 million or another number. This structural deficit. I think is a is an undercurrent that is going to force us as an industry to expand capacity, we need to the markets. Therefore, it the trick of course is to keep it affordable, but I do.
That that will increase over time.
Great. Thanks, a lot good luck.
Thanks Allan.
Our next question will come from Julio Romero. Your line is now open.
Hey, good afternoon, Allan and David.
And how are you.
I'm good.
Youre, obviously seeing a very strong price environment asps as expected and above 400, K next quarter.
Can you speak to maybe how much more price can be driven and this environment and kind of.
How do you see that kind of unfolding and is there a breaking point eventually.
Well I know the answer to the last part of the question and for sure. There is a breaking point, it's affordability and one of the things that is different about this environment now compared to other times that are felt quite euphoric from a new home construction perspective as I'm comforted by the fact that mortgage underwriting has remained really disciplined so qualification.
Income levels are going to ultimately have a big.
Effect on on how much pricing power.
And of course changes and interest rates will factor into that as well and I.
I think that there is more room.
Not panicked about some of the pressures and the in the on the cost side of the supply chain and I think we've got the ability to make changes to the product and accommodate those and in a mix.
But I don't think that the you know if I looked at the macro numbers at that level of price appreciation and we've seen.
Across all new homes are new and used homes and the last year I don't think Thats a run rate that we're going to see sustained over multiple years, but we're in a bit of a short squeeze right now so the next few months quarters.
There is quite a bit of pricing power.
Yes.
Got it and.
Yeah.
With the strong demand you're currently seeing consumers looking for share and amenities or has there been any change in consumer preferences and regards to and.
Figuration.
Floor plans at all and and has that affected your product mix.
Alright.
And has a little bit and it will come as absolutely zero surprise when I tell you that our place to home office and home School comes up and almost every sales conversation and.
And I don't think Thats, the cynical view that forever, we're going to work from home and teach from home, but I think when you realize you don't have that opportunity that flexibility.
It feels like your product is functionally obsolete and I think that's a big part of what we've seen over the last year and I think it's got legs to it I think we are very focused on having a.
Opportunities for people to work from home and.
Net debt effects the architecture, the lay out of the home and and many of our communities and many of our floor plans, where we are intentionally designing more than one.
So that <unk> got the opportunity for.
Quieter spaces and.
And more of them.
I think I talked last quarter, a little bit about the fact that you've got an interesting thing happening right now and in architecture and our interior architecture at least which is we've all got the.
And visuals from TV and the Internet of what open floor plan open concept high ceilings, and great rooms, and keeping rooms, we call them here in Atlanta.
Uh huh.
It does look great and they feel great.
But theyre not awesome for working from home teaching from home, so theres a little bit of a challenge how do you create those nooks and crannies and those purpose built spaces and still have these gathering places these sensors and place within your floor plans and it's actually kind of a.
And exciting thing to figure out how to do that and that is definitely a major theme and product and all.
And our floor plans everywhere and the country.
Okay.
Understood.
Just last one for me is if you could speak to any progress updates with your commitment to having all your homes being.
Net zero energy ready by 'twenty, five and does the current kind of unique demand backdrop.
Yes accelerate that at all or changed that at all.
I don't know that it changes the opportunity to accelerate is really.
It's kind of a function of community Nuc, New community count it's tough to go into a community that you are two thirds of the way sold through entitled permitted and have let contracts with subs and really fundamentally change the way the home is built.
So what will happen and the thing that will really play a big role and the and the rate of our achievement of that is as we opened new communities our capacity to bring those features into homes within that community.
And now there are some larger communities, where we're making changes and real time and those are incremental changes but.
And I was thrilled to.
We recognized to have the company recognized again as a energy star partner of the year.
Six years, and our ROE is a big deal testing every single home for 10 years is a big deal.
And I feel pretty confident we're going to remain a leader in this category I think we I think we are very disciplined about it our team is excited about it.
And it gets the future and we're driving it.
Great I appreciate you, taking the questions and best of luck and the third quarter.
Thanks, Julio Thanks Julien.
Yes.
Okay.
As a reminder, if you'd like to ask a question you May press star one.
Our next question will come from Jay Mccanless from Wedbush. Your line is now open.
Hey, good afternoon, everyone.
And I was just wanted to walk through the math if your backlog of 30 307.
700 homes that are going to close and <unk> 22.
Okay.
And Youre looking at.
High single digits, Youre talking somewhere 2500, 1500 closings for the third quarter.
Are you all thinking right now that your fourth quarter.
There's going to be in line and maybe slightly higher on the total closing basis, and what youre seeing and <unk> or do you feel like you can deliver those home deliver a few more homes than whats youre going to close and <unk>.
So as you and we're not going to give specific fourth quarter guidance, you can kind of back into it given what we said and what's in backlog and kind of what the spec level looks like.
But we're not going to go to specific guidance.
And I think as I mentioned and my comment there is a bit of uncertainty between Q3, and Q4 with the production and kind of moving and between so high single digits for Q3, and you can kind of back into it based on what's in backlog and the spec count as what you think for Q4.
Alright, well and that's going to be my next question is on the specs I mean is everything that you guys are starting right now mainly to meet the backlog are you trying to rebuild that spec count at all.
We are trying to and in some places we've got the throughput to do that Jay and candidly in some places the backlog of sold homes and started unsold homes is such that the throughput for a lot of additional specs is limited.
So the answer differs by community, we do want to have a.
Larger spec number were a little bit off of.
And our traditional number of specs per community and it really is mostly attributable to this excess that we had selling the specs.
But we want to take care of the customers, we've got and backlog and to the balance. There is is kind of how we got to where we think the second half of this year, we'll get from a total perspective, and that's kind of why we we focus more on the earnings side and on the units side, because I think theres going to be some movement as Dave said between Q3 and Q4, both specs and backlog.
Alright.
The communities that you are planning to start growing and.
22.
Is there any geographic specificity to those and then also.
When you think about underwriting now what type of a monthly absorption pace are you underwriting these newer communities too.
I'm really glad you asked both of those questions Jay the answer and the first one is no there isn't really a <unk>.
<unk> symmetric distribution of new communities, we've got growth and every market and it's part of the discipline and staying in the footprint right instead of getting excited by new market day or new market be I mean, we've got great teams, we've got long histories and the markets. We're in and we want to invest with our team and our markets that we know pretty well.
In terms of underwriting.
This is a question that debt I know comes up a lot. These are really really exciting frothy kinds of sales times. These are not the sales paces that we're using and our underwriting we are using sales paces that look like our last 345 years not that looked like the last six or seven months.
Okay, that's good to hear.
M.
Okay. That's all I had congrats on the great quarter. Thanks. Thank.
Thanks JJ.
And our next question will come from Alex Barron from housing Research Center and your line is now open.
Yeah, Hi, guys. Thanks.
I was hoping you could.
Comments on your interest expense versus interest incurred.
Obviously interest incurred has been going down because these guys on paying down your debt but.
And this quarter, we saw a jump and the interest that went through cost of goods sold so roughly when can we expect those two numbers to be.
More on line is it maybe until next year.
Well actually we've actually talked about it in the past absolutely Allan mentioned in his commentary in the script that we think we're going to see a benefit from and the interest perspective flowing through cost of goods sold and overall on the income statement as we look to next year in terms of when incurred and and and amortize come together, it's a little bit further off and the distance and there are some fab.
Does that go into it as you know.
Inventory turnover and encourage and beginning balance, but certainly the reduction next year as planned as Allan mentioned and a benefit from an income statement and earnings perspective zone referred to in his script.
Okay, great. Thanks, and then.
And as I think about capital allocation and I look at your balance sheet. Obviously, you guys don't have any debt maturing near term zone I'm, assuming you probably won't be.
Delevering and the near term. So what are the uses of cash at this point is it more to buy land is there potential per share buybacks.
How are you guys thinking about that.
Well, let me just correct one thing politely, if I may we are going to get debt below $1 billion, we've committed to do that by the end of fiscal 'twenty two.
We've got we structured intentionally a few years ago, a term loan with $50 million principal payments. So that we could balance the delevering with our growth ambitions and we've been executing against that so we will have a term loan at the end of this year and another one at the end of next year, we will pick up a few other bonds and the market to make sure that the.
Aggregate gets the total below a $1 billion, but that is for sure going to be one of the allocations that beyond that and frankly, the much larger dollar amount is investing and the business.
The market is strong and we're seeing lots of opportunities. We're excited about the commitments that we've made the deals that we've tied up and we've given pretty bullish guidance as it relates to land spending and the back half of this year and for the total year.
Here and and frankly, a lot of the deals that we're doing will have takedowns and other.
Our uses of capital and 'twenty, two and beyond so at this point I'm excited about the returns we can make investing and the business so that plus paying down the debt to get below $1 billion, that's really where our focus is from a capital allocation perspective.
Got it.
I could ask another one.
On your land balance didn't seem to go up year over year.
And so is that something that is in the works to kind of line up more with the.
On the growth you guys are seeing and orders.
And there are a lot of cross currents in the land balance and we had some some formerly land held for future development assets that were pretty big.
And as those have have shrunk as we've been selling through them. We have said, we don't need to have the same number of lots that we had for the size of the business. The other thing that's happening and you've seen this and the option percentage the option percentage has gone from 30% to over 45%, so and our land balance or dollars.
And we constantly talk about the efficiency of our balance sheet, we want to have a big investment, but no bigger than we need to have so that we can drive higher and higher returns and that's a big focus of our strategy is to make sure that we're growing our return on Unlevered assets and our return on equity. So I think actually that's a good thing.
Right that we've been very.
Prudent about the rate of growth and the assets and we've been able to drive a lot of EBITDA growth without a lot of asset growth, but we are definitely growing assets, but we're more focused on growing returns then we are growing assets.
And that's with balance growth is for us.
Okay, Great and we'll keep up the good work. Thanks.
Thank you all.
And I'm currently showing no additional questions at this time.
Alright, and want to thank everybody for tuning into our call to our second quarter call and look forward to talking to everybody again in 90 days. Thank you very much and this concludes today's call.
This will conclude today's call. Thank you for joining today.
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