Q3 2021 Beazer Homes USA Inc Earnings Call
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Our revised guidance.
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Good afternoon, and welcome to the Beazer earnings Conference call for the quarter ended June 30th 2021, today's call is being recorded and a replay will be available on the company's website later today at.
In Powerpoint slides intended to accompany this call are available on the Investor Relations section of the company's website at Www Dot Beazer Dot com at this point I'll turn the call over to David Goldberg Senior Vice President and Chief Financial Officer. Thank you Sir you may begin.
Thank you.
Good afternoon, and welcome to the Beazer homes conference.
Conference call discussing our results for the third quarter of fiscal 'twenty 1.
Before we begin you should be aware of that during this call we will be making forward looking statements.
The 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 do not undertake any obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise new factors emerge from time to time and 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 review highlights from the third quarter discuss our view of the current macroeconomic environment and outlined how we are strategically positioned for continued growth in fiscal 'twenty 2 and beyond.
I will cover our third quarter results in greater depth, our expectations for the fourth quarter and full fiscal year and update our.
Officer occasion for continued growth in our land position for by wrap up by Allan.
After our prepared remarks, we'll take questions in 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 a very successful third quarter generating financial results that met or exceeded our.
Expectations positioning us for a strong end of the fiscal year.
Our sales pace in the third quarter was 1 of the highest levels that we've generated in the last 5 years and in fact this pace would have been even higher if not for our deliberate efforts to proactively slow sales to align with our production capacity and limit our exposure to.
Material price inflation.
We delivered substantial gains in operating margin EBITDA and net income as we benefited from increased pricing and improved overhead leverage on.
On the balance sheet, we expanded both our total lot position and the share of lots controlled by option, while retiring $14 million in debt.
Together these results perfectly demonstrate our long standing balanced growth strategy, which is a multi year plan to grow profitability faster than revenue from of less leveraged and more efficient balance sheet.
With these results and confidence in our expectations for the fourth quarter, we are once again raising.
The guidance highlighted by earnings per share of at least $3.25.
Taking a step back we acknowledged the benefit our entire industry has experienced from the powerful confluence of demographics, new home supply constraints and massive workplace changes.
Does unleashed by the pandemic.
<unk> of these factors have led to significant home price appreciation, which has clearly outpaced wage and income growth.
In the coming quarters, we do not expect this level of price appreciation to continue our.
Our view is the disciplined mortgage underwriting we will effectively limit the extent of home price.
This appreciation.
That's entirely healthy and gives us confidence that we won't experience the kind of pricing excesses that could set up of painful correction in the future.
The demand and supply characteristics of our industry remain highly compelling.
Aspiration for homeownership, among millennials and changing homeownership expectation.
<unk> among baby boomers provide of durable source of demand for new homes, particularly with enduring worked from home expectations.
And the significant deficit of new homes simply can't be addressed quickly with the supply chain land use and entitlement barriers that exist.
Ultimately, our industry's challenge will be to ensure that labor and material cost expectations in the supply chain remain tethered to affordable home prices.
That's where we believe our market positioning will prove advantageous.
With 3 strong customer facing Differentiators, we have a lot of tools to work with.
Enable us to deliver extraordinary value at an affordable price and a highly competitive environment.
Last quarter, we provided initial visibility into our expectations for profitability growth in fiscal 'twenty, 2 and our confidence has only increased since then.
Here's why.
<unk>.
At the end of our third quarter, we had more than 500 homes in backlog scheduled to close next year nearly double the level at this time last year and importantly, these homes have higher prices and higher margins.
Second even as our ASP has increased we have remained focused on carefully managing our overhead costs. This will drive.
The 2 DNA leverage pushing SG&A below 11% next year.
And finally, our deleveraging efforts continue to reduce our cash interest expense setting us up for reductions in GAAP interest over time.
The next year, we expect at least $5 million in GAAP interest savings with further reductions and subsequently.
Right.
Taken together, we're confident that these factors will allow us to achieve our goal of generating double digit earnings per share growth in fiscal 'twenty 2.
Before I turn the call over to Dave I want to provide updates on 2 unique aspects of our business.
First over the past 6 months, we've experienced exceptional.
The year NAND and gatherings are 55, plus active adult business.
While traffic and engagement among the buyer segment was particularly impacted during the early part of the pandemic the strength in the resale market and the availability of vaccines have contributed to much higher sales activity. This is a growing part of our business.
<unk> <unk> is underway in Atlanta, Dallas, Houston, Nashville, and Orlando.
Second the rollout of charity title, our title business committed to contributing 100% of its profits to charity continues to gain momentum and.
In fiscal 'twenty, 1 we expect to provide title insurance for more than a third of.
Of our closings next year, we expect to provide title for 2 thirds of our customers, which should generate philanthropic resources of over $1 million of year on a run rate basis. This will allow us to expand our efforts with Fisher house and support local charities in each of our markets.
Incredibly proud of our team's innovative strategy to develop.
The dedicated funding mechanism that aligns our customers employees and partners and supporting our communities.
With that I'll turn the call over to David Thanks.
Thanks, Allan and good afternoon, everyone.
Looking at our third quarter results compared to the prior year new.
New home orders decreased approximately 13% to 1100.
Your line is of higher sales pace helped to offset a reduction in average community count.
Homebuilding revenue increased nearly 7% to $567 million on 1% higher closings and the 6% higher average sales price.
Our gross margin, excluding amortized interest impairments and abandonments.
994, 2% up approximately 300 basis points to the highest level in more than a decade.
SG&A was down 60 basis points as a percentage of total revenue to 11, 1% as we benefited from improved overhead leverage.
Adjusted EBITDA was $78.8 million up over 45%.
<unk> was EBITDA margin was 13, 8%.
Interest amortized as a percentage of homebuilding revenue was 4% down 10 basis points and net income from continuing operations was $37.1 million, yielding earnings per share of $1.22 more than double EPS for the same period last year.
Given our continued performance and substantial backlog, we are able to increase our financial expectations for fiscal 'twenty..1 we now expect EBITDA to be over $250 million.
Our full year EBITDA guidance equates to earnings earnings per share of at least $3.25.
From last quarter's guidance of above $3.
We now expect our return on average equity for the full year to be approximately 15%.
If you exclude our deferred tax asset, which doesn't generate profits our ROE would be about 22%.
Turning now to our expectations for the fourth quarter.
We expect the sales pace of over 3 sales per community per month.
As we actively manage pace to ensure cost certainty and of positive customer experience.
At this pace of higher than our historical average, but below the extraordinarily high pace, we experienced last year.
We expect backlog conversion to be in the mid <unk> as we continue to manage through the challenging production environment.
Our ASP should be about should be above.
<unk> $410000.
Gross margin should be up more than 100 basis points year over year.
SG&A on an absolute dollar basis should be down about 10%.
Our interest amortized as a percentage of homebuilding revenue should be under 4% and our tax rate will be about 25% <unk>.
Combined.
To drive earnings per share up over 20%.
In addition, we expect to repurchase over $55 million of debt, bringing our full year total to at least $80 million.
Our increased land spending in the quarter helped us grow our active lot count to over 19000.
We also increased.
The option percentage in the third quarter and now control nearly half of our active lots through options up from less than 30% in the same period last year.
Given our current pipeline of deals we expect to continue to grow our land position to over 20000 lots by the end of fiscal 'twenty 1.
It's worth noting that most.
Our <unk> have been in our pipeline for many months and are under contract at favorable prices in.
In addition, we remain focused on growing our position, while minimizing risk by maintaining our strict underwriting standards focusing on products that we built before in Submarkets that we already know and rely on options to control around half of our lots.
The deal of land prices have appreciated we're still finding deals that pencil, allowing us to refill the pipeline and grow our business.
In the third quarter, we spent over $140 million on land and development and we expect to spend around $600 million for the full year with higher land spending and of being a big increase.
2 of our option lot position, we're creating a framework for sustained profitable growth in the years ahead.
On slide 12, we depict our expectations for near term community count.
As you might expect the supply chain issues. So common in the home construction market have also impacted land development activities as such predicting the timing of new communities.
<unk> has never been more difficult.
While we'll be actively opening communities every month, we don't expect sequential growth in community counts until next spring.
Fortunately, we've concentrated our acquisition activities and established new home corridors. So many of our coming soon communities are already generating interest lists.
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We ended the third quarter with over $600 million of liquidity up about 50% versus the prior year with unrestricted cash in excess of $360 million and nothing outstanding on our revolver.
During the quarter, we retired approximately $14 million of our senior notes and with 2 remaining term loan repayments were on a clear path.
<unk> to achieve our goal of bringing our total debt below $1 billion before the end of fiscal 'twenty 2 are.
Our net debt to trailing 12 month adjusted EBITDA double of 3 times down from 8 times 5 years ago.
During the quarter, our corporate rating was upgraded by 1 of the rating agencies and we remain on positive outlook for both S&P and.
Moody's.
I'll now turn the call over to Alan for his conclusion. Thanks, Dave.
We had a terrific third quarter, but instead of repeating the highlights I'd like to close by putting this quarter in context.
We have been diligently and successfully executing against our balanced growth strategy over the last 5 years, we've grown EBITDA by more than 6.
The percent improved our return on assets by more than 5 percentage points and reduced debt by more than $300 million.
At the same time, we've quietly demonstrated leadership in each of the ESG categories.
As satisfying as these results have been so far we're even more excited about what's in front of us industry fundamentals.
<unk> are solid and we are deliberately investing for future growth in the meantime, we'll have higher prices and gross margins and lower overheads and interest expense to sustain earnings growth and.
And we aren't just succeeding for investors. We have charted the most ambitious energy saving of course in the industry with our path to net zero energy.
<unk> ready homes, and we've created a growing philanthropic platform diffuse the efforts of our employees with the resources provided by our customers.
I want to thank our team for their many ongoing efforts I am confident that we have the people the strategy and the resources to create durable value in the coming years.
With that I'll turn the call over to the operator to take us into Q&A.
Thank you Sir it is now time for the question and answer session of today's call. If you would like to ask a question. Please press star followed by 1 please make sure that your phone is on muted and record your name clearly when prompted if you wish to withdraw your question you can press star 2.
Please allow a moment for questions to come in.
Thank you. Our first question comes from Allan Ratner from Zelman and Associates. Your line is open Sir.
Hey, guys. Good afternoon, nice job on the quarter I'm glad to hear everyone's doing well thanks for taking my questions.
Of course.
David I guess.
Just on the guidance I was just hoping maybe for a little bit more of a finer point on the margin outlook recognizing that this quarter and came in incredibly strong above expectations up about 300 basis points year over year.
I know your guidance is for at least 100, but.
On a sequential basis, how should we think about the strength that we saw this.
This quarter and the sustainability of that.
Allan is it's a good question look you have some timing as it relates to lumber prices and lumber price increases in the earlier in the year.
That are going to affect the exact level of margins in the in the fourth quarter compared to the third quarter I think what we talked about of 1 Allan talked about as the homes in.
First of all of that we have higher margins. If we look into 'twenty 2 and that's what gives us confidence. So you of 100 basis points reflects those increase in lumber prices that we experienced earlier in the year. In addition to the the guidance that we've given out and into 'twenty 2 given the backlog we are now.
So just to clarify on that so down a little bit sequentially in the fourth quarter.
<unk> of the lumber timing and then maybe the accelerating the next year that that is kind of certainly because of the yet.
Thank you that's helpful. Allan I thought your comments early on about the pricing environment were interesting and kind of just the the dynamic with the mortgage lending environment, probably eventually putting some cap on the price increases we've seen.
For become you know first I'm curious if you've seen any signs of that happening yet you know we're hearing for most other builders that the credit statistics and everything in and qualifying is still very healthy and and really not changed at all so I'd be curious if you've seen something different.
But then expanding on that you know I think it.
It'd be an interesting environment if that plays out the way you say it is because on the other hand.
There is some optimism that costs will stabilize but everybody is talking about building more houses rate ramping community count building more spec building more inventory building backlog. So so what gives you the confidence of that.
The cost side, we will cooperate.
As pricing eventually hit the ceiling.
Allan if there were ever of compound question that was it.
And if I may some day.
Yes, let me, let me pull it apart and deal with the first thing first and then the second thing so relative to the mortgage market. As you know we do not have a mortgage subsidiary.
We like our position very much we've got multiple lenders, making proposals to every customer and so we get a pretty good snapshot of what's happening across a variety of lending platforms larger and smaller institutions and I would tell you I think what you said is right, so far and insofar as credit quality down payments.
Of the income ratios of all been pretty strong.
And that sort of gets to the issue that while home prices have risen a lot mortgage rates are really attractive. So if you look at home mortgage payments in relation to income.
We're higher than we were 612.24 months ago, but we're not and kind of crazy land.
My concern would be if house prices keep moving significantly how does that sustain itself and I don't think that will happen because I do see real discipline amongst the lenders and their underwriting.
At this point it isn't rubbing too badly I mean, certainly for certain borrowers. It does there are.
Debt, absolutely people who are affected by.
The price increases, but there is still significant demand out there that can afford at these prices.
Really trying to telegraph, what we've seen in the last 3 months 6 months 9 months that is not a trend line that people ought to be extrapolating and extending we're going to run out of that kind of of ups.
There are and I feel pretty good about the fact that the mortgage environment will act as 1 of those restraining factors on home prices.
So does that answer that part of your question yes.
Very helpful on the pricing side, and I would tend to agree and I think that would be healthy for the the market as a whole if that were to happen.
So.
So I guess that segue for the cost side, which you can answer now yeah. So so the cost side of the equation.
The way you framed it is I think correct there is going to be.
Some addition to the supply side that we and others through community count growth are going to try and address but.
Got.
Syed industry, a long way to go just to get back to the community count that we had a year ago.
Right and we will get there and I hope we get beyond that then we've got the issue that as you know and I think you've researched the deficit the supply deficit that's been created over the last decade I mean.
It depends on who you ask as of $3 million for.
Is it $5 million I don't know, what's the big number and I feel like that's where this notion that there's going to be a lot of additional supply has to be kind of looked at the context, yes. There is a fair bit of additional supply over time, but against a giant deficit.
Then you add the issue of of course, and that really will come down to.
Millions of Arctic level, whether or not the capacity is advancing from each of those product categories as the production level in the industry expands and the thing is I think just like you know and and our investors know that there is coming community count growth all of our manufacturers.
With the present suppliers know it as well so as we talked to are our principal providers.
Providers I think they are absolutely geared up to deal with unit volume growth net.
I know the way that will settle out in terms of what the price per product will be in each category no, but I think with a multi year advanced notice on.
A factor in the coming the expansion of activity I think we're seeing plenty of investment in the in.
In the supply chain to make us feel like there isn't going to be.
The.
Broadly speaking areas, where we just we can't get a particular product now that sounds really good the truth is in the last 6 months that hasn't.
Hasn't been the case, there have been areas, where there have been shortages and there had been spikes in prices, it's been quite extraordinary in the supply chain. So my answer to your question is more looking out 12 months to 24 months as ICR community count and other community count ramping I think our supply chain has got plenty of time and has been making the investments to be able to deal with that enhanced level of activity.
The.
Alright, that's very helpful and I appreciate you stepping through that multi part question. Good luck guys.
Alright, Thanks Allan.
Thank you. Our next question comes from Alex Barron from housing Research Center. Your line is open Sir.
Thank you good.
Good afternoon gentlemen.
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For the question I guess regarding the the <unk>.
Orders that you saw this quarter.
The most builders have said that they're still seeing good demand and that there is holding back sales. So just wanted to come.
Confirm that's what you guys are seeing and how do you see the the orders playing out over the next couple.
Orders, if you guys of RMB.
Holding back sales.
Yes, Alex and we've talked about in the script.
Absolutely see good demand out there that's absolutely the case in the quarter, we did proactively control and manage our sales pace to try to manage to try to match our production volume in our production capacity.
As we talk.
Script, very clearly in terms of how we see demand I think Alan gave a pretty good kind of lay out on how we see the supply and demand in the industry on a go forward basis, we think theres real good drivers of demand out there in the the demand that we're seeing is sustainable.
Without giving specifics I would tell you we're very optimistic about the the demographics and demographic trends in the market with both baby boomers and millennials.
<unk>.
Our positioning of accordingly.
And we gave for but I guess guidance Alex on Q4, right. I mean, we think orders in Q4 will be in the range of about 3 sales per month per community, which would be a little enhanced relative to 2016, 17, 18, 19, but certainly not at the level debt.
Were fortunate to experience last year in the September quarter.
Got it.
And in terms of the in terms of the supply chain issues, you know everybody's been discussing.
What is it that you guys are.
We are doing I guess debt to address.
Those issues are you like other builders.
I'm trying to start more specs than selling later in the process are you guys keeping things the way you've always done them.
What are you guys doing maybe different to try to bring in the the.
The delivery times.
The question is.
Great question, it's complicated we spend a ton of time on it as you would know Alex it's different in different cities and it's different in a given city.
Today than it was 90 days ago.
It's a little bit of of game of whack, a mole dealing with the.
Challenges, but a couple of key things for us the first thing was stopped selling homes.
There, we werent assured of when we could start it based on availability of labor and materials.
The old adage, if youre in a whole stop digging.
The second thing be sure that you are communicating with your.
The trades and your suppliers well in advance in the to understand what that availability is so we talked about our sales pace being aligned with our production capacity that's been a very big part of of how we have been dealing with this.
The period.
Something else and you talked about bringing.
The dates I would tell you. The first thing is it has to stop getting worse before you bring it in and 1 of the things that we've done.
And this is.
Unusual I guess, we've been really clear with customers about the challenges in weekly conversations and we've moved a lot of closing.
And out of our fourth quarter into our first quarter. So that we aren't trying to get proverbial 10 pounds of 5 pound bag the.
Fact that it's our fiscal year end quarter turns out to not be the most important factor for our customers. So when we're working with our trades and our customers, saying how about on October 15th.
<unk> good day that customers happy we can manage to that does it mean thats not a queue for closing for US yes. It does we're going to have a terrific Q for any way and frankly as we talked about we're going to have a really good Q1, because we've got such a big backlog that will deliver into next year. So I think part of of dealing with an environment like this Alex is being realistic and.
Delivered highly highly transparent both.
Up to our customers and out to our.
Our traits.
Yes, I got to imagine the customer.
Not be upset if you gave them a realistic expectation for your house is going to take 9 months.
Being in the 6 months because of all of these issues I'm sure they could adapt but I'm guessing the bigger challenge.
For you guys of being able to to have visibility on cost correct.
Well the timing and cost they are both big issues on the on the timing side, though where we're really focused right now I would tell you that there are stages in each market.
And since that we set a window, we tell the customer at the pre <unk> meeting here's the window in which your home is going to close we get to a particular stage in our construction process and thats when we set the date.
That's been fairly effective and it is.
Dealt with a lot of the anxieties that I think new homebuyers around the industry of had.
We're not knowing when the when theyre going to get their homes on the.
On the cost side, we've been pretty careful about not selling homes in advance of knowing our costs. So if we don't have cost certainty in the category or in a market around something that's an area, where we have intentionally throttled back sales activity.
So our view is we can absorb some of the higher cost we've been successful in doing that so far but it's a pretty risky proposition to sell a bunch of homes and not know your costs and that's what we've avoided.
Great well good luck. Thank you. Thanks.
Thanks, Alex.
Thank you. Our next question comes from Julio Romero from Sidoti.
The company your line is open Sir.
Yes.
Hi, Yes, good afternoon, Allan and David.
Oh, yes.
Good day, so I wanted to pull the string of little bit more on the.
The first of all of his question on on costs and I think you guys.
<unk> talked about lumber, a little bit and I know thats.
Lumber prices have been a little.
For all of the Costar to say the least in the first half of the calendar year I mean.
Does that higher lumber costs, I think you called out might affect margin in the upcoming quarter does that.
Stay isolated to the fourth quarter or for.
Kevin can that kind of seep into margins in the December quarter.
Little bit of the.
Yes, I think there'll be a little bit like some of the homes that we sold in the spring or going to close in that September quarter, and some are going to close in the December quarter, and we sold them with our eyes open knowing what lumber costs were the good news is as lumber costs have come down we're now selling homes with our eyes wide open with a different lumber cost so I.
I think the largest impact what Dave was alluding to the largest impact of the highest of lumber cost will be flowing through our cost of goods sold in the fourth quarter, which is why we would expect some sequential deterioration in gross margin, but reminding us that we will still be up year over year very nicely.
Understood and.
Are you guys, putting or disease or put any like lumber price escalators already material price escalators in the contract.
We haven't done that I know that there is some evidence of it we've looked at it.
There are legal challenges with it the communication challenges with it.
Their enforcement issues with it.
Im not philosophically like would say no never.
Think of the Super complicated, it's easy to say, it's hard to actually enforce.
And I think we have taken the approach of let's just not sell homes, where we don't know the costs and there can be surprises you can have.
Of particular trade issue on a given house book, but I think trying to shift that onto the customer is a pretty tough thing.
Got it I appreciate the way of saying that that makes sense.
And I guess.
The last 1 for me and I'll pass it on is on the preliminary guidance for fiscal 'twenty 2.
I think my pencil of fast enough I've got double digit EPS growth.
The 22, SG&A as a percentage of sales below 11% and.
I think sequential community count growth growth in the March quarter did I get that correctly.
Yes, I think that's all that's all fair that's kind of what we're trying to paint a picture of based on what we've got.
Got right now we feel very good about debt.
Got it thanks very much I appreciate you taking the questions.
Thanks Neil.
Thank you there are no further questions in queue at this time.
Okay I want to thank everybody for joining us on the call today, we will talk to everybody next quarter. Thank you very much. This concludes.
This call.
Okay.
This does conclude today's conference you may disconnect at this time and thank you for joining.