Q1 2023 Beazer Homes USA Inc Earnings Call
Good afternoon, and welcome to the Beazer homes earnings Conference call for the first quarter ended December 31 2020 to.
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 Dot Beazer dotcom.
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 2023.
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 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.
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 is Allan Merrill.
Our chairman and Chief Executive Officer on our call today, Alan will discuss highlights from our first quarter occur.
The current environment for new homes, and an update to our balanced growth strategy.
I'll then provide details on our first quarter results and second quarter expectations.
Dates on our cycle time and cost savings initiatives, a review of our land activity and future community count and end with a look at our balance sheet and book value.
We will conclude with a wrap up by Allan after our prepared remarks, we will take questions in 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.
And our first quarter, we were pleased to generate financial results and profitability in line with the expectations we outlined in November .
This translated into adjusted EBITDA of $47 million and <unk> of earnings per share.
Having said that the new home sales and cancellation environment proved to be even more difficult than we had anticipated.
As we will discuss however, more recent traffic and sales results have been much improved.
Beyond the selling environment, we are continuing to pursue and make progress with each of the operational priorities, we set out for the year.
This includes accelerating cycle times, reducing construction costs and re underwriting all pending land transactions.
These efforts will generate benefits in the coming quarters.
In the meantime, thanks to our significant backlog and the deleveraging we have.
Accomplished in recent years, we're in a strong position from a balance sheet perspective.
We have an ample supply of lots and plenty of liquidity and no near term maturities. So we expect to remain both resilient and opportunistic over the course of the year.
Let's dive into the sales and cancellation environment in the first quarter with an update on more recent trends.
Early in the quarter mortgage rates continued their relentless move higher which together with elevated home prices and other macro concerns effectively froze the market for most discretionary homebuyers.
The sales activity that was taking place was primarily for specs or quick move in homes, many of which were being offered with big incentives as most of our peers were completing their fiscal years.
That presented a tough environment for us.
For two main reasons first we had just completed our fiscal year end. So our finished spec position was extremely low we entered the quarter with fewer than 100 quick move in homes, leaving us with few opportunities for buyers with serious time constraints.
Second.
We experienced an increase in cancellations.
As a percentage of beginning backlog, our first quarter cancellation rate was about 14%, which was in line with prior years, but a lot higher than the 5% to 10% we had experienced in the preceding quarters.
And there was one other factor at play improving cycle times.
On our last call, we outlined our efforts to accelerate cycle times to extend our window for making fiscal 'twenty three starts and closings.
Fortunately, we saw a lot of progress during the quarter, which limited our enthusiasm to offer to be built homes at finished inventory prices.
In December as mortgage rates drifted lower we started to see a nice uptick in online and in person visits this.
This translated into a January sales pace more than double our first quarter results.
While we've adjusted prices features and incentives to align with the market overall, we haven't had to make drastic changes and we are slowly capturing lower construction cost for future closings.
There remains a lot of uncertainty about the trajectory of demand and pricing for new homes, largely because of affordability.
But the wage growth home price reductions and rate relief that have already occurred or gradually improving affordability this along with new and.
Limited, new and used home supply leads us to be cautiously optimistic about the spring selling season.
Looking further out we remain confident in the strength of the new home market and our ability to create shareholder value.
For quite a few years, we have described our financial strategy with the phrase balanced growth.
The objectives and our results arising from this strategy have been straightforward prop.
Profitability growth and a less leveraged than more efficient balance sheet have led to higher returns.
Our long term commitment to all three elements of balanced growth remains in place.
In order to consistently deliver these balanced growth results, we know we need to successfully execute differentiated and customer oriented operational strategies to date, our positioning has been to deliver what we call extraordinary value at an affordable price through.
Through our three pillars.
But to continue to win with customers, we know we need to continue to innovate.
Over a year ago, we became the first and so far the only public builder to commit to 100% of our homes would be built to the U S Department of Energy's net zero energy ready standard.
While we sat at the end of fiscal 'twenty five as our deadline, we are using the current slowdown to move even faster.
In fact, we expect to have net zero energy ready homes under production in each of our markets by the end of this year.
While there are obviously some additional costs associated with building. The this higher standard we believe further differentiating our homes creates an opportunity for driving both sales paces and prices.
Energy efficient homes cost less to operate are more durable over time and deliver higher customer satisfaction.
And it's worth noting that the recently adopted inflation reduction act provides meaningful financial incentives to attain the net zero energy ready standard.
Yes.
Companies have to make choices about how to pursue the creation of shareholder value.
Our path is to execute against our balanced growth objectives by delivering differentiated energy efficient homes with a truly unique mortgage experience.
With that I will turn the call over to Dave Thanks Allan.
For the first quarter of fiscal year 2023, homebuilding revenue was $444 $1 million with an average sales price of more than $533000 gross.
Gross margin, excluding amortized interest impairments and abandonments was 22, 3%.
SG&A as a percent of total revenue was 12, 3%.
Adjusted EBITDA was $47 $1 million.
Interest amortize as a percentage of homebuilding revenue was three 1%.
Net income was $24 4 million or <unk> 80 per share.
And our GAAP tax expense was about $4 million for an effective tax rate of 14, 5%, reflecting the benefit of energy efficiency tax credits from homes closed in prior years.
As a reminder, broadly speaking we don't currently pay cash taxes as we continue to utilize our deferred tax assets.
Yes.
Looking forward to the second quarter, we're providing the following expectations. We are anticipating a sales pace over two and a half per community per month, which is comparable to what we did in January while this remains somewhat lower than normal seasonal levels. It is significantly better than the first quarter pace of one three.
Average community count is expected to be up about three up 5% year over year.
We expect to close around 1000 homes, reflecting the backlog conversion between 55 and 60%.
This is up around 20 points versus the same period last year, it's still quite a bit lower than our historical norms.
Average sales price should be about $515000 well above our Q1 ASP.
And more in line with what we expect for the rest of the year as we continue to emphasize affordability and an elevated interest rate environment.
We expect gross margin excluding interest to be in the 21% to 22% range.
SG&A as a percentage of revenue should be relatively flat versus the same quarter last year.
We expect this to lead to both adjusted EBITDA and earnings per share very similar to the first quarter.
Interest amortized as a percentage of homebuilding revenue should be in the mid threes and our effective tax rate should be at or below first quarter levels. As we continue to reflect the benefit of our energy efficiency tax credits.
While theres too much uncertainty around future sales prices to provide profitability expectations for the full year with our large backlog and available production universe. We believe we can deliver at least 4000 homes in fiscal 2023, which should again lead to hold total homebuilding revenue in excess of $2 billion.
<unk>.
In November we highlighted a number of operational priorities for the year, including accelerated cycle times, reducing construction costs and re underwriting pending land deals I'll review. These one at a time.
The supply chain challenges, we faced over the last few years had extended our cycle times by nearly four months pushing our traditional April cutoff dates for starts back into January or.
Our efforts to recoup at least 30 days on average across our markets have been successful. So we are now looking to recoup additional time above and beyond the initial goal.
On the direct cost side the evidence of success is not apparent yet.
Our first quarter closings had even higher construction costs in the prior quarter, which wasn't surprising given the cost environment that exists. When these homes were started we're working in every market with nearly every trade to recapture those dollars, we expect meaningful improvements in construction costs materialize in the fourth quarter when the mix of closings will more heavily.
Reflect homes started with lower costs.
At the same time, we continue to re underwrite land deals using lower home prices slower sales paces and higher mortgage rates and.
In many cases, we've been able to renewed renegotiate the costs Android the structures of our pending deals even with these efforts underway. We remain confident in our expectations for community count growth moving forward through fiscal 2023 and accelerating in fiscal 'twenty four.
As it relates to our balance sheet, we ended the quarter with about $386 million of liquidity.
Our net debt to cap was 47, 3% and our net debt to EBITDA was two four times. We ended the first quarter at about $984 million of total debt and have no maturities until March 2025, or.
Our focus on liquidity and a supportive maturity schedule provides flexibility for us to allocate capital in ways that best support our balance growth objectives.
We continue to grow both the quantity and quality of our book value. We ended the quarter with a book value per share above $31 up $7 from last year.
Despite near term challenges the ultimate goal of our balanced growth strategy continues to be earning returns that are above our cost of capital while growing book value per share with.
With that I'll turn the call back over to Alan.
Thanks again, Dave.
Despite a tough sales environment, we were able to deliver positive first quarter financial results.
Just as importantly, our backlog of sold homes improved sales momentum and our cycle time and cost reduction initiatives are favorably positioned us to generate full year results that grow book value and are consistent with our balanced growth objectives.
Longer term fundamentals for housing remain intact and robust.
And we're confident our differentiated consumer strategies, including our net zero energy ready initiative will allow us to compete for homebuyers on a basis other than just price.
Finally, our team is why I remain convinced 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 to ask a question. Please press star followed by one please ensure that your phone is unmerited and record your name clearly when prompted.
To withdraw your request press star two.
Again to ask a question that is star followed by one one moment. Please while we wait for questions to come in.
And our first question is from Julio Romero with Sidoti <unk> Company you May go ahead.
Hey, good afternoon, Allan and David.
Okay.
Hey, I wanted to maybe start on.
Sure your goal of accelerating cycle times have been successful in recouping I guess 30 days. So how much more do you think you can achieve on that front.
It will depend on the city there are different characteristics and different markets. A couple of weeks I would say overall some places a little more some places a little less but that's kind of what we tried to depict on the slide is that we've moved that cutoff date out another couple of weeks.
Okay and.
Maybe just talk about.
Obviously on the demand side I think.
January and the move in mortgage rates has.
No.
Call it a little bit more optimism just talk about what youre seeing there.
And how that's maybe changed the strategic outlook for you guys.
But in December .
Like somebody turned the lights on.
Activity on the website activity in our communities really perked up and it wasn't like it was great weather or anything it was just it felt different end rates clearly played a role in it I also think that some of the anxiety about the economy and about housing.
Started to tamp down a little bit and we can't lose sight of the fact, we got a housing shortage in this country. So you know people started paying attention again and what we saw in January was absolutely as I'm sure you've heard from others interest in specs, but we've got more confidence around a shorter cycle time and that has made it easier to sell to be built homes as well.
That was pretty tough for a lot of last year, where we had a hard time at the time of contract telling people the months, let alone. The date that they are home would be completed we're in a very different place now. So I think there are a few things I think that the macro things the interest rate things and then I just think that with the supply chain sorting out you've also got <unk>.
More visibility for customers on win.
To be built home can be delivered and I think those things collectively add I think Dave or I said it in the script I mean January for US was an we don't we don't want to make too precise a thing of it because it is just one month, but what we experienced in the month that just ended of January was better than double what we did in the whole first quarter on a per month basis.
It felt a lot better.
Yes, no I appreciate the color and I guess.
If you could just touch on your other <unk>.
<unk> of.
Cost reductions and you talked about.
Not there, yet, but expecting meaningful improvements by the fourth quarter.
Sure.
Yes.
How does the trajectory of like lumber prices maybe.
Maybe impacted the way youre thinking about.
The flow through of cost reductions as we progress throughout the year.
Yeah, I mean with it with cycle times still.
Stuck above six months I mean, there is you saw prices down in the fall Youll start to get the benefit of some of those.
This spring, but it's really starts that have have occurred.
In November December and into the into January and February where we're seeing those lower lumber costs, and that's where we get into our fourth quarter.
I think that there will be improvement in our direct costs in the in the second and third quarter, but I think it's going to be pretty modest honestly the weighted average thing as much as anything where the weighted average of homes with lower costs will be far better by the time, we get to the fourth quarter. The lumber part will will play a big role in that but it's certainly not the only cat.
Gory, where we are seeking and achieving cost reductions.
Understood. Thanks, very much for taking my questions.
Of course, thank you.
Thank you. Our next question is from Allan Ratner with Zelman and Associates you May go ahead.
Hey, guys. Good afternoon, thanks for all the great info as always.
First question I'd love to drilling a little bit on the January trends and.
How that plays into your thinking on pricing and incentives and just the overall kind of environment. There. Yeah. Obviously, it's it's very encouraging to see the improvement in sales activity, but you brought it up yourself I mean, the 2.5 to six sales pace that you saw in January .
The area that youre expecting for the quarter.
If we go back pre Covid your fiscal <unk> absorption pace was.
Right around $3 three every year I mean, there wasn't a whole lot of volatility there. So youre about 25% below what we would consider to be normal right now even with the doubling so.
How do you think about pricing there are you still discounting or increasing incentives or adjusting base prices to try to get that piece closer to the long run average or are you looking at the sequential improvement and saying Hey, This is really good off of a weaker fourth Cal.
Calendar fourth quarter, let's kind of pause here and see if the momentum continues in February and March before we get more aggressive on the pricing front.
You know Allan it's an excellent question and a compound question.
The smart Alec answer is it is both and I'll go a little further than that because it really is an individual communities are an important.
Discussion that we're having with our division leaders our sales leaders.
We do want to get sales paces back ended as certainly seasonally into the threes.
And that might happen this year I don't know, but one good months does not an entire quarter make we're mindful of the environment has been pretty uneven over the last six months. So we were trying to be a little careful of not just assuming that there would be this snapback in that we were somehow entitled or where it was mathematically assured that.
This would continue into February and March and so I think we feel pretty good about at a minimum doing two and a half for the quarter, but we pointed it out you've acknowledged it that's not where we're used to being that's not what we want to get back to.
I think one of the things we saw in the first quarter was that price by itself doesn't create buyer momentum so changing incentives to convince a discretionary buyer to buy a home. It's a part of the equation, but it isn't the only part of the equation. So I think we are we are trying to turn that.
Dial kind of carefully we are absolutely competing for buyers and where market conditions at a community dictate a different base price or a different incentive or a different included feature package, we're not afraid to compete but we're seeing enough traffic.
And enough confidence and we have had the ability to remove some of the special incentives, which are tantamount to price increases that right. Now I think we're trying to see can we sustain the level of activity rather than trying to chase. The next buyer with another incentive so in this range depending on the.
Community and certainly depending on the city, we're kind of on both sides of the way you frame that but overall I think our bias is to slowly ramp the sales pace rather than dramatically go chase the sales pace and I know, it's a long answer but it is kind of a complicated issue.
That's really helpful. I think it certainly walks through the way you guys are approaching the business, which is probably a little bit different than some others.
Now so it's helpful to hear Youre, how youre thinking about it.
Second question on the land market. So you guys were a bit later than others to kind of really ramp your your lot count I think.
Early in the pandemic rightfully. So you were focusing more on the balance sheet and liquidity and if I look at your growth in law. It really all came in 22, maybe the calendar 'twenty one and.
You know you haven't walked away or doesn't look like you've walked away from any meaningful amount of watch right now, but at least what we're hearing is that while sellers are willing to adjust take downturns and things like that we haven't really seen any capitulation either from some land landowners on the options or land seller.
On price and.
Assuming that doesn't happen kind of puts you in a little bit of a tricky situation I guess, if these deal that you tied up later in the pandemic no longer pencil or maybe they pencil out at subpar margins. So how are you thinking about the land market. How are you thinking about what opportunities there might be do you think there will be a capitulation on price or.
Do you envision a stalemate potentially impacting your growth in 'twenty four and beyond if you don't see pricing come down.
Okay.
There's a there's a book in that question Alex.
Here's here's kind of my take first of all and I don't want to be argumentative mathematically, where the control of what showed up does appear to be in 'twenty, two but remember those deals would have been identified six nine and 12 months before they were approved in contracted so there was an.
Awful lot of euphoria in the market on the pricing side that happened. After we achieved deal terms with the underlying sellers, whether it was on a purchase or on an option contract.
So the fact that something showed up in our reported controlled in 'twenty two isn't necessarily indicative that that's the point at which we attracted I mean, we didn't change our underwriting process. We still have the same documentation required the same return requirements and it's burdensome and it takes a while so there is no exaggeration that those deal.
On average, we're more than six months and oftentimes as much as 12 months earlier when they were identified a lot of the price activity that happened. After we tied them up has either been given back or might be given back. So you know I don't dispute that but I'm not I'm not so worried about that generation of deals having subpar margins.
The experience that we've had so far we did walk away from one deal in the quarter and it was 150000 dollar abandonment charge approximately so we had one where we just couldnt see a path and we walked on it but.
We've had pretty good success as you pointed out would take downs. We've also had some of the land banking relationships, where we've renegotiated the rate the interest rate, which affects the carrying cost, which ultimately is a part of what our finished lot cost will be so I think we've had we've had a measure of success on terms.
And on other deals we have been able to renegotiate prices downward.
By millions of dollars is a capitulation no, but if you take a $6 million asset for $4 million and on its own.
2 million Bucks, but its a third off.
So I would tell you I think there is a little bit of price that is that is available in the market. It's not dramatic it's not 30% 50%.
And obviously it depends on cities.
I think some markets that are a little more challenging right now from a sales and pricing perspective, I do expect there to be more price movement ultimately on the land side and I'd call out Phoenix, I think Phoenix is a market where there needs to be there was a fever and Phoenix, we did not participate our lot position in Phoenix diminished 'twenty one.
'twenty two.
Frankly people are trying to get 3000 Bucks a front foot for lots, we just didn't see it it wasn't real a lot of people contracted at those prices. Some close didn't close I don't think that's where value is so you know I think if we sort of peel the onion, a little deeper and sort of go market by market, it's going to be different outcomes, but I'm not.
Not very concerned about having subpar margins your phrase from the deals that we tied up in 'twenty one.
Well. Thank you that was certainly a nice epilogue semi book of a question. So thank you.
Well I feel like I've got it I've got to keep up on the page count.
There you guys. Thanks, a lot guys I appreciate it alright, thanks Allan.
Thank you and just as a reminder, if you do wish to ask a question. Please press star followed by one.
And our next question is from Alex Barron with housing Research Center you May go ahead.
Yeah, Thanks, gentlemen.
Yes, I wanted to I guess.
Better understand.
Yes.
The guidance of 1000 closings for next quarter.
Just kind of the acceleration on the backlog conversion rate.
Does that imply you guys have a lot of I guess canceled houses.
On this slide mindset, or it's going to be able to get deliveries out quickly.
And going forward and my second question is what was the what.
What was the starts in the quarter and how are you guys thinking about shifting towards spec since that's what the market seems to want right now.
Well, let me handle the first question, we've talked about a conversion ratio of backlog conversion ratio in Q2, and the kind of 55% to 60% range. It's not as you said predominantly just stuff from the specs that were canceled that are sitting there. There are some snacks frankly that will close.
But frankly that 55% to 60% is more in line with historical levels and still below where we have been in 18 and 19. So we're just kind of seen some normalization in the backlog conversion ratio and frankly not back to levels, where we've been at historically.
And a lot of that cycle time.
Up a month makes a big difference in converting your backlog so I.
I think it is way more of that than any mix issue associated with formerly sold homes that became specs.
The second question on the production Universe, Dave maybe has the number immediately at hand, but interesting fun fact, Alex in the last 20 quarters, we've only had four quarters, where specs represented more than half of our closings.
Over five years.
I don't really see us trying to do what everybody else is doing one of the challenges in the last.
Year with buyers has been can you tell me when my home is going to be ready, we feel a lot better about being able to answer that question in a really competitive way with yes. We can tell you and here's when it's going to be available and we have confidence in that.
There are some markets and we have some buyer profiles within our footprint, where specs are have been and will continue to be a part of it but I don't think you should expect us to become something that we haven't traditionally been build huge numbers of specs and then try and engage in price discovery, we're selling a different home we've got a different buyer.
Syrians are different mortgage experience and I really don't feel like playing in other People's Sandbox is our best strategy.
Got it.
Now.
I guess, a month ago or two months ago builders were talking about getting inbound calls from people looking for.
For new starts new work and that seem to present, an opportunity to potentially get better better costs on those new starts.
But you know what that in that timeframe. It seem like prices were still heading downward right now.
It would seem from all the commentary.
Builders that you know given the momentum in new sales and stuff like that that maybe prices won't be heading downward anymore. So do you think theres still going to be that opportunity too to get better costs.
I do and the cost that we have gotten arent in the P&L, yet because those homes haven't reached the delivery stage.
And I also think it's important to understand that just because home prices may not fall.
Or from here as was feared I think we're going to get to a point, where we do have year over year price reductions because of the action that occurred in the first quarter really started last summer. So we've got to get to the other side, where we've got a one year anniversary.
And I think as it becomes more evident with closing prices are that.
Costs have to keep coming down.
Alex I think the other part of it is not just the price side, but also the volume side.
We see some some some pullback in volume and it clearly appears that starts volumes are down as an industry there'll be some excess labor out there that we think we can go get some cost savings from.
Okay. That's helpful. Thanks.
Thanks, a lot.
Thanks Lisa.
And our next question is from Jay Mccanless with Wedbush You May go ahead.
Hey, what was the spec count at the end of the quarter.
Jay It's about 820 specs, it's in the Q and I can get you the number.
Okay.
Now that you have the unsecured credit facility and.
The 2017 your maturities 29 senior maturities are still trading below par why not go and take some of those out maybe talk about especially with it looking like the community count is basically going to be flat for the next few quarters why not try to reduce some of the that future leverage.
Well, let's talk about Jay first of all the spectrum was 848, and so I didn't have my hand.
As you know in terms of the 'twenty five and capital allocation, we talked about it last quarter and the stories pretty consistent.
We're building some liquidity, we're kind of looking to $25, we're being very thoughtful on the capital allocation is we're going to make it.
Wanted to see if there is more stability in the market. If we see some improvement in demand. We're certainly committed to growing the business. So we're being pretty thoughtful in how we spend capital and again, it's a little bit of a wait and see perspective, when we have some time some time on the 20 fives.
No. If you had another question on top of that but.
No just just.
Trying to understand when you know when you have the opportunity to go out and take some of these some of these future maturities out below par.
Especially given how fast things went from good to bad in 'twenty two.
Just trying to give them more insight as to how you're thinking about capital allocation right now.
Alternative uses of capital and rates of return on a risk adjusted basis. I mean, certainly we are underwriting land deals even in this environment with conservative assumptions with return profiles that are vastly better than retiring debt with single digit yields and.
Now are those assumptions valid or are they durable well that's why Dave says, we're being a little bit cautious, but I think the opportunity for those kinds of returns certainly for returns that greatly exceeds delevering are good enough. The probabilities are good enough that it sort of discourages us from being in a big hurry using the liquidity for <unk>.
Deleveraging, Okay I think the other thing is and I want to make sure we're clear and we said in the script and I just want to make sure we have excellent visibility into community count growth in 'twenty, three and 'twenty four from the land position that we already have and Allan talked about it earlier in the Q&A.
Clearly, we're very comfortable with the land position in the community count growth is coming in our business.
Okay, alright, thanks for taking my questions.
Gotcha.
Thank you at this time there are no further questions.
Alright, I want to thank everybody for joining us for our call and we will see already in our second quarter earnings call and we appreciate your participation and this concludes today's call.
Thank you that does conclude today's conference. Thank you all for participating you may disconnect at this time.