Q2 2023 Beazer Homes USA Inc Earnings Call
Good afternoon, and welcome to the Beazer homes earnings Conference call for the second quarter ended March 31st 2023.
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 second quarter of fiscal 2023.
Before we begin you should be aware that during this call. We will make 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 is.
Statement is made.
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 is Allan Merrill, our chairman and Chief Executive Officer on our call today, Alan will discuss highlights from our second quarter. The current environment for new home sales.
And an update on our company's strategy and the primary goals, we have for the future.
Ill then provide details on our second quarter results expectations for the third quarter and full year.
<unk> on our cycle time and cost reduction initiatives and end with a look at our balance sheet and capital allocation priorities. We will conclude the wrap up by Allan after our prepared remarks, we will take questions at a time remaining I'll now turn the call over to Alan.
Thank you, Dave and thank you for joining us on our call. This afternoon.
Our team delivered strong operational performance in the second quarter, which allowed us to exceed the expectations we outlined in January .
On sales, we generated a pace of three two homes per community per month is a strong start to the spring selling season enabled us to more than double the pace, we saw in the first quarter.
And then profitability adjusted EBITDA was over $62 million with better than expected operating margins in closings lifting results.
We also celebrated an important balance sheet milestones for.
For the first time since 2005, the dollar value of our total shareholders equity exceeded our outstanding debt at the end of the quarter with book value now in excess of $32 per share.
During the second quarter. We were also pleased to be recognized for the homes, we deliver and the culture, we have created among customers and employees for.
For the eighth straight year, we received the sustained Excellence award from the U S Department of energy and the EPA. This is their highest honor among energy Star awards granted for delivering homes that exceed their stringent requirements.
For the second consecutive year, we were named by Newsweek as one of America's most trustworthy companies as determined through extensive polling of employees customers and investors.
And for the first time, we were recognized as a 2023 top 100 workplace by inter gauge.
These awards speak to the commitment we've made to delivering exceptional homes building trust with our customers and becoming an employer of choice.
Those are all outcomes it should contribute to growing share holder value in the years ahead.
Turning to the new home sales environment the momentum we've.
He is experienced in January continued through the quarter in.
In fact, I was a bit surprised by the strength of demand during the quarter.
Holly because affordability remains quite challenging.
While I know our team did a terrific job marketing and selling our homes.
We're clearly some other macro factors that helped.
First the economy is whether the rapid increase in rates better than many feared.
<unk> remains strong and wages have continued to grow.
With home prices modestly lower and incentive somewhat higher than this time last year wage.
Wage gains have contributed to an improvement in affordability.
Second home buyers seem to be adjusting to higher mortgage rates, particularly as they consider the cost of rentech.
They may buy a smaller home or one with fewer desire no options, but buying the homes still represents a way to cap a family's housing cost in our NIM.
Inflationary environment.
And third the supply of existing homes for sale is incredibly constrained because owners with low mortgage rates have little incentive to trade in or trade up.
This has led to share gains for new homes compared to existing homes. This spring with no signs of excess inventory in any of our markets.
The structural housing shortage in this country is very real.
Even as we acknowledge that it is a challenge for many consumers to attain homeownership, we are confident in the durability of demand and for well priced new homes.
To that end, we remain committed to our balanced growth strategy.
This strategy is designed to deliver profitable growth from an efficient and less leveraged balance sheet, resulting in returns above our cost of capital over a housing cycle.
Of course doing these things in a competitive environment is an easy which is why we created and have embraced three pillars to differentiate our homes and home buying experience.
During the second quarter, we commissioned an investor perception study to help us better understand what investors and analysts thought about our strategy and how we can improve our investor communications.
We're encouraged that there was broad support for both growing our business and improving our balance sheet, a clear validation of balanced growth.
But we also heard that we could do a better job describing our longer term goals.
So today, we'll outlined three multiyear goals that should help investors track our progress.
As it relates to growth.
Starting in the fourth quarter, we expected double digit annual growth rate in our community count for the next several years with a target of exceeding 200 active community by the end of 2026 the.
The growth in our lot position, particularly through options provides early evidence we're on this path.
As it relates to our balance sheet, we will.
<unk> to reduce leverage and we're targeting a net debt to net cap ratio below 30% by the end of 2026.
Investors noted the significant progress we've made reducing this ratio in the past several years and should take comfort that we intend to continue this journey.
And finally as it relates to the homes we build.
We are the only national Homebuilder, who is fully committed to the department of Energy's net zero energy ready program more specifically in our U S. G report, we pledged that by the end of 2025.
Free home, we start will meet this deal we standard in Q2, 4% of our starts were net zero energy ready and we expect this to ramp quickly in the years ahead. In fact, we now have net zero energy ready homes under production in 2014 of our 16 markets.
While there are technical and financial challenges associated with attaining this goal we are well on our way.
The fact is we are building tomorrows tone today, and we're excited to explain the benefits of our homes to buyers.
As the past few years have clearly demonstrated it is hard to predict market dynamics and even harder to translate those kinds of predictions and the precise financial guidance.
What has remained constant is our commitment to improving our profitability our balance sheet and our returns as.
As I've outlined today, we believe we have the strategy that will allow us to make further progress in the years ahead.
With that I'll turn the call over to David Thanks, Alan for the second quarter of fiscal 2023, we closed 1063 homes generating homebuilding revenue of $542 million with an average sales price of about $510000.
Gross margin, excluding amortized interest impairments and abandonments was 22%.
SG&A as a percentage of total revenue was 11, 2% for the quarter and below 11% on an LTM basis.
Adjusted EBITDA was $62 $1 million.
Interest amortized as a percentage of homebuilding revenue was three 2%.
GAAP tax expense was $5 1 million for an effective tax rate of 12, 8%, reflecting the benefit of energy efficiency tax credits from homes closed in the current quarter and prior years as a reminder, broadly speaking we don't currently pay cash taxes as we continue to utilize <unk>.
Our deferred tax assets.
Net income was $34 $7 million or $1 13 per share.
Looking forward to the third quarter, we are providing the following expectations, we anticipate our sales pace approaching three sales per community per month.
Average community count is expected to be relatively flat year over year.
We expect to close around 1000 homes, reflecting a backlog conversion ratio of between 50, and 55% up around 20 points versus the same period last year.
Average sales price should remain around $510000, we expect gross margin excluding interest to be in a 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 adjusted EBITDA above $50 million into.
Interest amortized as a percentage of homebuilding revenue should be in the low threes and our effective tax rate should be at or below second quarter levels. As we continue to realize the benefit of our energy efficiency tax credits.
Finally, we expect diluted earnings per share of approximately <unk> 90.
Last quarter, we outlined our expectation for delivering at least 4000 homes and generating revenue in excess of $2 billion. This fiscal year.
The initial strength of the spring selling season underscores our confidence in achieving these targets.
With the visibility provided from our backlog, we now expect to earn approximately $4 per share in fiscal 2023 based on an effective tax rate of approximately 14% for the full year.
I'd also like to provide an update on our cycle time and cost reduction initiatives.
Over the last two years supply chain challenges extended our average cycle times by nearly four months. This push our starts cutoff date from April back into January at the beginning of the year, we projected we'd be able to recover at least 30 of those days in fiscal 2023.
Thanks to a tremendous effort by our field operations teams, we've been able to recapture about 90 days on average this means that at in many of our markets, we will be able to close homes by subscriber that started in April , allowing us to offset some of the sales weakness from the first quarter.
We also had success, reducing direct construction cost in the second quarter, we expect to see more meaningful benefits in the fourth quarter when the mix of closings more heavily reflect homes started with these lower costs.
Onto the balance sheet, we ended the quarter with more than $500 million of liquidity, our net debt to net cap was 42, 7% and our net debt to LTM EBITDA was two two times, our shareholders' equity now exceeds our total debt and.
And we have no maturities until March 2025.
As we think about capital allocation, we are committed to investing for organic growth and further deleveraging.
Delevering will occur through growth in retained earnings and debt repurchases with the goal of bringing our net debt to net capitalization below 30% by the end of 2026 with the work we've done over the past several years, we have the flexibility to achieve both of these objectives.
We continue to grow both the quantity and quality of our book value. We ended the quarter with a book value per share over $32 up more than $6 from the prior year. Despite.
Despite near term challenges, we expect to grow book value and generate returns.
Above our cost of capital through the cycle with that I'll turn the call back over to Alan.
Thanks again, Dave.
The second quarter reflected strong operational performance and an improving sales and production environment.
Despite our ongoing affordability concerns we did what we said we were going to do and are now well positioned to have a solidly profitable fiscal year.
Looking further out we remain confident in the durability of demand for new homes and committed to both growth and balance sheet improvements.
And we believe our three pillars, particularly our leadership in energy efficiency.
Created a compelling opportunity for us with homebuyers.
With this differentiated value proposition and a dedicated and highly engaged team I remain confident we have the ingredients to create growing and durable value for shareholders in the years ahead.
And today, we provided a roadmap for investors to measure exactly where we're going and how fast we're getting there 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.
Please ensure your phone is on muted 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 and company you May go ahead.
Thanks, Hey, good afternoon, Alan and Dave.
Maybe to start on the Hey.
Maybe just start on the April trends.
Can you speak to that at all I know there was a point where mortgage rates dipped for a short period and then.
Kind of inflected back Albert I'm, just curious if you saw that play out at all in terms of buyer traffic website clicks overall activity.
Really nothing that drew attention.
Yes.
Given day, a given week there can be a little bit of volatility, but I have to say that the buyer has been more resilient too.
The puts and takes with mortgage rates over the last couple of months that I expected that they would be and that included this in April .
Okay. That's helpful.
And then on your <unk>.
Quarterly results the cancellation rate of 18% is.
Pretty improved from the 37% in the December quarter.
Can you maybe speak to how that create as trend again in April at least directionally.
Yes, I mean, we're not to the it ended the month, yet so I really don't have like a intra month number but there is no pattern that we see that is troubling or concerning that first quarter was super tough right that was.
Buyer.
Our concerns were were prevalent there was a big backlog number.
And we struggled a little bit and we talked a lot about it. It's why we provided and talked about the cancellations as a percentage of sales and a backlog in that quarter. They sort of put it in some context that things have normalized and we're really not seeing unusual.
Cancellation activities anywhere.
Yeah.
Got it and then just last one for me as you know.
Very exciting on a multi year goal announcement and the rollout here.
Just thinking about the capital allocation portion of that I know last quarter, you talked about wanting to maintain financial flexibility.
Uh huh.
As market conditions kind of.
Change that approach in the near term at all.
In terms of how much financial flexibility you want to keep.
In the near term.
Julio I wouldn't say that it's changed the amount of flexibility that we had when we talked about the importance of balancing both growth in the business organic growth in the business and reinvestment with debt repurchases were definitely remained very focus some flexibility I guess, what has probably changed there has been some more stability in the market.
Helps when you try to underwrite deals and I think youll see some growth in the land position in the back half of the year Accordingly, but look there's still a very clear focus on flexibility and came in very strong liquidity as we move forward. So no change from that perspective.
Helpful I'll hop back into queue, thanks very much.
Thanks Doyle.
Thank you. The next question is from Alan Ratner with Zelman and Associates you May go ahead.
Hey, guys.
Good evening, I guess now and great quarter.
Appreciate the longer term visit.
Visibility there in terms of the target so.
That's where I wanted to start the question.
So 200 communities. The last time you guys were there was about 13 14 years ago, obviously, a much different time, but at that point you controlled about 30000 marks may be a little bit north of that and I'm. Just curious is there.
That kind of a number in mind that we should we should keep as far as where the lot count needs to go over the next year or two to achieve that that target and if so what does that look like from a cash flow perspective, I mean, even if you option a good chunk of those lots I would imagine there is still a decent amount of cash needs to be invested to draw.
That type of growth.
Yeah, and I think we feel pretty good about the cash generation in the business and the profitability of the business to be able to do that.
And you've done this a long time now and so you know it's very difficult as you think about future deals exactly what size there'll be what deal structure there'll be I think Youre 30000 number is in the right neighborhood I wouldn't say I think it's crazy high or crazy low.
In terms of the capital.
The profitability that we're generating and frankly, the recycling of the capital that we have in the business.
I think we feel very comfortable that we can do both the things that we said, we can control and own enough land to deliver homes from 200 communities and.
Through as Dave said, both the growth and retained earnings and some selective debt repurchases, we can drive that leverage down below 30%.
So.
Yes, we are very focused on the capital side, but I feel very confident that we've got the resources to get there.
Alright perfect.
Second question on pricing. So you know a few of your competitors have indicated given the strong spring they have started to either dial back incentives or even raise raise base prices and Alan.
Alan I know you kind of share our view as far as the affordability challenges right now and obviously, we've also been surprised at how strong the demand has been in spite of that but.
I'm curious if you could talk a little bit about what you guys are doing on the pricing side right now and how much runway do you think there is to drive growth if we don't meaningfully yes.
Kind of fix the affordability equation, either through lower rates or significantly higher wages or lower home prices.
So.
Gosh I wish I had a great crystal ball on this Alan.
I think the thing that is.
The most difficult to appreciate in the affordability calculation and that's the thing I struggle with is the latency in certain of the data elements. We know that there has been decent wage growth across most aspects of the economy in the last year, but just any information that we pull that's based on publicly available data and sort of the charge.
That we do and there are lots of ways to do affordability charts were not capturing any of that wage growth that's occurred in the last year.
So I do think that the.
Continuation of wage growth is certainly one thing that is helping I think it's also the case that broadly and for us prices have stabilized.
And frankly, our prices are lower than they were a year ago.
And I think those two things together have contributed now how much runway there is to go and what the exact magic number is thank you can you tell me that unemployment remains under control and there is a structural gap between that the new mortgage rate and the mortgage rates that existing homeowners have which puts.
Pressure on the resale supply I feel pretty good I mean demographics, and and and a life of events are going to continue to create a need for housing and then I think you've got a group of those voluntary renters and when we talk just a little bit about this in the script.
Are realizing they are at a point where you.
You had to buy the house and date the rate.
Fix your your occupancy cost today by being an owner and if rates rollover there'll be an opportunity to refinance and I think that is also part of the psychology that is that is assisting on the demand side, but.
Look I think and we haven't gotten into 'twenty for forecasting I'm pretty confident in our Asp's next year will be lower.
Than they are this year and that will largely be driven by intentional mix shifts and I think a little bit by consumers opting for smaller plans. So I think that's the other thing is if you consume a little bit less house and you've had some wage growth and home prices are flat.
I think maybe there is just incremental improvement in the affordability picture.
Certainly other things could happen, but from where I sit right now that seems to be a reasonable trajectory.
I think that makes a lot of songs.
I'm wondering based on your comments about the disincentive to give up that low rate are you seeing stronger activity on a relative basis that your lower price points entry level. However, you kind of classify it versus versus move up at this point.
We are.
But we don't do a lot of move up business. So it's a it's challenging for me to think that what we see.
Great read through to broader trends.
Can tell you that the active adult buyer.
Who have either no mortgage where very low principal amounts they have been quite active this spring as well. So it isn't just that first time buyer.
Higher and maybe a first time buyer, who is deferred a home purchase but theyre also empty nesters that form a good chunk of the business both in age restricted and the non age restricted context, but in some of our markets like Indianapolis that empty nester as a really meaningful part of our buyer profile.
Got it and I will just wrap up with a comment more than a question, but yes kudos on the SG&A leverage because I know in this inflationary environment, it's tough to keep those costs under control.
A lot of your competitors I think have kind of moved in the opposite direction. There so nice job with the with the leverage there.
Okay. Thank you Alex.
Thank you and just a reminder, if you would like to ask a question. Please press star followed by one. Our next question is from Alex Barron with housing Research Center you May go ahead.
Yes, thanks, guys nice job on the quarter.
David I wanted to ask about the margin guidance.
I think I heard 21% to 22%.
Was that for next quarter.
Was that before interest or after interest.
That was excluding interest, whereas you guys say it but I know, it's a little bumpy.
As we were reading, but is 21% to 22% excluding the interim.
Got it okay.
And then I wanted to ask about.
Share buybacks do you guys have an authorization in place and if so how much and what are the general thoughts around buying back the share kind of given the disconnect between your equity and where the market is pricing.
Well, Alex we do have an authorization thats in the $30 million remaining.
Do I can tell you that our view on share repurchases as it clearly can be an attractive use of our capital depending on the share price, but right now and I think we've made it pretty clear in the script. The focus is clearly on growing the business.
And doing some modest deleveraging as Alan mentioned and of course, we're always focused on risk adjusted maximizing risk adjusted returns in the business and positioning the business for future growth. So we watch it very very carefully as you'd imagine and there are times when it's extremely appropriate.
Okay and in terms of growing the business on I heard you say you plan double digit community count growth.
Does that require you to get more active on the land front right now or do you feel like you already have enough.
Runway to achieve those goals with the land you already control.
We're in great shape for 24.
And well into 25, so the activity that we're engaged in right now is to sustain that growth rate into 2026 and beyond and the good news is with the control of lots that we've got.
Accumulated over the last three years, we're not having to be in a in a particular panic to change ace deals that can open next year. We know what deals are going to open next year. So we're really being quite selective about opportunities for 25 and 26.
There is a little bit of a frenzy around finished lots out there and folks trying to capitalize on a better environment than anticipated.
And I would say we've looked at some deals and it was kind of silly season pricing I'm happier with where we are with the growth in our land position over the last few years, creating a runway for our near term community count growth, allowing us to be more strategic in deploying capital for a couple of years out.
And then given that.
Several builders potential deals and stuff like that in the last two three quarters.
Have you found anything in that attractive or not.
Not really not yet.
A little bit what really happened over the last nine months and it started last summer through the fall I mean, we were very transparent about the fact that we were renegotiating everything and and really re underwriting everything.
We didn't work on very many deals, but we were quite successful in reducing either deposits or pricing or timing or risk shifting will close at a further stage <unk> entitlement rather than in earlier stage. So I mean, we did a number of things across the deals that we were working on and I'm really proud of what we did I think the truth.
There's a number of our competitors were doing similar things and Thats why there weren't that many deals that fell out there are some and we had tied up a few but I want to be clear, it's not as if in the last six months we've found.
Some magic solution to community count growth with other deals that got drop we've added a few here and there that way but.
Most of what we will be opening into 24 deals that we started circling.
Eight in 'twenty one.
And not things that we've identified in the last six or nine months.
Okay, great well best of luck with their new goals. Thanks.
Thanks, Alex.
Thank you and at this time there are no further questions.
Now I want to thank everybody for dialing into our second quarter earnings call and this concludes today's call. Thank you for your time and we'll see you for our third quarter call.
Thank you that does conclude today's conference. Thank you all for participating you may disconnect at this time.