Q3 2023 Beazer Homes USA Inc Earnings Call

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Good afternoon, and welcome to the Beazer homes earnings Conference call for the fiscal third quarter ended June 30th 2023, today's call is being recorded and a replay will be available on the company's website. Later today. In addition presentation slides intended to accompany this call are available within the Investor Relations section of the company.

Web site at Www Dot Beazer Dot com at this point I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.

Thank you good afternoon, and welcome to the Beazer homes conference call discussing our results for the third 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 made 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.

Today, Alan will discuss highlights from our third quarter. The current environment for new home sales and an update on our strategy and the goals we have for the future.

I'll provide details on the third quarter.

Expectations for future results.

Dates on our cycle times and cost reduction initiatives and end with a look at our balance sheet. We will conclude with a wrap up by Allan after our prepared remarks, we will take questions. During the time remaining I will now turn the call over to Alan.

Thank you Dave and thank you for joining us. This afternoon, we had a very productive third quarter highlighted by continued strength in new home orders and further recovery in our construction cycle times.

These factors and the great work of our team.

Wowed us to exceed the expectations, we outlined in April .

Our new home orders, we generated a pace of three two homes per community per month up nearly 30% from the prior year.

The resurgence in demand we experienced starting in January continued through this spring with buyers interested in both to be built and move in ready homes.

Closings exceeded our expectations both from improvements in cycle times and higher than anticipated sales of move in ready homes.

Homebuilding gross margins were also better than anticipated as we needed fewer incentives to secure our backlog and to make new sales.

Higher closings in gross margins allowed us to generate adjusted EBITDA of nearly $73 million and net income of just under $44 million.

From a balance sheet perspective, we celebrated yet another important milestone with shareholders' equity exceeding $1 billion or nearly $34 per share.

Okay.

Just over a year ago mortgage rates began to move sharply higher pushing mortgage payments as a percentage of income substantially above their long term average.

Predictably this lack of affordability led to a big drop in new and used home sales that persisted through the end of 2022.

During this time period home prices reversed direction and wage growth continued which slightly improve the picture.

Then in January demand returned to more normal levels, even though affordability with still strained.

On a macro level, we attribute this strength to two primary factors.

First there are both long term and short term housing deficits.

In prior calls we have noted the structural shortage of housing potentially its greatest 4 million homes.

This is a long term deficit and believe it will underpin demand for new homes for many years.

But right now we're seeing a different deficit and that is a shortage of used homes listed for sale.

While this is likely more of a short term issue homeowners may remain reluctant to list their home for sale until interest rates are substantially lower.

Second the overall economy remains quite strong.

Employment levels remain very low with job growth and wage gains continuing through the quarter.

Over time, one of the most reliable indicators of housing demand has been employment and wage conditions and those who are in a pretty good place right now.

But we're not just relying on these macro dynamics to address affordability as a company we have positioned ourselves to compete and then affordability challenged environment.

We are invested in markets with demonstrated new home demand, we've targeted the largest home buyer segments and we've developed three valuable Differentiators mortgage choice surprising performance and choice plans.

Taken together these efforts allow us to deliver extraordinary value at an affordable price to new homebuyers.

Our shareholders, we remain committed to our long term strategy, we call balanced growth.

It is characterized by growing profitability, improving balance sheet efficiency and generating returns above our cost of capital.

We're proud of the progress we've made so far and we expect to do even more in the years ahead.

Last quarter, we provided a roadmap for our longer term goals, specifically those related to growth leverage and the energy efficiency of our homes.

As it relates to our growth.

We expect to have more than 200 active communities by the end of 2026 with excellent visibility into year over year growth in each quarter for at least the next 18 months.

As it relates to our balance sheet, we expect to reduce our net debt to net cap ratio to below 30% over the next three years, a measured pace that will allow us plenty of flexibility to invest in our business.

And finally as it relates to the homes we build.

By the end of 2025, we expect that every home we start will meet the department of Energy's Zero energy ready standard.

In December of 2020, we became the first and still today, the only public builder to commit to achieve that standard.

In Q3, 11% of our starts or zero energy ready and included homes and every one of our divisions.

Overall I'm very proud of what we were able to accomplish in the third quarter and I'm excited about where we're going with that I'll turn the call over to Dave. Thanks Alan.

For the third quarter of fiscal year 2023, we closed 1117, new homes generating homebuilding revenue of $570 million with an average sales price of about $511000.

Gross margin, excluding amortized interest impairments and abandonments was 23, 4%.

As Alan mentioned, our margin came in higher than anticipated, which was the result of lower construction cost and better than anticipated profitability on homes, we sold and closed during the quarter.

Yes.

SG&A as a percent of total revenue was 11, 5% for the quarter down 30 basis points year over year as we benefited from improved leverage.

Taken together higher closings and improve margin led to adjusted EBITDA of $72 $8 million.

Interest amortize as a percentage of homebuilding revenue was three 1%.

Our GAAP tax expense was $6 $2 million for an effective tax rate of 12, 5% as we realized approximately $5 $7 million of energy efficiency tax credits related to closings in both the current quarter and from prior years.

Net income was $43 8 million or $1 42 per share.

Looking forward to the foot to the fiscal fourth quarter, we are providing the following expectations.

We anticipate our sales pace to be approximately $2 seven homes per community per month are up about 40% compared to the prior year.

Ending active community count is expected to be up about 10% year over year.

We expect to close roughly 1200 homes, reflecting our backlog conversion ratio exceeding 60%.

More than eight points versus the same period last year.

Our average sales price should be around $520000.

We expect gross margin excluding interest to be roughly 23%.

Our absolute dollar spent on SG&A should be relatively flat versus the same quarter last year.

We expect this to result in adjusted EBITDA of approximately $75 million.

Interest amortized as a percentage of homebuilding revenue should be in the low threes and our effective tax rate should be below 14% as we continue to benefit from our energy efficiency tax credits.

This should lead to diluted earnings per share to be in the range of $1 25.

To $1 50.

Finally, we expect land spend to be up sequentially and year over year.

With our performance in the fiscal third quarter, we now expect to generate more than $250 million of EBITDA and diluted earnings per share in excess of $4 60.

For fiscal year 2023.

Our book value should top $35, a share and our net debt to net capitalization is likely to fall below 40%.

While we don't plan to provide specific metrics for our fiscal year 2024 expectations until next quarter, we can share some directional visibility at this time.

In FY 'twenty four we expect healthy community count growth to lead to increases in closings revenue profitability and book value per share even as we anticipate full year asps to be around $500000 from a more affordable mix of communities.

Relative to our other multi year goals, we expect improvement in our leverage ratio and a sizable increase in the percentage of our starts that means zero energy ready standard.

As we enter the final quarter of our fiscal year I want to update you on the operational objectives, we set forth back in October .

In prior calls we've highlighted the improvements we've generated in cycle times on new starts which has allowed us to consistently push our cutoff date for homes that can close within the fiscal year.

In the third quarter these improvements materialize and the cycle times of our closings, which were down about 40 days versus last quarter looked.

Looking forward, we remain focused on getting cycle times back to where they were before COVID-19 disruptions.

On the cost savings side.

As more of a mixed picture.

While we have been pleased with the reduction in lumber costs, our expectations for significant savings from other categories have been tempered somewhat.

That's because of stronger sales and pricing environment has caused housing starts to bounce back up to bounce back this spring.

The good news is that some of the most constrained product categories like appliances and garage doors are back to normal delivery times, which removes some of the cost risk we faced over the past several years.

We have heard from investors that he don't fully understand our tax position.

And that's understandable because things like deferred tax assets and energy efficiency tax credits are not intuitive.

So today, we're going to provider, we're going to provide a framework that we believe will simplify estimated in our future GAAP and cash taxes.

Because the homeless rebuild meet stringent energy efficiency criteria, we are eligible to claim energy efficiency tax credits.

These credits reduced our GAAP tax rate in the period they are claimed.

Even if they are not used from a cash perspective in that year.

Today, all of our homes meet the energy Star standard and a growing percentage, we <unk> energy ready standard.

Based on our expectations for claiming credits from prior years as well as credits earned from homes that closed. This year, we expect our effective annual GAAP tax rate to be below 15% in fiscal year 2023.

This will rise to somewhere between 15 and 20% moving forward. Once we are fully claim the credits related to prior years.

From a cash perspective, we don't expect to pay cash taxes for fiscal 'twenty three fiscal 'twenty four and a portion of fiscal 'twenty five as we utilize our Nols, which are included in our deferred tax assets and then apply the energy efficiency tax credits we've accumulated from prior years, which are also included in our deferred.

Tax assets.

As we move into fiscal 2026 and beyond our cash tax rate should align with our GAAP rate is newly earned energy efficiency tax credits are utilized in the year they are generated.

Onto the balance sheet.

Total liquidity at the end of the quarter was $541 million comprised of $276 million of unrestricted cash and $265 million available on our fully undrawn revolver.

Our net debt to net cap decreased to 43% and our net debt to LTM adjusted EBITDA was two two times.

Our 2025 senior notes represent our nearest maturity and we anticipate using a combination of repayment and refinancing to address it.

While we have no immediate plans to be in the market. We do expect to renew our shelf registration statement in the next couple of weeks.

With that I'll turn the call back over Dallas, Thank you Dave.

The third quarter was highly successful on two fronts financially we generated excellent results driven by a strong sales pace and improvements in backlog conversion.

And operationally, we made demonstrable progress toward our multi year growth balance sheet and energy efficiency goals.

With a dedicated operating team a growing community count and a more efficient and less leveraged balance sheet.

We have the team the land and the financial resources to create durable value for our stakeholders in the years ahead.

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 portion of today's call. If you would like to ask a question. Please UN mute your phone press star one and record your name clearly when prompted if you need to withdraw your question at any time you may do so by pressing star team again that is star one to ask a question one moment as we allow time for participants to enter the queue.

Our first question comes from the line of Alan Ratner from Belmond <unk> Associates. Please go ahead.

Hey, guys. Good afternoon, congrats on all the great progress this year so far.

First question.

On the gross margin and I guess, the inputs that go into that so nice upside this quarter the guidance for <unk> implies kind of flattish, maybe even down a touch and you know that could be rounding, but it seems like from your comments Alan like you're pulling back a bit on incentives you might have a little bit of pricing power or the cost environment.

It seems pretty stable at this point it could could certainly re inflect higher again if.

If it trades get get a stretch, but I guess my question is why at least for the near term would margins be on an upward trajectory given the flow through of about I would imagine lower incentives coming through.

Yeah, I mean, the mix of closings in the fourth quarter is going to continue to be heavily weighted toward homes that were sold early in the calendar year. So it really the the sales activity in the third quarter really won't be in the fourth quarter results to any great extent.

So it's mix and it's frankly, just a little bit of uncertainty Allen, but I think you characterized it as very flattish.

But I I think.

As we've looked at what's in backlog and you know when it was sold a lot of that as we pointed out was sold at the end of last year beginning of this year from a calendar perspective, that's where it falls.

Got it okay I appreciate that.

Second on the community count ramp that you guys expect over the next.

Handful of years and I apologize, if you've kind of given this detail when I when I look at your lot count.

Yes.

Fairly steady over the last handful of years and yet.

Going from 125 up to 200 communities is a very significant ramp. So I'm just curious you know how much land.

How much lot growth do we need to see over call. It. The next 12 months to support that that type of ramp and I guess more broadly.

How are you feeling about the land market. These days in terms of pricing and availability et cetera.

Well I don't I wouldn't I would have you look back a little bit we had a pretty significant growth in our land position over the last three or four years, which is what's really fueling the growth in community count that you have seen we were in the 18000 lot range in our obviously in the 'twenty 2000 lot. So it's taken some time to go through all deal on those lots, especially during COVID-19 given some of the.

Disruptions, we've had but it's really that increase that you've seen that's really driving the community count growth that we're going to see in 'twenty four.

As to the second part of your question looking out we kind of mentioned during the script that we have good visibility into community count growth for the next 18 months and as we go forward and as we kind of go quarter to quarter, we'll continue to update what we see from a community count perspective, but we have our eyesight on getting over 200 by the end of 2026 Thats the guidance and we're finding land.

Deals frankly that pencil in pencil well for us to go out and grow the community count.

You know Alan I'll, just I'll add.

A comment on the land market and it's something I'm sure you're familiar with because I know you pay a lot of attention to the private builders what's happened in the financing market with bank finance is change the equation a little bit for builders that were let's just say project a revolver based.

And so theres still plenty of competition for land deals, but there are a group of builders that are a little less.

Let's just say expansive.

Than they used to be and that's been constructive.

Understood I appreciate that and then Dave just to kind of circle back I appreciate the ramp over the last few years I guess, what I was looking at just in terms of the numbers.

If I go back to say 2018 your lot count at that time was pretty similar to where it is today just in absolute terms.

And you never really got close to 200 communities I know that number tailed off obviously, so it's probably apples and oranges to some extent, but I think he probably peaked out at somewhere around 161 70 communities that that's really what I was getting at is like how much higher does that lot count need to go to to kind of support a ramp to 200 and you should expect our lot count over there.

Next couple of years, we'll get to 30000 and beyond.

And in fact, I think we will it will be up in the fourth quarter year over year, which is going to put it above 25 this year.

So that's not a big stretch remember in some of those older periods or nos.

Long ago days, a lot of that lot count was land held for future development.

And those were some big chunky assets that they counted as lots they were lots. They eventually became closings, but there were some 345 600 lot positions mixed in there that werent terribly efficient in terms of generating community count.

Understood. Good point, Thank you Alan Thanks, a lot guys.

Thanks Alan.

Next we'll go to the line of Alex <unk> from B Riley Securities. Please go ahead.

Thank you good afternoon, gentlemen, very nice quarter.

As it relates to G&A.

Need to add overhead given the meaningful growth detail.

You might lose a little bit of leverage.

Well I wouldn't I wouldn't say, Alex that we're going to lose leverage I think we're running a little bit higher on the overhead side now because we're planning for the community count growth that we have visibility into look I think we've done a real good job over the last four or five years really managing the absolute level of G&A from a dollar perspective, while we lost a little bit of leverage kind of this year as we've kind of been thing.

And about how we're going to grow and getting ready for the community count growth. So I don't know if they think there's negative leverage in the future, but we're probably not at a number today that we would be as we're kind of setting up for for the community count growth.

That's very helpful. And then could you also talk to the higher backlog conversion year over year, where this trend could go several quarters out.

Yes look I don't want to pontificate or or make estimates, while it's going happen several quarters out but the real key is and we've talked about this Alex we've picked up about three months of cycle time on starts.

We're starting to see that flow through on our on our closings, we talked about getting 40 days back and clearly the goal for US is to go out and get 30 days more.

And really work our way from there back towards where we were before pre COVID-19 disruption. So that's driving higher conversion rates for Iqos cycle times are coming down and the idea is to continue to go claw back what we've lost and we've made really good progress on starts and that should come through on closings over time.

Super helpful. Thank you very much well thanks.

Next we'll go to the line of Jay Mccanless from Wedbush. Please go ahead.

Hey, good afternoon, thanks for taking my questions Dave.

Dave one of the fall in what you were saying for fiscal 'twenty four.

With a 500000 ASP I mean, it's not that much different from what shall printed this quarter, but.

Is it going to be a fast ramp down or is it something you get to by the end of the year, where maybe you have a four handle on that price by the end of the year is it going to be pretty flat you think.

It is a ramp down J, we havent given specifics about 24, but it is a bit of a ramp down and it's just like we said in the prepared remarks. There is some mix in that from a community perspective. So as you get some of our more affordable communities coming online as we move through the year and you get some closings from those communities Youll see that gradually go down and Jay just one point yield yield.

See in our Q4 guidance that we talked about something like $5 20, and we're a little concerned thats a mix issue. It relates as I told the prior question.

Or answered in the prior question it relates to homes that were sold six to nine months ago, we didn't want folks trending off that 520 into next year. So I think it will trend down, but we expect the average for the full year will be right around that 500 level.

Okay got it.

And then could you talk about pricing power during the third quarter.

Whether percentage or or areas, you were able to take price any any color you could give us on that.

Yes, I mean, I look at incentives and between discounts and and.

Cost contributions in those kinds of things and I think on sales that we were making which was not very many of the closings that we had there was the benefit of a couple of points.

Now.

I always get a little.

Nerve is talking about this not because I'm, giving away some state secret, but if you change your base price by the dollar amount that you previously provided as an incentive it's sometimes hard to see that when you look over time, you can say well Gee, we didn't give any incentives well yeah. Because your base prices were a lot lower so I just caution you Jay as you.

About that picking up a couple of percentage points on incentives is terrific and I believe it was.

But there's also this ongoing dialogue about what are the included features and what is the base price that really best.

Competes in the marketplace.

I do think it's an area that on the on the external side is not super well understood Theres a lot of I think undo confidence in measuring incentives given the number of moving parts that are both related to price and features.

So I would say there was a little bit of pricing power not a ton.

We saw it in those different levers and I know thats not a super helpful answer I'm not trying to be evasive. It's just it doesn't really lend itself to it was three points. It was one point because there are these other there are these other components to that equation.

Okay got it.

And then the last question I had.

I guess the.

What are you.

It was going to be another incentive question, but I'll ask something different.

I'm, sorry, I've already out Alright, then.

So the move higher that we've seen in cash lumber over the last eight or nine weeks win win. If this continues when do you think this will show up in your gross margins like mid 24, when should we expect to see maybe a little headwind from higher lumber in addition to higher everything else.

Yeah. It is sometime in 'twenty four its hard for me to say.

We've been pretty effective this spring having.

90, and 120 day in a couple of 180 day locks that I'm aware of so we have some.

Resiliency of rates.

If lumber moves higher and stays higher we'll certainly feel that but we won't feel it for a couple of quarters at this point.

Okay, Alright sounds good thanks for taking my questions. Thanks Jade.

And again that is star one if you have a question on the phone.

Next we'll go to the line of Julio Romero from Sidoti. Please go ahead.

Thanks, Hey, good afternoon.

I wanted to ask a little bit more about the directional visibility for fiscal 'twenty for.

You talked about Asps being around 500000 due to the more affordable mix I was just hoping you could expand on that.

Do you expect maybe the geographies to change do you expect.

Maybe smaller homes or lesser amenities, just anything more you can give us on the mix would be helpful.

So.

What's happened and of course, you know this last fall last summer as rates were moving higher we and everybody else. We're looking at what are the features that can be removed from homes to help address affordability whats the right way to approach pricing versus incentives, but many of those effects for us didn't really affect our <unk>.

'twenty three because so much of fiscal 'twenty threes closings was carried into the fiscal year from 2022. So the very largest component of what Youre seeing is the effect of adjustments that we've made in the last year that we'll have really the that will be in the mix for for the full year.

And that's that's probably the lion's share the rest of it is at the edges changing the plan lineup in our community. If we had a 2200 2400 2800 and a 3200 foot plan. We may have eliminated the 3200 foot plan and that's easy to do.

Taking a 2400 foot home and downsizing it by 90 square feet, that's really hard to do so the plan lineup is a is an area where we got after it and frankly, we do have some townhome communities joining the community count in 2024.

Not a hugely higher percentage, but there will be a slightly higher percentage of attached product for us, which again has been part of our multiyear strategy to make sure. We stay affordable. So those are the bigger buckets.

Is that helpful.

It is I appreciate that it and then.

My second question would be I guess.

So one thing that isn't changing as obviously you plan to be.

Zero energy ready.

What do you have a target for maybe the percentage of starts next year that.

You are looking to have net zero energy ready.

Nice try.

I don't blame you for asking a it's an upward I'd like I was I really we spent a lot of time looking at that chart, we're going to get to a 100% by the end of fiscal 'twenty five we will make a significant jump in 'twenty four.

I wanted to be a little careful but boy, we went from 2% two quarters ago to 11%. This quarter. It is going to be a much higher percentage in the in the coming quarters.

I'll take it thanks very much for taking the questions.

And our final question showing in queue is from Alex Barron from housing Research Center. Please go ahead.

Yes, thanks, guys.

I know there's the.

The $5 million.

Yes.

I was curious is there are you constrained as to how much you were able to do.

And also.

Is there any any update on thoughts around share buyback given you are still trading below book value.

So, let's let's start Alex with with the bonds. There is no limitation and look we mentioned in the script that we expect to deal with the 25 for the combination of refinancing.

And repayment, but we have the liquidity and the capacity to go pay off the maturity if we wanted to completely.

We believe there is the market conditions are going to give us an ability to do some of that refinancing to do the mix that we talked about but what we won't do is really get kind of put in a position where we have to do a financing at a at a price or a yield that we're not that we're not happy with so we have a lot of flexibility certainly from a covenant perspective on what we can do perspective and from a liquidity.

Quiddity perspective.

No no issue there at all.

In terms of share repurchases I would tell you right now given our growth aspirations.

It's kind of a low priority for us it is something that we do think about and there are times for it but right now we have aspirations to grow the business and Thats the highest risk adjusted returns for us to go out and in desktop and land right now.

Okay, and sorry, if I missed it but I keep.

Maybe maybe you mentioned it did you guys comment anything on on guidance.

What kind of closings do you think youll be able to do for the year or next quarter.

Gave closings of 200 closings next quarter, Alex and then you can kind of some to the year from there.

Got it alright, guys. Thanks, and good luck in great job. Thank you. Thank you. Thanks Alex.

And we have no further questions at this time.

Okay I want to thank everybody for joining us on our third quarter conference call, we will be back in a quarter to wrap up the year. We appreciate your interest in Beazer and we'll talk soon.

Thank you all for participating in today's conference you may disconnect your line and enjoy the rest of your day.