Q2 2024 Beazer Homes USA Inc Earnings Call
Please standby the conference will begin in about one minute again. Please standby the conference will begin in about one minute. Thank you.
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Speaker Change: Good afternoon, and welcome to the Beazer homes earnings Conference call for the second quarter ended March 31, 2020 for 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 <unk>.
Company's web site at Www Dot Beazer dotcom at.
At this point I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.
David I. Goldberg: Thank you good afternoon, and welcome to the Beazer homes conference call discussing our results for the second quarter of fiscal 2024.
David I. Goldberg: Before we begin you should be aware that during this call, we'll be making forward looking statements.
David I. Goldberg: 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.
Speaker Change: Any forward looking statement speaks only as of the date the statement is made.
Speaker Change: 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.
Speaker Change: Joining me today is Allan Merrill, our chairman and Chief Executive Officer.
Allan P. Merrill: Our call today, Alan will discuss highlights from our second quarter.
Allan P. Merrill: Current environment for new home sales some details of our operational strategy. This spring and an update on the progress, we're making towards our multiyear goals.
Allan P. Merrill: I will then provide details on our second quarter results.
Allan P. Merrill: Lord expectations, a review of our balance sheet and land spending and then conclude with a review of our book value per share and the framework, we employ in considering capital allocation.
Allan P. Merrill: 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.
Alan: Thank you, Dave and thank you for joining us on our call. This afternoon.
Alan: Our team delivered another successful quarter highlighted by solid sales results and excellent profitability from our growing community count. We also invested for the future and enhanced our capital structure.
Alan: A more detailed terms.
Alan: New orders were up 10% from the prior year as we generated a page just over three sales per community per month.
Alan: This provides us with a backlog to modestly increase our expectations for full year deliveries EBIT.
Alan: EBITDA was over $58 million, driven by slightly better than anticipated gross margins and careful management of overheads.
Alan: We ended the quarter with 145 active communities up from a hybrid and 36 at the end of December and 121, a year ago.
Alan: Land spend was nearly $200 million.
Alan: Our total 12 month spending over $740 million.
Alan: And finally with our senior note issue and an extension of our revolver, we strengthened our balance sheet, enabling the consideration of a broad range of capital allocation priorities.
Alan: In addition, we were recognized for both our culture and the energy efficiency of our homes. We also held our annual fundraiser for our National charity partner Fisher House, which generated nearly $2 million.
Alan: We remain very confident in the multi year strength of the housing sector and new home production in particular.
Alan: Our thesis is anchored by both supply and demand factors.
Alan: Shortfalls in new home production over the past decade, and Milwaukee in effect of higher mortgage rates, both contribute to very tight supply.
Alan: And an economy characterized by low unemployment wage growth and attractive demographics for potential homebuyers provides clarity on the sources for current and future demand.
Alan: Last quarter I outlined our view that over the balance of the fiscal year, our sales pace and to some extent the mix and gross margins on those sales was likely to be closely related to mortgage rates due to strained affordability.
Alan: We articulated three scenarios defined by the direction of rates and this framework proved to be quite accurate in the second quarter.
Alan: Yeah.
Alan: During the second quarter mortgage rates moved around ultimately rising about 20 basis points. This fell inside our base case and as such we were able to exceed our sales goals.
Alan: With a slightly larger share of spec home sales.
Alan: Since the end of the quarter rates had moved nearly 50 basis points further straining affordability.
Alan: These rates persist, it's likely we will continue to see a stronger preference for specs.
Alan: As we have talked about for several years, we are in the midst of transitioning to zero energy ready homes in all new and longer lasting communities.
Alan: We call these already series homes.
Alan: While we've committed that 100% of our starts will be ready series by the end of next year. We are substantially ahead of schedule with more than three quarters of our starts being built to this standard last quarter.
Alan: Given the importance, we've placed on developing and delivering already series homes.
Alan: So this spring to accelerate our transition to the ready series, we've been encouraging our teams to be very competitive with pricing and incentives on our earlier star and plus series homes.
Alan: This will allows us allow us to close out of older communities more quickly and simplify our production and sales efforts around the ready series.
Alan: We can prove that these are the best built homes in our markets and the sooner we are solely focused on building building and selling them the better.
Alan: While this acceleration makes sense there is a short term financial consequence, which will be apparent in the third quarter.
Alan: Margins will be down sequentially.
Alan: Partially as a result of a higher share of specs, but more so from our efforts to move through our older series homes.
Alan: With that said, we expect margins to rise in the fourth quarter as our mix of closings shifts strongly toward ready series homes and.
Alan: And for the full year, our EBITDA and net income expectations remain within the range of our prior outlook as we anticipate more closings and tighter management of overheads to offset much of this short term gross margin pressure.
Alan: Dave will provide specifics, but I wanted to explain why we chose to impacts of mix and pricing of our sales. This spring.
Speaker Change: Finally, let me update you on our progress toward our multi year goals.
Speaker Change: As it relates to our goal to have more than 200 active communities by the end of fiscal 'twenty six.
Alan: As I mentioned, we closed the quarter with 145 active communities up nearly 20% versus the prior year.
Alan: We expect to end the fiscal year with more than 155 communities representing year over year growth of about 15%, which also happens to be a good benchmark for projecting year end community counts in 'twenty, five and 'twenty six.
Alan: As it relates to our balance sheet goal of having a net debt to net cap ratio below 30% by the end of fiscal 'twenty six.
Alan: We completed the quarter with the ratio at 43, 4% up a little bit versus the prior year.
Alan: This is simply a function of the seasonality and timing of our land spend by the end of this year. We expect this ratio to be in the mid to low thirties positioning us to be comfortably under 30% by the end of fiscal 'twenty six.
Alan: And finally as it relates to our goal to have 100% of our starts zero energy ready by the end of calendar 'twenty five.
Alan: I'm very pleased that we reached 77% ready series starts in the second quarter.
Alan: With our acceleration we are in excellent shape to reach our stated goal perhaps even early.
Alan: As we get closer to fiscal 'twenty five I'm excited to see the impacts of community count growth reduce leverage and a truly differentiated product will make to our financial performance and with that I'll turn the call back to Dave. Thanks Al.
Dave: Thanks, Alan for the second quarter of fiscal year 2024, New home orders for 1299 up 10% compared to the prior year driven by a 14% increase in average active community count.
Dave: This translated to a sales pace of three one sales per community per month slightly above our guidance.
Dave: 1044 homes generating homebuilding revenue of $539 million with an average sales price of about $516000.
Dave: SG&A was 11, 5% of total revenue as we continue to prudently invest for our rapidly growing community count.
Dave: Adjusted EBITDA was $58 $8 million.
Dave: Interest amortized as a percentage of homebuilding revenue was 3.0%.
Dave: Our GAAP tax expense was $6 $7 million for an effective tax rate was 14, 7%.
Dave: Net income was $39 $2 million or $1.26 per share.
Dave: This included an $8 $6 million pre tax gain or <unk> 28 cents per share of EPS from the sale of our investment and build our homesite technology company specializing in digital marketing for new home communities.
Dave: This gain contributing to our higher tax rate, but it has been excluded from our adjusted EBITDA.
Dave: Our third quarter expectations contemplate mortgage rates staying about where they are now with the economy remaining generally supportive.
Dave: In this environment, we expect to sell at least three homes per community per month and ended the period with approximately 150 communities.
Dave: We expect to close 1150 to 200 homes.
Dave: Honestly versus the prior year with an ASP of roughly $505000 gross margins in the quarter will likely be about 20% as we work through sales arising from our acceleration to the writing series.
Dave: SG&A as a percentage of total revenue should be approximately flat compared to the prior year.
Dave: Together these results should generate adjusted EBITDA above $50 million.
Dave: Interest amortized as a percentage of homebuilding revenue should remain in the low threes.
Dave: And our effective tax rate should be less than 12% as we continue to benefit from energy efficiency tax credits, leading to leading to diluted earnings per share above 80.
Dave: Yeah.
Dave: Turning to our full year, we now expect to deliver over 4750 homes, reflecting more than 10% annual growth at an ASP of about $510000.
Dave: Our third quarter margin guidance, we expect our full year gross margin to be above 21%, implying a good recovery in the fourth quarter from already series homes.
Dave: SG&A as a percentage of revenue should be around 11% as we continue to carefully manage overheads.
Dave: Cheating. These results would lead to adjusted EBITDA greater than $260 million and diluted earnings per share of at least $4 50.
Dave: Based on an effective tax rate of 15%.
Dave: At this level will generate double digit returns this year, while positioning the business for significant growth in fiscal 2025 and beyond.
Dave: Speaking of 2025, while it's still a little early to give specific guidance I want to offer some initial thoughts on revenue gross margin and returns.
Dave: Revenue should be significantly higher year over year, driven by community count growth.
Dave: We expect gross margin to improve in fiscal 'twenty five in part because of the mix shift Alan described in fact overtime margins on already serious home should continue to improve as we work with our trades to reduce their build costs.
Dave: It's also worth noting that every zero energy ready home, we deliver qualifies for $5000 tax credit, which would translate to about another point of margin if it werent buried in our tax expense.
Dave: Ultimately higher revenue and improved gross margin from an increasing number of communities should lead to greater profitability and higher returns next fiscal year.
Dave: <unk>.
Dave: Turning to our balance sheet in March we refinanced our 2025 senior notes with a new note due in 2031, leaving us with no maturities until 2027, we also extended our revolver exploration to March of 2028.
Dave: We ended the quarter with total liquidity of $433 million, providing plenty of firepower for our growth ambitions.
Dave: Even as we have increased land spending we remain focused on balance sheet efficiency to drive attractive returns more than half of our total lots are controlled through options a ratio we expect to sustain.
Dave: Finally, as it relates to our community count we already control all the land we need to hit our fiscal 2025 growth calls and most of what we need to hit our 200 community count goal by 2026.
Dave: Achieving our profitability will lead to a book value per share of <unk> $40 or higher by the end of the fiscal year.
Dave: The chart on slide 18 shows the progress we've made thus far in growing our stockholders' equity having more than doubled our book value book value per share in just the past four years.
Dave: In recent years, we have generated growth in our share price, but it has remained below our book value. Even if the composition has dramatically improved last year, we conducted a comprehensive investor survey to get to the root cause of that disconnect. There.
Dave: The results of that survey was clear shareholders told us they wanted to see a robust and sustainable growth trajectory and a less leveraged balance sheet.
Dave: Those results led us to introduce our multi year goals, which include ambitious growth and deleveraging objectives. These multiyear goals from the foundation of our approach to capital allocation, because we agree with our shareholders generating growth and balance sheet strength are essential to creating shareholder value.
Dave: Today, we have excellent visibility into achieving these calls this is allowing us to contemplate alternatives for our excess capital in practical terms that means we are weighing the return and risk characteristics of additional land investments against the value created through share repurchases.
Dave: Given our valuation in relation to current and future book value. We believe share repurchases are likely to represent an attractive additional use of capital.
Dave: We have $41 million remaining on our previously authorized share repurchase program.
Dave: With that I'll turn the call back over to Alan Thanks.
Alan: Thanks again, Dave.
Alan: We're pleased with the results we generated in the second quarter, we delivered solid orders in profitability from our growing community count and we positioned our company for the future with significant growth in our lot pipeline, perhaps more.
Alan: Importantly, we're excited about where we're headed we have a clear path to reaching each of our multi year goals.
Alan: They represent substantial growth in the business, a resilient and flexible balance sheet and an innovative and differentiated product offering. We are confident we can create significant shareholder value from these results.
Alan: To close I'd like to acknowledge my colleagues here at Beazer, we have a truly exceptional team all of whom are committed to creating value for our customers for our partners for our shareholders.
Speaker Change: And for each other it could not be more proud to represent them with that I'll turn the call over to the operator to take us into Q&A.
Speaker Change: Ladies and gentlemen, we will now like to open the phone line for questions. If you would like to ask a question you May press star one on your phone if you need to withdraw your question at any time you May press star two are.
Speaker Change: Our first question comes from Julio Romero from Sidoti <unk> Company. Please go ahead.
Julio Alberto Romero: Hey, good afternoon.
Julio Alberto Romero: Hey, guys. Thanks for all the color on on the product mix next quarter and the accelerated closeout of Star <unk>, plus series homes and kind of the strategic rationale behind it I guess just my question is how confident are you that the.
Julio Alberto Romero: The financial impact is it only centered around the third quarter and maybe talk about the scenarios that leaks into the fourth quarter.
Speaker Change: Yes, I'll jump in first earlier on and thank you for the question I think we're very confident that the margins in the ready series homes are higher both on the specs and to be belts that we resolved and then on our plus and star and we're going to run out of plus and star homes.
Speaker Change: That was sort of the point.
Speaker Change: Confidence into the fourth quarter is very good now look there is an overlay on any of this if the rate environment is radically different substantially higher rates over the next three or four months and what we've experienced there may be other things going on but it's not gonna be default of the of the product mix.
Speaker Change: Very helpful and then any way to kind of parse out the margin impact between for next quarter between greater specs versus the accelerated close out of the store and plus pumps.
Speaker Change: The thing is it's Ed.
Speaker Change: Right.
Speaker Change: Yeah.
Speaker Change: We anticipate the question I appreciate the question, it's a really tough one it's not a it's not an easy thing, but there's a lot of the specs are also star or plus so is the effect because they were specs, whereas the effect because they were star plus our sense is this more significant impact more than half is related to intentionality on our part.
Speaker Change: To get beyond Star and plus and the minor portion relates to a slightly higher mix of specs in the quarter.
Speaker Change: But as I've said, the two things kind of overlap because getting through star and plus that's what most of our specs work.
Speaker Change: Yeah, I got you that makes sense.
Speaker Change: Yeah.
Speaker Change: Very good.
Speaker Change: Thanks for all the color and thanks for the color on the community count growth and I'll pass it on thanks.
Speaker Change: Thanks Lynn.
Speaker Change: Next we'll go to the line of Alex Rygiel from B Riley. Please go ahead.
Alexander John Rygiel: Thank you very much nice quarter, gentlemen, can you talk about the cadence of.
Alexander John Rygiel: New order activity throughout the quarter and into the <unk>.
Alexander John Rygiel: Month of.
Alexander John Rygiel: April.
Alexander John Rygiel: Yeah.
Speaker Change: It was.
Speaker Change: It built a January wasn't great February was a little better and March was better than February I don't have final April numbers honestly.
Speaker Change: We closed the month yesterday I would say April was choppy it was similar to March.
Alexander John Rygiel: It didn't really differentiate itself significantly.
Alexander John Rygiel: Some markets a little better some markets a little weaker but.
Speaker Change: We don't release monthly order numbers, because I just think at our size, it's very hard to draw conclusions from a month, but I don't see anything fundamentally different in April than we saw in March.
Speaker Change: And in your implied full year closings guidance suggests a very strong step up in the fiscal fourth quarter, maybe one of the best on record.
Speaker Change: I suspect he's got that visibility in your backlog at this time, but maybe if you can comment on that.
Speaker Change: Yeah look outside it's Dave I would comment that we feel pretty comfortable given the production universe that we have.
Speaker Change: And you can see in the Q the number of units we have on our production between the backlog and our specs under construction, we feel real comfortable with the full year guide and increasing the guide as we did in the quarter.
Speaker Change: But frankly youre right Theres still work to do for the fourth quarter and we're out doing work so I think.
Speaker Change: Assumptions are correct and the math, you're doing is right, but we feel real comfortable given the size of the backlog in the products universe.
Speaker Change: Let me just add one other frame.
Speaker Change: <unk> on that.
Speaker Change: Not perfect, but I know, it's a bit of an industry convention to look at backlog and do a conversion ratio of what will backlog be at June 30th and what percentage of that will close in the fourth quarter. It's a much higher fourth quarter backlog conversion in the last couple of years, but that's also a function of the fact that cycle times are dramatic.
Speaker Change: Different than they were over the last couple of years. So we won't be back to the kinds of backlog conversion that we had.
Speaker Change: Pre COVID-19, so yes, it's a big step up but when you sort of put it in the pre and post COVID-19 context.
Speaker Change: With the production universe that we've got we feel we feel very good about it.
Speaker Change: Thank you.
Speaker Change: Next we will go to the line of Alan Ratner from Zelman <unk> Associates. Please go ahead.
Alan S. Ratner: Hey, guys good afternoon, nice quarter and thanks for all the detail.
Alan S. Ratner: Alan first of all.
Alan S. Ratner: I apologize if you've given this detail in the past, but I was hoping you could just go into a little bit more detail on exactly kind of what the the primary differences are between ready series in the older series I'm not sure if they're drastically different in terms of floor plans or anything else that would kind of contribute to that that margin lift that you're you're citing here.
Speaker Change: So there are a number of things and in fact I have to admit Alan I was really hoping for this question and in fact anticipating it. So there is a slide in the appendix.
Speaker Change: That has both the homeowner benefits and some of the building science features that make these homes different the envelope is different the way its rapid different the way. Its insulated is different it has what's called an ARV or an energy recovery ventilator.
Speaker Change: The thing that a consumer would immediately notice is typically two by six walls they'd also notice that the ducks are all unconditioned spaces.
Speaker Change: Kind of makes sense to people that are like US you know running a bunch of ducks and in unconditioned attic, where I'm, losing a lot of heat or or I'm, gaining a lot of heat depending on the season as a problem.
Speaker Change: And then as we talk to people, we can really put mathematics with third party validated testing on it relative to what's called a her score, but maybe even more importantly, the air exchanges per hour now I know that a large portion of our buyer population doesn't walk into a new home community, saying I'm shopping herzer I'm shopping ACTH.
Speaker Change: For us a big opportunity is to explain to people the value that that represents for them and then when they say, okay, well that all sounds good but everybody sort of talks about green, whereas the proof and that's where the third party validation the testing and the metrics are and then frankly, they can't Unsee, what they've seen they go into another community and they asked to see.
Speaker Change: Somebody's her scores and our homes are pulling thirties, and low forty's theyre going to go see seventies.
Speaker Change: And people are bragging about them.
Speaker Change: So those are those are some of the characteristics that are different I don't know if that if that totally answers your question.
Speaker Change: If we go a lot deeper I want my building science people too.
Speaker Change: Get into it but I will tell you I've highlighted that features in this exhibit so that you can see very clearly the things that a buyer sees and understands if we do our job. This just makes it a better home.
Speaker Change: Gotcha.
Speaker Change: So on that point, though I mean is the better margin would you say more of a cost savings or it sounds almost from what youre, describing it you almost get a more of a price.
Speaker Change: Price premium given all of these features in the home. So is it more of a is it more of a price versus a cost savings standpoint, yes, it's definitely a price issue because the cost to build these homes were higher than the cost to build our prior series homes and got it Dave talked a little bit about 25, and I mean, it's obviously early but the thing that we have seen.
Speaker Change: Every community or every division started with one community was zero energy ready and one home and then it was the whole community and then it was two communities and this this ball rolling downhill in terms of building momentum, what's really starting to happen is the trades get it they are seeing benefits in cycle time for example, our HBC.
Speaker Change: AC contractors are able to take a couple of days out of the install with the advanced duct.
Speaker Change: Install with with our homes. They didn't know that at first they were charging a premium they're like we don't know what this is we haven't used these products. We don't understand it we don't really want to do it you're going to have to pay extra to get us to do it now they look at it and say Wow. This home is actually going to be much better from a warranty standpoint, it was faster for us to build yes.
Speaker Change: Yes, we will do that again plays and we Havent I don't think really scratched the surface and clawing back some of those savings. So today. It is the fact that these homes are more expensive to build and I don't want to in any way diminish our efforts to date, but I still don't think we've really scratched the surface on truly connecting buyers with realizing.
Speaker Change: This is a home they cannot buy anywhere else and I have done this personally and markets when I travel, let's go look at a 2 million dollar home and let's see what their her score with their AC H score is let's ask questions like.
Speaker Change: Create a comparator to the kind of home that we're buying or building.
Speaker Change: We've got an opportunity to get better and better at explaining that and that's why I think the revenue side as an opportunity as much as the cost side is.
Speaker Change: Great. Thank you for all that detail and I'm not surprised you had the slide prepared for for US. Thank you for that as well.
Speaker Change: Second question, if I could you mentioned the slide in your first quarter deck that kind of had the three scenarios happen to pull it up and.
Speaker Change: In the downside scenario in that deck is an environment with rates in the high Sevens, which were kind of pushing back up against today I'm sure. That's not what you and everybody expected three months ago, but.
Speaker Change: That's on that Slide you also said and I guess in that environment, you would expect the sales pace to be sluggish and incentives to be higher it doesn't sound like from your comments, you're really seeing that effect from the move in rates. So I'm. Just curious if you could maybe just talk through what you are seeing in response to higher rates has the consumer being largely agnostic to it.
Speaker Change: Are you are you incentivizing more to kind of buy down the rate or do other things to improve the affordability equation given given the move higher.
Speaker Change: We haven't seen a dramatic shift in incentives, particularly financial incentives we have seen.
Speaker Change: Migration and that overstates it we've seen a move toward more temporaries and permanence as as rates have moved up obviously, you get pretty good Bang for the Buck on a two one or a three to one and in a higher rate environment. I think some buyers are analyzing that and saying well, it's unfortunate but with attempt I am going to get.
Speaker Change: A lower pay rate for a few years and I will have an opportunity to refinance I am always at pains to point out I don't know why I feel so strongly about it that of course when buyers use temporary buy downs. They do qualify at the full pre buy down right. So this is not creating.
Speaker Change: A different kind of a housing problem.
Speaker Change: And those of us who've been around the industry. A long time, you don't want to always be very clear about this isn't like.
Speaker Change: Some some previous period, but we are seeing we are seeing a little more interest in the temporary buy downs.
Speaker Change: And the other thing that we saw we saw and we saw in the second quarter and I think we're going to see it in the third quarter and frankly, it's going to help us a little bit is I think a heightened interest in specs.
Speaker Change: That's the other thing that happens and given that I'd really like a remaining spec are startup plus series to go away in the third quarter I'm, Okay with that.
Speaker Change: Got it alright, thanks as always I appreciate it thanks.
Speaker Change: And again for those on the phone if you would like to ask a question you May you Star one.
Speaker Change: Our next question comes from Alex Barron from housing Research Center. Please go ahead.
Alex Barron: Yeah, I wanted to focus in on.
Alex Barron: What would it take at this point given the valuation for you guys to step up and.
Alex Barron: So book value.
Alex Barron: We tried to make it pretty clear.
Alex Barron: In the prepared remarks, we have a framework that we use it as a consistent framework that looks at risk versus reward.
Alex Barron: And I would tell you we have a $40 million authorization. That's currently outstanding and given where the stock is currently trading not just from where the book is today, but where we see and have visibility on where it's going to be over time and looks like a much more attractive use of our capital on a go forward basis from a risk and return perspective, I won't get too detailed beyond that but clearly we are.
Alex Barron: Alright.
Alex Barron: Okay I'll go a little further I think we will be in the market executing against some share buyback what we're not going to do Alex is just say hey at any price. It's the right thing to do but in the current context of the share price I do think that we will be participating in share buybacks.
Alex Barron: When our window opens this quarter.
Alex: Yeah, no I'm, not saying that any at any price, but you know when it's trading at a 30% discount to book it seems almost like a no brainer.
Alex: But anyway, good to hear that.
Speaker Change: What about similar thoughts on dividends, maybe you are not quite there yet but other builders have.
Alex Barron: Started to launch more consistent dividends two thoughts around that.
Speaker Change: I would tell you that Alex it feels a little premature to have that conversation I think Alan I think we've tried to make it pretty clear kind of what the considerations in the market and frankly their purchase program as Alan said seems to make a lot of sense, given where we are so.
Speaker Change: Yes, we want to execute our multi year goals. Yes. We've got we are going to grow the community count we are going to have net debt to net cap below 30%. When we said we would.
Speaker Change: And we think we can do that and accommodate.
Speaker Change: And these are this range of share price of buybacks, but I think to go beyond that in terms of returning capital to shareholders, we need to get we need to get a little further along.
Speaker Change: Okay, great and if I could ask blip or on the orders.
Speaker Change: South East region orders were down 30%.
Speaker Change: That just mainly because you're experiencing strong demand in our communities are.
Speaker Change: Selling out faster than you're replacing them or what's the what's going on there.
Speaker Change: Yes.
Speaker Change: Excuse me a lot of our southeast divisions do not have very large community counts and one of the things that happened to us occasionally in the southeast is that will gap out.
Speaker Change: Because we don't run a big Big spec program. So we can get caught between phases of a little bit.
Speaker Change: I don't think.
Speaker Change: Anyone should infer from a quarter.
Speaker Change: A particular narrative around the southeast our southeast markets are pretty good.
Speaker Change: Happy to be in them and frankly, we are growing community count and every one of them.
Speaker Change: Okay, great well best of luck. Thank you.
Speaker Change: Thank you Alex.
Speaker Change: Thank you and again that is star one if you would like to ask a question.
Speaker Change: Currently our last question in queue is from Jay Mccanless from Wedbush. Please go ahead.
Jay McCanless: Hey, good afternoon, everyone.
Jay McCanless: So wanted to ask also on the orders with both the southeast and the east down pretty significantly relative to where the west was.
Jay McCanless: The Cynic in me says some of this move to the Redi plus homes as well.
Speaker Change: We moved some inventory generate some cash flow in a very competitive environment.
Speaker Change: Is that the right way to think about this or is there really a push to get some of these newer homes out there.
Jay McCanless: We want to get the newer homes out there.
Jay McCanless: You are familiar with our balance sheet, there isn't really a generate cash.
Jay McCanless: Focal point, we're really trying to maximize the value of every community. We've got some communities that have been in the in the star and plus series, where we've been able to introduce ready we want to accelerate that we've got some communities that are not going to be converted or transitioned to ready I'd like to build out of them and in.
Jay McCanless: The communities, where we are and all new communities are only ready we definitely want to get some sticks in the air. So we're seating as we always do those communities with some specs.
Jay McCanless: But that's the focal point is really around the sooner we have clarity certainty and the simplicity of we sell ready homes. They are better built and they perform better I think the happier we'll be our buyers will be in <unk> and our shareholders will be.
Jay McCanless: Jay I would tell you in the east the sales pace was very much in line with the overall company average it was little bit of a tough comp from last year, but theres really nothing to read into there.
Jay McCanless: Okay.
Speaker Change: And then I wanted to ask I'm looking for the slide in the deck, where you said that.
Speaker Change: Okay.
Jay McCanless: <unk> 14 Reis se.
Speaker Change: Gross margins.
Speaker Change: When you transition to already homes or mostly ready homes, there's going to be improved versus the second half of fiscal 'twenty four but when I'm looking at the numbers you gave right now it looks like 20% adjusted gross margin for the third quarter, probably something in line, maybe a little bit better for the fourth quarter.
Speaker Change: Pretty easy bar to say youre going to be higher than where where are these margins going to compare to where they were in the first half where you guys had pretty good pretty good set of gross margin in the first half of this year or just for a quick correction on the question. The words in the script, we're pretty clear if you look at the full year gross margin guide it suggests a pretty.
Speaker Change: Significant pick up in the fourth quarter. So it's not going to be around 20, we said, it's a number better than that.
Speaker Change: And I think we got to do above 21% for the full year.
Speaker Change: Only way Youre going to get there with Q3 of 'twenty is a good lift in Q4 exactly.
Speaker Change: Okay, but then still the question is how how does the margins under these new homes compare to what you were doing in the front half is it going to be equal or slightly less as you can get the build issues worked out what should we expect from that.
Speaker Change: I guess I would say is we think that margins in 25 will be higher than margins in 'twenty four and.
Speaker Change: And that's because these are homes that command I think that kind of value and because I think we can keep working on getting our build costs down so.
Speaker Change: <unk>.
Speaker Change: It's hard to make a comparison of one period to another period, because which periods in which homes, but at a higher level. What we've said is 25 will be above 24.
Speaker Change: Okay.
Speaker Change: And then the last one I had just on the specs it looks like your specs in process were up sequentially from first quarter to second quarter could you talk about what's driving that.
Speaker Change: Community count growth.
Speaker Change: Jay if you look at our slide we actually show on a per community basis, and its really not dissimilar on a per community basis suggests that we have the community count growth coming online and thats driving some incremental specs.
Speaker Change: Okay.
Speaker Change: Then.
Speaker Change: I actually did have one more what was the incentive percentage in the quarter and what was it in the prior year.
Speaker Change: Let me grab it for one second Jeff.
Speaker Change: I don't have it in front of me of anything right now I can tell you Jay the number hasnt moved too significantly in the second quarter, it's been a pretty minimal change I can follow up with the exact number but we look at it pretty closely on a quarter by quarters quarter by quarter week by week basis to see what's happening and it really didnt move much in the second quarter.
Jay: Okay, Okay, great. Thanks for taking my questions.
Speaker Change: You bet. Thank you.
Speaker Change: And I am showing no further questions.
Speaker Change: Okay I want to thank everybody for dialing into our second quarter call. We look forward to timely in next quarter as neutral at the end of the year. Thanks, So much and have a good night.
Speaker Change: Thank you all for participating in today's conference you may disconnect your lines and enjoy the rest of your day.