Beazer Homes USA, Inc. (NYSE:BZH) Q1 2023 Earnings Call Transcript

Beazer Homes USA, Inc. (NYSE:BZH) Q1 2023 Earnings Call Transcript February 2, 2023

Operator: Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the First Quarter Ended December 31, 2022. 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.beazer.com. At this point, I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.

David Goldberg: Thank you. Good afternoon, and welcome to the Beazer Homes conference call discussing our results for the first quarter of fiscal 2023. Before we begin, you should be aware that during this call we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors described in our SEC filings, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date this 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. On our call today, Allan will discuss highlights from our first quarter, the current environment for new homes and an update to our balanced growth strategy. I’ll then provide details on our first quarter results and second expectations, updates on our cycle time and cost savings initiatives, a review of our land activity and future community count and end with a look at our balance sheet and book value. We will conclude with a wrap-up by Allan. After our prepared remarks, we will take questions in the time remaining. I will now turn the call over to Allan.

Allan Merrill: Thank you, Dave, and thank you for joining us on our call this afternoon. In our first quarter, we were pleased to generate financial results and profitability in line with the expectations we outlined in November. This translated into adjusted EBITDA of $47 million and $0.80 of earnings per share. Having said that, the new home sales and cancellation environment proved to be even more difficult than we had anticipated. As we will discuss, however, more recent traffic and sales results have been much improved. Beyond the selling environment, we are continuing to pursue and make progress with each of the operational priorities we set out for the year. This includes accelerating cycle times, reducing construction costs and re-underwriting all pending land transactions.

These efforts will generate benefits in the coming quarters. In the meantime, thanks to our significant backlog and the deleveraging we accomplished in recent years, we’re in a strong position from a balance sheet perspective. We have an ample supply of lots, plenty of liquidity and no near term maturities, so we expect to remain both resilient and opportunistic over the course of the year. Let’s dive into the sales and cancellation environment in the first quarter with an update on more recent trends. Early in the quarter, mortgage rates continued their relentless move higher, which together with elevated home prices and other macro concerns, effectively froze the market for most discretionary homebuyers. The sales activity that was taking place was primarily for specs or quick move in homes, many of which were being offered with big incentives as most of our peers were completing their fiscal years.

That presented a tough environment for us for two main reasons. First, we had just completed our fiscal year end, so our finished spec position was extremely low. We entered the quarter with fewer 100 quick move-in homes, leaving us with few opportunities for buyers with serious time constraints. Second, we experienced an increase in cancellations. As a percentage of beginning backlog, our first quarter cancellation rate was about 14%, which was in line with prior years, but a lot higher than the 5% to 10% we had experienced in the preceding quarters. And there was one other factor to play improving cycle times. On our last call, we outlined our efforts to accelerate cycle times, to extend our window for making fiscal €˜23 starts and closings.

Fortunately, we saw a lot of progress during the quarter, which limited our enthusiasm to offer to be built homes at finished inventory prices. In December, as mortgage rates drifted lower, we started to see a nice uptick in online and in-person visits. This translated into a January sales pace more than double our quarter results. While we’ve adjusted prices, features and incentives to align with the market, overall, we have an had to make drastic changes and we are slowly capturing lower construction costs for future closings. There remains a lot of uncertainty about the trajectory of demand and pricing for new homes, largely because of affordability. But the wage growth, home price reductions and rate relief that have already occurred are gradually improving affordability.

Photo by Ernie Journeys on Unsplash

This, along with new and — limited new and used home supply, leads us to be cautiously optimistic about the spring selling season. Looking further out, we remain confident in the strength of the new home market and our ability to create shareholder value. For quite a few years, we have described our financial strategy with a phrase balanced growth. The objectives and our results are rising from this strategy have been straightforward. Profitability growth and a less leveraged and more efficient balance sheet have led to higher returns. Our long term commitment to all three elements of balanced growth remains in place. In order to consistently deliver these balanced growth results, we know we need to successfully execute differentiated and customer oriented operational strategies.

To date, our positioning has been to deliver what we call extraordinary value at an affordable price through our three pillars. But to continue to win with customers, we know we need to continue to innovate. Over a year ago, we became the first and so far the only public builder to commit that 100% of our homes would be built to the U.S. Department of Energy’s Net Zero Energy Ready standard. While we set the end of fiscal €˜25 as our deadline, we’re using the current slowdown to move even faster. In fact, we expect to have Net Zero Energy Ready homes under production in each of our markets by the end of this year. While there are obviously some additional costs associated with building to this higher standard, we believe further differentiating our home creates an opportunity for driving both sales paces and prices.

Energy efficient homes cost less to operate are more durable over time and deliver higher customer satisfaction. And it’s worth noting that the recently adopted Inflation Reduction Act provides meaningful financial incentives to attain the Net Zero Energy Ready standard. Companies have to make choices about how to pursue the creation of shareholder value. Our path is to execute against balanced growth objectives by delivering differentiated energy efficient homes with a truly unique mortgage experience. With that, I’ll turn the call over to Dave.

David Goldberg: Thanks, Allan. For the first quarter of fiscal year 2023, homebuilding revenue was $444.1 million, with an average sales price of more than $533,000. Gross margin, excluding amortized interest, impairment and abandonments was 22.3%. SG&A as a percent of total revenue was 12.3%. Adjusted EBITDA was $47.1 million. Interest amortized as a percentage of homebuilding revenue was 3.1%. Net income was $24.4 million or $0.80 per share. And our GAAP tax expense was about $4 million for an effective tax rate of 14.5%, reflecting the benefit of energy efficiency tax credits from homes closed in prior years. As a reminder, broadly speaking, we don’t currently pay cash taxes as we continue to utilize our deferred tax assets.

Looking forward to the second quarter, we’re providing the following expectations. We are anticipating a sales pace over 2.5 per community per month, which is comparable to what we did in January. While this remains somewhat lower than normal seasonal levels, it is significantly better than the first quarter pace of 1.3. Average community count is expected to be up 5% year-over-year. We expect to close around 1,000 homes reflecting the backlog conversion between 55% and 60%. While this is up around 20 points versus the same period last year, it’s still quite a bit lower than our historical norms. Average sales price should be about $515,000 well above our Q1 ASP and more in line with what we expect for the rest of the year, as we continue to emphasize affordability in an elevated interest rate environment.

We expect gross margin excluding interest to be in the 21% to 22% range. SG&A as a percentage of revenue should be relatively flat versus the same quarter last year. We expect this to lead to both adjusted EBITDA and earnings per share very similar to the first quarter. Interest amortize as a percentage of homebuilding revenue should be in the mid-3s and our effective tax rate should be at or below first quarter levels as we continue to reflect the benefit of our energy efficiency tax credits. While there’s too much uncertainty around future sales prices to provide profitability expectations for the full year, with our large backlog and available production universe, we believe we can deliver at least 4,000 homes in fiscal 2023, which should again lead to total homebuilding revenue in excess of $2 billion (ph).

In November, we highlighted a number of operational priorities for the year including accelerating cycle times, reducing construction costs and re-underwriting pending land deals. I’ll review these one at a time. The supply chain challenges we faced over the last few years had extended our cycle times by nearly four months, pushing our traditional April cut off dates for starts back into January. Our efforts to recoup at least 30 days on average across our markets have been successful. So we are now looking to recoup additional time above and beyond the initial goal. On the direct cost side, the evidence of success is not apparent yet. Our first quarter closings had even higher construction costs in the prior quarter, which wasn’t surprising given the cost environment that existed when these homes were started.

We’re working in every market with nearly every trade to recapture those dollars. We expect meaningful improvements in construction costs to materialize in the fourth quarter when the mix of closings will more heavily reflect home started with lower costs. At the same time, we continue to re-underwrite land deals using lower home prices, slower sales paces and higher mortgage rates. In many any cases, we’ve been able to renegotiate the costs and/or the structures (ph) of our pending deals. Even with these efforts underway, we remain confident in our expectations for community count growth moving forward through fiscal 2023 and accelerating in fiscal €˜24. As it relates to our balance sheet, we ended the quarter with about $386 million of liquidity.

Our net debt to cap was 47.3% and our net debt to EBITDA was 2.4 times. We ended the first quarter at about $984 million of total debt and have no maturities until March 2025. Our focus on liquidity and a supportive maturity schedule provides flexibility for us to allocate capital in ways that best support our balanced growth objectives. We continue to grow both the quantity and quality of our book value. We ended the quarter with a book value per share above $31, up $7 from last year. Despite near term challenges, the ultimate goal of our balanced growth strategy continues to be earning returns that are above our cost of capital while growing book value per share. With that, I’ll turn the call back over to Allan.

Allan Merrill: Thanks again, Dave. Despite a tough sales environment, we were able to deliver positive first quarter financial results. Just as importantly, our backlog of sold homes, improved sales momentum and our cycle time and cost reduction initiatives have favorably positioned us to generate full year results that grow book value and are consistent with our balanced growth objectives. Longer term fundamentals for housing remain intact and robust. And we’re confident our differentiated consumer strategies, including our Net Zero Energy Ready initiative will allow us to compete for homebuyers on a basis other than just price. Finally, our team is why I remain convinced that we have the people, the strategy and the resources to create durable value over the coming years. With that, I’ll turn the call over to operator to take us into Q&A.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. Our first question is from Julio Romero with Sidoti & Company. You may go ahead.

Julio Romero: Hey, good afternoon, Allan and David.

Allan Merrill: Hey, Julio.

Julio Romero: Hey, I wanted to maybe start on your goal of accelerating cycle times, you’ve been successful in recouping I guess 30 days. How much more do you think you can achieve on that front?

Allan Merrill: It will depend on the city. There are different characteristics in different markets. A couple of weeks, I would say overall, some places a little more, some places a little less. But that’s kind of what we try to depict on the slide is that we’ve moved that cut-off date out another couple of weeks.

Julio Romero: Okay. And maybe just talk about obviously on the demand side, I think January and the move-in mortgage rates have caused a little bit more optimism. Just talk about what you’re seeing there and how that’s maybe changed the strategic outlook for you guys?

Allan Merrill: Look, in December, it’s like somebody turned the lights on. Activity on the website, activity in our communities really perked up and it wasn’t €“ like, it was great weather or anything. It was just — it felt different and rates clearly played a role in it. I also think that some of the anxieties about the economy and about housing started to tamp down a little bit. And we can’t lose sight of the fact, we got a housing shortage in this country. So people started paying attention again. And what we saw in January was absolutely, as I’m sure you’ve heard from others, interest and specs, but we’ve got more confidence around a shorter cycle time and that has made it easier to sell to be built homes well. That was pretty tough for a lot of last year where we had a hard time at the time of contract telling people that the month, little on the date that their home would be completed.

We’re in a very different place now. So I think there are a few things. I think they have the macro things, the interest rate things. And then I just think that with the supply chain sorting out, you’ve also got more visibility for customers on when to-be-built can be delivered. And I think those things collectively, I think Dave or I said it in the script, I mean January for us was, and we don’t want to make too precise a thing of it because it is just one month. But what have we experienced in the month that just ended January was better than double what we did in the whole first quarter on a per month basis. That felt a lot better.

Julio Romero: Yeah. No, I appreciate the color. And I guess, If you could just touch on your other initiative of cost reductions and you talked about not there yet, but expecting meaningful improvements by the fourth quarter. How is the trajectory of like lumber prices may be impacted the way you’re thinking about the flow through of cost reductions as we progress throughout the year?