Beazer Homes USA, Inc. (NYSE:BZH) Q3 2023 Earnings Call Transcript

Beazer Homes USA, Inc. (NYSE:BZH) Q3 2023 Earnings Call Transcript July 27, 2023

Beazer Homes USA, Inc. beats earnings expectations. Reported EPS is $1.76, expectations were $0.88.

Operator: Good afternoon. And welcome to the Beazer Homes Earnings Conference Call for the Fiscal Third Quarter Ended June 30, 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’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 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 statement speaks only as of the date the statement is made. We do 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. Today, Allan 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, updates on our cycle times and cost reduction initiatives and end with a look at our balance sheet. We will conclude with the wrap-up by Allan. After our prepared remarks, we will take questions during the time remaining. I will now turn the call over to Allan.

Allan Merrill: 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 allowed us to exceed the expectations we outlined in April. On new home orders, we generated a pace of 3.2 homes per community per month, up nearly 30% from the prior year. The resurgence in demand we experienced starting in January continued through the 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. 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 improved the picture. Then in January, demand returned to more normal levels, even though affordability was 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 as great as 4 million homes. I think of this as 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’s 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. Unemployment 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. Both 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 in an affordability challenged environment. We are invested in markets with demonstrated new home demand, we have 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. For shareholders, we remain committed to a 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 built, 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 were Zero Energy Ready and included homes in 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.

David Goldberg: Thanks, Allan. For the third quarter of fiscal year 2023, we closed 1,117 new homes, generating homebuilding revenue of $570 million, with an average sales price of about $511,000. Gross margin, excluding amortized interest, impairments and abandonments was 23.4%. As Allan mentioned, our margin came in higher than anticipated, which was the result of lower construction costs and better-than-anticipated profitability on homes we sold and closed during the quarter. SG&A as a percentage 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 improved margin led to adjusted EBITDA of $72.8 million. Interest amortized as a percentage of homebuilding revenue was 3.1%.

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 fiscal fourth quarter, we’re providing the following expectations. We anticipate our sales pace to be approximately 2.7 homes per community per month or 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 1,200 homes, reflecting a backlog conversion ratio exceeding 60%, up more than 8 points versus the same period last year. Our average sales price should be around $520,000.

We expect gross margin, excluding interest to be roughly 23%. Our absolute dollars 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 3s 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 2024, 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 $500,000 from a more affordable mix of communities. Relative to our other multiyear goals, we expect improvements in our leverage ratio and a sizable increase in the percentage of our starts that meet the 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 materialized in the cycle times of our closings, which were down about 40 days versus last quarter. Looking forward, we remain focused on getting cycle times back to where they were before COVID disruptions. On the cost savings side, it is more of a mixed picture. While we’ve been pleased with the reduction in lumber costs, our expectations for significant savings from other categories have been tempered somewhat. That’s because the stronger sales and pricing environment has caused housing starts 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 they 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 provide a framework that we believe will simplify estimating our future GAAP and cash taxes. Because the home as we build meet stringent energy efficiency criteria, we are eligible to claim energy efficiency tax credits. These credits reduce 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 meet the Zero 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 have fully claimed the credits related to prior years. From a cash perspective, we don’t expect to pay cash taxes for fiscal 2023, fiscal 2024 and a portion of fiscal 2025 as we utilize our NOLs, which are included in our deferred tax assets and then apply the energy efficiency tax credits we have 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 as newly earned energy efficiency tax credits are utilized in the year they are generated. On to 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 40.3% and our net debt to LTM adjusted EBITDA was 2.2 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 to Allan.

Allan Merrill: Thank you, Dave. The third quarter was highly successful on two fronts. Financially, we generated excellent results driven by the strong sales pace and improvements in backlog conversion. And operationally, we made demonstrable progress toward our multiyear 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.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Alan Ratner from Zelman & Associates. Please go ahead.

Alan Ratner: Hey, guys. Good afternoon. Congrats on all the great progress this year so far.

Allan Merrill: Hi, Alan.

Alan Ratner: First question, on the gross margin, and I guess, the inputs that go into that. So nice upside this quarter. The guidance for 4Q implies kind of flattish, maybe even down a touch and that could be rounding. But it seems like from your comments, Allan, like, you’re pulling back a bit on incentives. You might have a little bit of pricing power. The cost environment seems pretty stable at this point. It could certainly re-inflect higher again if the trades get stretched. But I guess my question is, why at least for the near-term, wouldn’t margins be on an upward trajectory, given the flow-through of, I would imagine, lower incentives coming through?

Allan Merrill: 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 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, Alan. But I think you characterized it, it’s very flattish. But I think as we’ve looked at within backlog and 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.

Alan Ratner: 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 look at your lot count, it’s been 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, how much land — how much lot growth do we need to see over, call it, the next 12 months to support 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?

Allan Merrill: Well, Alan, I would have you look back a little bit. We had a pretty significant growth in the land position over the last three years or four years, which is what’s really fueling the growth in community count that you’re seeing. We were in the 18,000 lot range and now we’re obviously in the 22,000 lots. So it’s taken some time to go throughout on those lots, especially during COVID, 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 2024. As to the second part of your question, look, 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 eye set on getting over 200 by the end of 2026, that’s the guidance and we’re finding land deals, frankly, that pencil and pencil well for us to go out and grow the community count.

David Goldberg: Alan, I’ll just — I will 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 has changed the equation a little bit for builders that were, let’s just say, project or revolver based. And so there’s 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.

Alan Ratner: Understood. I appreciate that. And 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 you probably peaked out at somewhere around 160, 170 communities. That’s really what I was getting at, like how much higher does that lot count need to go to kind of support a ramp 200?

Allan Merrill: You should expect our lot count over the next couple of years will get to 30,000 and beyond. And in fact, I think, we’ll 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 those long ago days, a lot of that lot count was land held for future development.

Alan Ratner: Yeah.

Allan Merrill: And those were some big chunky assets that they count it as lots. They were lots. They eventually became closings, but there were some 300, 400, 500, 600 lot positions mixed in there that weren’t terribly efficient in terms of generating community count.

Alan Ratner: Understood. Good plan. Thank you, Allan. Thanks a lot guys.

Allan Merrill: Thanks, Alan.

Operator: Next, we’ll go to the line of Alex Rygiel from B. Riley Securities. Please go ahead.

Alex Rygiel: Thank you. Good afternoon, gentlemen. A very nice quarter. As it relates to G&A, is there a need to add overhead given the meaningful growth in community count, just so you might lose a little bit of leverage?

Allan Merrill: Well, 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 years or five years really managing the absolute level of G&A from a dollar perspective. Well, we probably lost a little bit of leverage kind of this year as we’ve kind of been thinking about how we’re going to grow and getting ready for the community count growth. So I don’t necessarily 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 the community count growth.

Alex Rygiel: Very helpful. And then could you also talk to the higher backlog conversion year-over-year and where this trend could go several quarters out?

Allan Merrill: Yeah. Look, I don’t want to pontificate or make estimates well that’s going to 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 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 disruption. So that’s driving higher conversion rates, right, because 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.

Alex Rygiel: Super helpful. Thank you very much.

Allan Merrill: Thanks, Alex.

Operator: Next, we’ll go to the line of Jay McCanless from Wedbush. Please go ahead.

Jay McCanless: Hey. Good afternoon. Thanks for taking my question. Dave, I wanted to follow on what you were saying for fiscal 2024, with a $500,000 ASP, I mean it’s not that much different from what you 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?

David Goldberg: It is a ramp down, Jay. We haven’t given specifics about 2024, but it is a bit of a ramp down. And it’s just like we said in the prepared remarks, there’s 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, you’ll see that gradually go down.

Allan Merrill: And Jay, just one point. You’ll see in our Q4 guidance that we talked about, something like $520 million. And we’re a little concerned, that’s a mix issue, it relates — as I told the prior question or answer to the prior question. It relates to homes that were sold six months or 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 we’ll be right around that $500 level.

Jay McCanless: Okay. Got it. And then could you talk about pricing power during the third quarter, whether percentage or areas you were able to take price? Any color you could give us on that?

Allan Merrill: Yeah. I mean I look at incentives and between discounts and closing cost contributions and 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 nervous 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, right? You could 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 think 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. And I do think it’s an area that on the external side is not super well understood. There’s a lot of, I think, undue 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 and we saw it in those different levers. And I know that’s not a super helpful answer, I’m not trying to be evasive. It’s just — it doesn’t really lend itself to it was 3 points. It was 1 point because there are these other components to that equation.

Jay McCanless: Okay. Got it. And then the last question I had, I guess, the — wouldn’t you — it was going to be another incentive question, but I’ll ask something different.

Allan Merrill: I’m sorry. I worry out.

Jay McCanless: That’s all right. No. No. Yeah. So the move higher that we’ve seen in cash lumber over the last eight weeks or nine weeks, when — if this continues, when do you think this will show up in your gross margins like mid-2024 or when should we expect to see maybe a little headwind from higher lumber in addition to higher everything else?

Allan Merrill: Yeah. It is sometime in 2024. It’s hard for me to say. I mean we’re — we’ve been pretty effective this spring having 90 days and 120 days, and a couple of 100-day, 80-day lots that I’m aware of. So we have some resiliency. If 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.

Jay McCanless: Okay. All right. Sounds good. Thanks for taking my question.

Allan Merrill: Thanks, Jay.

David Goldberg: Thanks.

Operator: [Operator Instructions] Next, we’ll go to the line of Julio Romero from Sidoti. Please go ahead.

Julio Romero: Thanks. Hey. Good afternoon. I wanted to ask a little bit more about the directional visibility for fiscal 2024. You talked about ASPs being around $500,000 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?

Allan Merrill: So, Julio, what’s happened in the course, you know this last fall, last summer as rates were moving higher, we and everybody else were looking at what are the features that can be removed from homes to help address affordability? What’s the right way to approach pricing versus incentives? But many of those effects for us didn’t really affect our fiscal 2023, because so much of fiscal 2023 closings was carried into the fiscal year from 2022. So the very largest component of what you’re seeing is the effect of adjustments that we’ve made in the last year that will have really the — that will be in the mix for the full year and that’s probably the lion’s share. The rest of it is at the edge is changing the plan lineup in a community.

If we had a 2,200-foot, a 2,400-foot, a 2,800-foot and a 3,200-foot plan, we may have eliminated the 3,200-foot plan. And that’s easy to do. Taking a 2,400-foot home and downsizing it by 90-square-feet, that’s really hard to do. So the plan lineup 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 a multiyear strategy to make sure we stay affordable. So those are the bigger buckets. Is that helpful?

Julio Romero: It is. I appreciate that. And then my second question would be, I guess, so one thing that isn’t changing is obviously your plan to be Net Zero Energy Ready. What — do you have a target for maybe the percentage of starts next year that you’re looking to have Net Zero Energy Ready?

Allan Merrill: Nice try. I don’t blame you for asking. It’s an upward, like, I was — I really — we spent a lot of time looking at that chart. We’re going to get to 100% by the end of fiscal 2025. We will make a significant jump in 2024. I want 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 coming quarters.

Julio Romero: I will take it. Thanks very much for taking the questions.

Allan Merrill: Yeah.

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

Alex Barron: Yeah. Thanks, guys. I noticed the $5 million debt repurchase. I was curious, is there — are you constrained as to how much you’re able to do? And also, is there any update on thoughts around the share buyback, given you’re still trading below book value?

Allan Merrill: Yeah. So let’s start, Alex, 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’s — 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 price or at a yield that we’re not happy with. So we have a lot of flexibility, certainly, from a covenant perspective and what we can do perspective and from a liquidity perspective, really 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 that’s the highest risk adjusted returns for us to go out and invest in land right now.

Alex Barron: Okay. And sorry if I missed it, but I keep — maybe you mentioned this. Did you guys comment anything on guidance for what kind of closings do you think you’ll be able to do for the year or next quarter?

Allan Merrill: We gave closings of 1,200 closings next quarter, Alex, and then you can kind of sum to the year from there.

Alex Barron: Got it. All right, guys. Thanks and good luck and great job. Thank you.

Allan Merrill: Thank you.

David Goldberg: Thanks, Alex.

Operator: And we have no further questions at this time.

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

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