Beazer Homes USA, Inc. (NYSE:BZH) Q4 2023 Earnings Call Transcript

Beazer Homes USA, Inc. (NYSE:BZH) Q4 2023 Earnings Call Transcript November 16, 2023

Beazer Homes USA, Inc. beats earnings expectations. Reported EPS is $1.8, expectations were $1.39.

Operator: Good afternoon and welcome to the Beazer Homes Earnings Conference Call for the Fourth Quarter and Fiscal Year ended September 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 for our fourth quarter and full-year 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 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 fiscal 2023 results, an update on our multiyear goals, how we are navigating the affordability challenges for home buyers, and our growth expectations for fiscal 2024. I’ll then provide details on our fiscal 2023 full-year results, updates on our cycle time and cost reduction initiatives, additional details on our expectations for the first quarter and full-year, 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 during the remaining time. I will now turn the call over to Allan.

Allan Merrill: Thank you, Dave, and thank you for joining us on our call today. I’m extremely proud of our team’s efforts and results for fiscal ‘23. We overcame an exceptionally difficult sales environment in the first quarter of last year, which allowed us to make significant progress against our balanced growth and multiyear goals. With a strong finish in the fourth quarter, we delivered both financial and operational results that met or exceeded our expectations. From a financial perspective, we generated more than $150 million of net income, resulting in healthy returns on both assets and equity. We invested almost $600 million in land and land development, and at the same time, we strengthened our balance sheet with leverage now below 40% and stockholders’ equity above $1 billion.

From an operational perspective, we positioned ourselves for growth by increasing our community count and controlled lot position. We reclaimed more than two months of construction cycle time, and we expanded our leadership in energy efficiency. We were also recognized as a top workplace, reflecting our efforts to sustain an exceptional level of employee engagement. Against a very difficult interest rate and housing backdrop, FY ‘23 challenged us in many ways, and we came through in very good shape. In the middle of fiscal ‘23, we laid out three multi-year goals intended to define specific targets and timelines as part of our long-standing balanced growth strategy. These targets represent our highest priorities and are centered around community count growth, balance sheet strength, and the energy efficiency of our homes.

As it relates to our growth, we ended the year with 134 active communities, up 9% versus the prior year, as we successfully activated 60 new communities. In FY ‘24, we expect year-over-year growth in our active community count each quarter. Further out, we have excellent visibility to more than 200 active communities by the end of fiscal 2026. As it relates to our balance sheet, we finished the year with our net debt to net capitalization ratio at 36%, representing a 9-point decline versus the prior year. Our profitability expectations for fiscal ‘24 should allow us to reduce that ratio into the low-30s by the end of this year, putting our multiyear goal of net debt to net cap below 30%, well within reach by the end of fiscal ‘26. Finally, as it relates to the homes we build, we remain the only public builder with a commitment to building 100% of our homes to the Department of Energy’s zero energy ready standard.

In 2023, we greatly expanded our production of these homes with a share of zero energy ready starts jumping from 2% in Q1 to 28% in the fourth quarter. By the end of fiscal ‘24 we expect well over half our starts will meet the DOE standard positioning us to have every home we start zero energy ready by the end of 2025. We remain confident in the longer-term supply and demand dynamics that underpin our strategy and our industry, but affordability has been is and is likely to remain the central challenge for new home sales. Part of the challenge is consumer psychology, with buyers daunted by monthly payments larger than they are accustomed to. But the other part is math. Many prospects simply don’t have the income to afford the payments for the home or the location they desire.

To help combat this, we have structured our incentives to allow customers to direct dollars between home price discounts and closing costs, which often include buy downs. This allows different buyers to make different choices. In a rising rate environment, builder financing incentives typically increase, at least initially, and our experience confirms this. As the 30-year mortgage rate moved from about 7% at the end of June to just over 8% in October. Our contribution towards closing costs increased about 1 point on new sales. As part of our mortgage choice program, our lenders also contribute to closing costs and rate buy-downs, which leverages our contributions. Of course, our mortgage strategy is about more than just buy-downs. It’s about choice.

We have multiple choice lenders available to provide loan estimates to every buyer, which incentivizes our lenders to compete on loan programs, closing costs, buy downs, and service levels in addition to rates. We have two other differentiators for home buyers, both of which directly target affordability concerns. Surprising performance encompasses our construction quality and energy efficiency efforts with measurable monthly savings on utility bills for our buyers. Choice plans enables buyers of 2B built homes to select floor plan elements to match their lifestyle at no additional cost. We are laser focused on affordability and believe we have created a differentiated strategy to address it. While the year ahead undoubtedly holds both opportunities and challenges, we continue to expect growth on many fronts.

Our larger community count provides the basis for our expectations for more closings, leading to higher revenue and profitability in 2024 as we aggressively pursue our multi-year goals. Overall, I’m very pleased with what we were able to accomplish in fiscal ‘23 and remain excited about where we’re going in fiscal 24 and beyond. With that, I’ll turn the call back to Dave.

David Goldberg: Thanks, Allan. I’m going to focus my comments this afternoon on our annual results. You can find our detailed fourth quarter performance in our press release. For the full-year, we generated an average pace of 2.6 sales per community per month with a cancellation rate of 20%. Homebuilding revenue was $2.2 billion, down about 5% as the benefit from higher ASPs largely offset a decline in closings. Gross margin, excluding amortized interest, impairments, and abandonments, was 23.1%. This was the second highest annual gross margin over the last 10-years. SG&A as a percentage of total revenue was 11.5% as we continued to invest in our growth. This all led to adjusted EBITDA of $272 million. Interest amortized as a percentage of home building revenue was 3.1%, flat compared to the prior year.

Our GAAP effective tax rate was 13.1% as we benefited from energy efficiency tax credits. This led to net income of $159 million or $5.16 of earnings per share. Land and land development spending accelerated in the fourth quarter allowing us to grow our controlled lot position both sequentially and year-over-year, while also increasing our percentage of lots controlled under option. In the beginning of fiscal 2023, we set forth cycle time and cost reduction objectives as we targeted regaining ground loss during COVID. I’m happy to report we made significant gains on both fronts during the year. In the fourth quarter, cycle times on closings were down more than two months versus the prior year. In fiscal year ‘24, we expect further improvements as we drive cycle times closer to pre-pandemic levels.

Turning to cost reductions, we were pleased with our ability to recognize significant savings in the back half of the year, primarily through lower lumber costs. This contributed to gross margins increasing sequentially from Q2 through Q4 on an average sales price that was declining, primarily due to product and feature changes implemented to address affordability. Looking forward to the fiscal first quarter, quarter-to-date sales are up year-over-year, but were more sluggish when mortgage rates reached 8%. Although we are encouraged by the recent move down in rates, our guidance today does not assume this will translate into a meaningful improvement in sales pace this quarter. We are currently expecting at least 650 sales, which will be up more than 30% of last year’s very low base.

Our ending active community count should be flat sequentially and up 10% year-over-year. On the income statement, transformer issues are likely to adversely impact our conversion rate as we anticipate having about 50 finished homes awaiting power at quarter end. We still expect a backlog conversion ratio above 45% as we benefit from improved cycle times, resulting in year-over-year revenue growth. Our ASP should be around $510,000. We expect adjusted home building gross margin to be 23% or higher. Our absolute dollars spent on SG&A should be up approximately $2 million versus the same quarter last year. We expect this to result in adjusted EBITDA around $40 million. Interest amortized as a percentage of homebuilding revenue should be in the low-3s, and our effective tax rate to be approximately 11% and as we continue to benefit from energy efficiency tax credits.

This should lead to diluted earnings per share around $0.70. Turning to our full-year. Our expectations assume the economy, housing conditions and mortgage rates remain relatively stable. In this environment, we expect to spend at least $700 million on land acquisition and development as we position for future growth. We are targeting double-digit growth in community count by year-end. Revenue growth will be a result of higher community count and year-over-year gains in backlog conversions. This should more than offset a decline in our ASP, which we anticipate to average $500,000 for the full-year. We expect to generate adjusted homebuilding gross margins in the range of 22% to 23% with a large share of new communities in our mix. Our effective tax rate to be near the midpoint of the 15% to 20% range we provided during last quarter’s call.

Taken together, we expect to generate double-digit returns and continue to grow book value significantly. Achieving our target for double-digit returns will lead our book value per share over $40 by the end of the fiscal year. The chart on Slide 15 shows the progress we’ve made thus far in growing our stockholders’ equity, having more than doubled our book value since the end of fiscal year ’19. At the same time, the quality of our book has improved, as our DTA as a percentage of book has gone from about 40% 3 years ago to nearly 10% at the end of this year and will continue to decline. On to the balance sheet. Total liquidity at the end of the year was over $610 million comprised of $346 million of unrestricted cash and $265 million available on our fully undrawn revolver.

Reducing our net debt to net cap translated into net debt to LTM adjusted EBITDA of 2.3 times. Our 2025 senior notes represent our nearest maturity, and we anticipate using a combination of repayment and refinancing to address it. Subsequent to the end of the quarter, there were three noteworthy developments. First, we expanded our revolver equipments to $300 million. Second, Moody’s Investor Services increased our rating from B2 to B1. And finally, we repurchased $4 million of our 2025 senior notes, bringing the total outstanding principal below $200 million. With that, I’ll turn the call back over to Allan.

Allan Merrill: Thank you, Dave. 2023 was a highly successful year for the company. We overcame the challenges associated with much higher mortgage rates and delivered excellent financial and operational results. Equally important, we entered FY ’24 with a differentiated strategy and attractive geographic footprint and expectations for growth across most financial metrics. . Looking beyond this year, we have provided investors with 3 specific multiyear goals to track our progress, growing our community count, strengthening our balance sheet and extending our leadership in building energy-efficient homes. I’m confident that we have the team and the resources to create growing and durable value for our stakeholders in the years ahead. And with that I will turn the call over to the operator to take us into Q&A.

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Q&A Session

Operator: Thank you. We would now like to begin the question-and-answer portion of today’s conference. [Operator Instructions] Our first question comes from Julio Romero from Sidoti & Company. Please go ahead.

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

David Goldberg: Hey, Julio.

Allan Merrill: Hey, Julio.

Julio Romero: Hey, so it was impressive to see that 42% year-over-year jump in land investment in the fourth quarter. Can you talked about the full-year expectation, I believe, about $700 million. Just how do you expect that to trend from a cadence perspective throughout the year? And how much does the reduced construction cycle times you’ve achieved to free up some free cash flow for that increased land spend?

David Goldberg: Julio, I think we’ll probably avoid talking about the cadence on land spend at this point in the year. It’s still a little bit early. Obviously, we’ve got our pipeline in front of us, and we talked about kind of what we expect to spend for the full-year. I would tell you the increase in the cash flow, frankly, does help, but we have plenty of liquidity on the balance sheet. You can see we ended the year with more than $600 million of liquidity. So I think the other thing, Julio, we’re looking at now, and you can kind of look at what we did in 2023, the spend in ‘23 was relatively backloaded to the fourth quarter. And we talked about that on previous calls. We spent time early in Q1 renegotiating land deals.

And the impact of that was better terms and better deals in many cases, but it also pushed land spend largely into Q4, and you can see the acceleration that we had that shouldn’t frankly be the case in 2024. We should have land spend more evenly distributed quarter-to-quarter. But I don’t want to get too far into the details of that until we kind of go through the year.

Julio Romero: That’s fair. And I appreciate the color you gave there for sure. And then just maybe if you could speak to — you obviously have your expectation for community count ramp-up. Maybe can you speak to the confidence in that community count ramp you’ve outlined in that path for growth? And while certainly, mortgage rates will have an effect. Maybe just talk about how Beazer might be on a relative basis a little bit less affected than others?

Allan Merrill: Well, sure. I’ll take a stab at it, and then Dave will fix it up, Julio. I think that during ‘24, we feel very confident about the ramp. Those are deals that are locked and loaded under development, and they’re going to get to the market this year kind of regardless of where rates are. A lot of ’25 is in a similar category. Clearly, we’ve got some discretion. If we decided that things were really tough we could slow up a little bit, but we’ve got the owned and controlled lot position to have multiple years of community count growth. So what we committed to last year, we’re still on that track. In terms of being in a little different position and look, sales this week, this month, this quarter, six months has an influence on land activity, but you know there’s a two-year or so latency between buying a deal and activating a deal.

And so those things are always going to be a little bit asynchronous. From a sales perspective, our view is pretty clearly that having mortgage choice and surprising performance and choice plans gives us ways of meeting the customer where they are from an affordability standpoint and trying to find ways that they can get into the home of their dreams as opposed to having to compromise. But that’s a little different context than the cadence of community count growth because the community count growth for ‘24 decisions we made in ’21, ’22 and ’23.

Julio Romero: Very good. I’ll pass it on. Thanks very much.

David Goldberg: Thanks, Julio.

Operator: Next, we’ll go to the line of Alan Ratner from Zelman & Associates. Please go ahead.

Alan Ratner: Hey, guys. Good afternoon. Congrats all the progress this year would love to drill in first on just kind of some of the more recent commentary you had, which I appreciate the color there. So if I look at the guidance, and I fully appreciate you’re extrapolating out maybe a tougher few weeks here. But 650 orders would be down about 35% sequentially. That’s much more severe than you guys typically see in your fiscal first quarter. And you mentioned the 100 basis point increase, I believe, in incentives for October. We’ve heard things from other builders kind of similar trajectory there? So how are you thinking about that interplay between kind of the current incentive environment, maybe what some of your competitors are doing versus the order side because that seems like it’s a pretty significant drop-off.

And my interpretation is maybe you guys are taking a bit of a backseat towards the calendar year-end companies that might be a bit more aggressive in the near-term.

Allan Merrill: Well, there’s a lot in that question, Alan. And you’re right on just about every front. For sure, this is a strange time of year. Dealing with November and December year-end companies that have big spec positions, and they’re trying to make not just sales, but closings in a relatively compressed period of time. And we typically lay a little bit lower during what is our fiscal first quarter and try not to get caught up in it. So that is the case, but that’s the case every year, it is the case this year. I think it’s also true that there’s just been so much volatility in mortgage rates in the last 60 days, I mean that run up to eight and then the easing, there’s no question that run up to eight affected traffic and it affected sales.