Beazer Homes USA Q3 2024 Earnings Call Transcript

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Provided by Quartr
August 1, 2024

There are 7 speakers on the call.

Operator

Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the Q3 Ended June 30, 2024.

Operator

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.

Speaker 1

Thank you. Good afternoon, and welcome to the Beazer Homes conference call discussing our results for the Q3 of fiscal 2024. 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.

Speaker 1

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 today is Alan Merrill, our Chairman and Chief Executive Officer. On our call today, Alan will discuss highlights from our Q3, the current environment for new home sales, our longer term outlook on the market and conclude with an overview of our progress towards our multiyear goals. I'll then provide details on our Q3 results, expectations

Speaker 2

for our

Speaker 1

Q4 and full year results, the basis for our confidence in profitability growth next year, our view of our land activity followed by a quick discussion of our balance sheet and book value growth. We will conclude with a wrap up by Alan. After our prepared remarks, we will take questions in the time remaining. I will now turn the call over to Alan.

Speaker 2

Thank you, Dave, and thank you for joining us on our call this afternoon. Despite the continuing challenges presented by an affordability constrained market, Our Q3 reflected profitability in line with our expectations and significant progress toward our multiyear goals. While our new home orders were softer than we had anticipated, reflecting both macro and market specific factors that I'll address in a moment, our long term confidence in the broader new home market and Beazer's positioning in particular remains very strong. In terms of 3rd quarter profitability, closings and revenue matched our expectations and adjusted gross margin came in slightly higher than anticipated. This led to adjusted EBITDA of $53,500,000 and diluted earnings per share of $0.88 In turn, book value grew to more than $38 per share.

Speaker 2

I'd also like to call out 2 operational highlights. 1st, we substantially grew our total lot pipeline. We now have more than 28,000 lots, up 25% from last year, providing excellent visibility into our growing community count. And second, we reached a major energy efficiency milestone this quarter as we have now closed more homes to the DOE's single family zero energy ready requirements than any other homebuilder in the country. Although we generated strong financial results in the quarter, the sales environment proved quite challenging.

Speaker 2

Our pace of 2.4 sales per community per month was below our expectations. From a macro perspective, we had many prospective buyers struggle to qualify for a mortgage and others who chose to defer their purchase based on expectations of lower mortgage rates later this year. And weather events in Texas were quite disruptive. These dynamics impacted all builders to some extent. But for us, there were a couple of specific markets where additional factors played an even bigger role.

Speaker 2

In particular, weak sales in Houston and San Antonio weighed on our results. Excluding these markets, which represent about a quarter of our community count, our sales pace would have been around 2.8 sales per community per month, closer to both normal seasonal patterns and our expectations. Houston and San Antonio are among the most affordable housing markets we serve, which is why we remain confident in their near and long term prospects. But during the quarter, both markets saw particularly strong demand at price points well below our offerings. While we might have achieved higher sales with more aggressive incentives, this quarter we chose not to chase volume in either market.

Speaker 2

That's because we believe it is important to demonstrate the value of our highly differentiated and newly introduced Ready Series Homes. Given a short period to adapt, we believe these homes and our team can more than hold their own competitively and we expect Houston and San Antonio to be among our most productive markets. Looking out to 2025 and beyond, we continue to be quite optimistic on new home sales. A decade of underbuilding has left the country undersupplied for housing and continuing employment and wage growth should underpin demand. While stretched affordability and growth in for sale inventories likely means that sales patterns will remain volatile in individual markets, we have not seen anything that changes our longer term bullish thesis.

Speaker 2

And eventually, we expect lower rates to improve affordability for homebuyers. With this positive longer term outlook, we remain fully committed to our 3 multiyear goals, which include expanding our community count, deleveraging our balance sheet and delivering a demonstrably superior home. We ended the quarter with 146 active communities, up about 17% year over year and up slightly on a sequential basis. By the end of fiscal 2024, we expect our active community count to exceed 155 representing annual growth of about 15%. With similar growth expected in FY 2025, we have a clear path toward achieving our goal of having more than 200 communities by the end of fiscal year 2026.

Speaker 2

As it relates to deleveraging our balance sheet, we expect to end FY 2024 with a net debt to net cap ratio in the mid-30s even as we invest in the growth of our business. And importantly, we're on track to achieve our target of having net debt to net cap below 30% by the end of FY 2026. Finally, as it relates to our goal that 100 percent of our starts will be 0 energy ready by the end of calendar 2025, we continue to make significant progress. During the Q3, just over 90% of our starts were ready series homes. This rapid progress has simplified our construction process, so we can now focus on reducing our 0 energy ready costs.

Speaker 2

On the sales side, I remain enthusiastic about our potential to drive value from a product position that is truly unique within our industry. We remain confident in the long term demand for new homes and believe the achievement of our multiyear goals will position us to create significant shareholder value. With that, I'll turn the call over to Dave.

Speaker 1

Thanks, Alan. For the Q3 of fiscal year 2024, we generated 10 70 new orders, reflecting a pace of 2.4 sales per community per month as mentioned previously. We closed 1167 homes generating homebuilding revenue of $589,600,000 with an average sales price of about $505,000 Adjusted gross margin excluding amortized interest, impairments and abandonments was 20.3%. SG and A was 11.9% of total revenue as we prepare for near term growth in community count. Adjusted EBITDA was $53,500,000 Interest amortized as a percentage of homebuilding revenue was 2.9%.

Speaker 1

Our GAAP tax expense was 2 point for an effective tax rate of 8.3%. Net income was $27,200,000 or $0.88 per share. Finally, during the quarter, we repurchased more than 450,000 shares representing about 1.5% of the company at an average price just above $28 Our guidance for the Q4 contemplates no improvement in the macro or company specific environment. With this backdrop, we expect a sales pace similar to our 3rd quarter and ending community count above 155. This would lead to about 1100 orders for the quarter up versus the prior year.

Speaker 1

We expect to close about 1500 homes, up more than 20% compared to the prior year period. ASP should be about $520,000 We expect adjusted gross margin roughly in line with the 3rd quarter at approximately 20%, reflecting no change in sales incentives. SG and A as a percentage of total revenue should be about 10%, down both sequentially and year over year. We expect this to result in adjusted EBITDA above $80,000,000 Interest amortized as a percentage of homebuilding revenue should be about 3% and our effective tax rate should be about 12% as we continue to benefit from energy efficiency tax credits. This should all lead to diluted earnings per share of about 1.35 dollars Our Q4 guidance implies that we now expect full year adjusted EBITDA of about $230,000,000 We note that this is down from our guidance last quarter reflecting the impact of weaker sales.

Speaker 1

Finding the right balance between volume and margin is always tricky. But in light of our differentiated product, substantial growth in community count and our positive longer term view of the market, we believe not chasing volume is appropriate for now. And context is important. Even at this sales pace, we expect to generate $4.20 of diluted earnings per share, representing a double digit return on equity and healthy book value accretion. While conditions in fiscal 2024 have been even choppier than anticipated, we remain optimistic about our ability to grow profitability in fiscal 2025.

Speaker 1

Let's start with the top line revenue. We expect to generate full year revenue growth of about 20% next fiscal year. Now many of you will note that our 4th quarter guidance implies backlog entering fiscal year 2025 will be down year over year. And it's true that in most years backlog entering the fiscal year is a pretty good signal for full year closings. This year, however, there are some other dynamics to consider.

Speaker 1

1st, as Alan laid out in his update to our multi year goals, we expect to end 2024 with at least 15% community count growth followed by another 15% growth in 2025. To support this growth, our units under production are increasing faster than sales as we start homes in our newer communities. So regardless of our year end backlog, we expect homes under production going into fiscal year 2025 will be up at least 10% over the 2,400 units under production we had to begin fiscal 2024. 2nd, we've seen continuing cycle time improvement, which translates into additional weeks in the spring where we'll be able to start homes that can close within the fiscal year. 3rd, we expect to generate a modest improvement in sales base.

Speaker 1

Our 4th quarter guidance would result in the lowest full year sales base in fiscal year 2024 that we've experienced in the last 10 years. We don't think this is the new normal. Any improvement will have a meaningful impact given our expanding community count. Finally, we expect our average sales price to be about $520,000 consistent with our guidance for the Q4 of fiscal 2024 and up year over year. Taken together, these factors should allow us to generate revenue growth of about 20%.

Speaker 1

And even without improvement in our operating margin, this growth should translate into robust profitability expansion. Now let's talk about margins. Our operating margin has been compressing over the last couple of years for 2 distinct reasons. First, we've been investing in our product and supply chain to develop and establish a differentiated home. It hasn't been easy and it hasn't been inexpensive, but with 93% of our starts 0 energy ready, those costs are now built in.

Speaker 1

Now we have the near term opportunity to reduce them. 2nd, we've increased overheads to support our rapidly growing community count. With these communities coming online, we expect to grow revenue faster than overheads next year. Taken together, in fiscal year 2025, we're optimistic we can generate operating leverage from our revenue growth. Ultimately, any improvement in our operating margin would only enhance our profitability.

Speaker 1

We realize that these comments don't amount to precise guidance, but we hope they help you understand our optimism for profitability growth next year. Pivoting to our land our investment in land, during the quarter we spent approximately $200,000,000 as we grew our land position to greater than 28,000 lots, our highest total lot position in a decade. Importantly, the majority of our incremental lot growth came through options. As such, our option percentage was nearly 55%, up sequentially and we expect to drive this percentage higher over time. For the full year, we are expecting land spend of at least 750,000,000 dollars Now turning to the balance sheet.

Speaker 1

At June 30, 2024, we had total liquidity of $328,000,000 We expect to end the year with a net debt to net cap in the mid-30s, relatively flat versus the prior year with nothing drawn on the revolver. This will support our growth aspirations and give us flexibility to adjust to future market conditions. And as a reminder, we have no maturities until fiscal 2027. On the equity side, based on the earnings guidance we gave, we expect book value per share to be around $40 by the end of the fiscal year with further growth expected in fiscal year 2025. We made enormous progress in growing our shareholders' equity having more than doubled our book value since fiscal year 2020, but note that we still traded a discount to book.

Speaker 1

We remain confident that our focus on delivering both earnings growth and deleveraging will close this gap. With that, I'll turn the call back over to Alan.

Speaker 2

Thank you, Dave, and I apologize for my cold. Despite the challenges posed by affordability and consumer sentiment, we delivered solid Q3 financial results. Just as importantly, we continue to make progress toward our multiyear goals. As we prepare for fiscal 2025, I'm encouraged by our position. We have the strategy, the land, the financial resources and most importantly the team to create significant value in the year ahead.

Speaker 2

With that, I'll turn the call over to the operator to take us into Q and A.

Operator

Thank you. We will now begin the question and answer session. And our first question is from Alan Ratner with Zelman and Associates. You may go ahead.

Speaker 3

Hey guys, good afternoon. Thanks for the comments and details so far. Appreciate it. I'd love to first drill in a little bit to the pace and price kind of decision that's, I'm sure ongoing here. So last quarter, you did kind of signal some temporary pressure on margins because you made a decision to kind of burn through some of the legacy product and some spec inventory and we saw that in 3Q in the margin.

Speaker 3

And I think at the time you expected it to be temporary, the 4th quarter guidance to imply pretty steady margins at these levels. So I'm curious if you did have to increase incentives even to generate these types of sales in the quarter and because your comments seem to imply that you're not going too hard on the incentives right now. But I guess more broadly, at what point does it make sense to get more aggressive? Is there a certain absorption target that you're thinking about? Or is it more just a timing thing that it doesn't make sense to do that into a seasonally softer period and you would wait more for the spring to do that?

Speaker 2

Hey, Alan. And I apologize again for

Speaker 1

hacking a little bit.

Speaker 2

I'm fighting through a summer cold here. A couple of responses. I mean, there's a lot to that question. As I think about what's really different from 90 days ago, we were intentional about moving through non Ready Series specs. What decision we made in the June quarter was in some of the communities, specifically in Houston, where we have introduced 0 Energy Ready and we saw a fairly significant shift in demand to that 300,000 ish price band.

Speaker 2

It just didn't feel like the time to say, okay, we want to get back to our 2.5%, 3% or 3% ish absorption rates and try and play in that sandbox. And it really wasn't in Houston for us a mix issue between 0 Energy Ready and prior series. It was these are new communities, new product and we need to give it a little bit of a chance. And we can acknowledge that, hey, on the one hand, a lot of activity below $300,000 and on the other, frankly, take us out of it. You can look at all of the public and privates that compete in the higher price points.

Speaker 2

Their paces in Houston in the quarter were in the ones. And that's kind of where we were. And we decided not to try and bend that curve. I don't think that's forever. I'm probably not going to give it more than 6 months before we start pulling levers in different ways.

Speaker 2

But that just felt like in the middle of this and especially because we were hearing from a lot of folks, gosh, if rates were just a little lower, we'd be able to pull the trigger. But gosh, just in the last 3 weeks, we've seen almost 40 basis points of movement in the 10 year. And I feel like we might have a little bit of tailwind coming there. So like I might be wrong and we may have to adjust this in 30 or 60 days. But in particular, in these newly launched community with 0 energy ready, we've been kind of cautious.

Speaker 2

And in the meantime, we are trying to move through all of that non zero energy ready product both the to be built and the specs. And I'd say we're very competitive But we didn't make any big shift to our incentive approach to achieve these results. And as I said, if you take Houston and San Antonio out, I mean, 2.8 was a little light to where we wanted to be. I think we did find the market slightly tougher, but we would have been within reasonable distance of our expectations, but for really a set of conscious decisions in Houston and San Antonio. And I don't want to whine about weather, but I will say and I haven't read all of the transcripts from all of our peers.

Speaker 2

Houston kind of went through it. We had our division office closed for a week. We had about 60 employees without power for time periods ranging from 2 to 5 weeks. I think it was just a pretty tough quarter in Houston.

Speaker 3

Got it. No, I appreciate that and certainly can understand the challenges there with the weather. I guess hearing your comments about affordability and the $300,000 and the demand there, It's hard to say whether that's a function of that buyer being more constrained. We are hearing more and more anecdotes about softening on the edges among consumers and in the job market as we saw in the data today. You guys are in a fairly unique position because you're opening up a lot of communities over the next 18 months.

Speaker 3

And I'm sure to a large extent, at least the near term openings are kind of fully baked as far as product offerings and things like that. But given kind of what you're seeing on the consumer front, is there any thought or ability to maybe flex some of the product or floor plans or product types to cater more towards that kind of high $300,000 low $400,000 price point if that's kind of where the depth of demand seems to be today?

Speaker 2

Yes. And again, every market is a little bit different, but let's stay in Houston for a minute. I think you pull up our website and see we have a bunch of communities that have base prices in the high threes. So we're not that far removed from where there was real enthusiasm in this quarter. And in fact, our product mix and this is now not a Houston Comics, I don't have it at my fingertips, but across our portfolio, our deliveries in the quarter were down what they've 80 square feet, about 3% year over year.

Speaker 2

So we have had a little bit of a twist if you will on the portfolio, Alan, where we focused on slightly smaller floor plans is one of the many strategies to deal with this affordability challenge. But we are selling a different home. And that's the thing that whether it's 2,100 square feet or 2,200 square feet or some other number on either side of that, we've chosen to take on standing out by offering a home that others can or won't build. And I think we need to just keep pressing that into the market and it's with consumers, it's with realtors. I'm really optimistic when people see it, when they understand it.

Speaker 2

It's kind of like how can I live without this? But if they're doing a screen on a price per square foot basis, I don't think there's anything we can do that's going to flip our product that's going to drop us down into that tier where what I would call the price oriented builders are really competing. And I'm kind of glad about that because I don't think that's even if we wanted to do that, we'd be terribly well equipped to do so.

Speaker 1

Understood. Appreciate the thoughts.

Speaker 4

Thanks a lot.

Speaker 1

Yes, Alan.

Operator

Thank you. The next question is from Julio Romero with Sidoti and Company. You may go ahead.

Speaker 4

Thanks. Hey, good afternoon, Alan and David. You guys talked a little bit about Texas and the weakness you saw there. Can you maybe give us a quick state of the union on what you're seeing in your other geographic markets at the moment?

Speaker 2

Yes. I will tell you that outside of those two markets, as I said, kind of 2.8, there was strength by coastally. Felt pretty good about our Mid Atlantic business, Virginia in particular showed some strength. Southern Cal and Las Vegas were pretty strong. Nashville in the middle of the country or not on either coast was pretty strong.

Speaker 2

So I would say that there wasn't a theme that I can really say strength versus weakness other than what we really saw as a fairly significant shift in the total number of transactions 100,000 price point in those 2 Texas markets, which differed frankly from what we had seen in prior quarters.

Speaker 4

Got it. That's helpful. And then I kind of the 4th quarter ASP guidance is a nice step up from prior quarters. Is that just mix? Is that

Speaker 2

Yes. You're starting to see some 0 energy homes start to come through, and those were sold as to be built.

Speaker 4

Yes, yes. And then, did you guys mention your land spend year to date and what you're expecting for the year?

Speaker 1

We talked about for the full year, Julio, we'd

Speaker 2

be at about $750,000,000

Speaker 1

You can just back up what we've done full year to what we've done year to date to get the 4th quarter estimates.

Speaker 4

Okay, perfect. That's it for now. Thanks very much guys.

Speaker 1

Thank you.

Operator

Thank you. Our next question is from Alex Barron with Housing Research Center. You may go ahead.

Speaker 5

Yes. Thanks, guys. So I heard you talk about some weather issues in Southeast? The orders seem to be a bit slow there.

Speaker 2

Yes. It's funny. We found ourselves in one of our bigger markets Atlanta between community count. We had a dip in community count. We closed out earlier in the year.

Speaker 2

We weren't able to pull forward the activations of the new communities. We had kind of a troughing in community count that was among the bigger factors.

Speaker 5

Got it. Yes, because we survey your community count and it looks like it jumped up. So maybe it's just recent openings, I guess.

Speaker 2

Yes. There's always a timing thing like the within a quarter, it can be a little bit misleading. If you are open on I'll just pick random dates. If you're open April 1, but you're sold out by April 15, well, you had it at the beginning. If your next community opens the last week of June, you have but you lost 70 days in between.

Speaker 2

Yes, there is not a demand pattern or a positioning issue. I'm pretty comfortable with our sales paces. And this community count is broad based that is coming, what we've already had and what's in front of us. It's really distributed across our footprint. So I mean there'll be quarterly anomalies in the data, but there really isn't a Southeast message, I don't believe.

Speaker 5

Got it. And assuming the Fed does start to lower interest rates soon and that leads to lower mortgage rates, do you guys anticipate just kind of sticking with your same incentives or decreasing them? Or what's sort of the thought process as rates start to come down?

Speaker 2

The thing about incentives is the market really tells us where they need to be and then what's the market? Well, the market's buyers, but it's also buyers who are influenced by what other people do, right? We don't exist in a vacuum. So I am hopeful that lower rates could lead to an environment where we'd see lower incentives. And I think that seems pretty likely.

Speaker 2

I can't predict what everybody else is going to do. And kind of back to my questioning with Alan at the beginning, we're not going to sit back and not compete for sales, right? Be too proud to incent. So we will always compete. It's just sometimes you've got to pick your windows.

Speaker 2

We made that choice. I think if rates start to come down, we and other builders will definitely benefit.

Speaker 5

Got it. And if I could ask one more. I was happy to see you're starting to buy back shares. Is that more of an opportunistic thing? Or do you think it's more of an ongoing shift in strategy?

Speaker 1

It's Dave. What I would tell you is we have a very consistent model we use for capital allocation and we consider when we look at excess capital in the business returns and risk amongst share repurchases, debt repurchases and incremental land spend, we did, as you mentioned, buy back 1.5% of the company about that in the quarter. And we'll always be good capital allocators and focus on our models. And again, the model hasn't changed. So not much more to say than that, but it's a consistent model for excess capital.

Speaker 5

All right. Best of luck guys. Thanks.

Speaker 1

Thank you. Thanks, Ed.

Operator

Thank you. Our next question is from Jay McCanless with Wedbush. You may go ahead.

Speaker 6

Hey, guys. Thanks for taking my questions. So just trying to catch up and figure out the what you gave on absorptions day because if you're going from 146 communities at the end of 3Q to over 155, I mean are all those back half weighted or is there some timing issues as to why just through the numbers getting bigger that you wouldn't see a little bit higher absorption, especially with what Alan was talking about Atlanta and some timing issues there?

Speaker 1

Well, I would tell you Jay, we've assumed the absorption pace in the environment really doesn't change much quarter to quarter. I'm happy to take it offline on the

Speaker 3

math with you, but we've kind

Speaker 1

of assumed things look pretty similar to the way they look throughout the Q3 and Q4.

Speaker 6

Okay.

Speaker 1

I'm not sure a math you want to kind of go through, but we can do that offline if you'd like.

Speaker 6

No, I mean, if you're going to hit that $155,000,000 the last month of the quarter, something like that, that would make sense in terms of not getting any better absorption.

Speaker 1

That's right. I mean, the communities come online as you would imagine throughout the quarter and there is some coming on in the latter part of the quarter.

Speaker 2

Yes. We will definitely have some September activations. And so the average community count will I don't know if it will be the exact arithmetic average at the beginning of the period and the end of the period. If anything, it might be slightly weighted to the back half. But you take a number in the middle and use the same absorption rate.

Speaker 2

And that's kind of where our sales guide came from. And Jay, I think we start to see some rate cutting. I'd like us to do and I'm hopeful we're planning to do better. But honestly, from a guide perspective, we wanted to be pretty direct about it. If nothing changed in the environment, here's what the math is and that's where the 1100 came from.

Speaker 6

Okay. So is it too much of a stretch to assume that sales activity from June to July didn't get much better? Any color you could give us on what happened in July?

Speaker 2

Yes. 1st part of July looked a lot like June. The last week's been better. But 1 week doesn't create a foundation for a quarterly or an annual guidance. But I would definitely tell you the last week in particular has felt quite a bit better.

Speaker 2

But try not to get too enthused about 1 week or too discouraged by 1 week. But I would say the back half of July has trended better than the front half.

Speaker 6

Okay. And then the only other question I had in terms of specs, it looks like your finished specs were up a little sequentially, but up a lot year on year. I'm assuming there's you guys are going to try and blow through some of that and that's why there's some conservatism around gross margin for the Q4?

Speaker 1

I think your assessment is right, Jay. Your assessment is correct, Jay. I wouldn't say blow through, but certainly there's some end of the year, especially on nonzeroenergy ready specs, which we talked about last quarter, we don't want to end the year with too many QMI's quick moving home. So Great.

Speaker 6

It's all ahead. Thanks.

Speaker 1

Thank you. Thanks, Jay.

Operator

Thank you. And that was our last question. I will turn it back to the speakers for any closing remarks.

Speaker 1

I want to thank everybody for tuning into our Q3 call. We look forward to talking to you next quarter at our fiscal year end. Thank you very much and that concludes today's call.

Operator

Thank you. That does conclude today's conference. Thank you all for participating. You may disconnect at this time.

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