Beazer Homes USA Inc (BZH) 2009 Q3 法說會逐字稿

Good afternoon, and welcome to the Beazer Homes third quarter fiscal 2009 earnings conference call. Today's call is being recorded and will be hosted by Ian McCarthy, the Company's Chief Executive Officer. Joining him on the call today will be Allan Merrill, the Company's Chief Financial Officer, and Bob Salomon, the Company's Chief Accounting Officer. Before he begins, Leslie Kratcoski, the Vice-President of Investor Relations will give instructions on accessing the slide presentation over the internet, and will make comments on forward-looking information. Ms. Krause?

Thank you. Good afternoon, and welcome to the Beazer Homes conference call on our results for the quarter ended June 30, 2009. During this call we will webcast a synchronized slide presentation. To access this site presentation, go to the Investor home page of Beazer.com and click on the webcast link in the center of the screen. 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 and uncertainties and other factors that may cause actual results to differ materially. Such risks and uncertainties and other factors as described in our SEC filings, including our annual report on Form 10-K for the year ended September 30th, 2008.

Any forward-looking statements speak only of the date on which such statement is made, and except as are required by law, 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 information may emerge from time to time and not possible for management to predict all such factors. Ian McCarthy, our President and Chief Executive Officer, and Allan Merrill our Executive Vice President and Chief Financial Officer will give a brief presentation, after which they will address questions you may have for the duration of this one hour conference call. We're also joined by Bob Salomon, our Chief Accounting Officer. In the interest of time and allowing everyone a chance to ask questions, we do kindly request that you limit yourself to one question and then one follow-up. I will now turn the call over to Ian McCarthy. Ian?

Thank you, Leslie, and thanks to you all for joining us this afternoon. During the third quarter of our fiscal year, the economic recession continue to weigh on both the overall housing industry and our operations. However, we have continued to experience sequential improvement in sales trends. In addition to normal seasonal patterns, we attribute this increased demand to attractive interest rates, historically high housing affordability, and Federal and state tax credits which have enticed more prospective buyers to purchase a new home. On the other hand, we remain cautious as rising levels of both unemployment and foreclosures, coupled with a scheduled expiration of the Federal Home purchase tax credit, make it difficult to predict when and to what extent, the housing market will sustainably recover.

As such, we continue to maintain a disciplined operating approach, and remain focused on generating and maintaining liquidity. Our financial results for its third quarter continue to reflect the difficult market and economic conditions that not only we and our peers continue to face, but many other industries and companies as well. None the less, we remain committed to our operational and strategic priorities to move our business forward for it benefit of the Company's stakeholders. These priorities include generating and maintaining sound liquidity, effective reallocating (inaudible) resources, addressing our capital structure, positioning for a return to profitability, and differentiating Beazer to our customers. All with an aim of generating profitable growth, and shareholder value over an entire housing cycle.

Let's now review our financial results for the third quarter of fiscal 2009. For the third quarter, total revenue declined 51% from the same period in the prior year. Total gross profit margin for the quarter before impairment and abandonment charges was 7.8%. Even after impairment and abandonments, we generated a positive gross margin of 2.5%, compared to a gross loss of 10.4% for the comparable period of the prior year, as a result of lower inventory impairments, and option contract abandonment charges. Sequential decline in gross margins before impairment and abandonment charges from a level of 10.8% in the second quarter of this fiscal year, is due in part to a $2.4 million accrual -- warranty accrual to repair homes in two communities in Florida, where subcontractors installed defective Chinese drywall.

In absolute dollars, as SG&A declined 38% year-over-year, but was still higher as a percentage of revenue due to lower revenue volume. Loss from continuing operations was $0.72 per share, compared to a loss of $2.85 per share in the prior year. For the third quarter, home building revenues declined 48%, resulting from a 43% decline in home closings, and a 9% decline in the average selling price compared to the same period in the prior year. Home closings were down across all segments. Excluding exit markets, from which we had only two closings in total, the decrease was 33%, in line with other industry participants. Net new home orders of 1537 for the quarter represents the 5% year-over-year decline in markets where we maintain a presence, and a 37% increase from the second quarter of this year.

As indicated in my opening remarks, we believe the quarter's level of sales are a reflection of increased demand, resulting from attractive interest rates, historically high housing affordability, and tax credits. Furthermore, our annual June promotion which focused on our eco-friendly features, as well as on educating buyers on the benefits of buying a new home now was quite successful. Looking ahead, we recognize that the inherit seasonality of our business will most likely be to generally lower levels of quarterly net orders over the next two quarters, then we realized in the previous two quarters. However, we expect the year-over-year comparisons for the next two quarters should be positive.

The cancellation rate for the third quarter improved to 23% compared to 29.8% in the second quarter of this fiscal year, and 36.8% in the third quarter of the prior year. Resulting backlog as of June 30th, was 1867 unit with a value of $431 million. Although this represented a decrease from the prior year of 27% excluding exit markets, it was the sequential improvement from the second quarter of this fiscal year of 46%. I'll now turn it over to Allan to further discuss our financial results. Allan?

Thank you, Ian. As Ian discussed earlier, we've been very focused on increasing efficiency in our business and diligently managing overhead expenses. Slide 11 provides a breakdown of our SG&A expense, since the reported aggregate number is significantly impacted by the various legal, severance, and settlement expenses we've incurred over the past several quarters. By removing commissions, which are purely variable component, as well as G&A cost related to severance, legal and professional fees, and stock compensation, we arrive at an operating G&A , so to speak, totaling 13% of revenue in the third quarter,and 15% of revenue year-to-date. Compared to the second quarter with a comparable ratio of 18%,and the first quarter ratio of 16%, we have seen real improvement due to the overhead reductions we took in January. Based on current run rates, we estimate that operating G&A as we have defined it here, will yield a full-year level in the low teens as a percentage of revenue.

Next I like to spend a few moments on the various non-cash inventory related charges incurred during the third quarter. As with our previous filings, you will find additional disclosures as it relates to impairment charges by segment in our 10-Q, which we expect to file tomorrow. Inventory impairments totaled $10.8 million in the June quarter, Of that $6.3 million related to properties held for development and $4.5 million related to land held for sale. Impairments on held for development inventory were primarily in the west segment..

The June quarter impairments represented 117 lots in four communities. During the June quarter, we also incurred lot option abandonment charges totaling $1.1 million, almost entirely in the east segment. And we incurred impairment in joint ventures of $4.8 million. The relatively lower level of impairments realized this quarter are a reflection of the improving sequential sales trends we've seen, resulting in better sales absorptions per community, and some signs of stabilization and pricing. Our land position as of June 30th, totaled just under 33,000 lots, and 81% which were owned and 19% which were controlled under option. This reflects reductions of approximately 17% and 29% from levels as of September 30,2008 and June 30, 2008 respectively.

Excluding property held for sale, approximately 41% of our remaining owned lots were either finished lots, or lots from which home construction had commenced, and only 1% was in the form of raw land. We continue to exercise caution and discipline with a regard to land and land development spending. During the third quarter fiscal 2009, we spent $31 million on land and land development, compared to $63 million for the same period a year ago. As we indicated last quarter, based on current sales pace with relatively few active communities that will require significant land or land development spending in 2009. In light at this, and with our intense focus on maintaining liquidity we continue to expect land and land development expenditures will be below last year's level of $333 million, by more than $100 million.

We continue to maintain strong discipline with respect to new home starts and speculative inventory. As of June 30th, we had only 234 unsold finished homes, and 504 unsold homes under construction, representing declines of 22% and 56% respectively from a year ago levels. The modest uptick in in sold homes from the March quarter is due to both normal seasonal patterns, and our anticipation of somewhat higher year-over-year sales this quarter and next. As part of efforts to address our capital structure, during the quarter we repurchased $115.5 million of senior notes in open market transactions for an aggregate purchase price of $58.2 million, for an average price of 50%, plus accrued and unpaid interest. Slide 17 provides a summary of the face amount repurchased by issue.

These repurchases resulted in a gain from the extinguishment of debt of $55.2 million, and a corresponding increase to our tangible net worth. At June 30th our total debt stood at $1.6 billion, decreasing about $156 million since the beginning of the fiscal year. As a result of our current liquidity position and reduced working capital needs in the current economic environment, we don't foresee any need for cash borrowings on our secured revolving credit facility during its remaining term. As a result we decided to amend and restructure the facility. As a part of this restructuring, the current secured revolving credit facility was reduced to $22 million will be provided by one lender. The restructured facilities will continue to provide for the future working capital on the letter of credit needs collateralized by either cash and assets at our option.

We also entered into three stand-alone cash secured letter of credit agreements with banks to maintain a pre-existing letters of credit that had been issued under the current secured revolving credit facility. At closing at August 5th, we elected to secure all our letters of credit using cash collateral, which required additional cash and restricted accounts of $37.8 million. Due to this restructuring, we recognized expense of $3.3 million on previously capitalized unamortized debt issuance cost as of June 30, 2009, which is reflected in other expense in our income statement for this quarter. We are not announcing any additional recapitalization steps at this time. We've hired a great team to advise us, Moelis & Company and Citigroup. And we expect to take steps in the future consistent with our primary objectives, mainly to protect our liquidity, increase our net worth, and reduce total indebtedness.

At June 30, 2009, the Company had cash and cash equivalents of $465 million, compared to $560 million at March 31,2009, and $314 million at at June 30, 2008. In addition, we had restricted cash of $11.3 million to sufficiently collateralize outstanding letters of credit under our current secured revolving credit facility. Last quarter, I shared our target at ending the year with the cash position comparable to the level at the end of last year, before the impact of any potential liability management transactions. Because we have committed approximately $60 million to repurchase senior notes, we now expect total year-end cash to be approximately $525 million. Our unrestricted cash balance should be about $475 million after taking into account cash back letters of credit. I'll now turn it back over to

Thanks, Allan. We are encouraged by signs that some negative housing market trends may be moderating, both at the local and national level, and further encouraged by our improvement in sales. At the same time, key macroeconomic indicators remain mixed. As such will continue to use caution and discipline in running the business, but we are hopeful we will see for the recovery in 2010. Finally, I like to express my appreciation for the support of our many stakeholders, as we continue to work through these challenging times. We're committed to returning the company to profitability upon a market recovery for the benefit of all these stake holders. I would now like to ask -- have the operator to open the lines up for questions. Thank you.

(Operator Instructions). Our first question comes from David Goldberg of UBS. Go ahead. Your line is open.

Thanks. Good morning, everybody.

Hi, David.

The first question is on the debt repurchases and how you guys determined how much of each maturity you were going to buy, and how you are thinking about that. I know you are not going to talk about the capital structural changes -- the cap structure you are thinking about, but just kind of how you figured out what you were going to buy, and how you think about it moving forward?

Obviously, David, there are a lot of moving parts there. I mean the yields on the securities were a factor, the maturity wall that starts in 2011 was a factor, capturing discount was a factor, availability of sellers was a factor. So I would say there isn't a single answer to that. We try to be opportunistic, and make a good use of shareholder funds.

Got it. The next question was on the commissions that you outlined in the (inaudible) it looks like the commissions as a percentage of ASPs are going up slightly each quarter, if I did my math right. It looks like it's going from 4% to 4.1% in the second quarter and now about 4.2%, 4.25% this quarter. And I am just trying to understand it thats a pattern that you're noticing that your paying more outside commissions or increasing level of incentive for outside commissions?

Well, its certainly not increasing incentives, but what it is reflecting is a slightly higher rate of realtor co-op in certain markets.

What you think you're paying outside realtors versus internally in terms of percent of ASPs?

I think outside realtors are typically getting three points, and the internal sales force, depending on the market works on different types of programs, but it is substantially below the three points we pay on the outside.

Thanks so much.

The next question comes from Michael Rehaut from JPMorgan. Go ahead, your line is open.

Hi, guys. This is actually Ray Huang in for Mike. First question -- go back to the commentary on expectations for year-over-year order growth. I was hoping you guys could kind of break that out by sort of order of magnitude. Are we talking about 5% or 10% growth? And I guess any type of regional market color that you are seeing -- which markets are getting better -- which ones are getting worse, at this point?

We can't give percentages for that, but what we did say there is we had a good quarter in June. We are very pleased with our quarter in June. We've had a really reasonable stable July. Year-over-year was slightly ahead of last year's July. We're at a lower level based on seasonality. The level of orders we expect in the September quarter, and the December quarter, will be lower than the June quarter, but we think that the comps are achievable. And we're hopeful that we can actually get to a point, where we can beat the comps for last year. We're feeling slightly better about the markets. We -- the feeling at the moment is that California did well in the June quarter with the tax credit there -- with the state tax credit there, combined with the federal tax credit. We have seen that fall back a little bit with the tax credit basically expired now in California.. In Texas, we're doing quite well and we've had a real pickup in Phoenix. The level of pricing there is quite low, but the absolute number of sales has picked up quite substantially. And I would say then the midwest and mid-Atlantic for us, are the other two markets that are quite strong at this time. And we are really hopeful that we are going to see some real pickup in those markets.

Are some of the markets that are maybe not performing as well as you had imagined?

I would say the southeast, particularly the Carolinas, and down in to Florida, still struggling, Florida. All of them came into this slow down right at the end, and I think is going to take longer to come out it.. Those are the markets that we feel are more difficult. And Los Vegas is still quite difficult for us as well at this time. But I am quite encouraged that markets like Phoenix now, really seem to be showing some activity.

I appreciate that, and just a follow-up question, what is the benefit of prior period impairments in the quarter?

I don't have that number. It is something we typically provided at the end of the year. It is clearly a fairly significant number in aggregate, but I'm sorry, I don't have it in front of me.

Okay, great. Thanks, guys.

Thanks, Ray.

Our next question comes from Dennis McGill of Zelman &Associates.

Hi, guys. Just a couple of quick ones. Have you talked about any limitations on how much debt that you can buy back?

We haven't talked about it. The revolving credit facility would have had some bearing on that, but since that facility has been amended and restructured, we don't have those types of limitations.

Okay. Perfect. Help me understand when we think about where your current gross margins is, it is certainly below where the industry is, and when we think about where your impairments are versus the industry,we haven't seen quite as much impaired, relative to the peer group. If you feel like the impairments so far are in line with the market, and with your pricing, when are we going to start to see that flow through the gross margin line? Because I would think the more you gotten impaired, the closer we should be seeing something in the high teens range or maybe even higher?

I'm certainly not going to start to predict the future gross margins. I am sure you have keyed in on this, in our results and in others. The quarterly comparisons right now, particularly sequentially are brutally tough to do. There's so many things flowing through. We have had warranty and insurance settlements, we've had close-out communities, I mean there are a litany of things. And so it is still tough to really discern a pattern. You are right though, directionally as the impairments stop, they do flow through. The thing that -- and again -- it's probably stating the obvious -- but the thing that has happened historically, is you've had these impairments, prices have fallen in the subsequent periods - so while you would have seen some flow through of the impairment that you previously took -- you gave it back in subsequent price reductions. As I mentioned in my comments, I think we are seeing signs of price stabilization, and that is a necessary precondition to limit future impairment, and to see the flow through in an increase in gross margin. If we continue to see positive sequential and year-over-year sales trends, then the margins expectations certainly improve.

So it would be fair to say that margins deterioration sequentially this quarter sounds like it was had a lot to do with the communities you were closing out of, so that may not be an impact going forward assuming on pricing stays flatish?

Yes, that is true. And there were also things in the second quarter. Nothing is really significant but I know we had a little insurance settlement, and a warranty claim, and an item in the second quarter that might have made that a few basis points higher. That is why I say the sequential comparisons become very very difficult/. Because they are going to be -- particularly as you're dealing with fewer units and therefore small numbers as opposed to large numbers, so you can start to see distortions from kind of anomalous events.. So you get lost trying to go quarter making the comparison.

That is very helpful. Thanks a lot.

Your next question comes from Susan Berliner. Go ahead. Your line is open now.

Thanks. Allen, I guess I just wanted to follow up. I just wanted to be clear, there are no restrictions any more on how many bonds you can repurchase since you get rid of the revolver?

The only restriction we have is on the redemption of sub debt. There aren't any that I am aware of that relate to the senior notes.

Okay, and then just potentially thinking ahead, if you were to issue secured debt in the market, besides the mortgages on your balance sheet, would you take out the $22 million for the revolver, as well as these -- I guess -- the LC facility, or would the LC facility be ignored?

I think -- and its dangerous for me to do that -- but I think what you are trying to get at is the secured debt basket?

Exactly.

The cash secured LC's wouldn't count against that.

Okay, okay. I guess I was wondering -- just one last question, on your land, I know you give us a breakdown on finishing, etc, can you give us an idea geographically where it is concentrated now, be it Florida or where ever?

We continue to be well distributed in each of our segments. I mean there are some particular divisions that are lighter than others, but I wouldn't say there is a disproportionate weighting in any one area. The markets that were historical heavier -- the land markets -- were in the west and mid-Atlantic and that continues to be true. We have both owned and option positions and distributed in each of the markets.

Okay. Thanks so much.

The next question comes from Jim Wilson at JMP Securities. Go ahead. Your line is open.

Thanks, and good afternoon guys.

Hi, Jim.

I was wondering, my questions I guess that I have left -- are related to specs. I was wondering if you could -- maybe go through what you have left kind of in spec standing, how much roughly came through in closings in the quarter, and there is a material margin difference versus a built to order homes that might of also impacted where your gross margins were?

I guess a couple of things, the number we had -- 234 finished specs at the end of the quarter and I think just over 500 under construction. The number of finished specs is well under one per community which is a very low number. The margin question is sort of interesting. There is no question that a long dated and aged spec will carry typically a lower margin. That is a truism in this industry that would go back in a long time. Interestingly though, shorter dated specs, so-called move in ready homes don't necessarily carry a discount to a to-be-built home now because the buyers, for all the reasons Ian mentioned, are reluctant to commit, and are scared of the overall housing market. When they're ready to go, they want a move in ready home. And so, together with expiring tax credits and other things, there is a premium associated -- or can be associated with those. I would just say that really changes the dynamic with specs. We haven't leaned into that in any significant way, and decided the new strategy is to go build a thousand specs. But the fact is, they don't carry the same characteristics that historically we would have seen. You saw just a little bit of an uptick for us seasonally between the March and the June quarter, really reflecting the fact that the sales trends that we had in June that continued into July, gave us the confidence to have a few more sticks in the air.

Okay, great. That was my only question.

The next question comes from Alex Barron, Agency Trading Group.

Thanks, hey guys. I want to ask you on your slide about the SG&A. Did any of those line items that you broke out there, that are going to drop off going forward?

Well, I'll pull it out here -- the severance expense will certainly help -- drops off, and the legal and professional fees won't drop off in the form of going to zero, because we have said we will continue to cooperate with the authorities, and we have some -- I would say irregular expenses. I can't really call them nonrecurring because they continue, but they are not predictable, and not a core part of the operation. They will eventually go away, but I would be reluctant to forecast that right away. So that was one of the reasons for this table, frankly, was to allow us over time to show things that will appear in the aggregate SG&A line. ,As you break it down, and if you can really isolate where it came from, the parts that we can control, we are squeezing tighter and tighter and tighter, and you can see that in that table. The area of severance and legal and professional in particular, I won't say they are entirely outside of our control, but they are lumpy aspects to them that we thought investors would benefit being able to analyze.

Our last question, or last question comes from Lee Brading Wells Fargo Securities. Go ahead, your line is open.

Hi guys.

Hi, Lee.

Thanks for taking my call. I was wondering, you bought back -- what you mentioned $115 million in bonds during the quarter. Was there any bond repurchases subsequent to quarter and?

No.

Okay. Then to follow up to -- on some of the spec discussions, you talked about the age spec being fairly low-margin, looking at your 234, can you give us an idea of the age of that 234? We have really done a good job of keeping that tight and clean, so I would tell you that is not-- with respect to those 234, a significant issue for us at all.

You mentioned a little less than one per community. Hearing some others -- some of them are targeting two or four per community, just kind of -- can you just give me an idea of what your thoughts are around that? Are you comfortable around this one area, or do you think you should -- in this environment if you feel like you are seeing things get a little better -- put more stick in the air?

I will give you two nonanswers, instead of one nonanswer. The first nonanswer is that as you look at those numbers around specs for community, different people say different things about finished or under construction. Obviously, if you look at our under construction and completed, we are over one, and so that maybe normalizes the comparison a little bit. The second non answer is a hugely depends on the community and the market. There are clearly markets that we have move-in-ready home buyers predominantly. And there are others that are still strongly to-be-built environments. So kind of taking a macro level and putting in number out there isn't that helpful, and its not the way we manage the business.

Let me add to that, but obviously liquidity and maintaining our liquidity is the primary goal at this time, so we really do control our specs very tightly. I think, as we see the market improve, that we may well try to have a few more specs out there. At this time, we try to control that so we maintain our liquidity.

Okay. Great. On the Q4 historically, you have a seasonal pop as far as looking at -- I look at backlog conversion, others do, you might not. But historically, if you have a pop in backlog conversion in Q4 from a standpoint, I was wondering if we should expect to see something similar to what we have seen in the past?

We definitely will. Q4 is trying to bring those spring sales and summer sales out to closing. It's our year-end. I think you will see something comparable. You will see a good conversion ratio there in this Q4.

My last question is, I know that your can rate hasn't improved, and I think you mentioned 23%. When you are seeing the cans now, what kind of can are you seeing? Is it -- what are -- what I am trying to get at is -- what do you see out there for unemployment? You hear the economists talking about employment figures, how much of that is affecting the cans right now?

I think I will have to just give you a commentary on that. Certainly unemployment is at factor, and a factor insert in markets. California I would say has compounded of the effect the tax credit going away there, and the furloughs and the concerns. Our Sacramento market in particular, we've definitely had some concern there about job losses. So I would say it is definitely is a factor. But I would say more important than that is cancellation rate, is the ability to get financing. Whether that is due to the buyers themselves not been able to get it, or because the appraisals are not coming through at a level that can support the contract. I think that is the biggest factor at this time. And so we're pleased with the we've got that down, and as an important factor, it shows health and the market to see that can rate come down. I would say we certain have to be aware of the unemployment factor, and we have to be aware of the effect of foreclosures still coming to the market affecting comps.

Thanks very much.

Thanks, Lee. Thanks very much. Operator, any more calls?

No, I will now turn the back to Ian McCarthy for some closing remarks.

Well, thanks very much. I would like to thank all of you again for joining us today, and remind you that a recording of this conference call with the slide presentation will be available this afternoon in the Investor Relations section of our website at Beazer.com. Thanks very much.

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