Beazer Homes USA Inc (BZH) 2010 Q2 法說會逐字稿

Good morning and welcome to the Beazer Homes second-quarter fiscal 2010 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.

Before he begins, Jeff Hoza, Vice President and Treasurer, will give instructions on accessing the Company's slide presentation over the Internet and will make comments regarding the formal forward-looking information. Mr. Hoza, you may begin.

Thank you, Tamera. Good morning and welcome to Beazer Homes conference call on our results for the quarter ended March 31, 2010. During this call we will webcast a synchronized slide presentation. To access the slide 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, uncertainties, and other factors that may cause actual results to differ materially. Such risks, uncertainties, and other factors are described in our SEC filings including our annual report on Form 10-K.

Any forward-looking statement speaks only as of the date of which statement is made. Except as required by law, 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 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 concerning our results for this quarter. As you are likely aware, last night we launched three concurrent capital offerings. In connection with these offerings, we will be participating in an investor call scheduled for 11 a.m. this morning through our underwriters.

In light of that call and the strict SEC rules governing offerings, we will not have a Q&A component during this earnings call. Investors are reminded that last night we filed with the SEC our 10-Q for the second quarter and prospectuses for the concurrent offerings. All this information is available through the SEC's EDGAR database. I will now turn the call over to Ian McCarthy.

Thanks, Jeff, and thanks to all of you for joining us this morning. In our second quarter we were pleased to generate substantially higher new home orders from continuing operations compared to the prior year, helped by both higher gross orders and a lower cancellation rate. We also reported better gross margins and lower operating SG&A costs compared to the prior year.

Additionally, we made significant progress in strengthening the balance sheet during the quarter. The increase in equity and reduction in debt better position us to fully participate in the eventual housing recovery.

More broadly, we see home buyers caught between the factors that favor a resumption of growth in the new high market and those that weigh against a meaningful recovery in the near term. As we have previously noted, attractive interest rates, historically high housing affordability, and recent signs of home price stabilization are very encouraging.

On the other hand, expiration of the federal tax credit, elevated unemployment, the overhang of foreclosures, and the potential for rising mortgage rates make it difficult to predict when and to what extent the housing market will sustainably recover. While our visibility remains quite low, we continue to be cautiously and patiently optimistic about this fiscal year.

As I noted, we have made significant progress in improving our capitalization. But we will continue to maintain a disciplined operating approach focused on gradually improving profitability while continuing to protect our liquidity.

While our second-quarter financial results show significant signs of improvement, they still reflect the difficult economic and home building conditions we and our peers have been dealing with for the past three years. We continue to execute on our operational and strategic priorities to move our business forward for the benefit of the Company's stakeholders.

These priorities include generating and maintaining sound liquidity; effectively allocating capital and resources; differentiating Beazer to our customers; positioning for a return to profitability; and addressing our capital structure -- all with the aim of generating profitable growth and shareholder value over an entire housing cycle.

As it pertains to capital allocation, while we continue to exercise discipline in land acquisition, we are cautiously exploring opportunities in many of our markets. We have the benefit of owning an ample supply of finished lots, so our efforts are really aimed at controlling positions that can generate home closings in 2011 and 2012.

We have stepped up our land acquisition activities in most of our markets this spring, and we are still being very selective about which deals we do. Through March 31 we approved 23 new communities for purchase or option this fiscal year although these communities only generated 1% of the new home orders during the quarter. Each deal we have approved with a rolling option or bulk takedown has fallen within our target nodes, represented by the buyer profiles we serve in very specific submarkets.

As we anticipate improving conditions for selling new homes, we are focused on creating a home buying experience that differentiates Beazer in the eye of the consumer. A great example is the recently announced expansion of our industry-leading eSMART program. We have committed that every home we build will be a high-performance home that saves energy, conserves water, and improves indoor air quality.

Through our four-year investment in Imagine Homes in San Antonio, we have been able to develop award-winning technology and then incorporate that technology into every home in every market across the country. The investment we have made in the envelope of our homes, by enhancing the insulation and ceiling, gives our homes a competitive advantage compared to other new homes, resale homes, and -- importantly -- foreclosed homes.

In addition to the expanded range of features included in every home we build, we have developed integrated advanced packages called eSMART Plus and eSMART Green that our customers can purchase. I encourage you to review the eSMART features we offer on our website.

Now let's review the results for the second fiscal quarter. Beginning last year, we have classified the results of operations historically included in the Other homebuilding segment as discontinued operations for all periods presented. These results relate to markets we previously determined to exit and where homebuilding operations are completed.

For the second quarter, total revenue was up 6.2% from the same period in the prior year, primarily due to higher home closings. Income from continuing operations was $0.10 per diluted share, reflecting a one-time gain of $53.6 million related to the restructuring of our subordinated debt, compared to a loss of $2.81 per share in the prior year.

For the second quarter, home closings increased 5.6% year-over-year to 852 units, while the average selling price of $231,700 was 0.3% greater than the same period in the prior year. The very slight increase in average selling price reflected a small change in the mix of closings, away from the Southeast segment toward the higher priced East and West segments.

Net new home orders of 1,673 for the quarter represented an increase of 48.8% year-over-year. This increase was attributable to order increases in all of our segments and a reduction in our cancellation rates, which were 17.6% this quarter compared to 29.8% in the prior year. Home sales benefited from attractive interest rates, historically high housing affordability, and home buyer tax credits.

In addition, I would like to compliment our Beazer ambassadors, who turned up the intensity of their sales activities during the quarter. They did an excellent job, in spite of inclement weather in many of our markets, in converting increased levels of traffic and buyer interest into these tangible results.

We have said that we expect fiscal year 2010 orders to exceed fiscal year 2009 levels, although not necessarily in each quarter. We still believe that. But the caveat relating to quarterly variability is important.

We cannot fully anticipate the impact the expiration of the tax credit will have on home sales or the extent to which our improvement in sales reflected a pulling forward of demand. As such, the seasonality of our order pattern this year is likely to be somewhat different than in prior years.

It is worth noting that at these very low levels of new home activity it is not a foregone conclusion that home sales will slow appreciably with the expiration of the tax credit. An improvement in employment coupled with stability in home prices could improve buyers' confidence which in turn would sustain higher new home orders levels compared to last year. Having said that, we are planning for a softer second half of the year, but hoping for something better.

Resulting backlog as of March 31 was 1,781 units with a value of $394.5 million, which represented increases of 39.4% in units and 33.1% in dollar value compared with the same period last year. The average selling price in backlog decreased by about $10,000 due primarily to an increase in the number of homes sold to first-time home buyers.

With that, I will turn it over to Allan to further discuss our financial results and other items. Allan?

Thank you, Ian. We continue to be very focused on increasing efficiency in our business and diligently managing overhead expenses. In absolute dollars, total SG&A declined $21.4 million year-over-year. As a percentage of revenue, total SG&A declined from 35.5% in the second quarter a year ago to 22.6% of revenue in the second quarter of this year.

As provided in previous quarters, slide 13 is a breakdown of our SG&A expense, since the reported aggregate number is significantly impacted by the various legal, severance, and settlement expenses we have incurred over the past several years. By removing commissions, which are a purely variable component, as well as G&A costs related to severance, legal, and professional fees, and stock compensation, we arrive at an operating G&A totaling 14.2% of revenue in the second quarter compared to 17.8% of revenue a year ago.

The slight dollar increase from the prior quarter was entirely related to the seasonal bump in marketing spending, which is timed to create buyer awareness and traffic in our new home communities this time of year. In dollar terms, operating G&A is now at a level that is sustainable until we see material increases in home closings.

Total gross profit margin for the quarter was 18.3% before impairment and abandonment charges, a 720 basis point improvement from the second quarter of last year and a 540 basis point improvement from the December quarter. As we said last quarter, gross margin trends are difficult to evaluate over short periods of time.

We expect our gross margin for fiscal 2010 to be higher than our full-year gross margin for 2009. But there will continue to be some volatility between quarters due to differences in mix and volume.

Please note that the margin this quarter reflected some nonrecurring warranty recoveries that increased margins by about 220 basis points. Since we can't predict these warranty items, we have to live with some gross margin volatility.

After impairments and abandonments, we generated a positive gross margin of 13.1% for the quarter, compared to a gross margin of negative 11.9% for the comparable period of the prior year as a result of lower inventory impairments and option contract abandonment charges.

Inventory impairments totaled $10.2 million in the March quarter, all of which related to properties held for development. Impairments on inventory were spread across communities in our Las Vegas, Phoenix, Orlando, and Charleston markets. The March quarter impairments represented 537 lots in 14 communities. Lot option abandonment charges were nominal at $13,000.

We also recognized a joint venture impairment of $8.8 million related to our interest in a large Las Vegas venture. We cannot say that the impairment cycle is done; but we can say that improving absorption rates and firming prices are currently reducing the probability of significant additional impairments.

Of course, if prices or absorption rates deteriorate materially, our impairment calculations will reflect those factors. As with our previous filings, you'll find additional disclosures as it relates to impairment charges by segment in our 10-Q, which we filed yesterday.

Our land position as of March 31 totaled just under 30,000 lots, 83% of which were owned and 17% of which were controlled under option. This reflects reductions of approximately 13.5% from the level as of March 31, 2009. Our total controlled lot count as of March 31 is less than a third of what it was at the peak in 2005.

Excluding property held for sale, approximately 39% of our remaining owned lots were either finished lots or lots upon which home construction had commenced. None of our active land was in the form of raw land.

Over the past several years we have dramatically reduced land and land development spending. Last year, our total land spending was just under $200 million, compared to $333 million in the prior year. In the second quarter land and land development spending was approximately $43 million, compared with $56 million in the prior year.

As Ian said earlier, we have ramped up our land acquisition activity this year, but we still expect cash expenditures on land and land development to be similar to 2009 levels, although this could be adjusted up or down based on market conditions.

While we continue to maintain strong discipline with respect to new home starts and speculative inventory, we increased starts this quarter, reflecting anticipated seasonality, the expiring home buyer tax credit, and our much better selling results. At March 31, we had 724 unsold homes under construction representing an increase of 90% from year-ago levels.

Despite the increase in starts, we had only 244 unsold finished homes at the end of the quarter, representing a decline of 35.6% from last year. We don't contemplate further structural reductions in our unsold home inventory levels, but rather the resumption of more normal seasonal patterns.

At March 31 our total debt stood at $1.3 billion, decreasing over $400 million during the past 12 months. Stockholders equity and consolidated tangible net worth were $411 million and $356 million, respectively.

As Ian mentioned, during the quarter we made substantial additional progress in our recapitalization efforts which are reflected in our March results. First, we issued both common stock and a mandatory convertible subordinated note. These transactions resulted in net proceeds of just over $150 million and substantially increased our equity. Since the mandatory convertible debt will automatically become equity within three years, we have treated that as prospective shareholders equity on this slide.

Second, we used the bulk of the proceeds of the two offerings to repurchase debt, including our unsecured 2011 senior notes totaling $127 million.

Third, we modified our previously issued subordinated notes. The modification of the terms resulted in a one-time non-cash gain of approximately $54 million. This gain, which is represented by a reduction in the carrying value of the notes on our balance sheet, will amortize against income over the next 26 years.

This slide reflects our existing debt maturity profile. Our cash position at March 31 at $568 million was equal to approximately 124% of the principal amount of debt coming due over the next three years and 91% of the principal amount of debt coming due over the next five years.

As Ian mentioned and as we have said throughout the last year, one of our key operational priorities has been to address our capital structure. Under this initiative we have focused on three primary objectives -- protect our liquidity, increase our net worth, and reduce our total indebtedness.

To that end and as you may have already seen, last night we announced three proposed concurrent underwritten public offerings consisting of common stock, tangible equity units, and senior unsecured notes. The offerings are anticipated to cover the issuance of 12.5 million shares of the Company's common stock; 3 million tangible equity units, which are comprised of a prepaid stock purchase contract and a senior amortizing note due 2013; and $300 million aggregate principal amount of senior unsecured notes due 2018.

In addition, as is typical, we will grant the underwriters a 30-day option to purchase up to an additional 15% of the shares and tangible equity units sold to cover any overallotment.

As you would expect, since we are now engaged in three offerings, we are very limited by SEC rules in what we can say publicly about the offerings outside of the three prospectus supplements we filed last night. Accordingly, to the extent you have any further questions regarding the offerings, you should review those prospectuses, which can be found on the SEC's EDGAR database.

At March 31, 2010, we had total cash and cash equivalents of $567.7 million, including restricted cash of $43.3 million to sufficiently collateralize outstanding letters of credit under our current LC facilities. This balance also reflects the receipt of a $101 million tax refund which was announced last quarter.

We appreciate the importance investors place on our cash position, and we continue to place great emphasis on maintaining significant liquidity. As such, our current expectation is that we will end the year with a cash balance similar to the balance at the beginning of the year. This expectation is before the impact of any potential incremental recapitalization transactions, but does reflect the financing transactions we completed in January; the repayment of our 2011 unsecured senior notes; the receipt of our tax refund; and land spending roughly comparable to last year.

It is important that investors understand that whether we ultimately have a higher or lower cash balance at the end of the year will be a function of both market conditions and the decisions we make with respect to potential recapitalization and investment strategy. Since we can't speculate about every potential macro and operating scenario, I will simply say that we believe we have plenty of liquidity to operate the business in the range of scenarios we can foresee.

With that, I will turn the call back over to Ian.

Thanks, Allan. We have been encouraged by the early signs of improvement in our business, which started in the September 2009 quarter and have continued since. We recognize both the signs of improvement and the continued risks to a broad-based housing recovery; but we expect to see gradual improvement over time, and we believe we are taking the right steps to position the Company to benefit from an improving conditions in the years ahead.

Finally I would like to again express my appreciation for the support of our many stakeholders as we continue to work diligently through these challenging times.

That is the end of our prepared remarks. A recording of this conference call with the slide presentation will be available this afternoon in the investor relations section of our website, Beazer.com.

As Jeff mentioned at the beginning of the call, rather than hosting a Q&A session right now, Allan and I will be making another presentation and answering investor questions during our call to review the offerings scheduled through our underwriters at 11 a.m. this morning. Thank you all for joining us today.

This does conclude today's conference. You may disconnect at this time. Thank you for your participation.