Beazer Homes USA Inc (BZH) 2016 Q3 法說會逐字稿

Good morning and welcome to the Beazer Homes Earnings Conference Call for the quarter Ended June 30, 2016. 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 time, I will turn the call over to David Goldberg, Vice President and Treasurer. Sir, you may begin.

Thank you, Mark. Good morning and welcome to the Beazer Homes conference call discussing our results for the third quarter of fiscal year 2016.

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, which are described in our SEC filings, including our Form 10-K, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date on which such statement is made, and 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.

Joining me today are Allan Merrill, our President and Chief Executive Officer and Bob Salomon, our Executive Vice President and Chief Financial Officer. We have reorganized our call this quarter to cut down on the redundancy and allow more time for questions. Allan will start by providing our perspective on market conditions and an update on our primary operational and financial goals. Bob will then discuss the third quarter highlights, our expectation for the fourth quarter and where we stand relative to our 2B-10 goals. I will come back on the line to provide a balance sheet and liquidity update followed by a brief wrap up by Allan. After our prepared remarks, we'll take questions in the time remaining. However, changing the format of our call, we will still provide the same information we have in prior quarters in our slides, which are available on our website.

I will now turn the call over to Allan.

Thanks, David, and thank you for joining us on our call this morning. We had a terrific quarter with strong sales, improved backlog conversion, rising gross margin and further overhead leverage. This resulted in another quarter of year-over-year growth in EBITDA.

Our results were aided by consistent job growth, low interest rates and a limited supply of both new and used homes. While global markets remain volatile, the US housing market is an area where fundamental demand and supply factors appear to be well matched. We remain bullish about the prospects for our industry and our Company over the next several years.

In recent quarters, we have spoken about executing a balanced strategy, coupling growth with an improving balance sheet. Let's recap what we've accomplished so far. Over the past five years, we've grown our trailing 12-month revenue from $676 million to $1.8 billion and our adjusted EBITDA from negative $30 million to just over $160 million.

At the same time, we have reduced our leverage ratio from 83% to 67% as our return to profitability has allowed us to recognize a big portion of our deferred tax assets and retire $71 million in debt this year. We achieved these results with a smaller community count by improving our core operational metrics, including ASPs, sales pace, gross margin and SG&A.

We're excited about our prospects to continue growing profitability and reducing debt over the next few years. A combination of revenue growth, gross margin expansion and additional overhead leverage will allow us to reach and then surpass our 2B-10 goals. At the same time, our focus on capital efficiency will allow us to substantially reduce debt.

In fact, we now expect that our deleveraging this fiscal year will total $150 million and that our total reduction will be more than $250 million through fiscal 2018. At that point we will have reduced our annual interest expense by about $20 million, representing more than $0.35 per share in earnings and attained credit statistics that closely match our peer group.

To drive these improvements, we will continue to rely on our three core consumer strategies. Choice Plans that allow buyers to customize their floor plans for free, Mortgage Choices, which ensures they get a great loan and great service and ENERGY STAR construction, which means they get a home with low operating and maintenance costs. That's what we mean by a balanced strategy, more earnings from a better value proposition for consumers and less risk for our shareholders by continuing to improve our balance sheet and capital efficiency.

With that, I'll turn the call over to Bob.

Thanks, Allan and good morning everyone. Our absorption rate for the quarter was three sales per community per month, in line with our expectation, leading to 1,490 orders. Importantly, our sales pace was balanced across our markets with notable improvements in Houston, Las Vegas, Maryland and Raleigh.

Homebuilding revenue grew 9.7% year-over-year to $451 million, our highest third quarter level since 2007. This was driven by a 5.5% increase in home closings to 1,364 homes and a 4% increase in our ASP to almost $331,000. Our backlog conversion ratio of 59% was significantly higher year-over-year as a result of improved cycle times and better weather in Texas this spring.

During the quarter, each of our regions experienced price improvement on a year-over-year basis, led by the West, where our prices were up more than 7%. Our average sales price in backlog as of June 30 was nearly $336,000, suggesting further ASP growth. We reported gross margins of 20.7%, up 50 basis points from last quarter, excluding impairments and amortized interest, as well as certain warranty recoveries.

As we discussed last quarter, we expected to be less aggressive in pricing specs with our term loan in place and this contributed to the margin improvement. We recorded an insurance recovery of $15.5 million this quarter related to prior period warranty costs. This benefit was partially offset by $11.9 million in impairments on two assets. Changes in competitive pricing were the primary causes of the impairments.

Overheads were also improved, with SG&A as a percentage of total revenue, including both homebuilding revenue and land sales at 12.6%, down 20 basis points. Our third quarter adjusted EBITDA was $38.3 million, up 4% versus last year.

As we continue to retire debt, we can immediately benefit from the reduction in our cash interest expense, but because of the way the capitalized interest works, it will take time for this to materialize on our income statement. Even with an additional $6.4 million of GAAP interest expense this quarter, our pretax income was similar to last year.

Third quarter net income from continuing operations was $6.1 million or $0.19 per share, compared with the prior year of $12.2 million or $0.46 per share. This quarter, we recognized $5.3 million in tax expense, compared to no tax expense last year, because we reversed most of the valuation allowance on our deferred tax assets at the end of last year. As a reminder, from a cash perspective, we will not be paying federal taxes for the foreseeable future regardless of the accounting for those taxes.

Moving on to our expectations for fourth quarter results, we expect orders to grow at least 10% relative to the fourth quarter of last year, driven by a better absorption rate. We expect our backlog conversion rate to be between 75% and 80%, significantly above the rate we achieved in our fiscal fourth quarter last year, but similar to the fourth quarter of 2014. The increase relates in part to having a higher percentage of our backlog scheduled to close in the quarter.

Our ASP is expected to be in the high $330,000s, representing growth both on a year-over-year and sequential basis. Our gross margins should be similar to the third quarter. Our SG&A as a percentage of total revenue should be a bit better than last year, and finally, land spend is expected to be above $100 million.

Taking a step back, it is evident that we continue to make progress toward achieving 2B-10, our multi-year goal to get to $2 billion in revenue and a 10% operating margin. As a reminder, our 2B-10 objectives are measured against our last 12-month performance.

Homebuilding revenue totaled $1.8 billion, up more than $315 million or 22% compared to last year. Our sales pace was 2.6 sales per community per month, slightly below our 2B-10 range, impacted by our sales performance in the first quarter of this year. We expect to move into our target range as we progress through the calendar year. Our average sales price was $325,000, more than 7% higher than the comparable period last year. Our average community count for the last 12 months was 166 and we continue to expect modest growth in our full-year average.

Our gross margin over the past year came in at 20.7%, the same as in the third quarter. Looking forward, we believe we can move our gross margin above 21%.

SG&A as a percentage of total revenue declined to 12.2%, down 90 basis points relative to this same time period last year. What that leads to is our adjusted EBITDA is now over $160 million, up more than 20% from the prior year. We have made significant progress to date and the path forward is clear. At this point, I'll turn it over to David to discuss our balance sheet and liquidity.

Thanks Bob. At the end of June, we owned or controlled over 20,000 active lots, plus about 3,700 lots in land held for future development, leaving us with more than enough land to reach and surpass our 2B-10 goals. Our share of inventory that is active has steadily grown and now represents 85% of total inventory. In addition, we have increased the share of optioned lots in recent years and expect that trend will gradually continue.

During the third quarter, we spent $72 million on land acquisition and development. This was slightly below our expectation, primarily related to the timing of land development spending. We expect to spend at a higher level in the fourth quarter with total spending likely to be over $100 million. In addition to our purchases, we also activated three assets previously classified as land held for future development, representing nearly $40 million of inventory, which will add to our community count in fiscal 2017 and 2018. Activating these assets is tantamount to land spending, but without using any cash.

Our remaining land held for future development balance now represents under 13% of our inventory, compared to a high of 33% in fiscal 2012. We expect to activate additional parcels over time, which will further enhance our capital efficiency.

Demonstrating our improved profitability and more efficient use of capital, our trailing 12 month EBITDA to inventory ratio has dramatically increased in fiscal 2012 and will continue to be a focus moving forward. We ended the quarter with more than $240 million of liquidity, consisting of $127 million of unrestricted cash and about $115 million of availability on our revolver after adjusting for Letters of Credit.

During the quarter, we reduced our debt by just under $30 million, including our first principal payment under our term loan, bringing our year-to-date debt reduction to over $71 million. These repurchases combined with the savings generated from refinancing our 2016 notes has reduced the run rate of our annual cash interest expense by more than $8 million. As Allan mentioned earlier, we have increased our deleveraging target for this year -- for this fiscal year to $150 million. Further, we now expect the total debt reduction of more than $250 million through fiscal 2018.

With that let me turn the call back over to Allan for his conclusion.

Thanks again David. I want to reiterate our main themes for 2016 and our accomplishments so far this year. For the 19th time in the last 20 quarters we generated year-over-year EBITDA growth. Year-to-date, our EBITDA is now up over 20%. We've grown our EBITDA much faster than our inventory, allowing us to improve our return on capital. And finally, we've eliminated more than $70 million in debt since September and committed to more than doubling that by our year-end.

We've made a lot of progress over the last five years and we look forward to continuing to drive EBITDA growth and debt reduction in the years ahead. I want to thank our team for their efforts. Together, we have the willingness and the ability to reach our objectives.

And with that, I'll turn the call over to the operator to take us into Q&A.

(Operator Instructions) Alan Ratner.

Hey guys, good morning and nice job with the progress this quarter. My first question, Allan, just on the 10% expectation for orders in the fourth quarter, just curious if you could elaborate on that a little bit and talk about maybe what you're seeing on the demand side that gives you that confidence, either maybe on July trends or anything else that gives you that confidence that absorptions will be up in that magnitude, given your remarks and nice acceleration.

And then second, afterwards, just curious if you could talk a little bit about what you're seeing in the land market as far as availability from land bankers, as well as option contracts. I know you mentioned you're looking to increase the share on the options side. At this point it looks like it's been fairly steady, maybe creeping up a little bit, but are you starting to see more availability of options in the marketplace, as well as what type of terms from land bankers? Thank you.

So relative to our optimistic view on Q4, I think two things. First of all, July trends have been pretty good. We are all in this long enough to know that one month doesn't a quarter make, but we do have some confidence in July, looking at it relative to last year.

The other thing is we weren't really excited about what happened in the fourth quarter of last year and I think we've got the plan in place to do better this year. And I think we've got the right communities to help us get there. I don't really have any big macro view.

On the issue of options that has trended up from the low 20s to the low 30s as a percentage. And I think it will incrementally move slowly upward. There isn't an absolute right number, it really is about terms, which is what your question implies, we're seeing plenty availability of third-party money to create option transactions for us. That money is available in more of our markets, which is constructive.

And so we're making decisions on individual transactions, whether we want to finance them through an option agreement or whether we want to put them on balance sheet. But I would say that the availability of transactions that meet our underwriting criteria remain strong and the availability of liquidity to give us alternatives in structuring transactions to pay for them is also quite strong.

Great that's good to hear. And if I could sneak in one more. Allan, just in terms of the demand you're seeing on specs versus to be built, the slide where you show your spec count that's been moving steadily higher. We heard from one builder yesterday that actually mentioned that they're seeing accelerating demand for specs. So buyers might be taking a bit longer to make the decision to buy, but when they do they want own immediately. I know you're at a different price point, but just curious, as you ramp up your spec production what type of trends are you seeing in demand for specs versus to be built and what's your margin differential currently on this? Thanks.

It's a big question, because last year or earlier in the year, we had kind of pivoted our spec strategy to create a liquidity cushion. And in the third quarter what you really saw is we pulled back from that with the term loan in place and we saw a nice improvement in spec margins, and that's really why we're pretty comfortable with where we are with the total spec count.

And if you look at it on a per community basis, it's very similar to where we were a year ago. It's up a couple, but we're in Sacramento now. And as you know, California is a market that tends to phase build. So that will slightly increase our spec numbers.

It's hard to answer that question and I can't in this call go division by division through 16 divisions. But I would say in our stronger markets, demand for specs is very good and I think we've got the right numbers in the right places for our fourth quarter.

Susan Berliner.

So happy with the debt reduction goals. I guess I was trying to figure out, so you basically have one quarter to reduce roughly $80 million of debt, and I'm just trying to figure out if that is associated with the refinancing of your 2018 and 2019 or how -- if you can give us any feeling how you could get there?

Sue, if you remember, our fourth quarter is always our big cash generation quarter. Our assumptions are based on the fact that the amount of cash we expect to generate this quarter is going to allow us to reduce debt to that amount.

But, I guess what is payable -- to just be paid down?

Well, we have a lot of options, Sue. Obviously, between the term loan and between the 18s to 19s, I don't think today we're going to telegraph exactly where we'll go. We will be good stewards of the capital, there's enough debt there for us to pick and choose from. And we'll obviously be interested in where yields are.

And can you just talk about your refinancing strategy for 2018 with regards to secured debt versus unsecured debt?

Sue, I would tell we're considering all options in the market right now. We're keeping a very close watch on the market and what's happening, what yields look like and what's available to us. We've laid out long-term, we prefer to be in an unsecured cap structure and we're taking the steps to try to get there as the market allows.

And one last question, if I may, if you can give us any color on the market, specifically Houston.

Well actually Q3 was terrific in Houston. We've had an acceleration year-over-year in absorption rates, which was nice. Our market share has expanded nicely, we're in the right locations. We're exposed to healthcare and the petro side. So I think we're very pleased, we've got a strong team, a good land base and excellent performance there.

Michael Rehaut.

I was hoping to get, and I'm sorry if I've missed this, I might have jumped on slightly late, but just kind of a review of the different regions. I know in your press release you kind of mentioned that you were pleased with sales pace overall for the quarter. But perhaps region by region, some of the key markets you can kind of give us a sense of, what's doing well or even better than expectations, where you might -- you've seen a little bit of softness, any help there from a regional perspective would be great.

Michael, we did talk about four markets we called out and interestingly they're spread across our three regions. In the West, both Las Vegas and Houston had really nice quarters. We saw good pickup in demand, and our price points in those markets are clearly to the lower side and we're seeing good demand there.

In the Southeast, Raleigh had a particularly notably good quarter and we're seeing great job growth there. And again, our placement in that market with value is very, very well aligned with the kinds of jobs that are being created.

And then in our East segment, we had a terrific quarter in Maryland, and we operate at more of a move-up price point there; closer in, A-plus school districts. And I would say that that market exhibited a little more strength this year and so we were very pleased with its performance.

And I guess just following on on that, obviously you've moved past New Jersey already, but any markets that might come up as candidates to exit or that would -- as a result of aligning more fully or aggressively focused on some of your stronger markets? And more broadly also maybe give us a sense of which markets or areas are currently garnering most of your -- or a larger amount of your investment dollars, where do you see the best opportunities?

So the short answer to the first question is, we love our footprint. We're where we want to be, we've no plans to be anywhere else. We think it's a terrific lineup, strong teams.

In terms of the second question, I'm happy to tell you that there are individual markets, divisions within each of our segments that are really effectively competing for capital right now. We're very focused on, I call it the triad. I'm focused on house prices, land prices and incomes and the relationship of those three in each market we watch unbelievably carefully.

Then the supply and demand characteristics within the market as well. And when we line that up, we've got plenty of places to deploy capital and it's allowed us to be very selective and raise a high bar for divisions to compete for the capital, but there are divisions in all three segments that are achieving that standard right now.

Mike, I just want to add something to Allan's first point on the deleveraging. We are very comfortable with the deleveraging plan that we put together, the pace of the deleveraging plan that we put together. Don't feel like we need to accelerate it relative to your comment about maybe moving our division, we feel real comfortable with the footprint and the pace of our debt reduction.

Susan McClary.

Allan, you mentioned that you believe you can get the gross margins up over 21% as we kind of move over time and that's somewhat in contrast to what we've heard from some of our peers, where they're seeing actually some gross margin pressures coming through. And you noted three kind of elements of your strategy within that. Can you talk about how you're thinking about achieving this higher level of profitability, just given the pressures that you're seeing out there?

Sure. Well, there are a lot of points to this. But remember that this year we did some things intentionally to create a liquidity cushion before we put the term loan in place. And we've absorbed that and we're moving past that and that was evident in the third quarter. But I think when we look at Choice Plans and Mortgage Choice in particular, they are clearly distinctive, they stand out, they resonate with customers, they help absorptions and they help pricing. And I think those two things are great differentiators.

We are at or above standard on energy. I have to admit that many builders have energy programs and it's hard for the consumers to sort through that. I'm pleased that we're one of only two national builders that are ENERGY STAR builders of the year. So I think all three legs of our competitive posture give us that opportunity. But the other side of it is and clearly where your question is getting is on the cost side. We feel like we have strategies in each of our markets to drive cost out of our homes. And obviously everyone is trying to do that, but we have specific plans for each market, for each plan type that we see a trajectory for us over the next couple of quarters.

And then in terms of the sales pace, I know that you mentioned that you expect that to move up through the year as well. I know you talked a little bit about the sales -- the demand side of that equation, but how should we be thinking about the community count coming through?

Yes, I think for the full year what we've said is we expect for the full year, our average community count will be up a little bit very modestly, I think are words that we've used. So I wouldn't expect a lot of change in the fourth quarter.

Sam McGovern.

In terms of the changes in deleveraging, are there any changes in terms of your strategy with regard to JVs or land banking, or is that relatively unchanged from what you guys have said in the last couple of quarters?

Sam there hasn't been any change in the strategy to JV. We are very focused on capital efficiency, that's going to be a guiding principle. But no change the way we're thinking about it.

And then can you comment again in terms of the long-term debt target, where you guys see that going over time. Has that changed at all in your mind?

No, I think we pulled it forward a little bit by increasing what we're doing this year, but we have a long-term objective to have a debt to cap that starts with a [5].

James Finnerty.

This is actually [Manisha Srivastava] on for James. Just to quickly touch back on the commentary on your debt. With the new $250 million debt reduction target through fiscal 2018, are you still expecting [to pace out] like a $70 million reduction in fiscal 2017 per your prior comments, or would you expect faster paydowns in fiscal 2017?

We did a couple of things today. We took our 2016 estimate from $100 million, up to $150 million, and we extended our objective from what previously had been $170 million total to $250 million total. So there were two different changes. I don't think we're telegraphing a 2017 number, other than the fact that we'll spread that $100 million over 2017 and 2018.

And then just quickly, in terms of the order growth in the West and East segments, could you just quickly talk about whether that was more a function of absorptions or community count, some color there would be helpful.

In both cases it was more a function of absorptions.

Susan Berliner.

Had one other. Can you just talk about your land sale targets? I know you sold a little bit this quarter, and I was wondering what you were seeing for next quarter.

Yes, Sue, we've got about $39 million held for sale right now. We, think we'll close in excess of $15 million in the fourth quarter.

Alex Barron.

I was hoping if you could, I guess, discus more broadly -- I like your strategy of paying down debt. I guess I'm just wondering, more broadly what your outlook is for community count growth, I guess as you pursue that goal and also your mothball land -- on your remaining mothball land what the plans are there at the moment.

Well, those two questions obviously go well together, and the quarter and last quarter both provide good evidence of that. We have been activating assets and that will create future community count growth for us as those communities get opened for sale.

And I think we have confidence that we can delever and grow community count. And the reasons are fairly straightforward. We are doing slightly smaller deals than we did earlier in the cycle. We have increased the share that options are representing in our mix of communities.

And the third point that you made, which is we've still got additional community count growth from our land held over the next couple of years. So this is a case we can afford to grow community count and pay down debt. We think that's the right thing to do.

Sounds good. And then as it pertains to the write-down you had this quarter, what was that related to again?

There were two different communities in different markets, and there were very specific triggers related to pricing -- competitive pricing at those communities. There was no other impact on any other communities in the market, they were very isolated.

Mark, are there more questions in the queue?

At this time, sir, we have no questions on queue.

All right. Well, thank you for joining us on our third quarter earnings call and we look forward to talking to you in a few months with our year-end results.

Thank you for joining today's conference call.