Beazer Homes USA Inc (BZH) 2017 Q1 法說會逐字稿

Good morning and welcome to the Beazer Homes earnings conference call for the quarter ended December 31, 2016. Today's call is being recorded, and a replay will be available on the Company 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, Vice President and Treasurer. Sir, you may begin.

Thank you, Gary. Good morning, and welcome to the Beazer Homes conference call discussing our results for the first quarter of FY17. 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-Q which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as to 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 statement, whether 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. Allan will start the call by providing an update on our fiscal first-quarter 2017 results and our operational priorities. Bob will discuss first-quarter results in greater depth, where we stand relative to our 2B-10 goals, and our expectations for the second quarter of FY17. I will then come back to provide more details about our land spending this quarter and provide an update on our balance sheet and liquidity followed by a wrap-up by Allan. After our prepared remarks, we will take questions with the time remaining. I will now turn the call over to Allan.

Thank you, David, and thank you for joining us on our call this morning. Our first-quarter results reflected continued progress on our balanced growth strategy. As anticipated, we generated a significant increase in our absorption pace, increased ASPs, and squeezed out a small improvement in gross margins. This enabled us to overcome the temporary reduction in community count resulting from last year's major deleveraging and to invest in our recently launched gatherings division.

Looking forward, we are focused on building homes for the two largest demographic groups in US history. Millennials and the baby boomers. In both cases, we offer homes representing an exceptional value at an affordable price. This positions us to grow revenue and EBITDA for the foreseeable future. And, we are going to couple this expansion with a much more efficient balance sheet driven by a massive reduction in dormant land held assets, an increase in option lots and the elimination of an additional $100 million in debt though FY18. Taken together, this strategy will allow us to continue to pursue our 2B-10 targets while driving improvements in our return on assets and equity.

As investors have undoubtedly noticed, the environment for new home sales remains supportive. Traffic and demand are strong, supported by accelerating wage growth and improving consumer sentiment. Mortgage rates are still attractive, even after recent increases. And, the supply of new and used homes remains very tight across our markets. Of course, there are risks and uncertainties, particularly related to mortgage rates, labor, and potential new policies out of Washington.

In the face of these issues, we are taking proactive steps that will lead to higher returns while helping mitigate our risk. Specifically, here are four operational priorities for this year. First, as discussed on our last call, we are expanding our gatherings business across our geographic footprint. Historically, our active adult gatherings communities had driven both higher sales paces and margins than our traditional business which is why we believe this expansion will be very positive for our results in FY18 and beyond. We have already started building a robust pipeline of sites to support this rollout.

Second, we are in the process of building out our operations in supply-constrained California markets. The restart of our Sacramento business last year, and the near-term arrival of our new San Diego communities will support improvements in our unit activity, cash flow, and profitability in the years ahead. Third, rising rates give us the opportunity to demonstrate the value of our mortgage choice program. For those of you that are unfamiliar with mortgage choice, it is our unique, preferred lender program. We make lenders compete for our buyers' business which means our buyers win two ways. They get more competitive rates and the best possible service.

Finally, we are focusing on speeding up our asset turnover through an improvement in our homebuilding cycle times. We think about cycle times as three distinct components. Sale to start, start to completion, and completion to close. In the current labor market, it is going to be challenging to dramatically improve start to completion times. But, we have got opportunities related to the other two components, particularly in improving the sale to start process. Faster cycle times will allow us to maintain our focus on to-be-built homes that generally carry higher margins. Those are just four of our initiatives FY17, all of which are designed to support our balanced growth strategy. With that, I'll turn the call over to Bob to discuss our results in more detail and update you on our 2B-10 progress.

Thank you, Allan. Good morning, everyone. In the first quarter, our sales absorption rate was 2.2 sales per community per month, up more than 18% year over year leading to a 9% increase in orders. Importantly, our sales pace remained balanced across our markets with notable gains in California, Las Vegas, Phoenix, Charleston, and Raleigh. Homebuilding revenue was flat versus the prior year at $336 million. Our average selling price of $338,000 was more than 5% higher than the same period last year. Each of our regions experienced price improvement on a year-over-year basis led by the southeast where prices were up 9%. We generated a backlog conversion ratio of 52% which was in line with our expectation and slightly higher than the prior year. Our average selling price in backlog as of December 31 was approximately $346,000, suggesting further ASP growth moving forward.

Our first quarter gross margins, excluding impairments and amortized interest was 20.5%, up 10 basis points versus the prior year when adjusted for a warranty recovery. We are pursuing modest additional gains as we move through FY17 though expanding gross margin will be difficult if interest rates move up significantly or the labor situation becomes even more constrained.

SG&A as a percentage of total revenue including both homebuilding revenue and land sales was 14.7%, up about 150 basis points year over year and higher than we anticipated. The reason for that was a $2.7 million write-off of a legacy investment in a development site. Excluding this write-off, our SG&A would have been 13.9%, in line with our expectation given the additional overhead spending related to our gatherings investments.

Our first quarter adjusted EBITDA was $24.4 million. Our total GAAP interest expense, which includes both direct interest expense and interest-amortized cost of goods sold, was $20.9 million in the first quarter, down slightly versus the prior year. As a reminder, the benefit we generated from retiring debt will take time to materialize on our income statement as we continue to work through previously capitalized interest. On a run-rate basis, our cash interest expense has been reduced by approximately $10 million year over year.

First-quarter net loss in continuing operations was $1.4 million which included the previously mentioned $2.7 million write-off. This compared to net income of $1.2 million for the same period last year which benefited from a $3.6 million insurance recovery related to Florida stucco issues.

Our total tax benefit in the quarter was $2.6 million. As we expected, the changes we recently made to the structure of our subsidiaries led to a 36% annual effective tax rate. On top of that benefit, we had approximately $1.2 million in energy efficiency tax credits.

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. Total revenue was $1.8 billion, up more than $110 million, or more than 6% compared to last year. We closed 5,365 homes over the last 12 months, about 4% higher than the prior year. Our sales pace was 2.8 sales per community per month within our 2B-10 target range and up as expected. And, the full-year sales pace remains among the highest in our peer group, and we continue to pursue improvements.

With our average selling price over the last 12 months of $333,000 and our average price in backlog over $345,000, we are lifting our 2B-10 target to $340,000 to $350,000. Our growth ambitions in terms of pace and community count remain unchanged. But, it is worth noting that we can achieve our targets for both revenue and EBITDA with fewer communities at this higher price range.

Our average community count for the last 12 months was 162 although we ended the quarter with 154 active communities. The decline was expected and previously disclosed, as we prioritized deleveraging in FY16. However, given the land pipeline in place, we expect community count to begin to grow in the back half of this year and into FY18.

Our gross margin over the past year came in at 20.6%. We remain focused on driving greater operating efficiency to offset rising direct costs which will help support our margins in the coming quarters. SG&A as a percentage of total revenue was 12.6%, but excluding the write-off incurred this quarter, it would have been 12.4%. This is still a little above where we would like it to be, but with a rising community count and higher average selling prices, we are positioned to bring this into our 2B-10 range. These results generated adjusted EBITDA of $155 million, up about $1 million from the same period last year and up more than $160 million over the past five years. We have made significant progress toward achieving 2B-10, and we expect FY17 to represent another big step toward that goal.

Moving on to our expectations for the second quarter of FY17. We expect absorptions to be flat to up slightly versus the same period last year. Our average community count will be around 150 which we expect to be the low point for the year. Our backlog conversion ratio should be similar to the lever achieved for the second-quarter of FY16. Our ASP is expected to be around $340,000, up significantly relative to the second quarter of last year. Our gross margin should be slightly higher than last year's second quarter. Our SG&A as a percentage of total revenue will likely be flat year over year. Our land sale revenue will be less than the second quarter of FY16 with little to no gross profit, resulting in EBITDA being comparable to last year. And, finally, our cash land spend for the second quarter should be around $100 million, up significantly compared to last year. At this point, I will turn it over to David to discuss our land spending and balance sheet.

Thanks, Bob. In the first quarter, we spent $103 million on land and land development. Additionally, we were able to activate more than $40 million of land held for future development. Combining these, our effective land spend was up about 28% versus the prior year. Over the past three years, our total land held for future development has declined from [up] $340 million to less than $175 million, a reduction of nearly 50%. Looked at differently, our active assets now represent 87% of our total inventory compared to slightly over 70% at the end of the first quarter of FY14. We see opportunities to reduce our land held assets even further this year allowing us to continue to improve our capital efficiency.

In line with our expectation, our average community count of 156 for the first quarter was approximately 8% lower than the same period last year, driven by our decision to accelerate debt reduction in FY16. While predicting future quarterly community count is difficult, you can see that we have 42 communities scheduled to open in the next 6 months and 40 near-term closeouts. Additionally, we have a pipeline of 44 communities that have been approved and are currently under contract, underscoring our confidence for growth in FY18. It is important to point out that our expectation for future community count growth is not solely a function of increasing the dollar spend on land acquisition. We can and will grow community count by using our capital more efficiently. Whether it is buying more land through traditional options, using land banking structures, focusing on smaller communities that protect against an eventual downturn, or activating assets previously classified as land held for future development, we are finding opportunities to accelerate our community counts, and therefore our growth profile, while mitigating risk and achieving our deleveraging goals.

Demonstrating the progress we've made to date in improving our profitability and more efficiently using capital, our trailing 12-month EBITDA-to-inventory ratio rose to nearly 10%, representing a dramatic improvement relative to prior years. Looking forward, we have opportunities to drive further improvements. As an example, we are in the process of expanding our Southern California division into San Diego. Over the next year or so, we expect to open seven communities in this area. All the land underlying these neighborhoods came from either land-bank transactions or activating land-held assets. Without having to invest much additional capital, opening these communities will generate a significant positive impact on our orders, closings, and average selling price in FY18 and 2019.

After last year's deleveraging, our balance sheet is well positioned to support our growth ambitions with nearly $160 million in unrestricted cash and over $300 million in total liquidity at the end of December. We have no debt coming due until 2019 outside of our scheduled term loan amortization payments totaling $55 million which we will repay as part of our planned $100 million debt reduction through FY18. With that, let me turn the call back over to Allan for his conclusion.

Okay. Thanks, David. I want to conclude today's call with a recap of our strategy. Simply put, we are working to generate revenue and profitability growth from a leaner and less leveraged balance sheet as we approach and then surpass our 2B-10 goals. That means deploying capital very efficiently, growing our community account with emphasis on our high-performing gatherings communities, keeping overhead per home closed near the bottom of our peer group, and doing all this while reducing our debt by at least an additional $100 million through FY18. Achieving these goals will allow us to continue expanding our top line, EBITDA, and our returns. I would like to thank our team for their continuing efforts. With their talent, I'm confident we have the people, the strategy, and the resources to reach our objectives. With that, let me turn the call over to the Operator to take us into Q&A.

(Operator Instructions)

We have our first question from Michael Rehaut of JPMorgan. Sir, your line is open.

Good morning. This is Neal on for Mike. [Looking] at the gross margins for the quarter, you have had pretty good progress toward the 21% to 22% target. But, I guess you were looking for more flat sequentially this quarter? So, what were maybe some of the puts and takes? Was it more labor or raw materials?

I think the answer, Neal, is that it is awfully difficult to project gross margins even 90 days out within 20 or 25 basis points. I would say I don't have a big read-through. We were happy that it was up year over year. There are pressures on the cost side, but as you know, last year we were pretty focused on generating liquidity. And, as we have evolved, I think that has released some of the pressure that we were otherwise under. I think the puts and takes for us are we still see opportunities for modest incremental margin gains on a year-over-year basis.

Okay. That's helpful. Taking into account that the balance sheet is substantially stronger, and you are now able to focus less on lower margin specs. Do you think that is one of the drivers this year? Or, what are maybe some other drivers for the rest of the year?

I think last year we acknowledged very clearly that we stepped on the specs a little bit to generate liquidity. It allowed us to pay off a ton of debt. But, we said at the end of that, we will transition back to our more historical pattern of specs and to-be-builts. And, I think that is a lift for us. Beyond that, I mentioned something around cycle times. Look, I appreciate that is a little bit of an eye roller for most investors. But, squeezing a week out of our cycle time, that saves money, and frankly, it helps backlog conversion which also leverages the fixed parts of gross profit. So, the fixed parts of cost of goods sold. There are a few different things there. There is no magic bullet. The labor situation is definitely challenging, and we are working in every trade in every city on that like our competitors I'm sure are. The position we are in, we see a little light that we can continue to squeeze out or eke out incremental margin improvements.

Okay, that makes sense. Thank you.

Thank you, sir. Our next question is from Jay McCanless. Sir, your line is open.

Good morning, everyone. First question I had, it looks like the closings out West were fairly strong this quarter. Could you talk about the impact to gross margin there? And, what are you expecting maybe for the rest of the year in terms of a balance between the different regions?

As you know, Jay, we don't give quarterly segment guidance. I would tell you that the West has become slightly more important with Sacramento that we activated last year. I think that will be incrementally true just a bit. But, I don't think there's going to be a big mix shift across our segments over the balance of this year. I think it is going to be relatively flat. There is some seasonality. So, I would look to last year's mix on a quarterly basis more than I would sequential. Because in the Northeast as example we tend to be a little lumpier, or in the mid-Atlantic, we tend to be a little bit lumpier on closings in the second and third quarter than we are in our West and our Southeast regions.

Got it. So, the expansion into San Diego, should we expect the same type of gross margin impact from that expansion that we have seen from Natomas? Or, is that going to carry a little bit higher average gross margin?

It's a good question. I think maybe not everybody understands everything that was packed into that question. Let me just take one step back, and then, I will try and react. For folks that hadn't focused on it, Natomas is our Sacramento assets. We had activated those from land held for future development a couple of years ago and started generated closings last year. It has become a good part of the business. The nice thing with Natomas is from where we started, we said clearly that the land held assets would carry margins well below what the Company average was. We have been able to generate a pretty good lift in margins in Natomas. And so, as we anniversary or lap being in Sacramento, that actually ends up being a bit of a help to margins as opposed to an incremental negative.

In Southern California, in San Diego in particular we have a mix. We have one land held for future development site that we will activate next year. And, we really won't have any closings, Jay, from that site until late next year. The other two are land-bank transactions. I would tell you that they are going to have very good margins. Land-bank transactions lever our capital so that it is not quite the same margin as if we had put it on balance sheet. But, I think those will be pretty constructive. Early indications on demand -- I have to say I feel pretty good about.

Thank you for the color on that. The last question I had -- other expense came in lower this quarter than what I had anticipated. This $5.2 million range, is that something we could use for the rest of the year? Could it even move lower?

Jay, this is Bob. That is our interest expense on the direct interest line which relates to how much debt we have versus qualified inventory. And, with the debt repay down last year, obviously, we are starting to now see that reduction go through the income statement. That is probably a reasonable place to think about on a go-forward basis.

Okay, great.

Thank you. Next question is from Alan Ratner of Zelman & Associates. Sir, your line is open.

Thank you. Good morning and thank you for taking my question. My question related to the SG&A rate. So, if you look at your 2B-10 targets, you are clearly growing the business and expecting further leverage there into the 11% to 12% range. If we look at the current level you are at, you're just shy of 13%. It would -- on an annualized basis. It still certainly above other builders. And, I think even your targets at 11% to 12% would be a bit higher than where you bottomed out in a prior cycle. And, when I look at other companies, there are several that are actually even below prior period troughs to day on the lower volume rates. So, maybe you could spend a minute talking about the challenges in driving the SG&A rate even lower? And, why this cycle you don't think you can get quite back to the levels you achieved in the early [end of] 2000s.

The simple answer, which is usually the best one, is ASP, Alan. The fact is every $10,000 in ASP is about 30 bps. I look at our peer group. They are typically about $100,000 in ASP from where we are, and you can do the math on what that would do. So, one of the reasons that I made the point in my closing comment about keeping our overheads on a per-unit basis near the bottom, if not the very bottom of our peer group is that I think we're actually doing a pretty good job with SG&A in the very low $41,000, $42,000 per unit. I'll stack that up against anybody's. My last calculation was there was one builder that had a lower number.

It isn't so much the fault of our homes, what our overheads are. So, I look at it on a per-unit basis, not just on percentage basis. Beyond that, there really aren't challenges. You know probably better than I do what our closings were 10 years ago, we closed 18,000 homes. So, that is a little different size Company, so that makes the comparison pretty difficult. But, I really think for you and for others the focus is that we are running the business on a lean basis. For every home closed, I think we get pretty good bang for the buck.

I appreciate that, Alan. Thank you. And then, second question if I could. Just the order guidance for Q2, it implies the absorption growth rate, which has been trending very strong the last couple of quarters in the high teens, does pull back a little bit. Just curious, based on what you're seeing, you didn't really spend a whole lot of time talking about demand trends post-election with move-in rates. Maybe you could spend a second talking about what you're seeing there? And, why the growth rate might be slow here a little bit here in the second quarter -- fiscal second quarter? Thank you.

So, you are right. We do expect a lower or negligible rate of improvement in the pace. But, we had a really good March quarter last year. That's part of it. I will take the bait in terms of let's go back and unpack Q1 and talk about January a little bit. Q1 was a really odd quarter. We talked about October on our fourth-quarter call, and we were up about 20% and thought, gee, that's a harbinger of a strong quarter.

November was not very good. November was odd. Nothing really changed. Traffic was good. Sales weren't very good. In fact, we were down year-over-year in November. December came back and acted a lot like October. And, I will tell you, we did not do crazy stuff.

A lot of our peers, and don't know why they do this, but they are closed many days between Christmas and New Year's. We tend to do really well between Christmas and New Year. And, that carried over into January. At a high level what happened in January was the pickup in pace that we got offset the decline in community count. So, we sit here feeling pretty good about January, realizing that February and March are bigger months and were quite strong last year.

I appreciate that, thank you very much and good luck.

Thank you.

Thank you. Next question is from Alex Barron of Housing Research Center. Sir, your line is open.

Thanks. Wondering about your SG&A comment being flat year-over-year. Were you talking in dollars or in percentage terms?

We were talking in percentage terms, Alex.

Okay. And then, as it pertains to the rest of the year, what kind of tax rate can we model or assume?

Our annual effective tax rate will be about 36%.

Got it. Okay, thanks a lot.

For the whole year.

Thanks, Alex.

Thank you. And, the next question is from Yaman Tasdivar of Private Investment Management Firm.

Hello, thank you for taking my question. As I mentioned on the last call, I'm going to be a long-term investor in your Company. So, my questions are going to be more longer term and strategic in nature.

Sure.

I was wondering what are your thoughts on, I would like to drill down into the labor issue a little bit more. And, I want to see your thoughts on how reduced immigration affects labor rates, especially in the southern states versus the last boom cycle from 2005 where we saw increased immigration? And, the follow-up is to that, if there is any implications, what does the new administration's policies do to your future gross margins and [EBITDA]? Thank you.

Well, I am glad you paraphrased or characterized the question as long-term in nature and strategic. Because the good news and bad news is there's a lot of unknowns. I don't know what the administration's immigration policy is ultimately going to look like. But, let's take labor and look at a little bit more broadly because I think immigration is certainly a part of it. And, I will address that.

I think there are three different pillars that we are looking at longer term to help offset some of the pressures that we anticipate in terms of the availability, and therefore the cost of labor. First, right in the middle of your question is we are clearly in favor of a responsible guest worker program. I know that we are well aligned with other industries, including agricultural the industry. That isn't super-popular right now, but I can tell you with some time spent in DC personally, I think that there is a bigger audience for a broader immigration program. And, in particular, around guest workers then would maybe appear to be the case based on headlines. I think it is a complicated issue. Obviously, it is a highly charged issue. But, I think they are certainly seasonal and industry group impacts that I think you will see some greater flexibility around guest workers in particular. But, that is not the only part of the labor question.

I think the second part really gets to training and education. I feel pretty strongly about this. I think that as an industry we have a big opportunity to do a better job competing for the available talent pool. By talking to high school kids and talking to college kids and community college kids about the fact that it is okay to work with your hands. It is a great industry. It's highly rewarding to deliver the keys to somebody for their home. I know that with our trade partners, we are spending time and money on making the case that this is an industry that you can own a business in, this is an industry that you can have a very high quality of life, and frankly, it is well compensated. You have all heard stories of plumbers, electricians, drywallers. Those jobs are well-paying. So, I think we need to do a better job on the training and the education side. The facts are, not every kid needs to go to college. I think you've seen a resurgence in enrollment in some of the trade programs, and we are certainly supporting that.

I think the third leg, and probably the one that offers the most long-term promise but is hardest to see in the near term is around innovation and automation. I do think that there are some early efforts. Some of our trade partners and distributors have to eliminate waste and inefficiency in the building material side. If we can eliminate waste -- things that I find in dumpsters on our job sites. The less of that there is, that's less labor that was consumed along the way. So, I think all three of those are important for us to long-term address the labor issues in the industry.

I don't really have the ability to go back and compare and contrast immigration policies and quantities with prior periods. But, I will tell you I think that this is a longer-term issue for the industry. It is not a second-quarter issue alone, and it is why we and our partners and our competitors are looking at both immigration and training and automation as solutions to the challenge.

Thank you so much. It is really good to hear about your personal anecdote that you see the color on this issue is more positive than what the headlines suggest. And, I also agree with you that a construction job is very rewarding as I know from my personal experience in some nonprofit projects. Thank you, and good luck in the next quarters.

Thank you.

Thank you. Our next question from Alex Barron of Housing Research Center. Your line is open, sir.

Thank you. I was hoping you could elaborate on what you expect the ASP to do over the next few quarters? I guess as your mix changes and as California becomes a bigger part?

Alex, we increased our target range for 2B-10 $10,000 to $340,000 to $350,000 knowing that our backlog is already centered in the middle of that. What we talked about in the script is we are looking for about a $340,000 ASP in Q2. Somewhere in that $340,000 to $350,000 range throughout the rest of the year.

Okay. And, what about your margins longer term? Would they be going up because of your increased California exposure?

We talked about the fact that the mix of those communities -- the land held communities and the land-banked communities in general carrying margins that are lower than the Company average. So, I would tell you that I think there is an opportunity over time for those to help. But, in the near term, we are generating a terrific return on capital, and frankly. a lot of cash by monetizing assets that have historically been stranded in generating no margin and no EBIT at all. That's really a big part of the strategy.

That makes sense. Okay, thank you a lot.

Thank you, it looks like we have no further questions at the moment. I would like to hand the call back to our speakers.

All right, thank you again for participating in our call. We look forward to talking to after the end of the second quarter. Thank you, and have a good day.

Thank you, speakers. That will conclude today's conference. Thank you all for participating. You may now disconnect.