Beazer Homes USA Inc (BZH) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Beazer Homes earnings conference call for the quarter ended March 31, 2017. Today's call is being recorded and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company's website at www.beazer.com. At this point, I will turn the call over to David Goldberg, Vice President and Treasurer. Sir, you may begin.

Thank you, Anna. Good morning, and welcome to the Beazer Homes Conference Call, discussing our results for the second quarter of fiscal year 2017. 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 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 statement, 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. Allan will provide an overview of our second quarter 2017 results and an update on our balance growth strategy. Bob will then discuss second quarter results in greater depth, where we stand relative to our 2B-10 goals and our expectations for the third quarter of fiscal 2017. 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'll take questions in the time remaining.

I will now turn the call over to Allan.

Thanks, David, and thank you for joining us on our call this morning. As you've seen in our press release by now, we had a great second quarter. In fact, our results were at or above our expectations on every front, highlighted by significant increases in homebuilding revenue, gross margin, operating margin and EBITDA. We also generated order growth as a higher sales pace, more than offset the temporary decline in community count, that resulted from our debt reduction activities last year. Strategically, we made big improvements during the quarter. Our debt refinancing strengthened our balance sheet and our land spending and Gatherings activities, both accelerated. All in all, it was a very productive quarter and I'm happy to say, sales in April remain quite strong.

Our balance growth strategy is about driving substantially higher profitability, while generating a healthier and more efficient balance sheet. This is designed to improve return on capital, while reducing risk. Over the last year, we've gotten great feedback on our efforts to improve our balance sheet, including a Universal support for our commitment to complete an additional $100 million in debt reduction over the next 18 months.

Now, I'd like to spend a few minutes defining the growth opportunity we see ahead of us and why we are confident we can achieve it. Simply stated, the growth we care about is growth in earnings per share. Having grown our adjusted EBITDA by $185 million since 2011 and with the achievement of our 2B-10 targets approaching, we have our site set on driving good old-fashioned EPS for the next several years. In this industry, community count growth often serves as a proxy for estimates of future earnings growth. But in our case at least, it misses an awful lot of the opportunity. In fact, there are 6 different levers that are wholly or partially under our control that underscore our confidence around driving EPS over the next few years.

First, as we've discussed on previous calls, we're making our balance sheet more efficient through a combination of reducing our land held for future development and increasing our use of both options in land bank financing where appropriate. This will allow us to reach our 2B-10 community count goal without a commensurate increase in land investment.

Second, our average selling price is going to move higher. This, in part, reflects our focus on millennials and baby boomers, that demand and can afford a home that offers extraordinary value at an affordable price. That's our sweet spot. So we don't have to chase purely price-driven buyers to outlying submarkets. With our strong land pipeline, we have visibility into gradually increasing average sales prices, driven by both product and geographic mix and not by price appreciation. Third, we have an opportunity to further improve our sales pace, particularly outside the usually strong spring selling season. With a limited supply of resale homes, improving wage growth and moderate interest rates, we should be able to grow our absorptions as the economy continues to improve. Beyond that, our Gatherings communities, will also play a key role. As we've mentioned, the Gatherings neighborhoods, we built over the last decade generated higher than company average sales paces, which bodes well for future absorption rates. Fourth, as we continue to work on operational efficiency, we think there will be incremental gross margin improvements. And again, growing our Gatherings communities will help. Gatherings sites have historically generated higher margins than the company average, mainly because there is so much less competition for the sites.

Fifth, as we saw this quarter, we are going to keep improving our SG&A leverage, as we continue to grow our top line faster than our overhead cost. These are the 5 levers that will allow us to reach and then surpass our 2B-10 targets. Then, below the EBITDA line, we have a sixth lever that will further contribute to our earnings growth, namely interest expense, percentage of revenue, will start to fall this year as a result of our successful deleveraging and refinancings. That 6 different levers, which taken together, create a much more robust earnings growth opportunity than would be described by community count alone.

Finally, before I turn the call over to Bob, I want to make sure to note the progress we're making on expanding the number of Gatherings sites. There are some statistics in our press release but the important part is that our expansion remains on track. And in 2 weeks, we're hosting an Investor Dinner in New York, where we will provide more insight in onto our plans for Gatherings and introduce some of our team members.

With that, I'll turn the call over to Bob to discuss the results in more detail and update you on our 2B-10 progress.

Thanks, Allan, and good morning, everyone. In the second quarter, our sales absorption rate was 3.4 sales per community per month, up 9% year-over-year, leading to a 1% increase in orders. We generated sizable year-over-year sales order growth in a number of our markets that include, Riley, Charleston, Indianapolis and Virginia. And we made our first sales in San Diego.

Homebuilding revenue rose about 12% versus the prior year to $422 million. Our average selling price of $340,000 was almost 4% higher than the same period last year. Each of our regions experienced price improvements on a year-over-year basis, led by the East, where prices were up almost 8%. We generated a backlog conversion ratio of 64%, 400 basis points higher than the prior year. The improvement in the backlog conversion ratio primarily, related to our efforts to reduce cycle times. All this has been challenging given the headwinds created by continued labor constraints, it remains a focus for additional improvement.

Our average community count for the quarter was 154 and we ended the quarter with 158 communities. This was a little higher than our expectations, related to a few closeouts that will now occur in the third quarter. Our second quarter gross margin, excluding impairments, abandonments and amortized interest, was 20.7%, up 50 basis points versus the prior year and 20 basis points, sequentially. This was ahead of our expectations, driven by gains across majority of our markets. SG&A as a percentage of total revenue, including both homebuilding revenue and land sales was 13.3%, down about 60 basis points year-over-year and ahead of the guidance we provided in February.

The outperformance was attributable to the stronger top line growth we generated in the quarter. Our second quarter adjusted EBITDA was $33.2 million, up $7 million or 27% versus the same period last year. Our total GAAP interest expense, which includes both direct interest expense and interest amortized through cost of goods sold was $23.9 million in the second quarter, up about $1 million versus the prior year. With the recent reductions in our cash interest costs, nearly $12 million annually, we are now, effectively, expensing the same amount of interest we're incurring. That means, future growth and EBITDA will flow straight to pretax income.

Our second quarter net loss with continuing operations was $7.5 million, which included $15.6 million of charges from the early extinguishment of debt and approximately $300,000 from impairment and abandonment charges. This compared to a net loss of $1.3 million for the same period last year, which included both the loss from the earliest extinguishment of debt of $1.6 million and impairment charges of $1.8 million. Excluding these charges, we would have made about $6.5 million more on a year-over-year basis. Our total tax benefit in the quarter was $4.5 million, based on the effective tax rate of approximately 36.7%. We continue to achieve -- 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, out 2B-10 objectives are measured against our last 12 months performance. Total revenue was over $1.9 billion, up more than $60 million or 3.6%, compared to last year. We closed 5,454 homes over the last 12 months, 1% 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.

Our 12-month sales pace remains among the highest in our peer group. Our average selling price over the last 12 months was $335,000. Last quarter, we lifted our 2B-10 target range to $340,000 to the $350,000. With an ASP in backlog over $347,000, we expect to make continued progress toward that goal in the coming quarters. Our average community count for the last 12 months was 159, and we ended the quarter with 158 active communities. Our gross margin over the past year came in at 20.7%. We remain focused on driving greater operating efficiency to offset rising direct costs and adding Gatherings communities. SG&A as a percentage of total revenue, over the last 12 months, was 12.3%. This is still a little above where we would like it to be but with the rising community count and higher average selling prices, we expect to reach our 2B-10 range.

These results generated adjusted EBITDA of $162 million, up about $2 million from the same period last year and up about $185 million since 2011. We have made significant progress towards achieving 2B-10 and we expect fiscal 2017, to represent another big step towards that goal.

Moving on to our expectations for the third quarter fiscal 2017. We expect orders to be relatively flat versus the same time period last year, despite a community count that will be down 5% year-over-year, but up a couple of communities sequentially. Our backlog conversion ratio should be just above 60%. Our ASP, is expected to be in the low $340,000, up significantly relative to the third quarter of last year. Our gross margins should be relatively flat sequentially consistent with our objective of full year gross margin improvement with allowances for modest sequential fluctuations.

Our SG&A as a percentage of total revenue, should be down slightly year-over-year. Our land sale revenue will be relatively flat sequentially. And finally, the cash component of our land spend is expected to be around $100 million, which will be up significantly year-over-year.

At this point, I'll turn it over to David, to discuss our land spending and balance sheet.

Thanks, Bob. In the second quarter, we spent $103 million on land and land development. Additionally, we were able to activate more than $20 million of land held for future development. Combining these, our effective land spend was up about 27% versus the prior year. Over the past 4 years, our total land held for future development has declined from nearly $360 million to about $150 million, a reduction of 57%. Our active assets now represent nearly 90% of total inventory, up from just 68% at the end of the second quarter of fiscal 2013.

We remain committed to further reducing our land held assets this year, allowing us to continue to improve our capital efficiency. While predicting future community counts is difficult. You can see that we have 34 communities scheduled to open in the next 6 months and a pipeline of 36 communities that have been approved and are currently under contract, offset by 36 near-term closings. We believe our community count has troughed and that we'll experience gradual growth in the coming quarters. Last quarter, we discussed the expansion of our Southern California division, in San Diego. During the second quarter, we opened 2 new communities in this market and we've been encouraged by the strong demand we're seeing thus far.

As a reminder, we expect to have 7 communities open in San Diego over the next 3 or 4 quarters. All the underlying land for these new neighborhoods came from either land bank or land held assets, demonstrating how we can generate higher sales, closings and EBITDA with limited additional capital investment. Demonstrating the progress we've made in improving our profitability and more efficiently using capital, our trailing 12-month EBITDA-to-inventory ratio was about 10%, representing a dramatic improvement relative to prior years. While we have made great strides to date, we're confident that there is significant upside to our profitability, still ahead of us. Reflecting the benefits of the refinancing that we've completed, and our efforts to reduce leverage, our balance sheet is well-positioned to support our growth ambitions, with nearly $140 million in unrestricted cash and over $280 million in total liquidity at the end of March.

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

Thanks, David. Our second quarter results demonstrated our ability to execute our balanced growth strategy and the opportunity we have to accelerate growth from a leaner and less leveraged balance sheet. As we move toward to our 2B-10 targets, we are increasingly measuring growth as growth in EPS, which will be driven by our 6 levers. Mainly, we're focused on generating a combination of community count growth, higher ASPs, increased sales pace, incremental gross margin, improved SG&A leverage and lower expense as a percentage of our top line. I want to thank our team for their continued efforts. With their talents, I'm confident we have the people, the strategy and the resources to reach our objectives.

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

(Operator Instructions) And our first question comes from Michael Rehaut.

So the first question, I want to dig in a little bit more on sales pace. Obviously, you have continued to show some solid improvement on year-over-year, as well as on an absolute basis. And I think it came in at bit better than what you were expecting, when you gave guidance last quarter. So as you look through across the different regions, and product lines across the company, I wanted to see how you think the different regions performed on a relative basis and what the biggest drivers are, of the upside growth of your initial expectations?

That was a good question. I would start by just telling you that all of our 3 segments performed above 3 sales per community per month in the quarter, which was terrific, because it really showed a broader base and we were less reliant on a very small number of divisions that just had really spectacular quarters. In fact, a couple of the divisions that in the prior year had been very strong, were down. Still at healthy levels but I felt very good about the fact that all -- as I said all 3 segments were up. It's hard to pick out individual markets other than the ones that Bob mentioned. But I think, we felt pretty good about it across single family and across our townhome programs.

Okay. Great. And then just moving onto Gatherings, I wanted to see, what you think as you look across your markets where the biggest opportunities are? And then I know that you've spoken about how historically Gatherings, have higher margins than sales trade in traditional business. So as you evaluate new land opportunities for Gatherings, I wanted to understand how you think about the underwriting criteria there?

Well, the underwriting criteria have, absolutely, been designed with outperformance relative to pace of margin in mind. And I made the comment, it's subtle, but I made the comment in the script that there's less competition for these sites. That's true. It's a little more complicated than that. What I would say is, we don't typically compete for sites with other builders. We are competing with other uses. And if there is a higher and better use, sort of real estate lingo, for a more intense use, an office building or maybe a retail center, although that's increasing unlikely, we don't have to compete for that site. But where the alternative use maybe 15 townhomes, and we can do 54 condo units. We’ve got a significant advantage and that's really one of the things that underpins our confidence in the margin strategy. Now the building takes a little while to build, but what that allows us to do before we open is create significant interest list so that when we open, we've got some pinup demand. We’re being cautious about that as we get to new markets, because we've got a good reputation with the program in Maryland and Virginia. But with the groundbreaking in Orlando, and we've drawn a lot of attention to that, to try and build that same level of expectations so that when we open for sales in the first quarter of '18, there are an awful lot of people who we have been exposed to and have been in dialogue with. And I think, those are some of the things that we're doing to make sure that we keep margins in pace above company average, as we roll the program out.

Okay, great. And just lastly, the backlog conversion, I think, came in a bit ahead of what you were looking for and I know you talked about the goal to try to improve cycle times. I want to see if there is any element of more spec sales in the quarter that shows a higher backlog conversion or it was just the cycle time improvement? And then if you could just comment on the margin differential you're seeing between spec and to-be-built? And if there was any impact in the quarter, that will be helpful?

Yes, the number of specs as we had during the quarter were actually pretty similar to prior years. So the improvement in backlog conversion was really driven by operational efficiencies. The margin differentials obviously, depends on which community and which area of the country but the margin differentials are kind of within historic norms and we're pretty comfortable with where we are.

Our next question comes from Jay McCanless of Wedbush.

First question, I have on the other expense line is, the number you guys have this quarter, is that what we should expect for the run rate going forward? The negative $3.9 million?

You know, Jay, it obviously, is a function of debt reduction but I think that -- as we talked about last quarter, about the same line, I think you'll see that continue to trend a little bit lower in the coming quarters.

Okay. And then on the order front, I know that your quarterly orders in the West, were down year-over-year, could you talk a little bit about what's going on there? But also, as we think about modeling going forward on the sales absorption lines, should we expect a little bit of improvement low to mid-single digits improvement there? Just as Gatherings, comes online and I'm assuming that's a higher turning property, should we build some improvement in the sales absorption line?

Just on the Gatherings question, I think the answer in time will be, yes. But groundbreaking on a site in Orlando, this quarter for sales in that one community in the first quarter of '18, it will be a little while before the weighted average effect, if you will, of Gatherings makes a big difference. So I think that's a -- that's an intermediate-term opportunity for us in both margins and on pace. In terms of sales pace, what we've said particularly, about the third quarter, Jay, is we expect orders to be roughly flat with last year, even though on a year-over-year basis, we are going to have a reduction in community count. As David said, the community count we think has trough, so on aggregate levels, it'll be up just a bit from the second quarter but year-over-year, that comp is still trough. So a flat order number would be a great outcome.

Okay, got it. And then on the West, can you talk about West orders being down, year-over-year?

Sure. Totally community count, that's really what it is and I would use the opportunity to take a little bit of a step back and kind of point something out that is underneath that because community counts don't change within the quarter, they actually change 2 years ago, you just didn't know it yet, right? Because it has to be with how we allocate capital. And I'm saying this in part, because it's known in our company and it's known in our Houston Division, but I think it's valuable for investors to understand a little bit of the discipline that we use when we’re allocating capital. We made a call in 2014, 2015 that house prices had run in an unusual way in Houston, it was pulling land prices. We were very concerned about how frothy things were and we made a conscious decision to throttle back land spending. And we knew when we made that decision, that we have fewer communities, 2 years out. We made that decision at that time. We didn't think that Houston, was going to hell in a handbasket but we definitely saw some signs, at the periphery there is going to be a little bit of a reset. And what we've seen over the last 2 years, is a little bit of a reset. I think we've been in an exceptionally good place and we have reloaded and so as I look out a couple of years, I'm really excited about the role that Houston's going to play. But as I look at the quarter that we're talking about, it really reflect decisions we made about capital allocation, a couple of years ago.

Understood. The last question I have, can you just talk about where you are on the progress to reducing net debt by $100 million? I think, in the release you guys talked about, the $56 million, on the term loan being paid down, so does that leave you roughly $44 million to go? Or where do you stand now?

Yes, Jay, it's still about $50 million. We paid down about $3 million in the refinancing transaction, net between the issuance and what we brought back. So we still have about $100 million over the next 18 months. So less $3 million or so. But not much uptick there. We still have every intention of going forward and doing the full repurchase and moving forward. So...

Our next question comes from Alan Ratner of Zelman & Associates.

Allan or Bob, just on the margin outlook, it sounds like in the near term, pretty stable trends there. Were just curious if you could talk about some of the recent development on lumber and costs going up, how you guys see that playing out over the next couple of quarters? And then on pricing, I think you gave some metrics in terms of year-over-year growth, I believe something -- that's partially mix driven. So have you seen pricing power reaccelerating through the spring? And in what magnitude are you raising prices across, however many percentage of your communities is that, that you're seeing that pricing power?

Alan, this is Dave. I'll start and I'll hand over some of the lumber questions that you asked and I'll pass it over to Allan and he can answer the pricing questions. I will tell you from the lumber perspective, clearly the market anticipated this tariff and prices start to move well in advance in the tariff. We've seen price increases, we absorbed half the price increases that you would've -- that you think we would increase -- we would see just getting locks of timing for the lots. We'll see the remainder of the impact from the increase in lumber costs in latter part of this year, which means it will show up in results late in '18 -- late in '17 into '18. So we have the results from it already and our guidance certainly incorporates higher lumber costs as we look forward.

I think on the pricing side, every lot, and every floor plan has its story. And I completely appreciate investors perspective on, hey, they think it's simple for us. What I would tell you is, with a strong sales pace, there is clearly less pressure on incentives and there are opportunities in most of our communities to adjust pricing.

One of the things that we keep repeating intentionally is extraordinary value, at an affordable price. I think we want to be not just on the base price, but on the whole value proposition, I think, we want to be seen as value, the features that are included and the amenities in the community and those kind of things. So I think we have got some pricing momentum, but we're being careful with that and while we're leaning into it, I think we want to sustain both absorption rates and some forward traction on prices and not choke one off for the other.

Understood. That sounds prudent to me. Second question, if you could just give us an update on your -- the reactivation of previous mothballed land? How much of your land book right now is still mothballed? And if you look at your overall community count, how many per -- how many communities have been reactivated? And what is performance looking like on these communities?

Yes, Alan, I think what we've talked about in the script, we've got about 10% of our total inventory is land held for future development. So we've activated a significant amount. So about $150 million left from a high years ago, we have around 400. We don't give total community counts specific to those but we have activated many of them, many of them are selling. And what I'll tell you is, the margin characteristics of those deals actually, they open up, they're certainly on the upside. And are higher from when we opened them up where as we've talked below company margins purposely, to get the community going. But we're very happy with the progression margin characteristics of all those communities.

Thank you. Excuse me speakers, we show no further questions at this time. Speakers, you may continue.

All right. Well, thank you very much for joining us on our earnings conference call. We look forward to talking to you after the third quarter. Everybody, have a great day. Thanks.

And that concludes today's conference. Thank you for your participation. You may disconnect at this time.