Beazer Homes USA Inc (BZH) 2020 Q1 法說會逐字稿

Good afternoon, and welcome to the Beazer Homes earnings conference call for the quarter ended December 31, 2019. 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.

Thank you. Good afternoon, and welcome to the Beazer Homes conference call discussing our results for the first quarter of fiscal 2020. 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 the date the statement is made, and 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 simply not possible to predict all such factors.

Joining me today are Allan Merrill, our Chairman and Chief Executive Officer; and Bob Salomon, our Executive Vice President and Chief Financial Officer.

On our call today, Allan will review highlights from the first quarter and then discuss our progress towards our goals for fiscal 2020. Bob will cover our first quarter results in greater depth as well as our expectations for the second quarter. I will then come back to provide an update of our balance sheet and more detail about our land spend, followed by 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 afternoon. We had a productive first quarter as we met or exceeded our expectations on each of our core metrics. First quarter orders were the highest they've been in a decade, up nearly 30% year-over-year as we benefited from both a healthy demand environment and community count growth. And importantly, gross margins ticked up, reflecting the improvement efforts we adopted last year once demand stabilized. This strong performance drove a large increase in our backlog, enhancing our visibility and adding to our confidence for the full year.

It's fair to acknowledge that sales comparisons with the prior year were relatively easy in the first quarter, but that doesn't diminish the fact that there are both market- and company-specific factors supporting our expectations for future improvement. At the market level, fundamentals remained strong across the board. Continued wage growth, low unemployment and high consumer confidence all support robust demand. And the supply of both new and used homes remains quite low. Of course, sustaining home affordability remains a challenge, but the reduction in interest rates over the last year has directly benefited homebuyers.

Inside the company, we are using the strong economic backdrop to reduce incentives as one part of our effort to drive gross margins back into the 20s. The first quarter reflected early results of these efforts with higher margins in backlog providing further evidence of the opportunity in front of us. With absorption rates at current levels, we are laser-focused on delivering year-over-year margin improvement in each quarter this year.

At the beginning of the fiscal year, we outlined 3 main goals for 2020. These goals arise from our long-standing balanced growth strategy, which targets a double-digit return on assets by growing EBITDA faster than revenue from a more efficient and less leveraged balance sheet. In the first quarter, we made progress on all of these goals. First, EBITDA was up 9.4%, marking the first year-over-year improvement we generated in 5 quarters and providing momentum toward our full year goal of more than 10% EBITDA growth. Second, strong sales and improving margins together with the continued monetization of previously nonearning assets are pushing us toward our double-digit ROA goal by year-end. And finally, growth in closings and profitability will generate sufficient cash flow to allow us to retire more than $50 million of debt while we invest for future growth. This should allow us to achieve a net debt-to-EBITDA ratio below 5x. Achieving these goals will lead to higher earnings per share, growth in book value and further growth in our return on equity, all from a less leveraged balance sheet.

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

Thanks, Allan, and good afternoon, everyone. Looking at our first quarter results compared to last year, new home orders increased over 28% to 1,251 as our average community count rose 5%, and our sales pace rose more than 20%. Our pace was 2.5 sales per community per month, the highest first quarter level we've generated in the last 10 years. Homebuilding revenue increased 4% to $417 million, driven by a 3% increase in closings and a 1% increase in our ASP.

Our gross margins, excluding amortized interest, impairments and abandonments, was up 10 basis points year-over-year, driven by our ongoing efforts to reduce incentives and simplify our product offerings. As we have previously noted, avoiding a significant drop-off in gross margins sequentially from the fourth quarter should bode well for the year as our first quarter gross margins have typically been well below the prior quarter.

SG&A as a percentage of total revenue was 13.3%, down 20 basis points. This led to adjusted EBITDA of $29.4 million, up over 9% versus the prior year. Total GAAP interest expense was up around $3.5 million. However, our cash interest expense was actually down $3.3 million due to our debt retirements and refinancing activity.

We recorded an income tax benefit of $200,000 in the quarter. This was driven by energy efficiency tax credits of $700,000, which compared to $5.3 million of credits in the prior year.

And finally, net income from continuing operations was $2.8 million.

Before we move on to our second quarter expectations, I wanted to provide additional details on the difference between our GAAP and cash interest expense. On Slide 7, you can see the relationship between the 2 measures over the past several years. As we have explained on prior calls, the amount of interest that we amortized through cost of goods sold is a function of both our capitalized interest and our inventory turnover, while our cash interest expense reflects what we are actually paying. In line with our balanced growth strategy, we are improving our return on assets with a less leveraged balance sheet by successfully growing our EBITDA faster than our assets, which is leading to higher inventory turnover. But by doing so, we are also accelerating the expensing of previously capitalized interest. This has occurred even as we have dramatically reduced our cash interest expense. Over time, we expect that our GAAP interest expense will converge with our cash interest expense, which will fall further as we pay off additional debt.

Turning now to our expectations for the second quarter of fiscal 2020. Relative to the same quarter last year, we are targeting a sales pace comparable to last year, and we expect our community count to grow slightly. Taken together, this shows a modest increase in orders as we have prioritized driving higher gross margins. Gross margin should be up at least 20 basis points year-over-year, back above 20%. We expect our backlog conversion ratio to be around 70%. Our ASP should be in the high 370s. We expect SG&A as a percent of total revenue to be roughly flat with last year. Total GAAP interest expense should be around $23 million, comprised of both interest included in cost of sales and direct interest expense. Cash interest expense will be approximately $21 million, down $4 million compared to last year. Our annualized effective income tax rate for the full year is expected to be about 26%, though we may experience fluctuations on a quarterly basis. Finally, the cash component of land spend should be around $135 million.

At this point, I'll turn it over to David.

Thanks, Bob. Reflecting the goals of our balanced growth strategy, we have structured our balance sheet in a way that allows us to invest in our business while continuing to reduce borrowings toward our goal of bringing debt below $1 billion. With our defined deleveraging path and without any significant maturities until 2025, we have substantial runway to focus on operations and growing the business. In the first quarter, we spent $146 million on land and development, in line with our expectations. Looking forward, we continue to expect land spending for the full year to be significantly higher than the prior year.

At the end of the first quarter, we owned or controlled nearly 19,000 active lots, representing a 3.5-year supply of land based on our fiscal 2019 closings. This level supports our growth goals as we continue to invest in our business. The table on the right side of Slide 10 details our expectations for future community openings and closeouts.

Finally, we continue to allocate a component of our land spend to the rollout of gatherings across our footprint. As of the first quarter, we are open for sale in Orlando and Dallas. We are under construction in Nashville and expect to start selling soon. And later this spring, we expect to break ground in Houston. Finally, we own or have approved the acquisition of additional sites in Atlanta, Charleston, Dallas, Maryland and Orlando.

On Slide 11, you can see the success we've had in executing our balanced growth strategy over the last few years as our first quarter EBITDA has grown by 80%, while our assets have declined by 13%. And we believe we can drive additional balance sheet efficiency as we focus on buying shorter-duration deals, increasing our use of options and generating cash from assets that were previously inactive.

Our improved balance sheet efficiency has enabled us to grow our business while substantially reducing debt and decreasing our cash interest expense. This is reflected on the right-hand side of the slide, where we compare the improvement in our first quarter EBITDA versus the reduction in first quarter cash interest expense over the last 5 years. Given our expectation for further debt reduction, we expect this trend to continue moving forward.

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

Thank you, David. The first quarter of fiscal 2020 was very productive for Beazer as we exceeded our sales targets, improved margins and invested for future growth. These results gave us momentum heading into the spring, providing confidence in our efforts to reach our goals for this year and positioning us for higher earnings and improved returns in the years ahead. I want to thank our team for their ongoing efforts. I'm confident that we have the people, the strategy and the resources to execute our plan over the coming years.

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

(Operator Instructions) Our first question comes from Alan Ratner with Zelman & Associates.

Nice quarter. Congrats. First question, just on the 2Q guide on orders. Obviously, really strong order growth this quarter, and it looks like you expect that to pull back quite a bit in 2Q, just up modestly year-over-year. I'm just curious kind of how you're thinking about that because it looks like the comp is fairly similar, and at least up to this point, it seems like the read on January from other builders has been pretty positive. So is there something specific that might be driving that pullback in growth?

Well, Alan, it's -- this is Allan Merrill. A couple of things going on there. I mean, last year in our second quarter, we actually had a pretty good number. And this year, we'd like to do that again but with better margins. And that's really the focus for us. I think it is certainly possible. The environment is constructive, and I think the opportunity is there to do better, but we really focus this year on driving margins back into the 20s, and that has an effect on our enthusiasm for leaning into the absorption rate.

That's helpful, Allan. And I guess, just on that point, could you talk a little bit about what's getting you there on the margin? I mean, have you been actively raising prices over the last several weeks? I mean, given the strong order activity, is that why you're so confident on the margin and, at the same time, do expect to see that pullback in growth? Or is there something else driving that costs or anything?

Well, there are a few levers. I mean, we -- Bob talked in the script a little bit about reducing incentives. And really, if we pivot back to last June, once it became clear that the market had regained footing, and we competed aggressively at this time last year to make home sales, removing incentives and talked a lot about simplification, and that takes a little bit of time, but we've been working on simplification strategies through our product lineup while adjusting incentives and raising prices where we can. And it's really a combination of those activities that give us the visibility into not just this next quarter but a real belief that we can have year-over-year increases in gross margin all year.

(Operator Instructions) Next, we will hear from Alex Barrón with Housing Research Center.

I appreciate the comments on the interest expense versus interest going through cost of goods sold. And I was just curious if you would expect that the interest going through the P&L for the whole year will be similar to last year's amount.

Well, we haven't given the full year guidance. But I think what we're trying to do, Alex, is to give a guide towards what the expense will be in total on a go-forward basis. And I think if you look at the percentage of revenue of this quarter, I think you'll see that percentage of revenue tick down as we get through the periods where we have much higher closing velocity, and we'll get some leverage out of the interest expense number in COGS.

Okay. And yes, I guess that's what I was kind of getting at. And then, I guess, I think the order growth has been much stronger probably for yourselves and everybody than probably what everybody was thinking, and seems like the year is off to a great start. So I'm just trying to kind of understand your priorities. You had mentioned before, focusing on debt reduction, but what is your appetite growing versus kind of maintaining -- generating cash and not growing as much to focus on the debt reduction? What's the kind of a greater priority at this point?

Well, we've taken, I think, a balanced approach to that. We're going to pay off at least $50 million this year. It's the way that we set up our term loan last year to give us a graduated path to really clearly show what debt reduction would look like. But that leaves us plenty of firepower to grow the land bank as and where appropriate. Just because we can doesn't mean we should. So we want to be careful in our underwriting, and we will be. But I think your point is right. The market is quite constructive. We're seeing opportunities to put money to work, and I think we can do both. I think we can grow our lot count and at least pay off $50 million, and we'll see, over time, this year, that balance may increase a little bit, but we've really committed to a minimum debt reduction this year.

Frankly, Alex, that's really the hallmark of balanced growth. It's the ability to pay down debt and grow the business that we've been doing for a while, and we'll continue to do, if the market is warranted and the opportunities are there, as Allan said.

Okay. Great. And if I could ask one last one. Can you give us a sense of where you think the tax rate is going to fall this year? And also are you guys able to take advantage of this energy tax credit renewal or extension?

Yes, Alex, our effective tax rate is going to be about 26%. And yes, we're looking at opportunities to take advantage of the tax rate or the efficiency tax credit renewal as well, just like we have in prior years.

Our next question comes from Jay McCanless with Wedbush.

Just wanted to ask on spec homes versus to-be-builts, how is the gross margin spread looking on that right now?

Well, Jay, they've -- with the constructive environment that we've had, they've been narrowing. And we're pretty positive about that. And I think you've seen with the increase in margin and the increase in margin guide going forward that we're pretty constructive about that margin differential.

And then on the flattish order growth, I guess, just a function of how much all brought in, in orders in the first quarter. Maybe could you all talk a little bit about the strength out West? And was it some new openings, was it just better demand than what you're seeing last year? Just a little more behind the scenes would be helpful.

So certainly, last year, the West was more adversely affected than other markets. California, in particular, was really, really tough last year in the fiscal first quarter. So that is certainly part of the year-over-year improvement. But it is the kicks that we had strong results in all 3 of our reporting segments and in essentially all of our divisions, so -- and it built during the quarter. December was better than November on a year-over-year basis, which was better than October. So that was actually quite strong. But yes, California certainly played a role.

If we kind of go back to the guide, and I addressed this a bit before, last year, I think we were 3.3 sales per community per month, which was on the high end of the average for the second quarter. So it was a pretty good number. But we achieved that number by being competitive. You may choose a different euphemism, but we were competitive. We wanted to make home sales both third and -- to-be-builts and specs. And this year, I think we can be in that range, but we are very focused on achieving what we call and. We want that pace, and we want to see the margin improvement.

And then just on Slide 10, if the community count is going to be up slightly for 2Q versus last year, the amount of communities you'll have closing over the next 12 months, should we expect maybe a flat-to-slightly down community count for the back half of the year? Or what's the cadence going to be as you guys see it?

Jay, it's David. It's too early for us to give you a prediction on what the back half of the year is going to look like. We try to give you the table to give you a sense of kind of what's in the pipeline. But as we move through the year, we'll talk about kind of how community count cadence is going to go. Not much more to say than the modest community count growth in Q2 as we talked about before.

Jay, I'll just give you one other comment on that. I think as you think about the spring, we simply don't know exactly which communities are going to sell at which paces. And in a context, where we are trying to do and not just pace, it just adds enough uncertainty as to the rate at which those 55 to 75 communities will close out, but it makes it very hard to figure out if the new openings, which are coming, and the closeouts will be timed. We've got good visibility into March, and that's what we've spoken to. You can see in the aggregate, we've got the firepower of communities to still have some community count growth, but trying to be precise in Q3 and Q4 at this point before we have our biggest selling quarters of the year, it's just too tough.

And then any -- I know you also said that January -- it sounds like January was -- has started off well. Any quantitative number, any quantitative description you'd like to give that? And I just, that number in the West was so big, would love to hear anything you'd like to say further about January.

Yes. We're not going to give a monthly number. We're not even reporting internally January yet. It's still January. So it would be tough. Yes. It has certainly been a good January, and we like to look at the business over quarters, not days and weeks, but we continue to see strength in the market across the footprint.

Next, we have a follow-up question from Alex Barrón with Housing Research Center.

I was curious if you guys are seeing any noticeable changes in the commissions that you're paying out to brokers. That's one question. The other question was, what are your thoughts or appetite as far as share buyback at this point?

Jay (sic) [Alex], I'll be happy to take both. On the commission side, there hasn't really been a change in what we've seen in terms of realtor behavior or payouts. On the share repurchase side, look, we've always been opportunistic with our capital. The key is kind of we only think about returns. We think about returns and risk in our capital allocation. And if there's opportunities to buy the stock back at a return that makes sense, we certainly have some firepower to do it. So the answer is, all -- everything is open for business, and we'll see where we go.

We are showing no further questions at this time.

All right. Thank you very much, everybody, for joining us on our call, and we will talk again in 3 months. This concludes today's call.

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