Beazer Homes USA Inc (BZH) 2023 Q1 法說會逐字稿

Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the First Quarter ended December 31, 2022. 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, Senior Vice President and Chief Financial Officer.

Thank you. Good afternoon, and welcome to the Beazer Homes conference call discussing our results for the first quarter of fiscal 2023. 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 described in our SEC filings, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date this statement is made. 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 simply not possible to predict all such factors.

Joining me is Allan Merrill, our Chairman and Chief Executive Officer. On our call today, Allan will discuss highlights from our first quarter, the current environment for new homes and an update to our balanced growth strategy. I'll then provide details on our first quarter results and second quarter expectations, updates on our cycle time and cost savings initiatives, a review of our land activity and future community count and end with a look at our balance sheet and book value. We will conclude with the 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.

Thank you, Dave, and thank you for joining us on our call this afternoon. In our first quarter, we were pleased to generate financial results and profitability in line with the expectations we outlined in November. This translated into adjusted EBITDA of 47 and $0.80 of earnings per share. Having said that, the new home sales and cancellation environment proved to be even more difficult than we had anticipated. As we will discuss, however, more recent traffic and sales results have been much improved.

Beyond the selling environment, we are continuing to pursue and make progress with each of the operational priorities we set out for the year. This includes accelerating cycle times, reducing construction costs and reunderwriting all pending land transactions. These efforts will generate benefits in the coming quarters. In the meantime, thanks to our significant backlog and the deleveraging we accomplished in recent years, we're in a strong position from a balance sheet perspective. We have an ample supply of lots, plenty of liquidity and no near-term maturities, so we expect to remain both resilient and opportunistic over the course of the year.

Let's dive into the sales and cancellation environment in the first quarter with an update on more recent trends. Early in the quarter, mortgage rates continued to relentless move higher, which, together with elevated home prices and other macro concerns, effectively froze the market for most discretionary homebuyers. The sales activity that was taking place was primarily for specs or quick move-in homes, many of which were being offered with big incentives as most of our peers were completing their fiscal years. That presented a tough environment for us for 2 main reasons. First, we had just completed our fiscal year-end, so our finished spec position was extremely low. We entered the quarter with fewer than 100 quick move-in homes, leaving us with few opportunities for buyers with serious time constraints. Second, we experienced an increase in cancellations. As a percentage of beginning backlog, our first quarter cancellation rate was about 14%, which was in line with prior years, but a lot higher than the 5% to 10% we had experienced in the preceding quarters.

And there was one other factor at play, improving cycle times. On our last call, we outlined our efforts to accelerate cycle times to extend our window for making fiscal '23 starts and closings. Fortunately, we saw a lot of progress during the quarter, which limited our enthusiasm to offer to-be-built homes at finished inventory prices. In December, as mortgage rates drifted lower, we started to see a nice uptick in online and in-person visits. This translated into a January sales pace more than double our first quarter results.

While we've adjusted prices, features and incentives to align with the market, overall, we haven't had to make drastic changes, and we are slowly capturing lower construction costs for future closings.

There remains a lot of uncertainty about the trajectory of demand and pricing for new homes, largely because of affordability. But the wage growth, home price reductions and rate relief that have already occurred are gradually improving affordability. This, along with new and limited new and used home supply leads us to be cautiously optimistic about the spring selling season.

Looking further out, we remain confident in the strength of the new home market and our ability to create shareholder value. For quite a few years, we have described our financial strategy with the phrase, "Balanced Growth." The objectives and our results arising from this strategy have been straightforward. Profitability growth and a less leveraged and more efficient balance sheet have led to higher returns. Our long-term commitment to all 3 elements of balanced growth remains in place.

In order to consistently deliver these balanced growth results, we know we need to successfully execute, differentiated and customer-oriented operational strategies. To date, our positioning has been to deliver what we call extraordinary value at an affordable price through our 3 pillars. But to continue to win with customers, we know we need to continue to innovate. Over a year ago, we became the first and so far the only public builder to commit that 100% of our homes would be built to the U.S. Department of Energy's Net Zero Energy Ready standard. While we set the end of fiscal '25 as our deadline, we're using the current slowdown to move even faster. In fact, we expect to have Net Zero Energy Ready homes under production in each of our markets by the end of this year.

While there are obviously some additional costs associated with building to this higher standard, we believe further differentiating our homes creates an opportunity for driving both sales paces and prices. Energy-efficient homes cost less to operate, are more durable over time and deliver higher customer satisfaction. And it's worth noting that the recently adopted Inflation Reduction Act provides meaningful financial incentives to attain the Net Zero Energy Ready standard.

Companies have to make choices about how to pursue the creation of shareholder value. Our path is to execute against our balanced growth objectives by delivering differentiated energy-efficient homes with a truly unique mortgage experience.

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

Thanks, Allan. For the first quarter of fiscal year 2023, homebuilding revenue was $444.1 million with an average sales price of more than $533,000. Gross margin, excluding amortized interest, impairments and abandonments, was 22.3%. SG&A as a percent of total revenue was 12.3%. Adjusted EBITDA was $47.1 million. Interest amortized as a percentage of homebuilding revenue was 3.1%. Net income was $24.4 million or $0.80 per share. And our GAAP tax expense was about $4 million for an effective tax rate of 14.5%, reflecting the benefit of energy efficiency tax credits from homes closed in prior years.

As a reminder, broadly speaking, we don't currently pay cash taxes as we continue to utilize our deferred tax assets.

Looking forward to the second quarter, we're providing the following expectations. We are anticipating a sales pace over 2.5 per community per month, which is comparable to what we did in January. While this remains somewhat lower than normal seasonal levels, it is significantly better than the first quarter pace of 1.3. Average community count is expected to be up about -- to be up 5% year-over-year. We expect to close around 1,000 homes, reflecting a backlog conversion between 55% and 60%. While this is up around 20 points versus the same period last year, it's still quite a bit lower than our historical norms.

Average sales price should be about $515,000, well above our Q1 ASP and more in line with what we expect for the rest of the year as we continue to emphasize affordability in an elevated interest rate environment.

We expect gross margin, excluding interest, to be in the 21% to 22% range. SG&A as a percentage of revenue should be relatively flat versus the same quarter last year. We expect this to lead to both adjusted EBITDA and earnings per share very similar to the first quarter. Interest amortized as a percentage of homebuilding revenue should be in the mid-3s and our effective tax rate should be at or below first quarter levels as we continue to reflect the benefit of our energy efficiency tax credits. While there's too much uncertainty around future sales prices to provide profitability expectations for the full year, with our large backlog and available production universe, we believe we can deliver at least 4,000 homes in fiscal 2023, which should again lead to total homebuilding revenue in excess of $2 billion.

In November, we highlighted a number of operational priorities for the year, including accelerating cycle times, reducing construction costs and reunderwriting pending land deals. I'll review these one at a time.

The supply chain challenges we faced over the last few years had extended our cycle times by nearly 4 months, pushing our traditional April cutoff dates for starts back into January. Our efforts to recoup at least 30 days on average across our markets have been successful, so we are now looking to recoup additional time above and beyond the initial goal.

On the direct cost side, the evidence of success is not apparent yet. Our first quarter closings had even higher construction costs in the prior quarter, which wasn't surprising given the cost environment that exists when these homes were started. We're working in every market with nearly every trade to recapture those dollars. We expect meaningful improvements in construction costs to materialize in the fourth quarter when the mix of closings will more heavily reflect homes started with lower costs. At the same time, we continue to re-underwrite land deals using lower home prices, slower sales paces and higher mortgage rates. In many cases, we've been able to renegotiate the costs and/or the structures of our pending deals. Even with these efforts underway, we remain confident in our expectations for community count growth moving forward through fiscal 2023 and accelerating in fiscal '24.

As it relates to our balance sheet, we ended the quarter with about $386 million of liquidity. Our net debt to cap was 47.3%, and our net debt to EBITDA was 2.4x. We ended the first quarter at about $984 million of total debt and have no maturities until March 2025. Our focus on liquidity and a supportive maturity schedule provides flexibility for us to allocate capital in ways that best support our balanced growth objectives.

We continue to grow both the quantity and quality of our book value. We ended the quarter with a book value per share above $31, up $7 from last year. Despite near-term challenges, the ultimate goal of our balanced growth strategy continues to be earning returns that are above our cost of capital while growing book value per share.

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

Thanks again, Dave. Despite a tough sales environment, we were able to deliver positive first quarter financial results. Just as importantly, our backlog of sold homes, improved sales momentum and our cycle time and cost reduction initiatives have favorably positioned us to generate full year results that grow book value and are consistent with our balanced growth objectives. Longer term, fundamentals for housing remain intact and robust, and we're confident our differentiated consumer strategies, including our Net Zero Energy Ready initiative will allow us to compete for homebuyers on a basis other than just price. Finally, our team is why I remain convinced that we have the people, the strategy and the resources to create durable value over the coming years.

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

(Operator Instructions) And our first question is from Julio Romero with Sidoti & Company.

I wanted to maybe start on your goal of accelerating cycle times. You've been successful in recouping I guess, 30 days. How much more do you think you can achieve on that front?

It will depend on the city. There are different characteristics in different markets. A couple of weeks, I would say, overall, some places a little more, some places a little less. But that's kind of what we tried to depict on this slide is that we've moved that cutoff date out another couple of weeks.

Okay. And maybe just talk about, obviously, on the demand side, I think January and the move in mortgage rates have caused a little bit more optimism. Just talk about what you're seeing there and how that's maybe changed the strategic outlook for you guys?

Look, in December, it's like somebody turned the lights on. Activity on the website, activity in our communities really perked up, and it wasn't like it was great weather or anything. It was just -- it felt different. And rates clearly played a role in it. I also think that some of the anxieties about the economy and about housing started to tamp down a little bit. And we can't lose sight of the fact we got a housing shortage in this country. So people started paying attention again. And what we saw in January was absolutely, as I'm sure you've heard from others, interest in specs. But we've got more confidence around a shorter cycle time, and that has made it easier to sell to-be-built homes as well. That was pretty tough for a lot of last year, where we had a hard time at the time of contract, telling people the month, let alone on the date, that their home would be completed. We're in a very different place now. So I think there are a few things. I think they have the macro things, the interest rate things. And then I just think that with the supply chain sorting out, you've also got more visibility for customers on when a to-be-built home can be delivered. And I think those things collectively, I think, Dave or I said it in the script, I mean January for us was -- and we don't want to make too precise a thing of it because it is just 1 month. But what we experienced in the month that just ended January was better than double what we did in the whole first quarter on a per month basis. That felt a lot better.

Yes. No, I appreciate the color. And I guess if you could just touch on your other initiative of cost reductions. And you talked about not there yet, but expecting meaningful improvements by the fourth quarter. How is the trajectory of like lumber prices may be impacted the way you're thinking about the flow-through of cost reductions as we progress throughout the year?

Yes. I mean with cycle time still stuck above 6 months, I mean there -- as you saw prices down in the fall, you'll start to get the benefit of some of those this spring, but it really starts that have occurred November, December and into January and February, where we're seeing those lower lumber costs, and that's where we get into our fourth quarter. I think that there will be improvement in our direct costs in the second and third quarter, but I think it's going to be pretty modest, honestly. It's a weighted average thing as much as anything, where the weighted average of homes with lower costs will be far better by the time we get to the fourth quarter. The lumber part will play a big role in that, but it's certainly not the only category where we are seeking and achieving cost reductions.

Our next question is from Alan Ratner with Zelman & Associates.

First question, I'd love to drill in a little bit on the January trends and how that plays into your thinking on pricing and incentives and just the overall kind of environment there. Obviously, it's very encouraging to see the improvement in sales activity, but you brought it up yourself, I mean the 2.5, 2.6 sales pace that you saw in January and that you're expecting for the quarter. If we go back pre-COVID, your fiscal 2Q absorption pace was right around 3.3 every year.

Yes.

I mean, there wasn't a whole lot of volatility there. So you're about 25% below what we'd consider to be normal right now even with the doubling. So how do you think about pricing there? Are you still discounting or increasing incentives or adjusting base prices to try to get that pace closer to the long run average? Or are you looking at the sequential improvement and saying, "Hey, this is really good off of a weaker calendar fourth quarter, let's kind of pause here and see if the momentum continues in February and March before we get more aggressive on the pricing front?"

Alan, it's an excellent question and a compound question. The smart Alec answer is, it is both, and I'll go a little further than that because it really is in individual communities an important discussion that we're having with our division leaders, our sales leaders. We do want to get sales paces back into certainly seasonally into the 3s. And that might happen this year. I don't know. But 1 good month is not an entire quarter make. We're mindful of the environment has been pretty uneven over the last 6 months. So we were trying to be a little careful of not just assuming that there would be this snapback and that we were somehow entitled or it was mathematically assured that this would continue into February and March. And so I think we feel pretty good about, at a minimum, doing 2.5 for the quarter. But we pointed it out, you've acknowledged it that's not where we're used to being, that's not what we want to get back to.

I think one of the things we saw in the first quarter was that price by itself doesn't create buyer momentum. So changing incentives to convince a discretionary buyer to buy a home, it's a part of the equation, but it isn't the only part of the equation. So I think we are trying to turn that dial kind of carefully. We are absolutely competing for buyers. And where market conditions at a community dictate a different base price or a different incentive or a different included feature package, we're not afraid to compete. But we're seeing enough traffic and enough confidence and we have had the ability to remove some of the special incentives, which are tantamount to price increases that right now, I think we're trying to see can we sustain the level of activity rather than trying to chase the next buyer with another incentive. So in this range, depending on the community and certainly depending on the city, we're kind of on both sides of the way you framed that. But overall, I think our bias is to slowly ramp the sales pace rather than dramatically go chase the sales pace. And I know it's a long answer, but it is kind of a complicated issue.

No, that's really helpful. I think it certainly walks through the way you guys are approaching the business, which is probably a little bit different than some others right now. So it's helpful to hear how you're thinking about it.

Second question on the land market. So you guys were a bit later than others to kind of really ramp your lot count, I think early in the pandemic, rightfully so, you were focusing more on the balance sheet and liquidity. And if I look at your growth in lots, it really all came in '22, maybe the tail end of '21. And you haven't walked away or it doesn't look like you walked away from any meaningful amount of lots right now. But at least what we're hearing is that while sellers are willing to adjust take down terms and things like that, we haven't really seen any capitulation either from some land owners on the options or land sellers on price. And assuming that doesn't happen, it kind of puts you in a little bit of a tricky situation, I guess, if these deals that you tied up later in the pandemic no longer pencil or maybe they pencil at subpar margins. So how are you thinking about the land market? How are you thinking about what opportunities there might be? Do you think there will be capitulation on price? Or do you envision a stalemate potentially impacting your growth in '24 and beyond if you don't see pricing come down?

There's a book in that question, Alan. Here's kind of my take. First of all, and I don't want to be argumentative mathematically where the controlled lot showed up, does appear to be in '22. But remember, those deals would have been identified 6, 9 and 12 months before they were approved and contracted. So there was an awful lot of euphoria in the market on the pricing side that happened after we achieved deal terms with the underlying sellers, whether it was on a purchase or on an option contract. So the fact that something showed up in our reported control in '22 isn't necessarily indicative that that's the point at which we tracked it. I mean we didn't change our underwriting process. We still have the same documentation required, the same return requirements and it's burdensome and it takes a while. So there is no exaggeration that those deals on average were more than 6 months and oftentimes as much as 12 months earlier when they were identified. A lot of the price activity that happened after we tie them up has either been given back or might be given back. So I don't dispute that, but I'm not so worried about that generation of deals having subpar margins.

The experience that we've had so far, we did walk away from 1 deal in the quarter, it was $150,000 abandonment charge approximately. So we had one where we just couldn't see a path and we walked on it. But we've had pretty good success, as you pointed out, with takedowns. We've also had some of the land banking relationships where we've renegotiated the rate, the interest rate, which affects the carrying cost, which ultimately is a part of what our finished lot cost will be. So I think we've had a measure of success on terms. And on other deals, we have been able to renegotiate prices downward by millions of dollars. Is it capitulation? No. But if you take a $6 million asset for $4 million, it's only $2 million, but it's 1/3 off. So I would tell you, I think there is a little bit of price that is available in the market. It's not dramatic. It's not 30%, 50%. And obviously, it depends on cities. I think some markets that are a little more challenging right now from a sales and pricing perspective, I do expect there to be more price movement ultimately on the land side. And I'd call out Phoenix. I think Phoenix is a market where there needs to be. There was a fever in Phoenix. We did not participate. Our lot position in Phoenix diminished '21, '22. Frankly, people are trying to get $3,000 a front foot for lots. We just didn't see it. It wasn't real. A lot of people contracted at those prices, some closed, some didn't close. I don't think that's where value is.

So I think if we sort of peel the onion a little bit deeper and sort of go market by market, it's going to be different outcomes. But I'm not very concerned about having subpar margins, your phrase, from the deals that we tied up in '21.

Well, that was certainly a nice epilogue to my book of a question. So thank you.

I feel like I've got to keep up on the page count.

Maybe you got.

(Operator Instructions) And our next question is from Alex Barron with Housing Research Center.

Yes, I wanted to, I guess, better understand the guidance of 1,000 closings for next quarter and just kind of the acceleration on the backlog conversion rate. Does that imply you guys have a lot of, I guess, canceled houses on the sidelines that are going to be able to get delivered that quickly? And going forward, my second question is, what was the starts in the quarter and how are you guys thinking about shifting towards specs, since that's what the market seems to want right now?

So Alex, let me kind of handle the first question. We've talked about a conversion ratio, a backlog conversion ratio in Q2 in the kind of 55% to 60% range. It's not, as you said, predominantly just from the specs that were canceled that are sitting there. There are some specs, frankly, that will close. But frankly, that 55% to 60% is more in line with historical levels and still below where we have been in '18 and '19. So we're just kind of seeing some normalization in the backlog conversion ratio and frankly, not back to the levels where we've been at historically.

And a lot of that is cycle time. Picking up a month makes a big difference in converting your backlog. So I think it is way more of that than any mix issue associated with formerly sold homes that became specs.

Second question on the production universe. Dave maybe has the number immediately at hand. But interesting fun fact, Alex, in the last 20 quarters, we've only had 4 quarters where specs represented more than half of our closings over 5 years. The first quarter happened to be slightly one of those quarters. I don't really see us trying to do what everybody else is doing. One of the challenges in the last year with buyers has been, can you tell me when my home is going to be ready. We feel a lot better about being able to answer that question in a really competitive way with, yes, we can tell you, and here's when it's going to be available, and we have confidence in that. There are some markets, and we have some buyer profiles within our footprint where specs have been and will continue to be a part of it. But I don't think you should expect us to become something that we haven't traditionally been, build huge numbers of specs and then try and engage in price discovery. We're selling a different home. We've got a different buyer experience, a different mortgage experience, and I really don't feel like playing in other people's sandbox is our best strategy.

Got it. Now I guess a month ago or 2 months ago, builders were talking about getting inbound calls from people looking for new starts, new work, and that seemed to present an opportunity to potentially get better costs on those new starts. But in that time frame, it seemed like prices were still heading downward. Right now, it would seem from all the commentary of builders that given the momentum in new sales and stuff like that, that maybe prices won't be heading downward anymore. So do you think there's still going to be that opportunity to get better costs?

I do. And the costs that we have gotten aren't in the P&L yet because those homes haven't reached the delivery stage. And I also think it's important to understand that just because home prices may not fall as far from here as was feared, I think we're going to get to a point where we do have year-over-year price reductions because of the action that occurred in the first quarter really started last summer. So we've got to get to the other side where we've got a 1-year anniversary. And I think as it becomes more evident what closing prices are that actually is going to be valuable in those negotiations because we're a good example. We just reported a $533,000 ASP and guided down almost $20,000. Well, guess what? That reflects changes that occurred 6 and 9 months ago. I think some more of that data being in the market actually helps the case with the trades for why costs have to keep coming down.

Alex, I think the other part of that is it's not just the price side but also the volume side. We see some pullback in volume and it clearly appears that start volumes are down as an industry. There will be some excess labor out there that we think we can get some cost savings from.

And our next question is from Jay McCanless with Wedbush.

What was the spec count at the end of the quarter?

Jay, it's about 820 specs. It's in the Q, and I can get you the number.

Okay. Now that you have the unsecured credit facility and the '27 senior maturities, '29 senior maturities are still trading below par, why not go and take some of those out, maybe talk about, especially with looking like the community count is basically going to be flat for the next few quarters, why not try to reduce some of that future leverage?

Well, let's talk about -- Jay, first of all, the spec number was 848, so I didn't have my hand just so you know. In terms of the '25 in capital allocation, we talked about it last quarter and the story is pretty consistent. We're building some liquidity. We're kind of looking to '25 for being really thoughtful on the capital allocation as we're going to make it. We want to see if there's more stability in the market if we see some improvement in demand. We're certainly committed to growing the business. So we're being pretty thoughtful with how we spend the capital. And again, it's a little bit of a wait-and-see perspective and we have some time on the '25s. I don't know if you had another question on top of that, but...

No. Just trying to understand when you have the opportunity to go out and take some of these future maturities out below par, especially given how fast things went from good to bad in '22. Just trying to get a little more insight as to how you're thinking about capital allocation right now.

Alternative uses of capital and rates of return on a risk-adjusted basis. I mean certainly, we're underwriting land deals even in this environment with conservative assumptions, with return profiles that are vastly better than retiring debt with single-digit yields. And are those assumptions valid? Are they durable? Well, that's why Dave says we're being a little bit cautious, but I think the opportunity for those kinds of returns, certainly for returns that greatly exceeds delevering are good enough. The probabilities are good enough that it sort of discourages us from being in a big hurry using the liquidity for deleveraging.

Yes, I think the other thing is, and I want to make sure we're clear, and we said it in the script, and I just want to make sure we have excellent visibility in the community count growth in '23 and '24 from the land position that we already have. And Allan talked about it earlier in the Q&A, clearly, we're very comfortable with the land position and the community count growth that's coming in our business.

Thank you. At this time, there are no further questions.

All right. I want to thank everybody for joining us for our call, and we'll see everybody on our second quarter earnings call, and we appreciate your participation, and this concludes today's call.

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