Earnings Call: Q3 2021

Jul 29, 2021

Good afternoon, and welcome to the Beazer Earnings Conference Call for the Quarter Ended June 30, 2021. 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'll turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer. Thank you, sir. You may begin. Thank you. Good afternoon, and welcome to the Beazer Homes conference call discussing our results for the Q3 of fiscal 'twenty one. 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 the statement is made. We do not undertake any obligation to update or revise any forward looking statement whether as a result 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 is Alan Merrill, our Chairman and Chief Executive Officer. On our call today, Alan will review highlights from the Q3, discuss our view of the current macroeconomic environment and outline how we are strategically positioned for continued growth in fiscal 2022 and beyond. I will cover our Q3 results in greater depth, Our expectations for the Q4 and full fiscal year and update our expectation for continued growth in our land position, followed by a wrap up by Allen. After our prepared remarks, we'll take questions in the time remaining. I will now turn the call over to Alan. Thanks, Dave, and thank you for joining us on our call this afternoon. We had a very successful Q3, generating financial results that met or exceeded our expectations, positioning us for a strong end to the fiscal year. Our sales pace in the Q3 was one of the highest levels that we've generated in the last 5 years. And in fact, this pace would have been even higher if not for our deliberate efforts to proactively slow sales to align with our production capacity and limit our exposure to raw material price inflation. We delivered substantial gains in operating margin, EBITDA and net income as we benefited from increased pricing and improved overhead leverage. On the balance sheet, we expanded both our total lot position and the share of lives controlled by option while retiring $14,000,000 in debt. Together, these results perfectly demonstrate our long standing balanced Growth strategy, which is a multiyear plan to grow profitability faster than revenue from a less leveraged and more efficient balance sheet. With these results and confidence in our expectations for the Q4, we are once again raising full Turning to the earnings per share of at least $3.25 Taking a step back, We acknowledge the benefit our entire industry has experienced from the powerful confluence of demographics, have led to significant home price appreciation, which has clearly outpaced wage and income growth. In the coming quarters, we do not expect This level of price appreciation to continue. Our view is that disciplined mortgage underwriting will effectively limit the extent of home price appreciation. That's entirely healthy and gives us confidence that we won't experience the kind of pricing excesses that could set up a painful correction in the future. The demand and supply characteristics of our industry remain highly compelling. Aspiration for homeownership among millennials and changing homeownership expectations among baby boomers provide a durable source of demand for new homes, particularly with enduring work from home expectations. And the significant deficit of new homes simply can't be addressed quickly with the supply chain, land use and entitlement barriers that exist. Ultimately, our industry's challenge will be to ensure The labor and material cost expectations in the supply chain remain tethered to affordable home prices. That's where we believe our market positioning With 3 strong customer facing differentiators, we have a lot of tools to work with to enable us to deliver extraordinary value at an affordable price in a highly competitive environment. Last quarter, we provided initial visibility into our expectations for profitability growth in fiscal 2022, and our confidence has only increased since then. Here's why. 1st, at the end of our Q3, we had more than 1500 homes in backlog scheduled to close next year, nearly double the level at this time last year. And importantly, these homes have higher prices and higher margins. 2nd, even as our ASP has increased, we have remained focused on carefully managing our overhead costs. This will drive SG and A leverage, Pushing SG and A below 11% next year. And finally, our deleveraging efforts continue to reduce our cash interest expense, setting us up for reductions in GAAP interest over time. Next year, we expect at least $5,000,000 in GAAP interest savings with further reductions and subsequent years. Taken together, we're confident that these factors will allow us to achieve our goal of generating double digit earnings per share growth in fiscal 2022. Before I turn the call over to Dave, I want to provide updates on 2 unique aspects of our business. First, Over the past 6 months, we've experienced exceptional demand in gatherings, our 55 plus active adult business. While traffic and engagement among this buyer segment was particularly impacted during the early part of the pandemic, the strength in the resale market and the availability of The vaccines have contributed to much higher sales activity. This is a growing part of our business with communities underway in Atlanta, Dallas, Houston, Nashville and Orlando. 2nd, the rollout of Charity Title, our title business Committed to contributing 100 percent of its profits to charity continues to gain momentum. In fiscal 2021, we expect to provide title insurance for more than a third of our Next year, we expect to provide title for 2 thirds of our customers, which should generate philanthropic resources of over $1,000,000 a year on a run rate basis. This will allow us to expand our efforts with Fisher House and support local charities in each of our markets. I'm incredibly proud of our team's innovative strategy to develop a dedicated funding mechanism that aligns our customers, employees and partners in supporting our communities. With that, I'll turn the call over to Dave. Thanks, Ellen, and good afternoon, everyone. Looking at our Q3 results compared to the prior year, new home orders decreased approximately 13% to 1199 as a higher sales pace helped to offset a reduction in average community count. Homebuilding revenue increased nearly 7% to $567,000,000 on 1% higher closings and a 6% higher average sales price. Our gross margin excluding amortized interest, impairments and abandonments was 24.2%, up approximately 300 basis points to the highest level in more than a decade. SG and A was down 60 basis points as a percentage of total revenue to 11.1 As we benefited from improved overhead leverage. Adjusted EBITDA was $78,800,000 up over 45%. Our EBITDA margin was 13.8%. Interest amortized as a percentage of homebuilding revenue was 4%, down 10 basis points. And net income from continuing operations was $37,100,000 yielding earnings per share of 1.22 more than double EPS for the same period last year. Given our continued performance and substantial backlog, we are able to increase our financial For fiscal 2021, we now expect EBITDA to be over $250,000,000 Our full year EBITDA guidance equates to Earnings per share of at least $3.25 up from last quarter's guidance of above $3 We now expect our return on Average equity for the full year to be approximately 15%. If you exclude our deferred tax asset, which doesn't generate profits, Our ROE would be about 22%. Turning now to our expectations for the Q4. We expect a sales pace of over 3 sales This pace is higher than our historical average, but below the extraordinarily high pace we experienced last year. We expect backlog conversion to be in the mid-40s as we continue to manage through Challenging production environment. Our ASP should be about $410,000 Gross margins should be up more than 100 basis points year over year. SG and A on an absolute dollar basis should be down about 10%. Our interest amortized as a percentage of homebuilding Should be under 4% and our tax rate will be about 25%. Combined, this should drive earnings per share up over 20%. In addition, we expect to repurchase over $55,000,000 of debt, bringing our full year total to at least $80,000,000 Our increased land spending in the quarter helped us grow our active lot count to over 19,000. We also increased our option percentage in the 3rd quarter and now control nearly half of our active lots through options, up from less than 30% in the same period last year. Given our current pipeline of deals, we expect to continue to grow our land position to over 20,000 lots by the end of fiscal 2021. It's worth noting that most of these deals have been in our pipeline for many months and are under contract at favorable prices. In addition, we remain focused on growing our position while minimizing risk by maintaining our strict underwriting standards, focusing on products that we've built before in some markets that we already know and relying on options to control around half of our lots. So our land prices have appreciated, we're still finding deals that pencil allowing us to refill the pipeline and grow our business. In the Q3, we spent over $140,000,000 on land and development, and we expect to spend around $600,000,000 for the full year. With higher land spending and a big increase in our option lot position, we're creating a framework to sustain profitable growth in the years ahead. On Slide 12, we depict our expectations for near term community count. As you might expect, the supply chain issues so common in the home construction market have also impacted land development activities. As such, predicting the timing of new communities has never been more difficult. While we'll be actively opening communities every month, we don't expect sequential growth in community accounts until next spring. Fortunately, we've concentrated our activities in established new home corridors, so many of our coming soon communities are already generating interest lists. We ended the 3rd quarter with over $600,000,000 of liquidity, up about 50% versus the prior year, With unrestricted cash in excess of $360,000,000 and nothing outstanding in our revolver, during the quarter, we retired $14,000,000 of our senior notes. And with 2 remaining term loan repayments, we're on a clear path to achieve our goal of bringing our total debt below $1,000,000,000 before the end of fiscal 2022. Our net debt to trailing 12 month adjusted EBITDA fell below 3 times, down from 8 times 5 years ago. During the quarter, our corporate rating was upgraded by 1 of the rating agencies and we remain on positive outlook both S and P and Moody's. I'll now turn the call over to Alan for his conclusion. Thanks, Dave. We had a terrific Q3, But instead of repeating the highlights, I'd like to close by putting this quarter in context. We have been diligently and successfully executing against our balanced growth Over the last 5 years, we've grown EBITDA by more than 60%, improved our return on assets by more than 5 percentage points and reduced debt by more than $300,000,000 At the same time, we quietly demonstrated leadership in each of the ESG categories. As satisfying as these results have been so far, we're even more excited about what's in front of us. Industry fundamentals are solid, and we're deliberately investing for future growth. In the meantime, we'll have higher prices and gross margins and lower overheads and interest expense to sustain earnings growth. And we aren't just succeeding for investors. We have charted the most ambitious energy saving course in the industry with our path to net zero energy ready homes, And we've created a growing philanthropic platform to fuse the efforts of our employees with the resources provided by our customers. I I want to thank our team for their many ongoing efforts. I'm confident that we have the people, the strategy and the resources to create durable value in the coming years. With that, I'll turn the call over to the operator to take us into Q and A. Thank you, sir. It is now time for the question and answer session of today's call. Thank you. Our first question comes from Alan Ratner from Zelman and Associates. Your line is open, sir. Hey, guys. Good afternoon. Nice job in the quarter and glad to hear everyone's doing well. Thanks for taking my questions. Of course. David, I guess first just on the guidance. I was just hoping maybe for a little bit more of a finer point on the margin outlook, recognizing that this quarter came in incredibly Strong above expectations up about 300 basis points year over year. I know your guidance is for up at least 100, but On a sequential basis, how should we think about the strength that we saw this quarter and the sustainability of that? Alan, it's a good question. Look, you have some timing as it relates to lumber prices and lumber price increases in the year Earlier in the year that are going to affect the exact level of margins in the Q4 compared to the Q3. I think what we talked about and what Alan talked about is the homes in backlog that we have at higher margins as we look into 2022 and that's what gives us confidence. So the up 100 basis Points reflect those increase in lumber prices that we experienced earlier in the year, in addition to the guidance that we've given into 2022, given the backlog we are now. So just to clarify on that, so down a little bit sequentially in the Q4 because of the lumber timing and then reaccelerating in next year. That's kind of Certainly consistent. Okay. Thank you. That's helpful. Alan, I thought your comments early on about the pricing environment were interesting and kind of just The dynamic with the mortgage lending environment probably eventually putting some cap on the price increases we've seen. First, I'm curious if you've Seeing any signs of that happening yet. We're hearing from most other builders that the credit statistics and everything and qualifying It's still very healthy and really not changed at all. So I'd be curious if you've seen something different. But then expanding on that, I think it's going to be an interesting environment if that plays out the way you say it is because on the other hand, there is some optimism that costs will stabilize. But Everybody is talking about building more houses, right? Ramping community count, building more specs, building more inventory, building backlog. So what gives you the confidence that The cost side will cooperate as pricing eventually hits the ceiling. Alan, if there were ever a compound question, that was it. And if I may That's an answer. Yes, let me pull it apart and deal with the first thing first And then the second thing. So relative to the mortgage market, as you know, we do not have a mortgage subsidiary. We like our position very much. We've got multiple lenders Making proposals to every customer and so we get a pretty good snapshot of what's happening across a variety of lending platforms, larger and smaller institutions. And I would tell you, I think what you said is right so far and insofar as credit quality, down payments, debt to income ratios have all been And that sort of gets to the issue that while home prices have risen a lot, mortgage rates are really attractive. So if you look at home mortgage payments In relation to income, we're higher than we were 6, 12, 24 months ago, but we're not in kind of crazy land. My concern would be if house prices keep moving significantly, how does that sustain itself? And I don't think that will happen because I do see real discipline amongst the lenders in their underwriting. So at this point, it isn't rubbing Too badly, I mean certainly for certain borrowers it does. There are absolutely people who are affected by the price increases, There is still significant demand out there that can afford at these prices. Really trying to telegraph what we've seen in the last 3 months, 6 9 months, that's not a trend line that people ought to be extrapolating and extending. We're going to run out of that kind of upside And I feel pretty good about the fact that the mortgage environment will act as one of those restraining factors on home prices. So does that answer that part of your question? Yes. That's very helpful on the pricing side and I would tend to agree and I think that would be healthy for Market as a whole if that were to happen. So I guess that segues to the cost side, which you can answer now. Yes. So the cost side of the equation, The way you framed it is, I think, correct. There is going to be some addition to the supply side that we and others through community count growth are going to try and address. But we've got as an industry a long way to go just to get back to the community count that we had a year ago, Right. And we'll get there and I hope we get beyond that. Then we've got the issue that as you know and I think you've researched the deficit, the Supply deficit that's been created over the last decade, I mean, depends on who you ask, is it $3,000,000 $4,000,000 $5,000,000 I don't know, Big number. And I feel like that's where this notion that there's going to be a lot of additional supply has to be kind of looked at in context. Yes, there's a fair bit of additional supply over time, but against a giant deficit. Then you add the issue Of costs and that really will come down to at the product level whether or not the capacity is advancing From each of those product categories as the production level in the industry expands. And the thing is, I think just like you know and our investors know that there is coming community count growth, all of our manufacturers and suppliers know it as well. So as we talk to Our principal providers, I think they are absolutely geared up to deal with unit volume growth. Now do I know the way that will settle out in terms of what the price per product will be in each category? No. But I think with The year advanced notice on the coming expansion of activity, I think we're seeing plenty of investment In the supply chain to make us feel like there isn't going to be, broadly speaking, areas We just we can't get a particular product. Now that sounds really good. The truth is in the last 6 months that hasn't been the case. There have been areas where there have been shortages and there have been spikes in prices. It's been quite extraordinary in the supply chain. So my answer to your question is more looking at 12 24 months As I see our community count and other community count ramping, I think our supply chain has got plenty of time and has been making the investments to be able to deal with that Yes, enhanced level of activity. All right. That's very helpful. And I appreciate you stepping through that multipart question. Good luck, guys. All right. Thanks, Alan. Thank you. Our next question comes from Alex Barron from Housing Research Center. Your line is open, sir. Thank you. Good afternoon, gentlemen. A question, I guess, regarding the orders that you saw this Most builders have said that they're still seeing good demand and that they're holding back sales. So just wanted to Confirm that's what you guys are seeing and how do you see the orders playing out over the next couple of quarters if you guys are indeed holding back sales? Yes, Alex, and we talked about it in the script, absolutely see good demand out there. That's absolutely the case in the quarter. We did proactively control and manage our sales pace to try to manage our to try to match our production volume and our production capacity As we talked about in the script very clearly, in terms of how we see demand, I think Alan gave a pretty good kind of layout on how we see the supply and demand in the industry on a go forward basis. We think there's real good drivers of demand out there and the demand that we're seeing is sustainable. And without getting into specifics, I would tell you we're very Think about the demographics and demographic trends in the market with both baby boomers and millennials and our positioning accordingly. And we gave guidance, Alex, on Q4, right? I mean, we think orders in Q4 will be in the range of about 3 sales per month per community, which would be a little relative to 2016, 2017, 2018, 2019, but certainly not at the level that we were fortunate to experience last year In the September quarter. Got it. And in terms of the supply chain issues everybody's been Discussing, what is it that you guys are doing, I guess, that to address Those issues, are you, like other builders, trying to start more specs and sell them later in the process? Are you guys keeping things the way you've always done them? What are you guys doing maybe different To try to bring in the delivery times. Well, the question is It's a great question. It's complicated. We spend a ton of time on it. As you would know, Alex, it's different in different cities and it's different in a given city Today than it was 90 days ago. It's a little bit of a game of whack a mole dealing with these challenges. But a couple of key things for us. The first thing was stop selling homes where we weren't assured of when we could start it Based on availability of labor and materials. The old adage, if you're in a hole, stop digging. I think the second thing, be Sure that you're communicating with your trades and your suppliers well in advance and that you understand what that availability is. So we talked about our sales pace Being aligned with our production capacity, that's been a very big part of how we have been dealing with this period. Something else and you talked about bringing in the dates. I would tell you the first thing is it has to stop getting worse before you bring it in. And one of the things that We've done and this is unusual, I guess. We've been really clear with customers about the challenges in weekly conversations and we've moved a lot of closings out of our Q4 into our Q1 so that we aren't trying to get proverbial 10 £7 in a 5 pound bag. The fact that it's our fiscal year end quarter turns out to not be the most important factor Sure for our customers. So when we're working with our trades and our customers saying, how about an October 15 delivery date, that customer is happy, we can manage to that. Does it mean it's not a Q4 closing for us? Yes, it does. We're going to have a terrific Q4 anyway. And frankly, as we talked about, we're going to have a really good Q1 because we've got Such a big backlog that will deliver into next year. So I think part of dealing with an environment like this, Alex, is being realistic and being Highly, highly transparent, both up to our customers and out to our freights. Yes. I got to imagine the customer would not be upset if you gave them a realistic Your house is going to take 9 months instead of 6 months because of all these issues. I'm sure they could adapt. But I'm guessing the bigger challenge So you guys have been able to have visibility on costs, correct? Well, timing and costs, they're both big issues. On the timing side though, where we're really focused right now, I would tell you that there are stages in each market where we set a window. We tell the customer at the Pre con meeting, here's the window in which your home is going to close. We get to a particular stage in our construction process and that's when we set To date, that's been fairly effective and it has dealt with a lot of the anxieties that I think new homebuyers around the industry About not knowing when they're going to get their home. On the cost side, we've been pretty careful about not selling homes In advance of knowing our costs. So if we don't have cost certainty in a category or in a market around something, That's an area where we have intentionally throttled back sales activity. So our view is we can absorb some of the higher We've been successful in doing that so far, but it's a pretty risky proposition to sell a bunch of homes and not know your costs, and that's what we've avoided. Great. Well, good luck. Thank you. Thanks, Alex. Thank you. Our next question comes from Julio Romero from Sidoti and Company. Your line is open, sir. Hi, yes. Good afternoon, Alan and David. Hello, Elias. How are you? I'm good. Thanks. So I wanted to pull the string a little bit more on, I think the first caller's question on cost. And I think you guys talked about lumber a little bit. And I know that Lumber prices have been a little bit of a roller coaster, to say the least, in the first half of the calendar year. I mean, does that High lumber costs, I think you called out might affect margins in the upcoming quarter. Does that stay isolated To this Q4 or can that kind of seep into margins in the December quarter at all? Yes, I think there'll be a little bit look, some of the homes that we sold in the spring are going to close in that September quarter and some are going to close in the December quarter. And we sold them with our eyes open knowing Lumber costs were. The good news is, as lumber costs have come down, we're now selling homes with our eyes wide open with a different lumber cost. So I I think the largest impact, what Dave was alluding to, the largest impact of the highest lumber costs will be flowing through our cost of goods sold in the 4th quarter, which is why we would expect some sequential deterioration in gross margin, but reminding us that we'll still be up year over year very nicely. Understood. And are you guys putting or does Cesar put Any like lumber price escalators or any material price escalators in your contracts? We haven't done that. I know that there is some evidence of it. Looked at it, there are legal challenges with it, there are communication challenges with it, there are enforcement issues with it. I'm not Philosophically, like would say, no, never. I just think it's super complicated. It's easy to say. It's hard to actually enforce. And I think we have taken the approach of let's just not sell homes where we don't know the costs. And there can be surprises. You can have a particular trade issue on a given house, but I think trying to shift that on to the customer is a pretty tough thing. Got it. Yes. And I appreciate the way you explained it. That makes sense. And I guess just a last one for me and I'll pass it on is on the preliminary guidance for fiscal 2022, I think that pencil looks fast enough. I've got double digit EPS growth, fiscal 'twenty two SG and A as a percentage of sales below 11%, and I think sequential community count growth in the March quarter. Did I get that all correctly? Yes. I think that's all fair. That's kind of what we're trying to paint a picture of based on what we've got right now. We feel very good about Thank you. There are no further questions in queue at this time. Okay. I want to thank everybody for joining us on the call today. We'll talk to everybody next quarter. Thank you very much. This concludes today's call. This