Beazer Homes USA, Inc. (NYSE:BZH) Q1 2024 Earnings Call Transcript

Beazer Homes USA, Inc. (NYSE:BZH) Q1 2024 Earnings Call Transcript February 1, 2024

Beazer Homes USA, Inc. misses on earnings expectations. Reported EPS is $0.7 EPS, expectations were $0.71. BZH isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon and welcome to the Beazer Homes Earnings Conference Call for the First Quarter Ended December 31, 2023. 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.

David Goldberg: Thank you. Good afternoon and welcome to the Beazer Homes conference call discussing our results for the first quarter of fiscal 2024. 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 statements speaks only as the date the statement is made. 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 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 home sales, our outlook for the balance of the year and finish with an update on the progress we’re making toward our multiyear goals. I’ll then provide details on our first quarter results, our second quarter and full year expectations, a look at our steady book value accretion and maturity schedule and end with a review of our land activity and future community count. We will conclude with a wrap-up by Allan. After our prepared remarks, we will take questions in the time remaining. I will now turn the call over to Allan.

Allan Merrill: Thank you, Dave, thank you for joining us on our call this afternoon. Against a challenging affordability backdrop, we delivered another solidly profitable quarter, with new home orders substantially ahead of the expectations we outlined in mid-November. At that time, mortgage rates had begun to decline, but it was too soon for us to know whether the decline would be substantial enough or durable enough to improve sales paces. With the quarter now in the rear view mirror, I’m pleased to report that we experienced a meaningful improvement in demand, particularly in December, leaving us optimistic for the upcoming spring selling season. Here are a few of the highlights from our first quarter. Orders were up over 70% against an easy comp in the prior year as we generated a 50% improvement in sales pace to two sales per community per month.

Our community count expanded nicely, up 14% year-over-year. Gross margins were 22.9%, driven largely by home sales made in prior quarters when mortgage rates were lower and earnings were $0.70 per share, driving book value over $36. As noted in our press release today, first quarter profitability was negatively impacted by a widely publicized cybersecurity incident, which occurred at one of our title and settlement service providers at the end of December. Although we were able to adjust closing arrangements for most buyers scheduled that week, we delayed about 40 closings until early January, shifting a modest amount of revenue and profitability into our second quarter. While the situation was very frustrating for these buyers, the incident is fully resolved and won’t impact our full year results.

The macro environment for new home sales remains constructive but challenging. Most parts of the economy are in reasonably good shape, with job and wage growth providing support for homebuyer demand. And the supply of both new and used homes remains at historically low levels. Those are the constructive parts. Affordability, or more precisely, the lack of it, is the challenging part. When rates got to 8% in the fall, many potential buyers either couldn’t or wouldn’t commit to home ownership. But as we saw in December, demand responded quite strongly to declining rates. Anticipating demand for new homes is always challenging because it is never a function of just one variable. But for now, the biggest factor remains affordability, and more specifically, mortgage rates.

Our operating strategy is focused on maximizing returns at the community level, taking into account, buyer profiles and local competitive dynamics. Given the breadth of our markets and products, this results in a fairly balanced mix of pace and margin ambition, which obviously evolves with market conditions, including mortgage rates. With that said, here’s how we’re thinking about our results for the balance of the year. Our base case is that mortgage rates stay in the range where they are now, in the upper 6s. In this scenario, we think demand is likely to remain healthy. To maximize returns, we’re targeting sales paces that are quite good but perhaps a bit lower than our historical levels. On the margin side, we’d expect some pickup toward the end of the year, as improved cycle times allow us to deliver more homes with lower incentives.

If rates move down into the 5s, we’d expect a fairly robust increase in demand, leading to higher sales paces and even better opportunities to drive higher margins. The downside case would be if rates trend back toward 8%. In that case, we’d expect sluggish sales paces accompanied by a return of the incentives we offered in the fall. Whichever scenario unfolds, we’ve got the liquidity and land position to manage through it, and we expect to be able to generate a double digit return on equity for the fiscal year while moving toward each of the multiyear goals we introduced last year. As a reminder, these goals target growth, balance sheet strength and a differentiated product strategy. As it relates to our goal to have more than 200 active communities by the end of fiscal ’26, we closed the quarter with 136 active communities, up 14% versus the prior year.

By the end of the year, we expect that number to be above 155, or about 15% annual growth, and to be positioned for similar growth in both FY ’25 and ’26. In support of these efforts, our land spend in the quarter was almost $200 million, up 73% year-over-year, with a large portion invested in the development activities necessary to activate new communities as it relates to our balance sheet goal of having a net debt to net cap ratio below 30% by the end of fiscal ’26. We completed the quarter with a ratio at 44%, down 4 points versus the prior year. Given our expectations for sales volume and profitability over the balance of the year, we expect this ratio to be in the low 30s at year-end. And finally, as it relates to our goal to have 100% of our starts zero energy ready by the end of calendar ’25.

We made huge progress in the first quarter with more than half our starts meeting the zero energy ready standard. By year-end this will be above 75% as we introduce our energy-efficient homes into many more communities. The idea I hope investors will take away from this call is that we are focused on generating meaningful profitability and returns this year while also making significant strides toward our multiyear goals. With that, I’ll turn the call over to Dave.

David Goldberg: Thanks, Allan. For the first quarter of fiscal year 2024, new home orders were 823, up 71% compared to the prior year. Our average sales pace was about in line with historical levels for our fiscal first quarter. We closed 743 homes, generating homebuilding revenue of $381 million with an average sales price of about $513,000. Gross margin excluding amortized interest, impairments and abandonments was 22.9%. SG&A dollars were up marginally versus the prior year better than our expectations. Adjusted EBITDA was $38 million. If the cyber event at the third-party service provider hadn’t occurred, adjusted EBITDA would have exceeded $40 million. Interest amortized as a percentage of home building revenue was 2.9%.

Our GAAP tax expense was about $1 million for an effective tax rate of 5.2%. Our tax rate was below our expectation, primarily related to discrete tax benefits in the quarter. Net income was $21.7 million or $0.70 per share. Our second quarter expectations are derived from the base case scenario that Allan described where mortgage rates stay about where they are now and the economic environment remains supportive. With this backdrop to maximize returns, we’re targeting a sales pace around three per community per month and an ending community count of 145. We expect to close around 1,100 homes. Our ASP should be roughly $515,000. We are projecting adjusted homebuilding gross margin to be approximately 21% as the majority of the homes we expect to close in the second quarter went under contract when mortgage rates and incentives were substantially higher.

SG&A as a percentage of total revenue should be approximately 12%. We expect this to result in adjusted EBITDA above $50 million. Interest amortized as a percentage of homebuilding revenue should be in the low 3s and our effective tax rate should be approximately 11% as we continue to benefit from energy efficiency tax credits. This should lead to diluted earnings per share around $0.90. Turning to our full year, we expect more than 4,700 closings, reflecting at least 10% annual growth and an ASP of about $510,000. Given our margin expectations for the second quarter, our first half gross margin should be between 21.5% and 22%. We think that’s also representative of where we’ll be for the full fiscal year. We anticipate margins to recover over the back half of the year as the homes with the highest incentives will have been delivered in the second quarter and third quarter.

This would lead to EBITDA in the range of $260 million to $280 million and our diluted earnings per share would be at least $4.50 based on an effective tax rate of 15%. At this level, we’ll generate double digit returns this year and position the business for significant growth in fiscal ’25 and beyond. Achieving our target for double digit returns would lead to a book value per share of $40 or higher by the end of the fiscal year. The chart on Slide 14 shows the progress we’ve made thus far in growing our stockholders’ equity, having more than doubled our book value since fiscal year 2020. At the same time, our DTA has become a very small percentage of our book value. As it relates to our balance sheet, we ended the quarter with $404 million of liquidity.

Our net debt to cap was 43.7% and our net debt to EBITDA was 3.3 times. We ended the first quarter with about $980 million of total debt. As you can see on Slide 16, over the last few quarters, we’ve been spending more on both land acquisition and development as we invest in our community count growth. We expect that to continue leading to land spend for the full year of around $750 million. While we’re increasing our spending to fuel growth, we’re doing so while focusing on balance sheet efficiency. About 53% of our lots were held in our option at the end of the quarter. We expect to maintain our option percentage around this level even as we increase our spend. This will allow us to drive attractive returns even as we grow our community count and closings.

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

Allan Merrill: Thank you, Dave. We’re pleased with the results we generated in the first quarter. We adapted to a challenging operating environment and delivered solid profitability, higher new home orders and a growing community count. These results, together with a favorable outlook for the spring selling season, have us positioned to deliver strong full year results, highlighted by a double digit return on equity and even more community count growth. Looking further out, it should be very clear that we are making steady and significant progress on the multiyear goals we established last year. The achievement of these goals will represent a near doubling in the size of our company, the best balance sheet in our history, and an extraordinary level of differentiation in the homes we build.

We believe that’s a formula for creating a lot of shareholder value in the years ahead. Finally, I’d like to acknowledge my colleagues here at Beazer. We have a truly exceptional team, all of whom are committed to creating value for customers, partners, shareholders and each other. I could not be more proud to represent them. With that, I’ll turn the call over to the operator to take us into Q&A.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from Jesse Lederman with Zelman & Associates. Your line is open.

Jesse Lederman: Hi, congrats on the strong results and thanks for taking my questions.

Allan Merrill: Sure.

Jesse Lederman: The first question is, seems like you’ve noted 2Q – fiscal 2Q gross margin seems it’s likely to be the low watermark for the year, which is great. Can you talk about how your use of incentives shifted during the first quarter, and if any changes have been made yet in the second quarter and any quantification you can provide as to maybe a percentage of the sales price? Anything along those lines would be helpful. Thanks.

Allan Merrill: Sure. So it’s Allan. Over the course of the first quarter. So, I mean, let’s just make sure that we ground that, we’re talking October, November, and December. It was tough to find the market in October and early November. We were working on temporary buy downs, permanent buy downs. But what we really found was base prices made a difference. And as rates started to come down, we saw more of a shift into permanent buy downs from the temporary buy downs. But that was really the mix that we were playing with. Of course, across 130-odd communities, the equation is a little bit different in each community. But I would tell you that base price and permanent buy downs would have been the principal changes that we made.

As we rolled into January, we definitely saw an ability to reduce the dollar value associated with those buy downs because we were buying to similar rates but from a lower starting point. And we’ve been able to claw back bits and pieces on base price just in the last three or four weeks. So as we think about the year, we’re not expecting dramatic improvement in that price incentive mix. But the homes we’ve sold in the last 30 days or so have a better mix of price and incentive than the homes we were selling in October, November, and the early part of December. Does that kind of give you a sense of what we were doing?

Jesse Lederman: Yes. Thanks, Allan. That’s very helpful. My next question is on cash flow. Looks like you used about $230 million of cash flow. I know you’re pretty dedicated to continuing to develop land and acquire some new land as well. Can you talk about your cash flow expectations for the remainder of the year?

David Goldberg: Yes. Look, Jesse, I think we talked about a little bit in the prepared remarks. We spent about $200 million on land in the quarter. Land is still the primary use of our cash flow that we’re generating in the business. And as we’re running land through cost of goods sold, it’s still predominantly focused on land for investment. So we are doing development work, as Allan kind of mentioned in the script, looking at developing – spending money on land development and activating new communities and turning that capital. So land is still our priority in terms of our incremental cash flow generation. And we did give the guidance for the full year land spend of $750 million.

Allan Merrill: Yes, but I – that’s all right. It’s also important. Let’s not lose context of net debt to net cap. We expect net debt to net cap will be in the low 30s by the end of the year. So we generate more cash in the fourth quarter. We use more cash in the first quarter, second quarter and third quarter relative to production and land spending. But over the course of the year, we’re going to be able to grow the land position and delever just within the 12 months of the fiscal year.

Jesse Lederman: Awesome. That’s helpful. And then one last quick one somewhat similar. Looking at any market expansion as you’re looking at in the land market, or is it more so your current footprint?

Allan Merrill: Yes, one of the things I’m really proud of, and we pivoted to a growth mindset because we got our balance sheet in order about two years ago, is that we’ve been able to chart a really aggressive growth strategy on a multi-year basis very organically in our existing footprint, largely serving the same buyers and building the same types of homes. So while there are always risks associated with growth, I feel pretty good about the fact that we know these markets, we know these submarkets, we know these buyer profiles, we’ve built these homes. So I guess a different way of answering is we’re not looking at geographic expansion as a lever to achieve our growth ambitions.

Jesse Lederman: Very helpful. I appreciate all the color.

David Goldberg: Thank you, Jesse.

Operator: Thank you. Our next question comes from Julio Romero with Sidoti. Your line is open.

Julio Romero: Thanks. Hi, good afternoon. I appreciate you guys kind of lining out the base bull and bear case for how kind of rates can affect the year. Can you maybe talk a little bit about how your sales mix might be affected in terms of younger versus older buyers and higher versus lower end features as it relates to those cases you outlined?

Allan Merrill: So I think the biggest impact is in a very high rate environment, we will sell more specs. It’s – the thing that we’ve seen over the last year and a half or two during this tightening cycle is that when someone has a shelter need, a desire and a capability, they don’t want to wait six months or eight months for a home. So the characteristic that I think I’d be most confident in predicting in kind of a higher rate environment, as we see a mix, it’s a little trickier to cut that across demographics, whether it’s age or other socio characteristics. Our buyers are not principally the price first buyer. There are opportunities to buy single family homes further out at lower prices. That’s not really our market. So that buyer in a high-rate environment is pretty challenged and probably has an accentuated need for specs.