Beazer Homes USA, Inc. (NYSE:BZH) Q2 2024 Earnings Call Transcript May 1, 2024

Beazer Homes USA, Inc. beats earnings expectations. Reported EPS is $1.26, expectations were $0.91. 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 Second Quarter Ended March 31, 2024. 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 second 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 today is Allan Merrill, our Chairman and Chief Executive Officer. On our call today, Allan will discuss highlights from our second quarter, the current environment for new home sales, some details in our operational strategy this spring, and an update on the progress we’re making towards our multiyear goals. I’ll then provide details on our second quarter results, our forward expectations, our review of our balance sheet and land spending, and then conclude with a review of our book value per share and the framework we employ in considering capital allocation. We will conclude with a wrap-up by Alan. 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, and thank you for joining us on our call this afternoon. Our team delivered another successful quarter, highlighted by solid sales results and excellent profitability from a growing community count. We also invested for the future and enhanced our capital structure. In more detailed terms, new orders were up 10% from the prior year as we generated a pace just over three sales per community per month. This provides us with the backlog to modestly increase our expectations for full year deliveries. EBITDA was over $58 million, driven by slightly better than anticipated gross margins and careful management of overheads. We ended the quarter with 145 active communities, up from 136 at the end of December and 121 a year ago.

Land spend was nearly $200 million, bringing our total 12-month spending over $740 million. And finally, with our senior note issue and an extension of our revolver, we strengthened our balance sheet, enabling the consideration of a broad range of capital allocation priorities. In addition, we were recognized for both our culture and the energy efficiency of our homes. We also held our annual fundraiser for our national charity partner, Fisher House, which generated nearly $2 million. We remain very confident in the multiyear strength of the housing sector and new home production in particular. Our thesis is anchored by both supply and demand factors. Shortfalls in new home production over the past decade and the lock-in effect of higher mortgage rates both contribute to very tight supply, and an economy characterized by low unemployment, wage growth and attractive demographics for potential homebuyers provides clarity on the sources for current and future demand.

Last quarter, I outlined our view that over the balance of the fiscal year, our sales pace and to some extent, the mix and gross margins on those sales was likely to be closely related to mortgage rates due to strained affordability. We articulated three scenarios defined by the direction of rates, and this framework proved to be quite accurate in the second quarter. During the second quarter, mortgage rates moved around, ultimately rising about 20 basis points. This fell inside our base case and as such, we were able to exceed our sales goals, though with a slightly larger share of spec home sales. Since the end of the quarter, rates have moved nearly 50 basis points, further straining affordability. If these rates persist, it’s likely we will continue to see a stronger preference for specs.

As we have talked about for several years, we are in the midst of transitioning to Zero Energy Ready homes in all new and longer lasting communities. We call these our READY Series homes. While we’ve committed that 100% of our starts will be READY Series by the end of next year, we are substantially ahead of schedule, with more than three quarters of our starts being built to this standard last quarter. Given the importance we’ve placed on developing and delivering our READY Series homes, I am pleased to report that despite having somewhat higher construction costs, these homes are generating higher margins than our prior series. So this spring, to accelerate our transition to the READY Series, we’ve been encouraging our teams to be very competitive with pricing and incentives on our earlier STAR and PLUS Series homes.

This will allow us to close out of older communities more quickly and simplify our production and sales efforts around the READY Series. We can prove that these are the best built homes in our markets, and the sooner we are solely focused on building and selling them, the better. While this acceleration makes sense, there is a short-term financial consequence which will be apparent in the third quarter. Margins will be down sequentially, partially as a result of a higher share of specs, but more so from our efforts to move through our older series homes. With that said, we expect margins to rise in the fourth quarter as our mix of closings shifts strongly toward READY Series homes. And for the full year, our EBITDA net income expectations remain within the range of our prior outlook as we anticipate more closings and tighter management of overheads to offset much of the short-term gross margin pressure.

Dave will provide specifics, but I wanted to explain why we chose to impact the mix and pricing of our sales this spring. Finally, let me update you on our progress toward our multiyear goals. As it relates to our goal to have more than 200 active communities by the end of fiscal 2026, as I mentioned, we closed the quarter with 145 active communities, up nearly 20% versus the prior year. We expect to end the fiscal year with more than 155 communities, representing year-over-year growth of about 15%, which also happens to be a good benchmark for projecting year-end community counts in 2025 and 2026. As it relates to our balance sheet goal of having a net debt to net cap ratio below 30% by the end of fiscal 2026, we completed the quarter with a ratio at 43.4%, up a little bit versus the prior year.

This is simply a function of the seasonality and timing of our land spend. By the end of this year, we expect this ratio to be in the mid to low 30s, positioning us to be comfortably under 30% by the end of fiscal 2026. And finally, as it relates to our goal to have 100% of our starts Zero Energy Ready by the end of calendar 2025, I’m very pleased that we reached 77% READY Series starts in the second quarter. With our acceleration, we are in excellent shape to reach our stated goal, perhaps even early. As we get closer to fiscal 2025, I’m excited to see the impact that community count growth, reduced leverage and a truly differentiated product will make to our financial performance. And with that, I’ll turn the call back to Dave.

David Goldberg: Thanks Allan. For the second quarter of fiscal year 2024, new home orders were 1,299, up 10% compared to the prior year, driven by a 14% increase in average active community count. This translated to a sales pace of 3.1 sales per community per month, slightly above our guidance. We closed 1,044 homes generating homebuilding revenue of $539 million with an average sales price of about $516,000. Gross margin excluding amortized interest, impairments and abandonments was 21.7%. SG&A was 11.5% of total revenue, as we continue to prudently invest for our rapidly growing community count. Adjusted EBITDA was $58.8 million. Interest amortized as a percentage of homebuilding revenue was 3.0%. Our GAAP tax expense was $6.7 million for an effective tax rate of 14.7%.

Net income was $39.2 million or $1.26 per share. This included an $8.6 million pretax gain or $0.28 per share of EPS from the sale of our investment in Builder Homesite, a technology company specializing in digital marketing for new home communities. This gain contributed to our higher tax rate but has been excluded from our adjusted EBITDA. Our third quarter expectations contemplate mortgage rates staying about where they are now, with the economy remaining generally supportive. In this environment, we expect to sell at least three homes per community per month and end the period with approximately 150 communities. We expect to close 1,150 to 1,200 homes, up modestly versus the prior year with an ASP of roughly $505,000. Gross margins in the quarter will likely be about 20% as we work through sales arising from our acceleration to the READY Series.

SG&A as a percentage of total revenue should be approximately flat compared to the prior year. Together, these results should generate adjusted EBITDA above $50 million. Interest amortized as a percentage of homebuilding revenue should remain in the low 3s and our effective tax rate should be less than 12% as we continue to benefit from energy efficiency tax credits leading to diluted earnings per share above $0.80. Turning to our full year, we now expect to deliver over 4,750 homes, reflecting more than 10% annual growth and an ASP of about $510,000. Based on our third quarter margin guidance, we expect our full year gross margin to be above 21%, implying a good recovery in the fourth quarter for more READY Series homes. SG&A as a percentage of revenue should be around 11% as we continue to carefully manage overheads.

Achieving these results would lead to adjusted EBITDA greater than $260 million and diluted earnings per share of at least $4.50 based on an effective tax rate of 15%. At this level, we’ll generate double digit returns this year, while positioning the business for significant growth in fiscal 2025 and beyond. Speaking of 2025, while it’s still a little early to give specific guidance, I want to offer some initial thoughts on revenue, gross margin and returns. Revenue should be significantly higher year-over-year, driven by our community count growth. We expect gross margin to improve in fiscal 2025, in part because of the mix shift Allan described. In fact, over time, margins on our READY Series homes should continue to improve as we work with our trades to reduce their build costs.

It’s also worth noting that every Zero Energy Ready Home we deliver qualifies for a $5,000 tax credit, which would translate to about another point of margin if it weren’t buried in our tax expense. Ultimately, higher revenue and improved gross margin from an increasing number of communities should lead to greater profitability and higher returns next fiscal year. Turning to our balance sheet. In March, we refinanced our 2025 senior notes with a new note due in 2031, leaving us with no maturities until 2027. We also extended our revolver expiration to March of 2028. We ended the quarter with total liquidity of $433 million, providing plenty of firepower for our growth ambitions. Pivoting to our investment and land, we spent nearly $200 million in the quarter, driving our year to date spending to just under $400 million.

We remain on track for full fiscal year spending of at least $750 million with the ability to invest more as opportunities arise. Even as we have increased land spending, we remain focused on balance sheet efficiency to drive attractive returns. More than half of our total lots are controlled through options, a ratio we expect to sustain. Finally, as it relates to our community count, we already control all the land we need to hit our fiscal 2025 growth goals and most of what we need to hit our 200 community count goal by 2026. Achieving our profitability will lead to a book value per share of $40 or higher by the end of the fiscal year. The chart on Slide 18 shows the progress we’ve made thus far in growing our stockholders equity, having more than doubled our book value per share in just the past four years.

In recent years, we’ve generated growth in our share price, but it has remained below our book value even as the composition has dramatically improved. Last year, we conducted a comprehensive investor survey to get the root cause of that disconnect. The result of that survey was clear. Shareholders told us they wanted to see a robust and sustainable growth trajectory and a less leveraged balance sheet. Those results led us to introduce our multiyear goals, which include ambitious growth and deleveraging objectives. These multiyear goals form the foundation of our approach to capital allocation because we agree with our shareholders, generating growth and balance sheet strength are essential to creating shareholder value. Today, we have excellent visibility into achieving these goals.

This is allowing us to contemplate alternatives for our excess capital. In practical terms, that means we are weighing the return and risk characteristics of additional land investments against the value created through share repurchases. Given our valuation in relation to current and future book value, we believe share repurchases are likely to represent an attractive additional use of capital. We have $41 million remaining in our previously authorized share repurchase program. With that, I’ll turn the call back over to Allan.

Allan Merrill: Thanks again, Dave. We’re pleased with the results we generated in the second quarter. We delivered solid orders and profitability from a growing community count and we positioned our company for the future with significant growth in our lot pipeline. Perhaps more importantly, we’re excited about where we’re headed. We have a clear path to reaching each of our multiyear goals. They represent substantial growth in the business, a resilient and flexible balance sheet and an innovative and differentiated product offering. We are confident we can create significant shareholder value from these results. To close, 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 our customers, for our partners, for our shareholders and for 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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