Beazer Homes USA Inc Q3 FY2025 Earnings Call

Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the third fiscal quarter ended June 30, 2025. 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 third quarter of fiscal 2025. 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 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 third quarter, the current operating environment, including a discussion about our product differentiation strategy, an update on our asset alignment efforts, including the two communities we impaired in the quarter, and end with the status of our multiyear goals. I will then provide an overview of our operational response to a weaker sales environment, detailed guidance for our fourth quarter results and finish with updates on our balance sheet and liquidity, including our outlook for land spending and share repurchases. Alan will conclude with a wrap-up, after which we will take any questions in the remaining time. Before turning the call over, I'd like to share that we've added a new Vice President of Investor Relations, Mark Chekanow, who's in the room with us today. Mark just joined us about a month ago, and we're very pleased to have him on the team. I will now turn the call over to Alan.

Thank you, Dave, and thank you for joining us on our call this afternoon. Despite a particularly challenging sales environment in the third quarter, we were pleased with our progress toward our multiyear goals and the resilience of our gross margin. Relative to our goals, we grew our average community count 15% to 167, successfully activating 19 communities, and we grew book value per share to over $41 as we repurchased another $12.5 million of stock. We also generated an adjusted homebuilding gross margin of 18.4%, up slightly versus Q2 as margins on our newer homes overcame higher incentives and an elevated spec mix. Weighing against these accomplishments were several headwinds that impacted our sales results. At a macro level, affordability concerns and rising new and used home inventories impacted both traffic and sales conversion. While it's possible for us to know if or when mortgage rates may decline, we believe new home inventories will gradually be absorbed over the next several quarters because builders have already reduced start activity. Longer term, the structural housing shortage supports demand for new homes in our markets. Within our business, sales paces during the quarter varied greatly. In Texas, which represents approximately 40% of our active communities, our pace was disappointing at 1.3 sales per community per month, well below our recent third quarter absorption rates for the state, which have ranged from 1.9 to 3.1. These are among the markets that experienced the largest buildup of new home inventories during the spring. Despite near-term traffic and sales challenges in Texas, we remain bullish on the state. Dallas, Houston, and San Antonio are growing and economically vibrant, and we've got experienced teams and well-located communities in each city. And we're making product feature and incentive changes, which are showing early signs of success. Sales paces in our other markets were largely in line with our expectations for the quarter. We acknowledge that builders who have reduced home sizes, feature levels, or performance standards to be able to offer lower home prices have exceeded our sales paces this year. So I'd like to discuss the rationale for our commitment to a differentiated product and customer experience strategy. Today, we are both the #1 energy-efficient homebuilder in the country and the highest rated national homebuilder for customer service according to TrustBuilder. Attaining these positions has taken time and commitment, but we believe they will lead to substantial returns to shareholders over time. Let's dig a little deeper into how we are building a unique energy efficiency position. First, we identified a pervasive consumer pain point around utility bills, namely their size and rate of growth. Then we had to create a solution. Committing to ENERGY STAR and then Zero Energy Ready across all product types and all climate zones meant specifying different materials and construction processes from slab insulation to 2x 6 framing to enhanced insulation and house wrap systems to HVAC equipment with advanced heat pumps and proprietary inverters. Our peers simply don't do these things. So we had to create a different supply chain and recruit a more technically advanced trade base to build these homes. Now our efforts are focused on demonstrating to homebuyers and realtors that our homes are different, they're better, and we can prove it. I was in one of our model homes in Indianapolis recently, and our team showed me a display of two movable wall sections, demonstrating to buyers completely different construction methods. The picture is shown on the slide. One side is code-built and the other is Beazer built. The sensation of swinging open each of these panels by hand and feeling the difference in the weight of our materials was kind of amazing. I'm convinced that anyone who feels that difference will intuitively understand that we're building something radically different and obviously better. Of course, to generate shareholder returns from our efforts, we must get paid for building a better home. And on that score, there's still room for improvement. So far, we've lowered the average construction cost premium to around $8,500 per home or roughly $55 a month if we pass that entire cost on to buyers. But here's the thing. Our homes cost a lot less to operate, often by hundreds of dollars per month. That means these investments pay for themselves immediately before attributing any value to our homes' comfort, durability, and health benefits. Unlike a race to the bottom on features and prices, super low utility bills is a unique market position and one that we are positioned to own. As we further reduce the cost to build these homes and continue to refine our sales process, we believe our profitability has a lot of upside. We've been clear about our intention to improve returns while we grow, which requires attention to both profitability and capital efficiency. We think about capital efficiency in terms of both the structure and the position of each community. We've had a lot of success on the structuring side, doubling our option lot percentage to 60% over the past five years. This improvement has allowed us to increase our active controlled lots by more than 55%, which will continue to fuel community count growth even as we've reduced our owned lots. We're also improving the positioning of our communities to drive returns. This can mean selling excess lots, adjusting product types or features, or changing pricing strategies. We own or control more than $3 billion of land, and we remain convinced we couldn't replace it at our cost basis. Still, we actively manage the portfolio to improve returns. Over the past 12 months, we've sold $45 million of land that was not core to our strategy, generating about $8 million in gross profit. In other cases, we've changed plans, elevations, or features to better fit customer needs. And of course, sometimes we change our intentions based on market conditions. Two such cases arose during the third quarter, resulting in modest impairments. The first is a community in the Maricopa submarket of Phoenix, which has become increasingly price sensitive since our initial investment. As such, we decided to aggressively reprice our remaining homes and sell the balance of our finished lots. We have no other investments in Maricopa. The second is a condo community in Orlando. The condo market in Florida has become quite challenging, largely due to rising insurance and HOA costs for homeowners. During the quarter, we decided these conditions were likely to persist indefinitely, so we adjusted pricing to accelerate our return of capital. We have no other active or planned condo communities in Florida. We conduct a robust review of the entire portfolio every quarter with a consistent methodology that we detail in our 10-Qs and 10-Ks. While these two instances led to impairment, our review process this quarter did not identify any material risk of further impairments. Shifting now to our multiyear goals. We remain on track to achieve each of these objectives. Reaching our goal of exceeding 200 communities by the end of fiscal 2027 would result in a double-digit 5-year compound annual growth rate in community count, creating a platform for significant top and bottom line growth. With 167 active communities and nearly 27,000 active lots under control, we have a clear path to reaching this goal over the next two years. While additional investments could enhance this growth, given current market conditions, we're deliberately slowing land spend so that we can allocate more capital toward our two other goals. Our leverage goal remains to reach a net debt to net capitalization ratio in the low 30% range by the end of fiscal 2027. An increase in community count and slowing land spend should contribute to an accelerated rate of deleveraging in fiscal 2026. Our final goal is to generate a double-digit compound annual growth rate in book value per share through the end of fiscal 2027. This would equate to a book value in the mid-50s. We expect to achieve this goal through a combination of profitability and share repurchases. We've been actively repurchasing our shares at a discount to book in recent quarters with a year-to-date spend of $33 million at an average price just over $22. With $87 million remaining on our authorization, we have ample capacity to continue our buyback. With that, I'll turn the call over to Dave.

Thanks, Alan. We have detailed our third quarter 2025 results in our presentation, our press release, and our 10-Q. And of course, we're happy to discuss them during the Q&A portion of this call. There's no question the sales environment has been weaker than we anticipated. While we remain highly optimistic about our strategy and prospects, we are aggressively responding to current conditions. These actions include renegotiating the pricing and terms on land contracts and rebidding land development and vertical construction trade and material agreements. While these actions will only slightly benefit our fourth quarter, they should contribute to a much more profitable fiscal 2026. With that said, let's start with our expectations for the fourth quarter. We note that our outlook contemplates conditions remaining relatively consistent with what we're seeing now in the market. We expect sales to be relatively flat versus the same period last year as a higher community count offsets a slower pace. We expect to end the fourth quarter with around 175 communities, up about 8% year-over-year. We anticipate closing between 1,200 and 1,300 homes in the quarter with an ASP around $535,000. The sequential increase in ASP is a function of product and community mix shift. Adjusted gross margin should remain around 18% as specs continue to represent an elevated share of our closings. SG&A should be around 11.5% of total revenue. We remain focused on adjusting our overhead to be in line with current conditions and expect improved SG&A leverage in fiscal 2026. We expect land sale revenue to be above prior periods and to contribute to profitability as we manage our portfolio to enhance returns. All in, this should generate about $50 million in adjusted EBITDA. Interest amortized as a percentage of homebuilding revenue should be just over 3%. Given our expectations for energy efficiency tax credits and our pretax income, we're anticipating generating a net tax benefit of several million dollars in the quarter. This should all lead to diluted earnings per share of just above $0.80. Our balance sheet remains healthy with total liquidity at the end of the third quarter exceeding $290 million. We expect to end the fiscal year with total liquidity around where we ended fiscal 2024 and with nothing drawn against our revolver and no maturities until October 2027. We view our current valuation as compelling and have the flexibility to allocate additional capital to share repurchases. So far this year, we've repurchased about 1.5 million shares or about 5% of the company. We anticipate continued share repurchases as part of our capital allocation strategy, though the magnitude will vary quarter-to-quarter based on our share price, profitability, and land spend. During the third quarter, we spent $154 million on land acquisition and development, reflecting our decision to slow land spending. For the full year, we now expect the total land spend to be between $700 million and $750 million with an option percentage above 60%. This should result in an active controlled lot position similar to the end of last year. Utilizing more option contracts improves asset turns and will accelerate growth and boost returns when sales paces normalize. With that, I'll now turn the call back over to Alan.

Thanks, Dave. The simplest summary I can provide is this. We're responding to the current environment while still strengthening our differentiated market position. In addition to moderating our land spend, we're evaluating our existing lot positions and managing our portfolio to maximize returns on each asset. We're also in the midst of a broad effort to renegotiate contracts and agreements for land, labor, and materials. These steps should boost near-term profitability and cash flow. At the same time, we remain focused on executing our differentiated strategy, including delivering the most energy-efficient homes and providing a best-in-class customer experience. Taken together, we believe succeeding in these areas will enable us to drive long-term shareholder returns. We have the strategy and the resources to achieve our goals, and I'm proud of the entire Beazer team for their dedication to our customers, our partners, our communities, and to each other. With that, I'll turn the call over to the operator to take us into Q&A.

Thank you. Our first question comes from Tyler Batory of Oppenheimer.

Alan, I appreciate the detail you gave on sales pace, but I just wanted to start there and dig a little deeper. It sounds like it was mostly a Texas issue, but can you talk a little bit more broadly in terms of how you're balancing pace and price? Talk a little bit more too about if there's potentially a lower bound that you're willing to accept on the pace side of things. And you also talked a little bit about demand too. I think one of the trends of earnings season so far is that demand is fairly inelastic out there. So I just wanted to get a perspective on what you're seeing in the market.

Sure. There were a couple of questions in there. I believe your observation about demand elasticity is quite accurate. You can't restore confidence through pricing, which is certainly one of the trends we are witnessing. Many factors can diminish confidence, such as increased inventory or income insecurity. Therefore, we didn't find a significant opportunity to aggressively adjust pricing to boost volume. That said, I have to express my disappointment with our overall performance in Texas. I don't anticipate another quarter like that in Texas, as our communities are capable of better results. We were somewhat affected by the inventory issues in the market and may not have pushed hard enough. We've made several adjustments to our products and marketing strategies in that area. I feel somewhat optimistic about our position as we concluded the quarter and moved into the fourth quarter. However, outside of Texas, our results generally met expectations. Interestingly, there were positive performance indicators in various regions. While it's often simpler to convey a singular narrative, I can highlight that we experienced strength in Virginia, likely due to the return to office in D.C. Myrtle Beach also showed robust performance, primarily as a retirement and vacation home market. Additionally, our business in Southern California did exceptionally well in the third quarter, being chronically undersupplied. Demographics and market drivers vary significantly across the country, making it challenging to summarize demand, pace, and margins succinctly. Outside of Texas, we have been competitive, but we must enhance our competitiveness within Texas, and we intend to do so.

Okay. Very good detail there. On the cost side of the equation, obviously, you build a little bit of a different home compared with some of the other homebuilders out there. So interested in what you're seeing on the labor front; there's been some more availability out there. How you're handling material costs as well, just kind of how all of those factors are working for you given that you do build a little bit of a different home than some of the peers.

Tyler, it's Dave. Hope you're well. A couple of things to think about. Certainly, we get a lot of questions on tariffs. We haven't seen much impact from tariffs on our material costs. But I think there's probably a more important story there for us. And Alan talked about it in his remarks in the script; we're making some really good progress on our costs, both in Zero Energy Ready and our broader costs. And we've been driving down our direct costs, quite frankly. And we think we're going to see a lot of that benefit as we move into 2026, the benefit from the cost savings that we're generating. So from a cost perspective, I think you'll see more. I think we've had some opportunities to take some costs out. And certainly, you mentioned labor. I think there's some opportunities there, and it's not just going to be on the cost side in terms of renegotiating with trades. I think there's some benefit on the cycle time and picking up some days on the cycle time as we move into '26. So I think there's some good opportunity for us. And obviously, we're always changing kind of features and included features to make sure we have the right cost to hit affordability.

Okay. And the last question, maybe a little bit more housekeeping. What percentage of orders or closings in the quarter were spec? Where are you thinking in terms of that number for the full year? And I know it's a little bit elevated versus where it's been in the past. How much of a headwind is that in terms of gross margin this year given that mix?

Yes, Tyler. We have been discussing the SG&A, with the spec count percentage being in the high 60s. I won't provide a specific number for the fourth quarter, but we do expect it to remain around that level. Additionally, where we stand in that closing range will determine the spec count. It's also important to mention that we factored in some increased closing costs as we approached Q4, which has contributed to the gross margin pressures observed. Overall, we are pleased with our performance in the 18s and have shown resilience in that range, although it may have seen a slight increase from one quarter to the next.

Our next question comes from Julio Romero of Sidoti & Company.

Staying on the gross margin topic for a bit. Can you maybe just talk about this quarter and rank order the drivers of how you were able to meet the homebuilder gross margin guidance that you gave last quarter despite what looks like lower ASPs in a tougher demand environment than was already expected? I know you called out some spec profitability improvements, some Zero Energy Ready homes comprising a greater part of the mix. But if you could just help us think about these drivers in the quarter.

Sure. Julio, it's Dave. Look, I think Alan started his comments, and I think it's exactly right. We're really happy with the resilience of our gross margin. And that's honestly newer homes and our efforts to bring down those energy-ready costs I was talking about before, withstanding kind of higher incentives and frankly, that higher mix of specs that we're seeing. So I would tell you that's the biggest kind of driver when you think about the gross margin. It's really the resilience that we're seeing in gross margin. It's those newer homes in newer communities and frankly, our efforts to help reduce costs.

Excellent. Very helpful. And then thinking a little bit about your differentiated energy-efficient homes. Can you speak a little bit about the strategy to communicate that differentiation to the consumer? Is that kind of reliant on word-of-mouth? Or are there more structured educational and marketing initiatives in the works?

It's a little bit of everything except the Super Bowl ad. There is some brand marketing, but really, it's about the experience that our prospects and their realtors have when they visit a community. That's why I was so excited. And I mean, I realize it was a little unusual to put it in the earnings script, but I was so excited when I was in Indiana a couple of weeks ago, and the team showed me something that they came up with because we've challenged all of our divisions to think about how do we show, tell, what we're doing that it's different. You can show her scores or ACH scores, you can show utility bills, but how do you create that visceral sense that this is just really different. And I thought it was absolutely genius that they just were able to mount these two wall panels and pivot them, and they're easily movable, but one is way heavier than the other. And I just felt like that was one of those aha moments where we found something. We found a mechanism to tell a story; the old adage, if a picture is worth a thousand words, a movable wall panel is probably worth 5,000 words. And look, we're definitely trying to innovate, like building this home is different. So telling the story is different. And it's an all-out effort across every division to find ways to connect. And I'll just add one degree of difficulty for those first-time buyers who are coming out of an apartment or for that empty nester buyer who is downsizing; the way that we connect this is slightly different. Now what they have in common is a much lower utility bill. But for that first-time buyer, it's about accessing the opportunity to have homeownership because their all-in costs are within a zone that they can afford. For that move down or for that empty nester homebuyer, it's about connecting with, look, your income isn't going up; it's probably fixed, having certainty around your utility bills and having a better built home that you've earned after all the years that you've worked, like that's just a different kind of conversation. And so seminars and teach-ins and flyers, yes, it's all of those things. But what it's really about is finding the opportunity to connect the value with each type of buyer that we see. And I'd say the learning curve is steep, but it's exciting, like it's better every quarter.

Our next question comes from Alan Ratner of Zelman & Associates.

I'm hoping you can help clarify the guidance a little bit for me. I'm having a hard time understanding a little bit of it. So specifically on the orders, your guidance for flat orders year-on-year would imply a pretty healthy sequential ramp in orders, about 20%. And I'm looking at your business historically; I've only seen one year in the last 30 where your fourth quarter orders were higher than 3Q. And I understand this quarter was disappointing, but I look at your margin guide; it's pretty flat quarter-over-quarter. So it doesn't seem like you're drastically changing the incentive strategy or the pricing strategy. And I didn't hear much commentary that the market has meaningfully improved over the last handful of weeks. So can you just help explain a little bit the optimism why orders are going to be up by that magnitude over the third quarter?

Well, look, I've got to look, Alan, because we have a little bit of different numbers, and I got to look at your model, but frankly, we talked about relatively flat. And we talked about 8% community count growth. And so when you kind of look at the year-over-year change in pace, I think it implies a pace that we're pretty comfortable getting to. It is a little bit better sequentially; that's absolutely true. But we do tend to have a little better months as we get into the end of the year. So we feel pretty comfortable, and Alan talked about some improvements in Texas and things that we're doing. We feel pretty comfortable with the pace that we guided to.

Look, I think the big thing is, and I don't have the community count chart, but there were a lot of years in the last, however many you've looked at, where the community count goes down. So it's kind of working against the headwind of the decline in community count between Q4 and Q3. We have the benefit of the tailwind of a bigger community count leaning into the fourth quarter. So that's part of it. And we're simply not going to have a 1.3 in Texas again.

So Alan, it seems you won't be reaching 1.3. What specifically will change to enhance that since your margin remains flat? I would assume that if you're being more aggressive with pricing, considering it makes up 40% of your business, it would negatively affect your margins. I'm just trying to understand how these aspects align.

I believe that newer homes have better margins. While we are putting in considerable effort in Texas, which may lead to increased incentives, we have taken that into account in our guidance. Throughout the year, we had anticipated a decent boost in fourth-quarter margins due to our backlog of Zero Energy Ready homes, which is still present. However, this has been somewhat offset by a larger proportion of speculative builds. I had hoped our guidance would indicate higher margins in the fourth quarter, but what we are actually considering is some potential improvement in performance in Texas and a rise in incentives, which will counterbalance the margins we have built into our backlog of to-be-built homes.

Thank you. Our next question comes from Alex Rygiel of Texas Capital Securities.

Dave, could you talk a little bit about your cancellation rate and how we should think about it in light of maybe some of your peers and how they disclose it or calculate it and whether or not there's something to do there from a bigger company standpoint to capture more retention that could drive greater closings?

Alex, I would be a little bit careful on talking about other people's cancellation rates and how other builders can calculate them. I would tell you in our business, cancellation rates as a percentage of gross sales typically are between 15% and 20%. They're on the high end of that, but really nothing to see there. It's pretty normal in our business, especially given some of the issues we've talked about around consumer confidence. It's not surprising that we're a little bit on the higher end of that. But honestly, really nothing unusual.

And then as it relates to your closings ASP guidance for the fourth quarter, is that a good baseline to consider for 2026?

I want to be real careful on giving any kind of '26 guidance. We'll be talking about it as we move into next quarter. Obviously, there's a bunch of new communities coming online where the ASP will be a little bit different. So I prefer to not get into '26 guidance right now.

Our next question comes from Jay McCanless of Wedbush.

I know this has been asked, but I'm going to go ahead and ask it again. If we look at the gross margin, the adjusted gross margin declining sequentially from 3Q to 4Q, I guess, what is in that sales mix? Is there a lot of discounted homes that you talked about for the two impaired properties? Is it clearing out some specs? I guess just kind of give us a sense of what you think is going to close in the quarter.

We've got a pretty good backlog at June 30 that includes a bunch of the to-be-built that I talked about just a minute ago. There will be a higher share of specs in the fourth quarter, not a lot higher. We've been in the high 60s. I think it may be a little bit higher than that. And we've contemplated that, which is why I don't think we're going to get the lift in gross margin that we otherwise would have gotten.

I was pleased to hear you mention the new home inventory that some other builders seem to be avoiding. What are you hearing from the field? Have we experienced the worst of the situation regarding competitive new home inventory, or do you anticipate it worsening for at least the next three months while one of your larger competitors works to clear out inventory before their year-end?

I recognize that the start activity in the markets we are closely monitoring is generally down compared to last year. We weren't the only ones to feel optimistic last fall about the starts for the spring selling season, which ultimately turned out to be disappointing. This led to increased inventory levels, prompting the industry to slow down start activity and revisit pricing strategies. These two trends are evident in almost every market. As we move towards the end of summer and into fall, we will start seeing seasonal effects on the start numbers. The real indicators will emerge in October and November, when we will determine if there is renewed excitement for the spring selling season or if caution prevails. Over the next few months, I anticipate that new home inventories will decrease as we and others address the excess build-up while starting fewer projects.

And then the last one for me. We've heard from some of the government officials, trade department, et cetera, that the inbound import lumber duty rates for Canadian imports have already gone up and potentially, we're going to see a further increase of that on August 8. I guess what are you hearing from your lumber suppliers? Are they talking about passing through a price increase as a result of these higher Canadian softwood lumber duty rates?

I have not heard that, Jay. I think there's a lot of fear on the lumber side about the starts number coming down. And I think holding price is what they're focused on, whether they're going to be able to do that or not.

And our last question comes from Alex Barron of Housing Research Center.

I was just wondering what is your current average build time? And was there any improvement versus last quarter and a year ago? And is there any initiatives that you think could bring it down further?

I would say that over the last couple of years, we have certainly improved our cycle time, particularly after the peak we experienced during COVID. We are seeing gains of a few days to maybe a week, although the rate of improvement has slowed slightly. Looking ahead to 2026, and considering the observed slowdown and its effects on lumber, I believe there is still some potential to further enhance our cycle time and move closer to pre-COVID levels. This is definitely our goal, and we see a promising opportunity for cycle time improvement.

We're a couple of weeks away from being back to where we were in 2019. And I appreciate Dave trying to be a little careful here about the exact day count. But I think there's still an opportunity set of about two weeks. And I would say a part of that is going to be related to the fact that our trades have learned how to build these homes, which are different, and they have some different products in them and a little more availability of labor. And I think the combination of those, I don't think we'll get all two weeks back, and we may. But I think, as Dave said, as we get into '26, I think there are another three to five days for sure that we could get back and maybe a couple more.

Got it. What about the spec to build-to-order mix, like what percentage of each are you guys doing right now?

We previously mentioned that the number is in the high 60s. Typically, we see specs to be built at around 65% to 70%. However, our business usually reflects a more balanced approach, close to 50-50, with a tendency towards to-be-built homes. The current market seems to favor specs, and we find ourselves slightly above our historical averages in this area. We anticipate this trend to persist into the fourth quarter.

At this time, we have no further questions.

I want to thank everybody for joining our third quarter call, and we look forward to speaking to you on our fourth quarter call. This concludes today's call.

Again, thank you all for participating in today's conference. You may disconnect at this time. Thank you, and have a good day.