Earnings Call Transcript - BZH Q4 2023

Operator, Operator

Good afternoon and welcome to the Beazer Homes Earnings Conference Call for the Fourth Quarter and Fiscal Year ended September 30, 2023. Today's call is being recorded and a replay will be available on the company's website later today. In addition, presentation slides intended to accompany this call are available within 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, CFO

Thank you. Good afternoon and welcome to the Beazer Homes conference call for our fourth quarter and full-year of fiscal 2023. Before we begin you should be aware that during this call we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties, and other factors described in our SEC filings, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date 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. Today Allan will discuss highlights from our fiscal 2023 results, an update on our multiyear goals, how we are navigating the affordability challenges for home buyers, and our growth expectations for fiscal 2024. I'll then provide details on our fiscal 2023 full-year results, updates on our cycle time and cost reduction initiatives, additional details on our expectations for the first quarter and full-year, and end with a look at our balance sheet and book value. We will conclude with a wrap-up by Allan. After our prepared remarks, we will take questions during the remaining time. I will now turn the call over to Allan.

Allan Merrill, CEO

Thank you, Dave, and thank you for joining us on our call today. I'm extremely proud of our team's efforts and results for fiscal 2023. We overcame an exceptionally difficult sales environment in the first quarter of last year, which allowed us to make significant progress against our balanced growth and multiyear goals. With a strong finish in the fourth quarter, we delivered both financial and operational results that met or exceeded our expectations. From a financial perspective, we generated more than $150 million of net income, resulting in healthy returns on both assets and equity. We invested almost $600 million in land and land development, and at the same time, we strengthened our balance sheet with leverage now below 40% and stockholders' equity above $1 billion. From an operational perspective, we positioned ourselves for growth by increasing our community count and controlled lot position. We reclaimed more than two months of construction cycle time, and we expanded our leadership in energy efficiency. We were also recognized as a top workplace, reflecting our efforts to sustain an exceptional level of employee engagement. Against a very difficult interest rate and housing backdrop, fiscal 2023 challenged us in many ways, and we came through in very good shape. In the middle of fiscal 2023, we laid out three multiyear goals intended to define specific targets and timelines as part of our long-standing balanced growth strategy. These targets represent our highest priorities and are centered around community count growth, balance sheet strength, and the energy efficiency of our homes. As it relates to our growth, we ended the year with 134 active communities, up 9% versus the prior year, as we successfully activated 60 new communities. In fiscal 2024, we expect year-over-year growth in our active community count each quarter. Further out, we have excellent visibility to more than 200 active communities by the end of fiscal 2026. As it relates to our balance sheet, we finished the year with our net debt to net capitalization ratio at 36%, representing a 9-point decline versus the prior year. Our profitability expectations for fiscal 2024 should allow us to reduce that ratio into the low-30s by the end of this year, putting our multiyear goal of net debt to net cap below 30% well within reach by the end of fiscal 2026. Finally, as it relates to the homes we build, we remain the only public builder with a commitment to building 100% of our homes to the Department of Energy's zero energy ready standard. In 2023, we greatly expanded our production of these homes with a share of zero energy ready starts jumping from 2% in Q1 to 28% in the fourth quarter. By the end of fiscal 2024 we expect well over half our starts will meet the DOE standard positioning us to have every home we start zero energy ready by the end of 2025. We remain confident in the longer-term supply and demand dynamics that underpin our strategy and our industry, but affordability has been and is likely to remain the central challenge for new home sales. Part of the challenge is consumer psychology, with buyers daunted by monthly payments larger than they are accustomed to. But the other part is math. Many prospects simply don't have the income to afford the payments for the home or the location they desire. To help combat this, we have structured our incentives to allow customers to direct dollars between home price discounts and closing costs, which often include buy-downs. This allows different buyers to make different choices. In a rising rate environment, builder financing incentives typically increase, at least initially, and our experience confirms this. As the 30-year mortgage rate moved from about 7% at the end of June to just over 8% in October. Our contribution towards closing costs increased about 1 point on new sales. As part of our mortgage choice program, our lenders also contribute to closing costs and rate buy-downs, which leverages our contributions. Of course, our mortgage strategy is about more than just buy-downs. It's about choice. We have multiple choice lenders available to provide loan estimates to every buyer, which incentivizes our lenders to compete on loan programs, closing costs, buy-downs, and service levels in addition to rates. We have two other differentiators for home buyers, both of which directly target affordability concerns. Surprising performance encompasses our construction quality and energy efficiency efforts with measurable monthly savings on utility bills for our buyers. Choice plans enable buyers of two-built homes to select floor plan elements to match their lifestyle at no additional cost. We are laser focused on affordability and believe we have created a differentiated strategy to address it. While the year ahead undoubtedly holds both opportunities and challenges, we continue to expect growth on many fronts. Our larger community count provides the basis for our expectations for more closings, leading to higher revenue and profitability in 2024 as we aggressively pursue our multiyear goals. Overall, I'm very pleased with what we were able to accomplish in fiscal 2023 and remain excited about where we're going in fiscal 2024 and beyond. With that, I'll turn the call back to Dave.

David Goldberg, CFO

Thanks, Allan. I'm going to focus my comments this afternoon on our annual results. You can find our detailed fourth quarter performance in our press release. For the full-year, we generated an average pace of 2.6 sales per community per month with a cancellation rate of 20%. Homebuilding revenue was $2.2 billion, down about 5% as the benefit from higher ASPs largely offset a decline in closings. Gross margin, excluding amortized interest, impairments, and abandonments, was 23.1%. This was the second highest annual gross margin over the last 10 years. SG&A as a percentage of total revenue was 11.5% as we continued to invest in our growth. This all led to adjusted EBITDA of $272 million. Interest amortized as a percentage of home building revenue was 3.1%, flat compared to the prior year. Our GAAP effective tax rate was 13.1% as we benefited from energy efficiency tax credits. This led to net income of $159 million or $5.16 of earnings per share. Land and land development spending accelerated in the fourth quarter allowing us to grow our controlled lot position both sequentially and year-over-year, while also increasing our percentage of lots controlled under option. In the beginning of fiscal 2023, we set forth cycle time and cost reduction objectives as we targeted regaining ground lost during COVID. I'm happy to report we made significant gains on both fronts during the year. In the fourth quarter, cycle times on closings were down more than two months versus the prior year. In fiscal year 2024, we expect further improvements as we drive cycle times closer to pre-pandemic levels. Turning to cost reductions, we were pleased with our ability to recognize significant savings in the back half of the year, primarily through lower lumber costs. This contributed to gross margins increasing sequentially from Q2 through Q4 on an average sales price that was declining, primarily due to product and feature changes implemented to address affordability. Looking forward to the fiscal first quarter, quarter-to-date sales are up year-over-year, but were more sluggish when mortgage rates reached 8%. Although we are encouraged by the recent move down in rates, our guidance today does not assume this will translate into a meaningful improvement in sales pace this quarter. We are currently expecting at least 650 sales, which will be up more than 30% from last year's very low base. Our ending active community count should be flat sequentially and up 10% year-over-year. On the income statement, transformer issues are likely to adversely impact our conversion rate as we anticipate having about 50 finished homes awaiting power at quarter end. We still expect a backlog conversion ratio above 45% as we benefit from improved cycle times, resulting in year-over-year revenue growth. Our ASP should be around $510,000. We expect adjusted home building gross margin to be 23% or higher. Our absolute dollars spent on SG&A should be up approximately $2 million versus the same quarter last year. We expect this to result in adjusted EBITDA around $40 million. Interest amortized as a percentage of homebuilding revenue should be in the low-3s, and our effective tax rate to be approximately 11% as we continue to benefit from energy efficiency tax credits. This should lead to diluted earnings per share around $0.70. Turning to our full-year. Our expectations assume the economy, housing conditions and mortgage rates remain relatively stable. In this environment, we expect to spend at least $700 million on land acquisition and development as we position for future growth. We are targeting double-digit growth in community count by year-end. Revenue growth will be a result of higher community count and year-over-year gains in backlog conversions. This should more than offset a decline in our ASP, which we anticipate to average $500,000 for the full-year. We expect to generate adjusted homebuilding gross margins in the range of 22% to 23% with a large share of new communities in our mix. Our effective tax rate to be near the midpoint of the 15% to 20% range we provided during last quarter's call. Taken together, we expect to generate double-digit returns and continue to grow book value significantly. Achieving our target for double-digit returns will lead our book value per share over $40 by the end of the fiscal year. The chart on Slide 15 shows the progress we've made thus far in growing our stockholders' equity, having more than doubled our book value since the end of fiscal year '19. At the same time, the quality of our book has improved, as our DTA as a percentage of book has gone from about 40% 3 years ago to nearly 10% at the end of this year and will continue to decline. On to the balance sheet. Total liquidity at the end of the year was over $610 million comprised of $346 million of unrestricted cash and $265 million available on our fully undrawn revolver. Reducing our net debt to net cap translated into net debt to LTM adjusted EBITDA of 2.3 times. Our 2025 senior notes represent our nearest maturity, and we anticipate using a combination of repayment and refinancing to address it. Subsequent to the end of the quarter, there were three noteworthy developments. First, we expanded our revolver equipment to $300 million. Second, Moody's Investor Services increased our rating from B2 to B1. And finally, we repurchased $4 million of our 2025 senior notes, bringing the total outstanding principal below $200 million. With that, I'll turn the call back over to Allan.

Allan Merrill, CEO

Thank you, Dave. 2023 was a highly successful year for the company. We overcame the challenges associated with much higher mortgage rates and delivered excellent financial and operational results. Equally important, we entered fiscal year 2024 with a differentiated strategy and attractive geographic footprint and expectations for growth across most financial metrics. Looking beyond this year, we have provided investors with three specific multiyear goals to track our progress, growing our community count, strengthening our balance sheet, and extending our leadership in building energy-efficient homes. I'm confident that we have the team and the resources to create growing and durable value for our stakeholders in the years ahead. And with that I will turn the call over to the operator to take us into Q&A.

Operator, Operator

Thank you. We will now start the question-and-answer segment of today's conference. Our first question comes from Julio Romero from Sidoti & Company. Please go ahead.

Julio Romero, Analyst

Thanks. Hey, good afternoon, Allan and David.

David Goldberg, CFO

Hey, Julio.

Allan Merrill, CEO

Hey, Julio.

Julio Romero, Analyst

Hey, so it was impressive to see that 42% year-over-year jump in land investment in the fourth quarter. Can you talk about the full-year expectation, I believe, about $700 million. Just how do you expect that to trend from a cadence perspective throughout the year? And how much does the reduced construction cycle times you've achieved free up some free cash flow for that increased land spend?

David Goldberg, CFO

Julio, I think we'll probably avoid talking about the cadence on land spend at this point in the year. It's still a little bit early. Obviously, we've got our pipeline in front of us, and we talked about kind of what we expect to spend for the full year. I would tell you the increase in the cash flow, frankly, does help, but we have plenty of liquidity on the balance sheet. You can see we ended the year with more than $600 million of liquidity. So I think the other thing, Julio, we're looking at now, and you can kind of look at what we did in 2023. The spend in 2023 was relatively backloaded to the fourth quarter. And we talked about that on previous calls. We spent time early in Q1 renegotiating land deals. And the impact of that was better terms and better deals in many cases, but it also pushed land spend largely into Q4, and you can see the acceleration that we had; that shouldn't frankly be the case in 2024. We should have land spend more evenly distributed quarter-to-quarter. But I don't want to get too far into the details of that until we kind of go through the year.

Julio Romero, Analyst

That's fair, and I appreciate the insight you provided. Could you discuss your expectations for the ramp-up in community count? I'm interested in your confidence regarding the outlined growth path for that community count. While mortgage rates will certainly have an impact, how might Beazer be relatively less affected than others?

Allan Merrill, CEO

Well, sure. I'll take a stab at it, and then Dave will fix it up, Julio. I think that during 2024, we feel very confident about the ramp. Those are deals that are locked and loaded under development, and they're going to get to the market this year kind of regardless of where rates are. A lot of 2025 is in a similar category. Clearly, we've got some discretion. If we decided that things were really tough we could slow up a little bit, but we've got the owned and controlled lot position to have multiple years of community count growth. So what we committed to last year, we're still on that track. In terms of being in a little different position and look, sales this week, this month, this quarter, six months has an influence on land activity, but you know there's a two-year or so latency between buying a deal and activating a deal. And so those things are always going to be a little bit asynchronous. From a sales perspective, our view is pretty clearly that having mortgage choice, surprising performance, and choice plans gives us ways of meeting the customer where they are from an affordability standpoint and trying to find ways that they can get into the home of their dreams as opposed to having to compromise. But that's a little different context than the cadence of community count growth because the community count growth for 2024 decisions we made in 2021, 2022, and 2023.

Julio Romero, Analyst

Very good. I’ll pass it on. Thanks very much.

David Goldberg, CFO

Thanks, Julio.

Operator, Operator

Next, we'll go to the line of Alan Ratner from Zelman & Associates. Please go ahead.

Alan Ratner, Analyst

Hey, guys. Good afternoon. Congrats on all the progress this year. I would love to drill in first on just kind of some of the more recent commentary you had, which I appreciate the color there. So if I look at the guidance, and I fully appreciate you're extrapolating out maybe a tougher few weeks here. But 650 orders would be down about 35% sequentially. That's much more severe than you guys typically see in your fiscal first quarter. And you mentioned the 100 basis point increase, I believe, in incentives for October. We’ve heard things from other builders kind of similar trajectory there? So how are you thinking about that interplay between kind of the current incentive environment, maybe what some of your competitors are doing versus the order side because that seems like it's a pretty significant drop-off? And my interpretation is maybe you guys are taking a bit of a backseat towards the calendar year-end companies that might be a bit more aggressive in the near-term.

Allan Merrill, CEO

Well, there's a lot in that question, Alan. And you're right on just about every front. For sure, this is a strange time of year. Dealing with November and December year-end companies that have big spec positions, and they're trying to make not just sales but closings in a relatively compressed period of time. And we typically lay a little bit lower during what is our fiscal first quarter and try not to get caught up in it. So that is the case, but that's the case every year, it is the case this year. I think it's also true that there's just been so much volatility in mortgage rates in the last 60 days; I mean that run up to eight and then the easing, there's no question that run up to eight affected traffic and it affected sales. I mean, October into the early part of November wasn't great. But it's also true that what's happened in the last 10 days has definitely stimulated a level of activity that we weren't seeing three or four weeks ago. So we find ourselves in an awkward point for the earnings call because I could feel really good about seven days where I could look at the last month or two and say, well, it's sort of mixed or, as you did, you can look at it over years and look at, well, what's the normal sort of progression. So I think we've given a fairly cautious estimate of where sales may land in the first quarter. And it's influenced a little bit by what you said. I don't think we're in a place where we feel like we have to go chase unit activity right now. We've got compressing cycle times working in our favor. We've got a rock-solid balance sheet. We've got a lot of runway left in the fiscal year. So this just doesn't feel like a window where we needed to win the day, win the week, in order to set ourselves up for the year. So I've touched on three or four different ideas there, but I mean each of them sort of come back to definitely not giving a guide on orders that are super ambitious. We're giving a guide that's very rooted in some of the tougher weeks of the last two months.

Alan Ratner, Analyst

You answered every part of my multipart question, Allan. So thank you for that. Second topic would love to discuss our mortgage rate buy-downs. You've talked a lot about the mortgage choice program that you guys have. There's a lot of focus being spent on mortgage rate buy-downs right now across the industry; there are other homebuilders devoted a lot of time on their calls talking to their national programs. They're offering what the exact rate is. And I know your situation is different. So is there any way for you to give us a little bit of data or insight into kind of what the average rate your buyer actually is getting based on the incentives you're providing or what percentage of your buyers actually are choosing to put the dollars into a rate buy-down just to kind of give us a little bit of a comparison point to where you guys stack up versus the rest of the industry?

Allan Merrill, CEO

Sure, I can provide some insight. While I can't share specific data due to not operating as a mortgage company, there are a few noteworthy points. We recognize that many competitors provide limited-time incentives on specific homes. Our approach tends to differ as we focus more on the community and the homes themselves. When speaking with our preferred lenders, it's interesting to hear from our sales consultants and buyers about the detailed and sometimes lengthy process they go through in deciding between options like a 3-2-1 buy-down or a permanent buy-down. They consider how future rates might look and whether they can qualify at the fully indexed rate. The temporary buy-down seems to be the preferred choice for saving cash, while interest in the permanent option remains. With various offerings from multiple lenders, buyers understand that they are not being taken advantage of, as they have transparency across the board. Recently, a larger number of our buyers have preferred permanent buy-downs, but during October, as rates climbed to eight, there was a noticeable shift back towards temporary buy-downs. This suggests that buyers feel more confident that current rates may not go higher, making temporary buy-downs more appealing. While I can't get into very specific rates due to various factors like buyer credit characteristics and loan-to-value ratios, I am pleased to know our buyers are receiving multiple proposals and actively comparing options with an engaging dynamic.

Alan Ratner, Analyst

Excellent detail. Thank you for the time as always. Appreciate it.

Allan Merrill, CEO

Thanks, Alan.

Operator, Operator

Next, we'll go to the line of Alex Rygiel from B. Riley. Please go ahead.

Alex Rygiel, Analyst

Thank you and good evening, gentlemen, very nice quarter. Your ASPs have been trending right around this $510,000 level. I appreciate the thoughts about the first quarter. But as we look beyond that, is there any thoughts or commentary that you can add to directionally where that ASP could go a little bit further out based upon the new communities that you're bringing on and whether or not there could be a mix shift there?

David Goldberg, CFO

Alex, it's Dave. I don't really want to go beyond 2024 and the kind of initial conversation that we've had on that. But I remind you, in the prepared remarks, we talked about kind of a full-year ASP. And frankly, that's down from where it is right now, around $500,000. Really, a lot of that is kind of choices we're making, right? It's what we're offering, it's community choice, it's product choice. It's included features. So it's not saying assumption as you would imagine, on price declines or lower prices, but rather choices we're making to address affordability and still keep value high for the buyer.

Alex Rygiel, Analyst

That's very helpful. And then you talked about in the past some certain geographies that maybe you had an interest in accelerating growth in; I think Florida might have been one of the states. Can you give us a little bit of an update there?

Allan Merrill, CEO

Sure. First of all, we love our footprint. We can grow in every single market that we're in. I don't think people love it when I say dumb taxes, but I say it anyway. We paid them in a number of places. And so now it's the point to benefit from the learnings that we've had along the way. And there's no question. We want to be where the jobs are: Jobs are in Florida, jobs are in Atlanta, jobs are in the Carolinas, jobs are in Nashville, jobs are in Indianapolis. I mean, those are places that we see great growth opportunities. And then, of course, the West has been very good to us. Phoenix is obviously a little bit more challenging. It's a tough land market. There are water issues. I don't think that's going to be a big growth engine. I do think our business will become a bit bigger there. But I think the larger amount of growth for us is going to be in Texas. Our recently acquired San Antonio business will play a big role in that, Florida, up the East Coast.

Alex Rygiel, Analyst

Very helpful. Thank you very much.

David Goldberg, CFO

Thanks, Alex.

Operator, Operator

Thank you. Our last question in the queue is from Jay McCanless from Wedbush. Please go ahead.

Jay McCanless, Analyst

Hey, guys. Thanks for taking the question. So when I look at the fiscal 2024 guidance on page 14, it looks like the adjusted gross margin range, all are thinking it's going to be down anywhere from 50 to 110 basis points versus what you put up in fiscal 2023. I guess, could you talk about, one, what type of mortgage rate assumptions are built into that? And then maybe two, is that a function of some of the discounting and price cuts that we're seeing from some of your competitors right now?

Allan Merrill, CEO

So a few things are happening, and both Dave and I have insights to share. First, we assume that interest rates will stay approximately in their current range, around 0.25% to 0.38% in either direction. We do not expect rates to consistently exceed eight percent. This perspective shapes our full-year guidance. Regarding margins, it's influenced more by the shift in community types rather than discounting. As mentioned, we opened 60 communities in 2023 and plan to open more in 2024, leading to a greater number of new communities contributing to closings next year. Historically, we've found that the highest gross margins are not typically achieved in the first three to nine months after a community opens. This plays a significant role in our margin guidance. While there's a small reflection of increased financing costs since June, we have not anticipated a worsening situation; rather, we've normalized our expectations based on current mortgage rates. The mix issue is primarily driven by the influx of new communities. I'm particularly excited about these new communities that have been restructured and brought to market in a very different interest rate environment than initially planned, and they are now able to generate margins above our ten-year average, which is encouraging.

Jay McCanless, Analyst

Absolutely. I guess the second question I had, the homes that you're selling now that will need to get finished or even just a straight-up to be built. I guess what's the range of delivery times that you're giving out now? And I know you said cycle times are down two months in the fourth quarter, I guess, from what you're selling now, where do those cycle times compare to where they were pre-COVID?

Allan Merrill, CEO

We're still probably 30 days wide of the pre-COVID, and I'd like to get about half of that back this year. I don't know that we'll get it all back because I think there's some structural delays built into the municipal processes. They haven't staffed back up. The flip side is there's not a lot of multifamily or commercial start activity. So I think on the trade side, the number of crews, and the quality of crews, I think that's where the opportunity is. But targeting to get back at least a couple of weeks this year.

Jay McCanless, Analyst

Okay, that sounds good. Thanks for taking my questions.

David Goldberg, CFO

Thanks, Jay.

Operator, Operator

Thank you. And our final question in queue comes from Alex Barron from Housing Research Center. Please go ahead.

Alex Barron, Analyst

Yes, thank you. Yes, I wanted to ask about the DTA and expected tax rate. Maybe Dave, do you still expect it will take a few more years before you completely use this up? In other words, I'm trying to figure out if the tax rate is going to stay low for another two to three years before it resets back up?

David Goldberg, CFO

Alex, good question. We do have a slide in the presentation in the appendix that kind of go over GAAP tax expectations and cash tax payments for some detail. But I would tell you, yes, we think we're going to be using our tax benefits for 2024, 2025, and potentially into 2026. And then what you'll see as you get into; we'll start to use the tax benefits that we're generating for energy efficiency tax credits as we're closing the home. So it will be much more simultaneous like most builders. So yes, I think we'll have a lower tax rate. We talked about the midpoint of the 15% to 20% range in 2024. And quite frankly, I think from a statutory perspective on an ongoing basis, we'll be below kind of normal factory levels because we're generating tax credits and using them in 2026 kind of real time.

Alex Barron, Analyst

Got it. And then I was hoping you could comment on thoughts around share buybacks given your stock is still trading below one times book.

David Goldberg, CFO

Absolutely, Alex. I would tell you, and we've kind of talked about this before, we're confident in our balanced growth strategy and the ability to generate sufficient liquidity to really support our growth aspirations and continue to delever our balance sheet. As it relates to share repurchase, I would tell you, share repurchases are clearly an attractive use of capital depending on share price. But right now, our highest priority is clearly growth and debt repurchasing.

Alex Barron, Analyst

Got it. Alright, thanks and best of luck.

David Goldberg, CFO

Thanks, Alex.

Operator, Operator

And currently, I'm showing no other questions in queue.

David Goldberg, CFO

Okay. I want to thank everybody for joining us on our fiscal fourth quarter call, and look forward to talking to everybody in three months on our first quarter call. Thank you very much for your time this evening.

Operator, Operator

Thank you all for participating in today's conference. You may disconnect your line and enjoy the rest of your day.