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spk00: And welcome to the Beezer's Homes Earning Conference Call for the quarter ended March 31st, 2021. Today's call is being recorded and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investors Relations section of the company's website at www.beezer.com. Now, I will turn over the conference call to David Goldberg, Senior Vice President and Chief Financial Officer. Thank you.
spk06: Thank you. Good afternoon, and welcome to the Beezer Homes Conference Call discussing our results for the second quarter of fiscal 21. 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 the date the statement is made. We do not undertake any obligation to update or revise any forward-looking statement, 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 Alan Merrill, our Chairman and Chief Executive Officer. On our call today, Alan will review highlights from the second quarter and discuss the supportive macro environment. He will then provide a preview for the remainder of the year and outline our expectations for growth in fiscal 22. I'll then provide more details on our results, projections, and balance sheet. 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 Alan.
spk05: Thanks, Dave, and thank you for joining us on our call this afternoon. We had an extraordinary quarter. highlighted by an unprecedented increase in our sales pace and significant growth in our gross margin, EBITDA, and net income. At the same time, we invested for the future, grew our share of lots controlled by options, and continued to reduce debt. In sum, we had a nearly perfect balanced growth quarter, with profitability growing faster than revenue, while operating from a less leveraged and more efficient balance sheet. Perhaps the best news is that our team is poised to translate continuing strength in market conditions into even better results in the quarters ahead. As I'm sure you've heard, the strength in new home demand has contributed to both longer cycle times and higher construction costs. To date, we have successfully adapted to this environment by raising prices, limiting sales paces, and extending delivery dates on sold homes. As we work through these issues, our objectives remain the same. we expect to create value for customers, partners, employees, and shareholders by delivering great homes on time and at the margin we intended when we made the sale. Our commitment to creating value for our stakeholders can also be seen in our recent accomplishments and goals on the ESG front, as summarized on slide five. This quarter's highlights included being named an Energy Star Partner of the Year for the sixth consecutive year, representing another significant step toward our goal of having every home we build net zero energy ready by 2025. We believe the strength in the housing market will prove to be pretty durable. And the reasons are simple. Strong demographic demand, exceptionally limited supply, and a recovering economy. On the demand side, we expect many of the COVID housing norms to be persistent. namely the desire for more space, better space, and outdoor space. Even as we return to offices and schools, our homes have clearly taken on new roles in our lives. Couple that with the great awakening of millennials to the benefits of homeownership and the desire of many boomers to simplify, and you have a recipe for depth and breadth of demand that isn't likely to disappear anytime soon. On the supply side, The shortage of owner-occupied homes we described on our call in January turns out to be even more acute than we suggested. On that call, we conservatively estimated that the deficit was more than one million homes. In recent weeks, Freddie Mac published a deeply researched report which demonstrated the housing shortage is closer to four million homes. There's simply no way for our industry to accelerate entitlement, development, and construction to make a serious dent in that number anytime soon. Finally, on the economy, while there are still many COVID-related challenges, there's ample evidence of both job growth and wage growth, which bode well for consumer spending and housing. In sum, our industry is in a highly advantageous position with demographically driven demand in a recovering economy faced with seriously constrained supply beyond 2021. Turning now to our expectations. With our sold and already started backlog up more than 50% and continuing strength in lead and traffic trends, our visibility and confidence in fiscal 21 results is quite high. Dave will provide details on our outlook for the third quarter and full year, but I'm happy to share that we are raising our expectations again. The headline is that we now expect full year earnings per share to be above $3. Looking beyond this year, Our balanced growth strategy is a longer-term approach to generating shareholder value while carefully managing risk. Over the past several years, our strategy has yielded a big jump in profitability, even bigger improvements in our returns, and a meaningful reduction in debt. And we're not done. While it's too early for us to give any type of detailed guidance for next year, there are three factors that give us confidence that we can again improve profitability and returns in fiscal 2022. First, our current backlog already contains nearly 700 homes scheduled to close in the first quarter of next year. That's more than half of our typical first quarter closings. With our normal cycle times, most of these homes would have closed this year. But these aren't normal times. So instead, we have a great start on next year. Second, community count growth is coming. Incredibly strong sales over the past six months mean the dip in our community count arrived a little sooner than we previously anticipated. But next year, the positive progression in our community count will be evident. And remember, these communities were tied up 6 to 12 months ago before the recent run-up in home prices. And third, we will finally see real interest savings. We have dramatically deleveraged our balance sheet in recent years, but haven't really benefited from a reduction in interest expense in our earnings. That's because of the timing difference between the immediate cash benefit of much lower interest costs and the non-cash gap expense that arises from previously capitalized interest. Next year, we expect to realize a multimillion-dollar reduction in our gap interest expense based on actions we have already taken. These factors and our confidence in the industry's supply and demand equation should yield another successful year for our balanced growth strategy. Before closing, I would like to again express our appreciation for the scientists, doctors, first responders, and essential workers who saw us through what appears to be the worst of the pandemic and have positioned our country to begin to recover. With that, I'll turn the call over to Dave. Thanks, Alan.
spk06: Looking at the second quarter compared to the prior year, new home orders increased approximately 12% to 1,854 as our sales pace was up more than 40%, to 4.7 sales per community per month. Home building revenue increased about 12% to $547 million on 9% higher closings. Our gross margin, excluding amortized interest, impairments, and abandonments, was 22.2%, up approximately 140 basis points. SG&A was down 100 basis points as a percentage of total revenue to 11% as we benefited from improved overhead leverage. Adjusted EBITDA was $64.2 million, up over 45%. Our EBITDA margin was 11.7%, the highest second quarter level in the past 10 years. Interest amortized as a percentage of home building revenue was 4.4%, down 20 basis points. And that led to net income from continuing operations of $24.6 million, yielding earnings per share of 81 cents, more than double the same period last year. With the strength of our current backlog and positive macro outlook, we are in a position to once again increase our financial expectations for fiscal 21. We now expect EBITDA to be up over 20% or more versus the prior year, a significant increase from the previous guidance. This level of improvement implies EBITDA growth of more than 10% in the second half of this year, with greater year-over-year growth expected in the third quarter. Our full-year EBITDA guidance equates to earnings per share above $3 up from last quarter's guidance of at least $2.50. We now expect our return on average equity for the full year to be approximately 14%. If you exclude our deferred tax asset, which doesn't generate profits, our ROE would be over 20%. The current production environment is going to impact both sales and closings in the third quarter. As the second quarter progressed, In the face of elongating cycle times, we deliberately slowed home sales to provide a better experience for customers and increase the value of our communities. Many of these restrictions remain in place, and as such, we anticipate new home orders to be down 10% to 20%. On the closing side, because of the challenging production environment, it is difficult for us to predict the timing and mix of closings between the third and fourth quarter of this year. We are focused on delivering great homes, not maximizing third quarter closings. Even with this caution, we still expect closings to be up in the high single digits in the third quarter year over year. Our ASP should be above $400,000 for the first time ever. Gross margins should be up over 100 basis points. SG&A as a percentage of total revenue should be down at least 20 basis points. Our interest amortized as a percentage of home building revenue should be around 4%, and our tax rate will be about 25%. Combined, this should drive a sequential increase in quarterly earnings per share. We ended the second quarter with over $600 million of liquidity, more than double this point last year, with unrestricted cash in excess of $350 million and no outstanding draws in our revolver. During the quarter, we retired approximately $10 million of our senior notes, and with two remaining term loan repayments, we're on a clear path to achieve our goal of bringing our total debt below $1 billion by the end of fiscal 22. During the quarter, we spent almost $100 million on land acquisition and development. Based on our land pipeline and approvals, we expect our land spend to accelerate in the remaining quarters of fiscal 21, resulting in over $600 million of total land spend for the year. We also increased our option percentage in the second quarter and now control more than 45 percent of our active lots through options, up from less than 30 percent in the same period last year. We still anticipate community count troughing around 120 later this year, but we expect it to grow steadily from there in fiscal 2022 as we benefit from our increased land spending. I'll now turn the call over to Alan for his conclusion.
spk05: Thanks, Dave. The second quarter of fiscal 21 was very successful for us as we maintained the momentum of the last several quarters, highlighted by very strong new home orders and substantially improved margins, while also improving the efficiency of our balance sheets. These results and continued strength in the market have enabled us to raise our expectations for the year. Perhaps more importantly, our performance should help investors understand the longer-term opportunity for value creation embedded in our balanced growth strategy and our ESG leadership. I want to thank our team for their ongoing efforts. I'm confident that we have the people, the strategy, and the resources to create durable value over the coming years. And with that, I'll turn the call over to the operator to take us into Q&A.
spk00: Thank you. If you'd like to ask a question, you may press star 1, and you will be prompted to record your name clearly for question introduction. Again, if you'd like to ask a question, please press star 1. One moment, please, while we gather questions. Our first question will come from Alan Regner from Zellman & Associates. Your line is now open.
spk03: Alan?
spk02: So we've heard from a lot of builders over the last couple of days, and it seems there's two somewhat differing views on the best way to approach the market these days. You've got some builders that are sticking to kind of a to-be-built strategy and feel like that's what the consumer really is desiring today to kind of design and pick their perfect dream home. And then you've got other builders that that for a multitude of reasons feel like it makes more sense to wait until the home is started and kind of further along in the construction process perhaps to sell. I think at least those builders in the near term are probably seeing a little bit of a greater lift to gross margin. They're benefiting from those extra months of pricing power as well as maybe some increased visibility on their cost structure. And I know you guys kind of have a balanced sales approach, at least kind of historically. So I'm curious if you have a view one way or another or if you've kind of shifted your sales strategy one way or another to reflect kind of all the various trends and dynamics in the market today, uncertainty on costs, pricing, significant price appreciation, et cetera.
spk05: Great question, Alan. I think my starting position on that is in an environment where you have near absolute cost certainty, our value proposition for buyers tilts towards a larger share of our sales being to be built. But in the current environment, we are doing a couple of things because of pockets of uncertainty around cost, either slowing the rate of those to be built sales or starting homes so that we have that certainty on cost and then selling them. So it Unfortunately, I don't have a red or blue, a yes or no answer for you, but it's a navigating through. But the pivot for us is where we have cost certainty, we have more confidence, and therefore the to-be-built model allows us, we think, to be paid for our pillars, for our choice plan, for our surprising performance. But I totally understand the point that it's tough to sell a home, not know what your costs are, lock the price, and then end up with costs that you didn't anticipate. And so we're managing that problem at a community level.
spk02: Got it. Your response, Alan, makes a lot of sense and is helpful. And I guess on that note, it seems like at this point really the only limitation on sales are production. Maybe for your guys, community count is a factor as well. What does your production pace look like right now? How many homes are you starting per month per community? If you look at it that way or on an annualized basis, how many homes do you feel like your production machine is capable of starting? And is there any flex point on that where you can potentially drive that high or assuming demand continues to be as robust as it is, if not accelerate even further?
spk05: I think it can go up over time, but it's not the capacity, the throughput can't. There's no flip switch to flip. to make that capacity go up in the next 30, 60, 90 days. And that's why you saw us talking about a meaningful part of our backlog delivering in Q1. I mean, we looked at the capacity for our throughput where we could have price certainty and deliver the right home the way we wanted and realized that the reality of that production environment is that we won't have the backlog conversion that we've historically had in the third and the fourth quarter. it is going to get better, I think, in terms of the production capacity for us and for the industry, because I think that this, whether it's $4 million or another number, this structural deficit, I think, is an undercurrent that is going to force us as an industry to expand capacity. We need to. The market's there for it. The trick, of course, is to keep it affordable, but I do think that that will increase over time. Great. Thanks a lot. Good luck. Thanks, Alan.
spk00: Our next question will come from Julio Romero. Your line is now open.
spk03: Hey, good afternoon, Alan and David. Hey, Julio. How are you? I'm good. So, you know, you're obviously seeing a very strong price environment. You know, ASP is expected above 400K next quarter. Can you speak to maybe how much more price, you know, can be driven in this environment? And, you know, kind of, you know, how do you see that kind of unfolding? And, you know, is there a breaking point eventually?
spk05: Well, I know the answer to the last part of the question for sure there is a breaking point. It's affordability. I mean, one of the things that is different about this environment now compared to other times that have felt quite euphoric from a new home construction perspective is I'm comforted by the fact that mortgage underwriting has remained really disciplined. So qualification, income levels are going to ultimately have a big effect on how much pricing power we have. And of course, changes in interest rates will factor into that as well. And I think that there is more room. I'm not panicked about some of the pressures on the cost side of the supply chain. I think we've got the ability to make changes to the product and accommodate those in a mix. But I don't think that if I looked at macro numbers, the level of price appreciation we've seen across all new homes or new and used homes in the last year, I don't think that's a run rate that we're going to see sustained over multiple years. But we're in a bit of a short squeeze right now. So the next few months, quarters, there's quite a bit of pricing power.
spk03: Got it. And, you know, with the strong demand currently seeing, you know, are consumers looking for certain amenities or has there been any change in consumer preferences in regards to, you know, configurations, you know, floor plans, you know, at all? And has that affected your product mix?
spk05: Well, it has a little bit, and it will come as absolutely zero surprise when I tell you that a place to home office and home school comes up in almost every sales conversation. And I don't think that's a cynical view that forever we're going to work from home and teach from home, but I think when you realize you don't have that opportunity, that flexibility, it feels like your product is functionally obsolete, and I think that's a big part of what we've seen over the last year. And I think it's got legs to it. I think we are very focused on having opportunities for people to work from home, and that affects the architecture, the layout of the home. And in many of our communities and many of our floor plans, we are intentionally designing more than one so that you've got the opportunity for quieter spaces and more of them. And I think I talked last quarter a little bit about the fact that You've got an interesting thing happening right now in architecture, or interior architecture at least, which is we've all got the visuals from television and the Internet of what open floor plan, open concept, high ceilings, great rooms, keeping rooms, we call them here in Atlanta. Those look great, and they feel great, but they're not awesome for working from home, teaching from home, So there's a little bit of a challenge. How do you create those nooks and crannies and those purpose-built spaces and still have these gathering places, these senses of place within your floor plans? It's actually kind of an exciting thing to figure out how to do that. And that is definitely a major theme and product in our floor plans everywhere in the country.
spk03: Understood. I guess this last one for me is if you could speak to any progress updates with your commitment to having all your homes being net zero energy ready by 25, and does the current kind of unique demand backdrop accelerate that at all or change that at all?
spk05: I don't know that it changes it. The opportunity to accelerate is really kind of a function of community, new community count. It's tough to go into a community that you are two-thirds of the way sold through, entitled, permitted, and have let contracts with subs and really fundamentally change the way the home is built. So what will happen and the thing that will really play a big role in the rate of our achievement of that is as we open new communities, our capacity to bring those features into homes within that community. Now there's some larger communities where we are making changes in real time and those are incremental changes. But I was thrilled to be recognized, to have the company recognized again as an Energy Star Partner of the Year. Six years in a row is a big deal. Testing every single home for 10 years is a big deal. And I feel pretty confident. We're going to remain a leader in this category. I think we are very disciplined about it. Our team is excited about it. I think it's the future, and we're driving it.
spk03: Great. Appreciate you taking the questions, and best of luck in the third quarter.
spk06: Thanks, William. Thanks, William.
spk00: As a reminder, if you'd like to ask a question, you may press star 1. Our next question will come from Jay McCannon from Webhook. Your line is now open.
spk04: Hey, good afternoon, everyone. So I just wanted to walk through the math. If you're backlogged to 3,300, have 700 homes that are going to close in 1Q22, and you're looking at high single digits, you're talking somewhere 1,400, 1,500 closings for the third quarter. Are you all thinking right now that your fourth quarter is going to be in line and maybe slightly higher on the total closing basis than what you're seeing in 3Q, or do you feel like you can deliver a few more homes than what you're going to close in 3Q?
spk06: So, Jay, we're not going to give specific fourth quarter guidance. You can kind of back into it, given what we said and what's in backlog and kind of what the spec level looks like, but we're not going to go to specific guidance. And I think, as I mentioned in my comments, there's a bit of uncertainty between Q3 and Q4 with the production and kind of moving in between. So high single digits for Q3, and you can kind of back into it based on what's in backlog and the spec count. That's what you think for Q4.
spk04: Right. Well, and that's going to be my next question is on the specs. I mean, is everything that you guys are starting right now mainly to meet the backlog, or are you trying to rebuild that spec count at all?
spk05: We are trying to, and in some places we've got the throughput to do that, Jay, and candidly in some places the backlog of sold homes and started sold homes is such that the throughput for a lot of additional specs is limited. So the answer differs by community. We do want to have a a little larger spec number. We're a little bit off of our traditional number of specs per community, and it really is mostly attributable to this excess that we had selling the specs. But we want to take care of the customers we've gotten backlogged, and so the balance there is kind of how we got to where we think the second half of this year will get from a total perspective, and that's kind of why we We focused more on the earning side than on the unit side because I think there's going to be some movement, as Dave said, between Q3 and Q4, both specs and backlog.
spk04: The communities that you're planning to start growing in 22, is there any geographic specificity to those? And then also, when you think about underwriting now, what type of monthly absorption pace are you underwriting these newer communities to?
spk05: I'm really glad you asked both those questions, Jay. The answer in the first one is no, there isn't really an asymmetric distribution of new communities. We've got growth in every market, and it's part of the discipline of staying in the footprint, right? Instead of getting excited by new market A or new market B, I mean, we've got great teams, we've got long histories in the markets we're in, and we want to invest with our team in our market that we know pretty well. In terms of underwriting, you know, this is a question that I know comes up a lot. These are really, really exciting, frothy kinds of sales times. These are not the sales paces that we are using in our underwriting. We are using sales paces that look like our last three, four, five years, not that look like the last six or seven months.
spk04: It's good to hear. Okay, let's all head. Congrats on the great work. Thanks. Thanks, Jay.
spk00: And our next question will come from Alex Barron from Housing Research Center. Your line is now open. Yeah. Hi, guys. Thanks.
spk01: I was hoping you could comment on your interest expense versus interest incurred. Obviously, you know, interest incurred has been going down because you guys have been paying down your debt. But this quarter, we saw a jump in the interest that went through cost of goods sold. So, Roughly, when can we expect those two numbers to be more in line? Is it maybe until next year?
spk06: Well, we've actually talked about it in the past. Absolutely, Alan mentioned in his commentary in the script that we think we're going to see a benefit from the interest perspective flowing through cost of goods sold and overall in the income statement as we look to next year. In terms of when incurreds and amortized come together, it's a little bit further off in the distance, and there are some factors that go into it, as you know, between inventory turnover and incurreds and beginning balance. But certainly the reduction next year is planned, as Alan mentioned, and a benefit from an income statement and earnings perspective, as Alan referred to in his script.
spk01: Okay, great. Thanks. And then as I think about, you know, capital allocation and I look at your balance sheet, obviously, you know, you guys don't have any debt maturing near term, so I'm assuming you probably won't be delivering in the near term. So what are the uses of cash at this point? Is it more to buy land? Is there potential for share buyback? You know, how are you guys thinking about that?
spk05: Well, let me just correct one thing politely, if I may. We are going to get debt below a billion dollars. We've committed to do that by the end of fiscal 22. You know, we've got, we structured intentionally a few years ago a term loan with $50 million principal payment so that we could balance the de-levering with our growth ambition, and we've been executing against that. So we'll have a term loan at the end of this year, another one at the end of next year. We'll pick up a few other bonds in the market to make sure that the aggregate gets the total below a billion dollars, but that is for sure going to be one of the allocations. Beyond that, and frankly, the much larger dollar amount is investing in the business. The market is strong. We're seeing lots of opportunities. We're excited about the commitments that we've made, the deals that we've tied up, We've given pretty bullish guidance as it relates to land spending in the back half of this year and for the total year. And frankly, a lot of the deals that we are doing will have takedowns and other uses of capital in 22 and beyond. So at this point, I'm excited about the returns we can make investing in the business. So that plus paying down the debt to get below a billion dollars, that's really where our focus is from a capital allocation perspective.
spk01: Got it. If I could ask another one. your land balance didn't seem to go up year over year. So is that something that is in the works, you know, to kind of line up more with the growth you guys are seeing in orders?
spk05: I mean, there are a lot of cross-currents in the land balance. You know, we had some formerly land held for future development assets that were pretty big. And as those have shrunk as we've been selling through them, we have said we don't need to have the same number of lots that we had for the size of the business. The other thing that's happening, and you've seen this in the option percentage, the option percentage has gone from 30% to over 45%. So in a land balance or dollars, we constantly talk about the efficiency of our balance sheet. We want to have a big investment, but no bigger than we need to have so that we can drive higher and higher returns. And that's a big focus of our strategy. is to make sure that we're growing our return on unlevered assets and our return on equity. So I think actually that's a good thing, right, that we've been very prudent about the rate of growth in the assets, and we've been able to drive a lot of EBITDA growth without a lot of asset growth. But we are definitely growing assets, but we're more focused on growing returns than we are growing assets. That's what balanced growth is for us.
spk01: Oh, hey, great. We'll keep up the good work. Thanks.
spk05: Thank you all.
spk00: And I'm currently showing no additional questions at this time.
spk06: All right. I want to thank everybody for tuning in to our call, to our second quarter call. We look forward to talking to everybody again in 90 days. Thank you very much. And this concludes today's call.
spk00: This will conclude today's call. Thank you for joining today.
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