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spk00: Good afternoon and welcome to the Beezer earnings conference call for the quarter ended June 30th, 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 investor relations section of the company's website at www.beezer.com. At this point, I'll turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer. Thank you, sir. You may begin.
spk03: Thank you. Good afternoon, and welcome to the Beezer Homes conference call discussing our results for the third 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 of 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 third quarter, discuss our view of the current macroeconomic environment, and outline how we have strategically positioned for continued growth in fiscal 22 and beyond. I will cover our third quarter results in greater depth, our expectations for the fourth quarter and full fiscal year, and update our expectations for continued growth in our land position, followed by a wrap-up by Alan. After our prepared remarks, we'll 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 a very successful third quarter, generating financial results that met or exceeded our expectations, positioning us for a strong end to the fiscal year. Our sales pace in the third quarter was one of the highest levels that we've generated in the last five years. And in fact, this pace would have been even higher if not for our deliberate efforts to proactively slow sales to align with our production capacity and limit our exposure to raw material price inflation. We delivered substantial gains in operating margin, EBITDA, and net income as we benefited from increased pricing and improved overhead leverage. On the balance sheet, we expanded both our total lot position and the share of lots controlled by option while retiring $14 million in debt. Together, these results perfectly demonstrate our longstanding Balanced Growth Strategy, which is a multi-year plan to grow profitability faster than revenue from a less leveraged and more efficient balance sheet. With these results and confidence in our expectations for the fourth quarter, we are once again raising full-year guidance highlighted by earnings per share of at least $3.25. Taking a step back, we acknowledge the benefit our entire industry has experienced from the powerful confluence of demographics, new home supply constraints, and massive workplace changes unleashed by the pandemic. Collectively, these factors have led to significant home price appreciation, which has clearly outpaced wage and income growth. In the coming quarters, we do not expect this level of price appreciation to continue. Our view is that disciplined mortgage underwriting will effectively limit the extent of home price appreciation. That's entirely healthy and gives us confidence that we won't experience the kind of pricing excesses that could set up a painful correction in the future. The demand and supply characteristics of our industry remain highly compelling. Aspiration for home ownership among millennials, and changing homeownership expectations among baby boomers provide a durable source of demand for new homes, particularly with enduring work-from-home expectations. And a significant deficit of new homes simply can't be addressed quickly with the supply chain, land use, and entitlement barriers that exist. Ultimately, our industry's challenge will be to ensure that labor and material cost expectations in the supply chain remain tethered to affordable home prices. That's where we believe our market positioning will prove advantageous. With three strong customer-facing differentiators, we have a lot of tools to work with to enable us to deliver extraordinary value at an affordable price in a highly competitive environment. Last quarter, we provided initial visibility into our expectations for profitability growth in fiscal 22, and our confidence has only increased since then. Here's why. First, at the end of our third quarter, we had more than 1,500 homes in backlog scheduled to close next year, nearly double the level at this time last year. And importantly, these homes have higher prices and higher margins. Second, even as our ASP has increased, we have remained focused on carefully managing our overhead costs. This will drive SG&A leverage, pushing SG&A below 11% next year. And finally, our deleveraging efforts continue to reduce our cash interest expense, setting us up for reductions in gap interest over time. Next year, we expect at least $5 million in gap interest savings, with further reductions in subsequent years. Taken together, we're confident that these factors will allow us to achieve our goal of generating double digit earnings per share growth in fiscal 22. Before I turn the call over to Dave, I want to provide updates on two unique aspects of our business. First, over the past six months, we've experienced exceptional demand in gatherings, our 55 plus active adult business. While traffic and engagement among this buyer segment was particularly impacted during the early part of the pandemic, The strength in the resale market and the availability of vaccines have contributed to much higher sales activity. This is a growing part of our business with communities underway in Atlanta, Dallas, Houston, Nashville, and Orlando. Second, the rollout of charity title, our title business committed to contributing 100% of its profits to charity, continues to gain momentum. In fiscal 21, we expect to provide title insurance for more than a third of our closings. Next year, we expect to provide title for two-thirds of our customers, which should generate philanthropic resources of over a million dollars a year on a run rate basis. This will allow us to expand our efforts with Fisher House and support local charities in each of our markets. I'm incredibly proud of our team's innovative strategy to develop a dedicated funding mechanism that aligns our customers, employees, and partners in supporting our communities. With that, I'll turn the call over to Dave.
spk03: Thanks, Alan, and good afternoon, everyone. Looking at our third quarter results compared to the prior year, new home orders decreased approximately 13% to 1,199 as a higher sales pace helped to offset a reduction in average community count. Home building revenue increased nearly 7% to $567 million on 1% higher closings and a 6% higher average sales price. Our gross margin, excluding amortized interest, impairments, and abandonments, was 24.2%, up approximately 300 basis points to the highest level in more than a decade. SG&A was down 60 basis points as a percentage of total revenue to 11.1%, as we benefited from improved overhead leverage. Adjusted EBITDA was $78.8 million, up over 45%. Our EBITDA margin was 13.8%. Interest amortized as a percentage of home building revenue was 4%, down 10 basis points. And net income from continuing operations was $37.1 million, yielding earnings per share of $1.22, more than double EPS for the same period last year. Given our continued performance and substantial backlog, we are able to increase our financial expectations for fiscal 21. We now expect EBITDA to be over $250 million. Our full-year EBITDA guidance equates to earnings per share of at least $3.25, up from last quarter's guidance of above $3. We now expect our return on average equity for the full year to be approximately 15%. If you exclude our deferred tax asset, which doesn't generate profits, our ROE would be about 22%. Turning now to our expectations for the fourth quarter. We expect a sales pace of over three sales per community per month as we actively manage pace to ensure cost certainty and a positive customer experience. This pace is higher than our historical average but below the extraordinarily high pace we experienced last year. We expect backlog conversion to be in the mid-40s as we continue to manage through the challenging production environment. Our ASP should be above $410,000. Gross margin should be up more than 100 basis points year-over-year. SG&A on an absolute dollar basis should be down about 10%. Our interest amortized as a percentage of home building revenue should be under 4%, and our tax rate will be about 25%. Combined, this should drive earnings per share up over 20%. In addition, we expect to repurchase over $55 million of debt, bringing our full year total to at least $80 million. Our increased land spending in the quarter helped us grow our active lot count to over 19,000. We also increased our option percentage in the third quarter and now control nearly half of our active lots through options, up from less than 30% in the same period last year. Given our current pipeline of deals, we expect to continue to grow our land position to over 20,000 lots by the end of fiscal 21. It's worth noting that most of these deals have been in our pipeline for many months and are under contract at favorable prices. In addition, we remain focused on growing our position while minimizing risk by maintaining our strict underwriting standards, focusing on products that we've built before in some markets that we already know, and relying on options to control around half of our lots. So while land prices have appreciated, we're still finding deals that pencil, allowing us to refill the pipeline and grow our business. In the third quarter, we spent over $140 million on land in development, and we expect to spend around $600 million for the full year. With higher land spending and a big increase in our option lot position, we're creating a framework to sustain profitable growth in the years ahead. On slide 12, we depict our expectations for near-term community count. As you might expect, the supply chain issues so common in the home construction market have also impacted land development activities. As such, predicting the timing of new communities has never been more difficult. While we'll be actively opening communities every month, We don't expect sequential growth in community accounts until next spring. Fortunately, we've concentrated our acquisition activities in established new home corridors, so many of our coming soon communities are already generating interest lists. We ended the third quarter with over $600 million of liquidity, up about 50% versus the prior year, with unrestricted cash in excess of $360 million and nothing outstanding in our revolver. During the quarter, we retired approximately $14 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 before the end of fiscal 22. Our net debt to trailing 12-month adjusted EBITDA fell below three times, down from eight times five years ago. During the quarter, our corporate rating was upgraded by one of the rating agencies, and we remain on positive outlook at both S&P and Moody's. I'll now turn the call over to Alan for his conclusion.
spk05: Thanks, Dave. We had a terrific third quarter, but instead of repeating the highlights, I'd like to close by putting this quarter in context. We have been diligently and successfully executing against our balanced growth strategy. Over the last five years, we've grown EBITDA by more than 60%, improved our return on assets by more than five percentage points, and reduced debt by more than $300 million. At the same time, we've quietly demonstrated leadership in each of the ESG categories. As satisfying as these results have been so far, we're even more excited about what's in front of us. Industry fundamentals are solid and we're deliberately investing for future growth. In the meantime, we'll have higher prices and gross margins and lower overheads and interest expense to sustain earnings growth. And we aren't just succeeding for investors. We have charted the most ambitious energy saving course in the industry with our path to net zero energy ready homes, and we've created a growing philanthropic platform to fuse the efforts of our employees with the resources provided by our customers. I want to thank our team for their many ongoing efforts. I'm confident that we have the people, the strategy, and the resources to create durable value in the coming years. With that, I'll turn the call over to the operator to take us into Q&A.
spk00: Thank you, sir. It is now time for the question and answer session of today's call. If you would like to ask a question, please press star followed by 1. Please make sure that your phone is unmuted and record your name clearly when prompted. If you wish to withdraw your question, you can press star 2. Please allow a moment for questions to come in. Thank you. Our first question comes from Allen Ratner from Zellman and Associates. Your line is open, sir.
spk02: Hey, guys. Good afternoon. Nice job in the quarter. Glad to hear everyone's doing well. Thanks for taking my questions. Of course. David, I guess first just on the guidance, I was just hoping maybe for a little bit more of a finer point on the margin outlook, you know, recognizing that this quarter came in incredibly strong above expectations up about 300 basis points year over year. I know your guidance is for up at least 100, but on a sequential basis, how should we think about the strength that we saw this quarter and the sustainability of that?
spk03: It's a good question. Look, you have some timing as it relates to lumber prices and lumber price increases earlier in the year that are going to affect the exact level of margins in the fourth quarter compared to the third quarter. I think what we talked about and what Alan talked about is the homes in backlog that we have at higher margins if we look into 22, and that's what gets us confidence. So the up 100 basis points reflects those increase in lumber prices that we experienced earlier in the year, in addition to the guidance that we've given into 22, given the backlog we are now.
spk02: So just to clarify on that, so down a little bit sequentially in the fourth quarter because of the lumber timing and then reaccelerating in next year? That's kind of what you see right now? Okay. Yep. Thank you. That's helpful. Alan, I thought your comments early on about the pricing environment were interesting and kind of just the dynamic with the mortgage lending environment probably eventually putting some cap on the price increases we've seen. First, I'm curious if you've seen any signs of that happening yet. We're hearing from most other builders that the credit statistics and everything and qualifying is still very healthy and really not changed at all. So I'd be curious if you've seen something different. But then expanding on that, you know, I think it's going to be an interesting environment if that plays out the way you say it is. Because on the other hand, there's some optimism that costs will stabilize, but everybody's talking about building more houses, right? Ramping community count, building more specs, building more inventory, building backlog. So what gives you the confidence that, you know, the cost side will cooperate as pricing eventually hits a ceiling?
spk05: You know, Alan, if there were ever a compound question, that was it. And if I may, yeah, let me pull it apart and deal with the first thing first and then the second thing. So relative to the mortgage market, as you know, we do not have a mortgage subsidiary. We like our position very much. We've got multiple lenders making proposals to every customer. And so we get a pretty good snapshot of what's happening across a variety of lending platforms, larger and smaller institutions. And I would tell you, I think what you said is right so far. And insofar as credit quality, down payments, debt to income ratios have all been pretty strong. And that sort of gets to the issue that while home prices have risen a lot, mortgage rates are really attractive. So if you look at home mortgage payments in relation to income, we're higher than we were 6, 12, 24 months ago, but we're not in kind of crazy land. My concern would be if house prices keep moving significantly, how does that sustain itself? And I don't think that will happen because I do see real discipline amongst the lenders and their underwriting. So at this point, it isn't rubbing too badly. I mean, certainly for certain borrowers it does. There are absolutely people who are affected by the price increases, but there is still significant demand out there that can afford at these prices. really trying to telegraph. What we've seen in the last three months, six months, nine months, that's not a trend line that people ought to be extrapolating and extending. We're going to run out of that kind of upside, and I feel pretty good about the fact that the mortgage environment will act as one of those restraining factors on home prices. So does that answer that part of your question?
spk02: Yes, that's very helpful on the pricing side, and I would tend to agree, and I think that would be healthy for the market as a whole if that were to happen. So I guess that segues to the cost side, which you can answer now.
spk05: Yeah, so the cost side of the equation, the way you framed it is, I think, correct. There's going to be some addition to the supply side that we and others through community count growth are going to try and address. But, you know, we've got as an industry a long way to go just to get back to the community count that we had a year ago, right? And we'll get there, and I hope we get beyond that. Then we've got the issue that, as you know, and I think you've researched the deficit, the supply deficit that's been created over the last decade. I mean, it depends on who you ask. Is it 3 million, 4 million, 5 million? I don't know. It's a big number. And I feel like that's where this the notion that there's going to be a lot of additional supply has to be kind of looked at in context. Yeah, there's a fair bit of additional supply over time, but against a giant deficit. Then you add the issue of costs, and that really will come down to, at the product level, whether or not the capacity is advancing from each of those product categories as the production level in the industry expands. And the thing is, I think just like you know and our investors know that there is coming community count growth, all of our manufacturers and suppliers know it as well. So as we talk to our principal providers, I think they are absolutely geared up to deal with unit volume growth. Now, do I know the way that will settle out in terms of what the price per product will be in each category? No, but I think with a multi-year advance notice on the coming expansion of activity, I think we're seeing plenty of investment in the supply chain to make us feel like there isn't going to be, broadly speaking, areas where we can't get a particular product. That sounds really good. The truth is, in the last six months, that hasn't been the case. There have been areas where there have been shortages and there have been spikes in prices. It's been quite extraordinary in the supply chain. So my answer to your question is more looking at 12 and 24 months. As I see our community count and other community count ramping, I think our supply chain's got plenty of time and has been making the investments to be able to deal with that enhanced level of activity.
spk02: All right. That's very helpful, and I appreciate you stepping through that multi-part question. Good luck, guys.
spk05: All right. Thanks, Ellen.
spk00: Thank you. Our next question comes from Alex Barron from Housing Research Center. Your line is open, sir.
spk04: Thank you. Good afternoon, gentlemen. I have a question, I guess, regarding the orders that you saw this quarter. You know, most builders have said that they're still seeing good demand and that there's holding back sales. So just wanted to confirm that's what you guys are seeing and how do you see the orders playing out over the next couple of quarters if you guys are indeed holding back sales?
spk03: Yeah, Alex, and we talked about it in the script, absolutely see good demand out there. That's absolutely the case in the quarter. We did proactively control and manage our sales pace to try to match our production volume and our production capacity As we talked about in the script very clearly, in terms of how we see demand, I think Alan gave a pretty good kind of layout on how we see the supply and demand in the industry on a go-for basis. We think there's real good drivers of demand out there and the demand that we're seeing is sustainable. And without getting into specifics, I would tell you we're very optimistic about the demographics and demographic trends in the market with both baby boomers and millennials and our positioning accordingly.
spk05: And we gave guidance, Alex, on Q4, right? I mean, we think orders in Q4 will be in the range of about three sales per month per community, which would be a little enhanced relative to, you know, 2016, 17, 18, 19, but certainly not at the level that we were fortunate to experience last year in the September quarter.
spk04: Got it. And in terms of the supply chain issues, you know, everybody's been discussing What is it that you guys are doing, I guess, to address those issues? Are you, like other builders, trying to start more specs and sell them later in the process? Are you guys keeping things the way you've always done them? What are you guys doing maybe different to try to bring in the delivery times?
spk05: Well, the question is a great question. It's complicated. We spend a ton of time on it. As you would know, Alex, it's different in different cities, and it's different in a given city today than it was 90 days ago. It's a little bit of a game of whack-a-mole dealing with these challenges. But a couple of key things for us. The first thing was stop selling homes. where we weren't assured of when we could start it based on availability of labor and materials. You know the old adage, if you're in a hole, stop digging. And the second thing, be sure that you're communicating with your trades and your suppliers well in advance and that you understand what that availability is. So we talked about our sales pace being aligned with our production capacity. That's been a very big part of how we have been dealing with this period. Something else, and you talked about bringing in the dates. I would tell you that the first thing is it has to stop getting worse before you bring it in. And one of the things that we've done, and this is unusual I guess, we've been really clear with customers about the challenges in weekly conversations and we've moved a lot of closings out of our fourth quarter into our first quarter. so that we aren't trying to get proverbial 10 pounds in a five-pound bag. The fact that it's our fiscal year-end quarter turns out to not be the most important factor for our customers. So when we're working with our trades and our customers saying, how about an October 15th delivery date? That customer's happy. We can manage to that. Does it mean it's not a Q4 closing for us? Yes, it does. we're going to have a terrific Q4 anyway, and frankly, as we talked about, we're going to have a really good Q1 because we've got such a big backlog that will deliver into next year. So I think part of dealing with an environment like this, Alex, is being realistic and being highly, highly transparent, both up to our customers and out to our trades.
spk04: Yeah, because I've got to imagine, you know, the customer would – not be upset if you gave them a realistic expectation, said, hey, you know, your house is going to take nine months instead of six months because of all these issues. I'm sure they could adapt. But I'm guessing the bigger challenge for you guys is being able to have visibility on costs, correct?
spk05: Well, timing and cost, they're both big issues. On the timing side, though, where we're really, you know, focused right now, I would tell you that there are stages in each market where we set a window for We tell the customer at the pre-con meeting, here's the window in which your home is going to close. We get to a particular stage in our construction process, and that's when we set the date. That's been fairly effective, and it has dealt with a lot of the anxieties that I think new home buyers around the industry have had about not knowing when they're going to get their home. On the cost side, we've been pretty careful about not selling homes in advance of knowing our costs. So if we don't have cost certainty in a category or in a market around something, that's an area where we have intentionally throttled back sales activity. So our view is we can absorb some of the higher costs. We've been successful in doing that so far, but it's a pretty risky proposition to sell a bunch of homes and not know your costs, and that's what we've avoided.
spk04: Great. Well, good luck. Thank you. Thanks, Alex.
spk00: Thank you. Our next question comes from Julio Romero from Sidodian Company. Your line is open, sir.
spk01: Hi, yes. Good afternoon, Alan and David. Hello, Julio. How are you? I'm good, thanks. So I wanted to pull the string a little bit more on, I think, the first caller's question on cost, and I think you guys talked about lumber a little bit, and I know that lumber prices have been a little bit of a roller coaster, to say the least, in the first half of the calendar year. I mean, you know, does that high... lumber costs, I think you called out, might affect margins in the upcoming quarter. Does that stay isolated to this fourth quarter, or can that kind of seep into margins in the December quarter at all?
spk05: I think there'll be a little bit. Some of the homes that we sold in the spring are going to close in that September quarter, and some are going to close in the December quarter. And we sold them with our eyes open, knowing what lumber costs were. The good news is, as lumber costs have come down, we're now selling homes with our eyes wide open with a different lumber cost. So I think the largest impact, what Dave was alluding to, the largest impact of the highest lumber costs will be flowing through our cost of goods sold in the fourth quarter, which is why we would expect some sequential deterioration in gross margin, but reminding us that we'll still be up year over year very nicely.
spk01: Understood. You know, are you guys putting, or does Beezer put any, like, lumber price escalators or any material price escalators in your contracts?
spk05: We haven't done that. I know that there is some evidence of it. We've looked at it. You know, there are legal challenges with it. There are communication challenges with it. There are enforcement issues with it. I'm not, you know, philosophically, like, would say no, never. I just think it's super complicated. It's easy to say. It's hard to actually enforce it. And I think we have taken the approach of let's just not sell homes where we don't know the costs. And, you know, there can be surprises. You can have a particular trade issue on a given house. But I think trying to shift that on to the customer is a pretty tough thing.
spk01: Got it. Yeah, and I appreciate the way you explained it. That makes sense. And I guess just, you know, last one for me, and I'll pass it on, is on the preliminary guidance for fiscal 2022, I think my pencil was fast enough. I've got double-digit EPS growth, fiscal 22, SG&A as a percentage of sales below 11%, and I think sequential community count growth in the March quarter. Did I get that all correctly?
spk05: Yeah, I think that's all fair. That's kind of what we're trying to paint a picture of based on what we've got right now. We feel very good about that.
spk01: Got it. Thanks very much. Appreciate you taking the questions. You bet. Thanks, Leo.
spk00: Thank you. There are no further questions in queue at this time.
spk03: Okay. I want to thank everybody for joining us on the call today. We'll talk to everybody next quarter. Thank you very much. This concludes today's call.
spk00: This does conclude today's conference. You may disconnect at this time
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