Beazer Homes USA Inc (BZH) Q3 2019 Earnings Call Transcript

BZH earnings call for the period ending June 30, 2019.

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Motley Fool Transcribers
Aug 2, 2019 at 9:23AM
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Beazer Homes USA Inc (NYSE:BZH)
Q3 2019 Earnings Call
Aug 1, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the Quarter Ended June 30, 2019. 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, Vice President and Treasurer.

David Goldberg -- Vice President and Treasurer

Thank you. Good afternoon and welcome to the Beazer Homes' conference call discussing our results for the third quarter of fiscal 2019. 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, which are described in our SEC filings, including our Form 10-Q for the quarter, 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. And 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 are Allan Merrill, our President and Chief Executive Officer; and Bob Salomon, our Executive Vice President and Chief Financial Officer.

On our call today, Allan will review highlights from the third quarter and then discuss our operational and capital allocation priorities for the remainder of this year and end of the future. Bob will cover our third quarter results in greater depth, as well as our expectations for the fourth quarter of fiscal 2019. And I will then come back to provide more details about efforts to improve balance sheet efficiency, land spend and our capital allocation priorities followed by a wrap-up by Allan. After our prepared remarks, we will take questions in the time remaining.

I will now turn the call over to Allan.

Allan P. Merrill -- President and Chief Executive Officer

Thanks, David, and thank you for joining us on our call this afternoon. We had productive and profitable third quarter, generating results that were at or above our expectations on every front leaving us well positioned for a strong end to fiscal year. Orders were up over 6% as we benefited from an increase in community count and improving demand. This led to higher revenue and a better operating margin than we anticipated allowing us to deliver EBITDA ahead of our expectations. The quarter was successful in terms of capital allocation as well.

We retired about $17 million of debt and repurchased $11 million of stock during the quarter, bringing our total capital return to investors this year to nearly $60 million. We expect that number to reach approximately a $100 million by year-end with more debt than equity repurchased. The long-term goal of our balance growth strategy is to achieve a double digit return on assets by delivering higher EBITDA from a more efficient and less leverage balance sheet. While setting long-term target is obviously difficult, there is one goal we are particularly focused on, reducing our total debt below a 1 billion.

For investors the combination of improving EBITDA with less debt will generate significant growth both earnings and book value per share. Based on the strength in the current environment, we expect improvement on each component of our balance growth strategies next year. We anticipate growth in EBITDA from three primary sources. First, we're going to generate top line growth as we benefit from higher community account we have reach this year. Second, we have a path to higher gross margin that includes delivering a higher percentage of to be built homes, reducing incentives, particularly on spec homes despite in the first half of the year and simplifying our plans to allow direct cost reductions despite tight labor and material markets.

And third, by delivering more closings within our existing footprint in product line, we can incrementally improve our overhead leverage even though we already have one of the lowest overhead for home come close ranges in the industry. While we are growing EBITDA, we expect further improvements in our balance sheet efficiency as we accelerate the monetization of formerly land assets, increase our use of options and slightly shorten the size and duration of new communities. These steps will allow us to improve liquidity and reduce risk. And finally in terms of debt reduction, we expect to reduce debt in fiscal 20 by more than the amount we retired this year. In summary, our balance growth strategy positions us for improvements next year and beyond.

With that, I am going to turn the call over to Bob.

Robert L. Salomon -- Executive Vice President, Chief Financial Officer and Chief Accounting Officer

Thanks, Alan, and good afternoon everyone. Looking at our third quarter results compared to the prior year, new home orders increased 6.5% to 1,544 as our average community count rose to 174, an increase of more than 10% from the previous year. We ended the quarter with 173 active communities. Due to the timing of some activations and closeouts, our third quarter number was a little ahead of our expectations, allowing us to achieve our targeted level for the full year sooner than anticipated. Homebuilding revenue dropped 5% to $482 million as a 4% increase in our ASP partially offset 9% decline in closing.

Our backlog conversion ratio was approximately 64%, up 360 basis points, as we benefited from higher percentage of spec closings in the quarter and improve cycle times. Our third quarter gross margin excluding amortize interest, impairments and abandonment was 19.4% ahead of our expectation by about quarter of point aided by some warranty pickups. SG&A as a percent of total revenue was 12.2%, down in absolute dollars in line with our expectations. This led to adjusted EBITDA of $38.7 million. Finally, we benefited $4.4 million of energy tax credits which brought our net income for the quarter to $11.6 million.

Turning out our expectations for the fourth quarter, our sales were up double-digit since July and working to take advantage of the improved environment to drive higher margins. Accordingly, order should be up 5% to 10% year-over-year with an average community count around 170. We expect closings be relatively flat versus last year with the modest improvement in the backlog conversion ratio expect to remain slightly elevated. Our ASP should be above $385,000, up versus the prior year in the third quarter. Our gross margin should be roughly flat sequentially as demand for spec has been higher than anticipated. We expect margins to improve next fiscal year as our mix of specs and to be built homes normalizes. SG&A should be around 10%, down as a percentage and about flat on an absolute dollar basis relative to last year. And finally, the cash component of land spend should be around to $100 million.

At this point, I will turn it over to David.

David Goldberg -- Vice President and Treasurer

Thanks Bob. The objective of our balanced growth strategy is to drive higher returns on our aspects by improving our EBITDA and by using our balance sheet more efficiently. Slide eight illustrates our active assets as of percentage of a total and returns were generating. You can see that we've been successful in activating non-earnings assets while increasing returns. In the coming quarters, we expect to purchase all the former land held assets that are non-earnings today will start producing revenues contributing to better returns in the future. In the third quarter, we spent a $103 million on land and development in line with our expectations, going forward we focused on increasing use of options and targeting small purchases with shorter durations.

On Slide 10, we outline the components of our expected community count for the coming quarters. We expect to end fiscal 2019 with around 170 active communities those forecasting exact quarterly trend as challenging. The majority of the new communities we are bringing online have lower ASPs relative to our existing communities as we remain focused on delivering an extraordinary value at an affordable price for millennial and babyboomers. In terms of the rollout of gathering across our footprint, as in the third quarter, we have gatherings buildings under construction in Orlando, Dallas and Nashville with additional sites under development in Dallas and Houston. We've also approved projects in various stages of entitlement that will result in having gathering sites in nearly half of our markets by the end of this fiscal year.

There's been a great deal of progress returning capital to investors. During the third quarter, we continued our debt reduction returned approximately $17 million, bringing our year-to-date totals to $22 million. We expect for time more than $15 million of debt this fiscal year. In May, we entered into a second ASR program and repurchase shares in the open market, bringing our total buybacks for the fiscal year to nearly $35 million or 3.3 million shares. This represents more than 10% of the Company acquired at a blended price approximately 60% of current value. Over the last 11 years, we've made significant strides in improving our leverage have introduced total indebtedness by more than $500 million. Over the next several years, we plan to reduce debt by an additional $200 million to achieve our target of getting under $1 billion in total debt. This reduction will bring our net debt to EBITDA into the fours before accounting for any growth and earnings.

With that, let me turn the call back over to Allan for his conclusion.

Allan P. Merrill -- President and Chief Executive Officer

Thanks David. The demand environment is improved this year, which should allow a strong finish to the fiscal year. Looking forward to next year, we expect EBITDA growth as we benefit from higher revenue, improved gross margin and further overhead efficiency. Longer term, our balance growth strategy should allow us to continue to grow book value and earnings per share while bringing debt blow $1 billion. I want to thank our team for their ongoing efforts. I'm confident that we have the people, the strategy and the resources to execute our plans over the coming years.

And with that, I'll turn the call over to the operator to take us into Q&A.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jay McCanless with Wedbush. You may go ahead.

Jay McCanless -- Wedbush -- Analyst

The first question I had on the order growth was definitely within the guidance which I gave, but a little lower than we were looking for. Did you all have any issues with getting communities open or as we've heard some other builders talk about weather delays forcing communities to the openings to the end of the quarter?

Allan P. Merrill -- President and Chief Executive Officer

No, Jay, I think for us, it really it was, as we talked about in May, and started to benefit from in June, we really use the stronger environment to try and reduce incentives and drive margin. And that progression for the quarter for us showed the effects of that. I have no doubt that had we not been pursuing that we would have had a different order number, but we felt like this was sort of the right balance of order growth and incentive production.

Jay McCanless -- Wedbush -- Analyst

Got it. And I apologize but you said already, but could you quantify what has happened with incentives and on closings, and also what's happening with incentives on orders, maybe this year versus last year?

Allan P. Merrill -- President and Chief Executive Officer

We don't have a consistent metric that we have publicly disclosed around that. So, it's a little bit tricky. What I can tell you is that every week and in some and most cases is more frequent than that. Each of our divisions and each of their communities, it has got a pricing strategy that they're following and directionally across the board. But particularly as it related to specs, we were removing incentives and those may have been modest initially, whether it's you removing $1000 or $500 or changing that set of included features, but it's more the direction than it is the precision. And I think we want to leave you with because it's not an exact science, and it's not terribly reliable, because the things that you do to change that mix in incentives over time, makes the comparisons difficult.

Jay McCanless -- Wedbush -- Analyst

And then just looking to the to the fourth quarter guidance, closings that's flat year-over-year, certainly better than we were expecting. But I would have thought the additional volume would have produced a gross margin a little bit better than flat quarter over quarter. Can you talk about what's happening there?

Allan P. Merrill -- President and Chief Executive Officer

Well, I think Bob made the point that in the third quarter, the gross margin was at the high end of the range that we had kind of anticipated it got up to 19.25. And then beyond that we benefited from some warranty pickups. And we won't have those in the fourth quarter. I don't think, so we still see a positive progression from Q3 and Q4 access. I will say that I think as we started to remove incentives in the third quarter toward specs, it actually stimulated more spec sales than we expected. And so, I think we'll still have a slightly higher share of homes closed in the fourth quarter that are specs. And that's another factor, but you know, looking at into Q1, I think that mix starts to normalize.

Robert L. Salomon -- Executive Vice President, Chief Financial Officer and Chief Accounting Officer

Yes, Jay. I think Alan was pretty clear in his comments about kind of expectations for higher margin as you move into 20, on any kind of lifted the reasons behind it. But certainly, we feel like there's margin improvement reduces that does reduce the incentives. There's a little mix in Q4.

Allan P. Merrill -- President and Chief Executive Officer

But it's still a positive progression, I think.

Robert L. Salomon -- Executive Vice President, Chief Financial Officer and Chief Accounting Officer

Yes.

Jay McCanless -- Wedbush -- Analyst

Yes, absolutely. And then the last one I had. Just any kind of color or insight you can give us about community camp growth in '20? And what we should be modeling?

Allan P. Merrill -- President and Chief Executive Officer

Yes, Jay. So, you know, obviously, it's difficult to predict the quarterly trends. Let alone try to go a couple quarters out and tell you what we think is going to happen. We clearly said we're going to benefit from the comedian comp growth we've already experienced. We've already achieved and that's going to drive higher sales and top line growth next year. I will tell you pretty early in the planning process and we'll have more to talk about next quarter about kind of whole year community count items. But at this point, just kind of kind of the higher in the first half as we kind of talked about and we've already experienced.

Robert L. Salomon -- Executive Vice President, Chief Financial Officer and Chief Accounting Officer

And I would just add. Looking at Slide 10, Jay, the slide we typically provide or have for years. I think it'll give you kind of the components. The timing within that is tough, but I think you and others can see that there's a lot of activity. The pipeline's pretty good.

Operator

Thank you. The next question comes from Thomas Maguire with Zelman & Associates. You may go ahead.

Thomas Maguire -- Zelman & Associates -- Analyst

Hey guys, good after. Nice job on the quarter. Just to stay with the demand, can you talk about just translate price point maybe and understand the market is improved broadly, but any relative or differences you would call it or pockets of weakness or strength?

Allan P. Merrill -- President and Chief Executive Officer

For us, the strength was pretty well across the board price point and markets. There's no question that the focus that we have as a company in the first time, first move up on the on the one side and then the active adult side, both benefited. We don't have a huge exposure to the second and third move up market. So, I wouldn't take a lot of read through from our experience in that category, but in the two segments that we really serve, we saw strength in both.

Thomas Maguire -- Zelman & Associates -- Analyst

Got it. That makes sense. And then just shift gears to capital allocation side. And I know you guys touched on earlier, but maybe just some more thoughts about. How you guys prioritize and specifically the way the buyback first for further debt reduction maybe beyond the target you've talked about? And just from a high level, what's kind of discussion that you guys have when you willing those moving pieces?

Allan P. Merrill -- President and Chief Executive Officer

Well, I mean, in terms of the high levels, we want to get total debt below $1 billion. It will take a period of time to get there. We said that we expect to reduce at least $50 million debt this year and we said today, that we expect to reduce debt in dollar terms next year by even more. So that kind of that break trial if you will from where we are through this year in the next year with a goal in mind and that's pretty well articulated. Mean within the capital structure in terms of individual components that. We're obviously not going to speculate on that, but we've got a pretty favorable maturity structure. So, I think we have a lot of flexibility in how we pursue debt reduction in this.

Operator

Thank you. [Operator instructions] Our next question comes from Alex Barron with Housing Research Center. You may go ahead.

Alex Barron -- Housing Research Center -- Analyst

I was hoping you guys could comment on what you've seen in the California market? I guess last quarter I think you guys had a view given the imperilments, but I'm wondering how the market has progressed since that time?

Allan P. Merrill -- President and Chief Executive Officer

It's good question, Alex. The fact is, this spring California has participated in the improvement and demand that we've seen across our footprint. We're competitively better positioned with a price adjustment that we took, and we saw pretty significant improvement in sales space in California owing both to our better positioning and the fact that I believe that each of the sub some markets that we participate in showed greater strength. So, I am glad we took the steps, we took to become more competitive and we are benefiting from a improvement in demand.

Alex Barron -- Housing Research Center -- Analyst

Got it. And then also I guess we've been to Vegas recently and I've seen you guys are doing pretty well based on your price points there. Do you feel like there's more land that would enable you to keep going once now you finish some of the current project?

Allan P. Merrill -- President and Chief Executive Officer

We do, we got a terrific land pipeline in Las Vegas and we got a great position. I mean it's good I example of what we do well, extraordinary value at an affordable price. Are there lower price points available in some of the submarkets? Absolutely, but I can tell you in terms of the bank for the buck-in and value to the customer, we have a phenomenal position. And it's an interesting market. As you know, there's kind of quite a concentration of land ownership, but we got positions in a couple the master plans and we got a capacity and executed on self-development deals. So, we've got multiple ways of participating in that market. I have to say, I'm really kind of shout out to our team in Las Vegas, they've executed exceptionally well.

Alex Barron -- Housing Research Center -- Analyst

And one last question on the $1 billion debt target by when do you expect to hit that?

Allan P. Merrill -- President and Chief Executive Officer

That's a good question too. We said over the next several years. Look, I think over time that will become more and more clear, to us and obviously to the market. But if we reduced that by at least 50 this year more than that next year and we sort of talked about $1 billion, that gives you kind of 200 and change quantum that we are working toward. You can see kind of see the breadcrumb trail as I said, but I'd be reluctant to go much further than that in precision of the timing.

Operator

And our next question comes from Jay McCanless with Wedbush. You may go ahead.

Jay McCanless -- Wedbush -- Analyst

Just couple more. Bob, tax rate for the fourth quarter, will we see a repeat of this credit we saw in 3Q?

Robert L. Salomon -- Executive Vice President, Chief Financial Officer and Chief Accounting Officer

I don't think so it's possible. We were always looking to maximize our ability for tax credits. But at this point, I don't see any in the fourth quarter. So, the tax rate should be in a 25% range.

Jay McCanless -- Wedbush -- Analyst

And then, I was going to ask now that July's completed, any color or commentary you guys can give us on July would be helpful?

Allan P. Merrill -- President and Chief Executive Officer

Yes. So, obviously, the paint is still dry with some month just ending yesterday, but I'm pretty pleased. Our one month on a year-over-year basis performed better than any month in the third quarter. And better than the third quarter as a whole, obviously. And as David said, it was up double-digits or maybe Bob said that. So that was encouraging. I mean, a year ago, there were signs of weakness starting to emerge in the middle of the summer. And I would say this year, July itself very, very different from a year ago.

Jay McCanless -- Wedbush -- Analyst

Do you see a...

David Goldberg -- Vice President and Treasurer

He, Jay, give me one second. It's Dave. Just to your point though and Alan talked about this before, we've guided 5% to 10% order growth for the quarter and it kind of compares that double-digit. And it's to Alan's point about taking incentives back and rebuild the margin,it's very clear this quarter to kind of what the game plan is for us.

Jay McCanless -- Wedbush -- Analyst

Got it. And then just on pricing power. I don't ever remember you guys breaking out by a percentage of communities or something like that. But if you've talked about, what type of pricing power do you have? You feel like you can accelerate it in certain communities or certain markets?

David Goldberg -- Vice President and Treasurer

Yes, I mean, I think each market has an individual, the specified mix of the community. So it's so hard to talk about. But let me talk about one market. Talking about actually, Alex asked about Las Vegas, Las Vegas is kind of interesting. There are two facts about Las Vegas that kind of get to your question. The first is Las Vegas for us in the quarter and the highest sales price, and it was a sales page per community per month little above five. It was the highest in the Company for us. What's interesting is a year ago? It was actually quite a bit higher.

And the difference, while it was still a great number and a company leading number for us, the difference was that we've used the better environments to really be much more aggressive on finding the price in the market. And I think that's a combination of base price included features and incentive structure. So, that's an example of a market where there was an explicit and clear trade off and paste versus margin and yet still resulting in a really healthy margin, not every market, obviously isn't that characteristic, but you know, a majority of our markets had increases in pace in the third quarter.

In fact, a significant majority had year-over-year increases in pace. And when you see those kind of increases in pace that's a good indicator that we're able to drive some margin drive some price. So I would say, we don't break it out by percentage, but it's fairly broad based our ability to even if it's at the margins, I'm much more interested in the direction than the specific number at a moment in time because once you sort of turn that corner, and you started to move in a direction, that gets a certain momentum, and that's kind of what we've seen over the last two months.

Operator

Thank you. And at this time, there are no further questions.

Allan P. Merrill -- President and Chief Executive Officer

Okay, we want to thank everybody for joining the call this quarter and we will talk again in three months. Thank you very much. This concludes today's call.

Operator

[Operator Closing Remarks]

Duration: 25 minutes

Call participants:

David Goldberg -- Vice President and Treasurer

Allan P. Merrill -- President and Chief Executive Officer

Robert L. Salomon -- Executive Vice President, Chief Financial Officer and Chief Accounting Officer

Jay McCanless -- Wedbush -- Analyst

Thomas Maguire -- Zelman & Associates -- Analyst

Alex Barron -- Housing Research Center -- Analyst

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