Beazer Homes USA Inc (BZH) Q1 2021 Earnings Call Transcript

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Beazer Homes USA Inc (BZH -1.04%)
Q1 2021 Earnings Call
Jan 28, 2021, 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 December 31, 2020. Today's call is being recorded and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company's website at www.beazer.com.

At this point, I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.

David I. Goldberg -- Senior Vice President & Chief Financial Officer

Thank you. Good afternoon and welcome to the Beazer Homes conference call, discussing our results for the first quarter of fiscal 2021. 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, 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, 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 is Allan Merrill, our Chairman and Chief Executive Officer. On our call today Allan will review highlights from the first quarter, explain the basis of our confidence in the new home market, and discuss our improving expectations for fiscal 2021. He will also describe two significant commitments we recently made as part of our ESG strategy.

I will cover our first quarter results in greater depth, and provide detailed expectations for the second quarter and full year of fiscal 2021. I will then update our expectation for continued growth in our land position, 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 -- Chairman, President and Chief Executive Officer

Thank you, Dave, and thank you for joining us on our call this afternoon. With an acute focus on health and safety, we generated outstanding operational and financial results in the first quarter. Operationally, orders were up more than 15% year-over-year, driven by a sales pace that was up more than 40%. In fact, both orders and our sales pace reached their highest first quarter levels in more than a decade, even as we intentionally slowed sales with price increases. We also expanded our lot supply, creating a path for future growth. Financially, we delivered big improvements in gross margin, adjusted EBITDA and net income.

The strength in demand for new homes has exceeded our expectation over the past six months. We have known that pent-up demand was building, based on the disconnect between demographics and strong affordability on the one hand, and anemic housing starts for most of the last decade on the other. What we did not anticipate was, that a pandemic would be a catalyst for that demand to begin to materialize. Many consumers are now focused on improving their living situation. Whether their motivation is more space, better space, outdoor space or an entirely new location, demand for housing has been excellent. The question on everyone's mind is how long will this strength last? Well, we believe it's likely to persist for some time.

From a supply perspective, our industry has delivered far fewer homes in the last 10 years, than job growth and household formation would have predicted. We think this cumulative deficit is conservatively well above 1 million homes, which means that a few good quarters are unlikely to exhaust the need for new homes. So what about the durability of demand? Well, to buy a home, perspective homeowners typically need two things, income security in the form of a job, and homes for sale that they can afford. With vaccines at hand, we are optimistic that economic and job growth may resume as soon as this spring. In that case the concern about the durability of demand may be better seen as a question about affordability.

Affordability ultimately boils down to mortgage rates and home prices, however the Fed is on record is supporting low rates for an extended period, we know we have to work hard to keep home prices within the reach of most buyers, and that is exactly why our positioning is so important. We believe we're in the right markets, with the best job growth. We're targeting the largest buyer segments baby boomers and millennials, and we focus on delivering exceptional value at an affordable price, not competing primarily on price.

Ultimately this positioning gives us confidence that our pivot toward growth will allow us to fully participate in a strong housing market over the next several years. As we enter this springs' selling season we have an unusually high degree of visibility and therefore confidence in our likely full-year results. That's because the dollar value of our backlog is up nearly 60% compared to last year. So today, we are increasing our expectations for each of the objectives we outlined for fiscal 2021. Dave will provide more precise figures in his comments, but we now expect higher earnings and increased land activity this year, while exceeding earlier debt repayment objectives.

In summary, we're going to make significant progress on our balanced growth strategy, which is designed to grow profitability faster than assets and revenue from a more efficient and less leveraged balance sheet.

Although ESG is receiving increased attention, it isn't something new at Beazer. We have been addressing all three facets of ESG for years, because we see it as fundamental to fulfilling our purpose statement which we've included on Slide 7.

Today, I'd like to draw your attention to the significant commitment we announced in our most recent proxy statement, that will result in a reduction in greenhouse gas emissions. In short, we have committed that by the end of 2025, every home we build will be Net Zero Energy Ready. In numeric terms, it means all of our homes will achieve a Home Energy Rating System or HERS rating of 45 or less, which is an energy conservation standard that is far beyond most existing Building and Energy codes.

At this level our homes will generate as much energy as they consume by attaching a properly sized alternative energy system. Underscoring this commitment, we're a proud builder partner of the Department of Energy's Zero Energy Ready Homes Program and we're the first national production builder to commit to building 100% of our homes in accordance with the program. Improving energy efficiency is so important that we've made it a part of our long-term compensation plans as well.

Before turning the call back over to Dave, I want to talk about one more aspect of our ESG strategy, namely our commitment to social responsibility. We have a long-standing relationship with Fisher House Foundation, an organization that build homes where military and veteran families can stay free of charge, while a loved one is in the hospital. Our work with Fisher House has had a profound impact on our employees, our customers and our partners and that's caused us to want to do more. To fund this ambition, last year we started a title insurance agency called Charity Title, that will donate 100% of its profits to charity. By creating an innovative, dedicated funding source for our philanthropic efforts, we expect to be able to expand both our contribution levels and the number of organizations we can support.

We encourage you to review the ESG materials contained in our proxy statement in 2020 annual report, which are available in the Investor Relations section of our website.

With that, I'll turn the call over to Dave.

David I. Goldberg -- Senior Vice President & Chief Financial Officer

Thanks, Allan. Looking at the first quarter compared to the prior year, new home orders increased 15% to 1,442, despite a lower community count. Sales pace was up over 40% to 3.5 sales per community per month. Homebuilding revenue increased about 2% to $424 million on flat closings. Our gross margin, excluding amortized interest, impairments and abandonments was 22.1%, up approximately 230 basis points. SG&A was down approximately 60 basis points as a percentage of total revenue to 12.7% driven by controlling overhead expenses. This led to adjusted EBITDA of $43.6 million in the quarter, up nearly 50% and exceeding 10% of revenue.

Total GAAP interest expense was down about 3%. Our tax expense for the quarter was about $4.1 million, for an effective tax rate of 25.5%. As a reminder, on a cash basis, our deferred tax assets offsets substantially all of our tax expense. Taken together, this led to $12 million of net income from continuing operations or $0.40 per share, up over 3 times versus the same period last year.

Looking at the second quarter, we expect the following versus the prior year. New home orders should be down slightly. While we expect sales pace to be up, we do not expect it to fully offset our reduced community count, as we focus on increasing margin and returns. Closings are likely to be up 10% to 15%. There are couple of factors impacting our expectation for closings next quarter. First, given the strength in demand, we have fewer spec homes to sell and close this quarter. And second, we are balancing cycle time pressures with our commitment to delivering an exceptional customer experience.

Our ASP is expected to be approximately $390,000. We note that the change in our ASP isn't reflective of our pricing power or margin opportunity, as we are constantly adjusting features and product mix to retain affordability. In fact, this quarter we had two segments with lower ASPs and substantially higher margins. As we described last quarter, increases in lumber prices in September and October would create a modest headwind on gross margin for the second quarter. Despite this, we expect gross margin to be up slightly versus the same quarter last year.

SG&A as a percentage of total revenue should be down at least 50 basis points, reflecting the benefit from top-line leverage. We expect EBITDA to be up more than 20%. Interest amortized as a percentage of homebuilding revenue should be in the low 4s. Our tax rate is expected to be about 25%, and combined, this should drive net income and earnings per share up more than 60%.

At the start of our fiscal year we provide our expectation for our full-year results. Given our first quarter performance, as well as our positive outlook, we are now able to increase each of those expectations. First, we previously expected EBITDA to be up slightly versus the prior year. We now expect EBITDA to grow at a double-digit rate to over $220million, much faster than the growth in assets or revenue. This improvement is largely driven by increased profitability, as we expect gross margin to be up at least 50 basis points versus the prior year in the second half of fiscal 2021.

Second we targeted double-digit earnings-per-share growth on our last call. At the low end this would have represented EPS of less than $2 per share. We now expect earnings per share of at least $2.50. And finally, we committed to reduce debt by more than $50 million last quarter. We now intend for that to be closer to $75 million. We expect to end fiscal 2021 with a book value per share in excess of $22. Our expected level of profitability, our return on average equity for the full year should be approximately 12%, and if you exclude our deferred tax assets, which don't generate profits, our ROE should be over 17%.

During the quarter, we spent $110 million on land acquisition and development and ended with nearly $500 million of liquidity, up more than $200 million versus the prior year. We expect land spending to accelerate in the remaining quarters of 2021, ultimately exceeding the $600 million we initially anticipated, funded by our cash from this liquidity and cash from operations.

On Slide 12, we depict our expectations for near-term community count, which we still anticipate will likely trough in the 120s later this year. We expect community count growth will be evident in fiscal 2022, as we benefit from our increased land spending.

Last quarter we said 2021 would be an important inflection here as we allocated more capital to growth and expanded our use of options. The initial results of this effort were evident in the first quarter as we grew our active lots by about 8% to over 18,000, and importantly, we control 42% of our active lots through options at quarter end, a 7 point sequential increase. Given our current pipeline of deals, we expect to continue to grow our land position as we move through the remainder of the year.

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

Allan P. Merrill -- Chairman, President and Chief Executive Officer

Thank you, Dave. The first quarter of fiscal 2021 was very productive for Beazer, as we increased our sales pace, grew our backlog and improved both gross margins and SG&A, while expanding our lot position in a highly efficient manner. Even better, we expect this operational momentum to persist through the fiscal year in the new home market, characterized by healthy demand and constrained supply.

In November, we described fiscal 2021 as an inflection year, where we expected to modestly improve profitability, while investing for future growth. In fact it is shaping up to be much more than that, allowing us to raise our expectations for profitability investment and debt reduction, ultimately one should demonstrate our opportunity to improve shareholder returns from our balanced growth and ESG strategies.

I want to thank our team again 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. With that I'll turn the call over to the operator to take us into Q&A.

Questions and Answers:

Operator

[Operator Instructions] And our first question will be from Jay McCanless with Wedbush. Your line is open.

Jay McCanless -- Wedbush Securities -- Analyst

Hey, good morning or good afternoon. Thanks for taking my questions. The first question I had, I'd like to see that you're getting a little more aggressive on the debt repayment, but with the run that you've seen in the stock, this year, is there any thought of maybe raising some equity and attacking what you've got for '21 and '22 to repay.

David I. Goldberg -- Senior Vice President & Chief Financial Officer

Jay, I would tell you we -- and you know us pretty well, from a capital allocation perspective, we're always considering every opportunity that's in the market and stock certainly had a good run, and we are paying attention to it and we'll let you know if we do anything. But nothing on plan right now and frankly will just keep options and leaving them open.

Jay McCanless -- Wedbush Securities -- Analyst

Okay. And then in terms of the community count glad to see that it's still looking like the end of this year when that bottoms out any geographic preference or a little bit more bias to one geography over another?

Allan P. Merrill -- Chairman, President and Chief Executive Officer

Jay, good afternoon, it's Allan. Not really. I mean, I got to tell you, I'm pretty excited about the pipeline across all of our geographies. We're finding things to do everywhere. We went through a hard process of rationalizing markets over the last 5, 10 years and so we're kind of in places that we know we can grow and I am seeing a path in each of those markets. On any given quarter, deal flow, it's just the vagaries of the way deals become available and how they move through our process, but I think if you look at it over a year or two, you're going to see us bigger in every one of our markets.

Jay McCanless -- Wedbush Securities -- Analyst

Got it. And then in the West, order growth was a little bit slower than the other two regions, was that a function of just community timing or anything to point out or know there or talk about there.

Allan P. Merrill -- Chairman, President and Chief Executive Officer

No, I think we talked a little bit in the script about using price in part to control demand and we did have some exposure or some experience with that in a few of our Western markets, so that was part of it as well. I mean we've got such a big backlog in some of those markets, we wanted to be careful about adding to that backlog, so that we could in a appropriate way get to the starts out there and keep that customer experience. So I would say it was probably more on the near-term sales side than it was a community as it related to the change in the order growth.

Jay McCanless -- Wedbush Securities -- Analyst

Okay. That's all I had. Thank you for taking my questions.

Allan P. Merrill -- Chairman, President and Chief Executive Officer

Thanks, Jeff.

Operator

Our next question comes from Alan Ratner with Zelman & Associates. Your line is open.

Alan Ratner -- Zelman & Associates -- Analyst

Hey guys, good afternoon. Congrats on the strong performance and thanks for the update on the ESG initiatives. That's certainly noteworthy and congratulations on the efforts there. My first question relates to the land market. I think, a common theme, we're hearing from a lot of builders is that the industries picking up the pace of land acquisition pretty sharply over the last 3 to 6 months and you guys are obviously in the mix there. Some builders are talking about doing certain things it to remain kind of a competitive and avoid some of the inflation and that's going on in the market. Whether that means buying larger deals whether that means maybe going a little bit further out to reduce lot costs. So I'm curious, A, can you talk a little bit about the inflation you're seeing and B, have you changed either your underwriting standards or kind of the targeted land at all to deal with the competitive nature of the market today.

Allan P. Merrill -- Chairman, President and Chief Executive Officer

Well Alan, you're absolutely right. The markets are very competitive. I'll give you an oversimplification and we could maybe go a little deeper, but where we're seeing particular enthusiasm. I mean and the way I've described it is, think of a barbell, very small kind of bespoke deals that private builders can be all over are super aggressively priced and deals where there are 200 or more lots, that are in the obvious submarkets, where there are currently a lot of permits. Those are incredibly highly priced where we have kind of found success and really a good footprint for us is 50 to 150 lots in most of our markets, where if somebody is doing 2,000 units in a market they kind of can't waste time on 75 or 80 lot deals, they have to do 30 of them in a year and so we find that there is a bit of a window. In many of our markets for that. So the deal size is really the thing that we kind of target. We ask ourselves, why did we get so lucky, why are we able to be successful in this location. And is it just economics, we paid the most or do we have an ability to extract more value from that site.

So the other part of the strategy is we're not very adventuresome. I mean when we know a submarket and we've got the trades in the realtor relationships in an area. I feel like that's an opportunity for us to know what that price is and make sure that we're not letting somebody else into our kitchen. Where you start getting into new sub-markets, new buyer profiles, you always have to be very cautious because I can tell our team, the other team gets paid too and we end up in kind of a new area new sub-market and we could find ourselves paying the dumb tax, that I referred to. So I -- we are definitely not changing our underwriting numerics. We haven't eased up at all and if anything, I think we've been pretty effective with our option strategy, but really the key for us is sticking to what we know and finding deals that are meaningful for us. But frankly or may be a bit smaller than some of the very biggest builders would pursue.

Alan Ratner -- Zelman & Associates -- Analyst

Got it. That's really helpful color there, so I appreciate that. Second question, I'd love your thoughts on single family rental. I know you dipped your toe in the water there a few years ago and as far as I'm aware, you're not really active in this space today, but I mean a lot of builders are aggressively either raising capital for that initiative or are acting as a GC for operators. And your comment earlier about the million starts threshold or under building so to speak. I've heard different opinions on how to think about single-family rental and in that equation, because clearly there is a lot, a lot of single-family home is being built for that purpose. And I'm curious, A, are you seeing any competitive pressure from that yet, it's probably a little bit early on, but do you view that as competition for your communities. If you see a development across the street, or do you view that more as kind of just shifting from apartment demand today.

Allan P. Merrill -- Chairman, President and Chief Executive Officer

Boy. That's a big topic and I guess you're right. I do want to establish both their credential in our humility, I mean we were early in this, in 2010, when we started our pre-owned rental homes company. We simply didn't at that time, have the capital. Even with our partners to scale it fast enough and I think we did the right thing. We created value for our partners and ourselves and we sold it to one of the big public REITs and they've done very well with our portfolio. So I am respectful of the degree of difficulty of actually operating a business in that space, being a landlord is a different business. And I think we were humble about the degree of difficulty, but your question about it being competitive, look it plays in a few different levels, it plays in the land market, and it is absolutely the case that there are some scenarios where we've been outbid for a asset by someone who's intention was to turn it into a rental community. So yes, that is

David I. Goldberg -- Senior Vice President & Chief Financial Officer

So, yes, that is a source of demand for land. And so it's competitive in that way. I think for a lot of our buyers, they've made a decision to become homeowners. And so they are not as -- and I'm sure that this is not universally true, but I don't sense that the issue is, it's 10 in the morning I'm kind of the tweaks in between am I a renter or am I an owner? They've decided, they cross the threshold. It's time to become an owner. Their value and -- value creation and wealth building and autonomy that come with being an owner.

So I really do view that rental option is competing with other rental options primarily, but it's a great option I would say. I think there are a lot of renters who rather than being in a poorly constructed out of date old used home, are much better served in a newly built home. But I also know that the cost of production of those homes, the cost of land for those homes, I mean that the monthly rent create an important yardstick for us to be measuring our monthly payments against, and if anything, I've been pleased to see the rental rates that those communities require, because in virtually every instance the pre-tax PITI ends up being below that rental rate. That's a pretty good case for us to make about why this is still a really attractive time to be a homeowner.

So it's a major factor, we take it seriously, we have sold lots to rental operators, we have bought lots that were originally intended for rental operations, that they decided we're better for ownership operations. So I would say we're pretty close to it. But those are my thoughts about it, I don't feel any urge to get back in, to go try and start a new business. We're awfully excited about growing our own business.

Alan Ratner -- Zelman & Associates -- Analyst

I really appreciate your thoughts on that and that it will be interesting to watch unfold over the next few years. So thank you.

Allan P. Merrill -- Chairman, President and Chief Executive Officer

It will be great.

Operator

Thank you. And the next question comes from Julio Romero with Sidoti & Company. Your line is open.

Julio Romero -- Sidoti & Company, LLC -- Analyst

Hey, good afternoon, everyone.

Allan P. Merrill -- Chairman, President and Chief Executive Officer

Hey, Julio.

Julio Romero -- Sidoti & Company, LLC -- Analyst

So, you mentioned you expect growth to be up slightly in the quarter even with those lower headwinds. Can you just talk about that? Is that a function of product mix or maybe we have lumber or any other input costs, any additional color?

Allan P. Merrill -- Chairman, President and Chief Executive Officer

Yeah, Julio. I think you broke up a little bit on the question, I think the question was about second quarter gross margin and our expectation. When we talked about in the script, lumber and timing on lumber price increases in September and October, and the way that would impact margins. In terms of having a year-over-year increase we still got good pricing in the market. We had the price in the market. And given the visibility we have from our backlog, we're pretty comfortable in terms of the price and cost match that we can get margin increases in second quarter.

Julio Romero -- Sidoti & Company, LLC -- Analyst

Understood. I'll hop back in the queue. Thank you.

Allan P. Merrill -- Chairman, President and Chief Executive Officer

I think it's important to point out, Dave, that we will do better in the second quarter than we did last year, but it won't be like the first quarter.

David I. Goldberg -- Senior Vice President & Chief Financial Officer

Yeah.

Allan P. Merrill -- Chairman, President and Chief Executive Officer

It that headwind is there and so we'll be up, but by a lot less.

Operator

Our next question comes from Alex Barron with Housing Research Center. Your line is open.

Alex Barron -- Housing Research Center, LLC -- Analyst

Thank you and good afternoon, guys. Great job on the quarter. I had a question about the interest expense or the margin I guess and related to the interest expense. I'm guessing your comments around margins going up 50 basis points is that outside of the impact of your interest capitalization and all that?

David I. Goldberg -- Senior Vice President & Chief Financial Officer

So just to be clear, Alex the comment very clearly was slight increase on a year-over-year basis in the gross margin in Q2, and up more than 50 basis points in the back half of the year. And yeah, that's excluding the interest.

Alex Barron -- Housing Research Center, LLC -- Analyst

Okay. Now if we focus on the interest that's running through cost of goods sold, obviously, you guys have been paying down the debt. And last year the interest that ran through cost of goods sold was higher than the interest incurred. Should we expect the interest in cost of goods sold to start kind of narrowing a little bit more than interest incurred this year?

David I. Goldberg -- Senior Vice President & Chief Financial Officer

Yeah, Alex. We've talked about it before. Remember of the interest, it's amortized through cost of goods sold, it's a function of the capitalized balance and our inventory turnover. And so as the capitalized balance starts to kind of move its way down, you'll see those two numbers converge. It's going to take some time. It's not going to be right away, but you will eventually get to that point, we see some convergence.

Alex Barron -- Housing Research Center, LLC -- Analyst

Well, I think to be more precise, I would expect the interest in cost of goods sold will exceed our interest incurred again this year.

David I. Goldberg -- Senior Vice President & Chief Financial Officer

Yes.

Alex Barron -- Housing Research Center, LLC -- Analyst

Okay. Got it. But the general trend, I guess, is moving in that direction, which is...

David I. Goldberg -- Senior Vice President & Chief Financial Officer

They're going to migrate. Over time you should expect that convergence, but it won't be in 2021, it will narrow. So there's a little difference. I mean the good news is our cash interest expense is lower than our book interest and so it effectively understates the earnings power of the business, because we're running through that GAAP interest expense, but that's just extra liquidity we've got to put into land.

Alex Barron -- Housing Research Center, LLC -- Analyst

Right. Now, on your comments about the orders being flattish and I'm guessing and you can correct me if I'm wrong, I'm guessing that has more to do with the drop in community count. So two questions, one is, where do you see the inflection point for community count is going up? And if that's not the reason are you guys just limiting sales at this point because of starts or some other factor?

David I. Goldberg -- Senior Vice President & Chief Financial Officer

Well, you are 100% right. We expect our pace will be stronger in Q2 this year than Q2 last year, but very unlikely we'll let that yes, high enough that it will offset what we know the reduction in community count is, which is why we won't probably match last year's total orders and absolutely we are being very careful at the community level about releases, not because we're so much trying to manage the community count, we're trying to maximize the value of every asset, and given the scarcity of homes in our markets, selling a little bit slower and the pricing power that is associated with that to us in this environment makes a lot of sense. So that is the thought process. You can appreciate that every community in each market has a slightly different set of issues. But the macro approach that we are taking is definitely slowing the sales pace with price, which is having the effect of dampening that pace a little bit.

In terms of when the inflection point is going to occur, we found, at least I found in my experience here that making projections about community count a couple of quarters out is really foolish, because of the vagaries of land development. We know that we will trough in the 120s mid-to-late this year and we know that next year we will have a higher community count, but trying to be precise enough to tell you what day, at what week that's going to happen, I'm sorry. Alex, I just can't do that.

Alex Barron -- Housing Research Center, LLC -- Analyst

Okay, got it. Thanks a lot.

David I. Goldberg -- Senior Vice President & Chief Financial Officer

Thanks, Alex.

Operator

There are currently no other questions.

Allan P. Merrill -- Chairman, President and Chief Executive Officer

Okay. I want to thank everybody for joining us for our first quarter call and we'll see you for our second quarter call. This concludes today's conference call. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

David I. Goldberg -- Senior Vice President & Chief Financial Officer

Allan P. Merrill -- Chairman, President and Chief Executive Officer

Jay McCanless -- Wedbush Securities -- Analyst

Alan Ratner -- Zelman & Associates -- Analyst

Julio Romero -- Sidoti & Company, LLC -- Analyst

Alex Barron -- Housing Research Center, LLC -- Analyst

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