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Beazer Homes USA, Inc. (NYSE:BZH)

February 26, 2013 11:40 am ET

Executives

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

Analysts

Susan Berliner - JP Morgan Chase & Co, Research Division

Susan Berliner - JP Morgan Chase & Co, Research Division

Good morning, everyone. Thanks so much for joining us. We're very pleased to have Beazer Homes. Here with us today is Bob Salomon, CFO; and Carey Phelps, Head of Investor Relations. With that, I'm just going to turn it over to Bob for his presentation, and we'll open it to Q&A.

Robert L. Salomon

Thanks, Susan. And thank you, everyone, for joining us today. Forward-looking statements, for your review. I will not read them, but I think you probably know what they say. Beazer Homes, we're a leading single family and multifamily home builder in the United States. The seventh largest builder based on last 12 months deliveries. And on inventories, we've delivered over 100,000 homes in the past decade and have operations across 16 states. We target entry level, move-up and active adult buyers, and we're segmented into 3 operating regions. The West and East have our largest concentration of both revenue and assets, and also, we have a presence in the Southeast. About 60% of our buyers, though, are targeted towards first-time buyers, and then the rest would be split between move-up and active adult. We're pleased with our first quarter results. We've had very good progress on our path to profitability plan that we've outlined several quarters ago, with both an improving home building market and maybe more importantly for us, improving internal operations. We had significant year-over-year improvement in virtually every financial metric that's tracked. We generated a positive EBITDA of $7.7 million compared to $3.9 million last year. Our orders were up 29% on a declining community count. Closings grew by 20%, and we have substantial improvements in both ASP and home building gross margins. Our backlog has continued to be strong, we're up 39% in units and importantly, 52% in value. We've invested $90 million in land and land development during our first quarter, and we ended the quarter with significant cash balance, just under $400 million in unrestricted cash.

For the quarter, we lost $19 million from continuing operations compared to $35 million last year. And remember, last year, we had a $10 million warranty recovery that was of the one-time type nature, that made the improvement even more substantial when you adjust for that factor. We had a significant benefit from income taxes last year as well. So really the continuing operations before taxes is probably the best comparator. Subsequent to quarter end, we had a pretty important financing for the company. We extended our 2015 maturities, shifting and refinancing that to a 2023 maturity with very nominal increase in interest expense. As a result of that financing, we have less than $200 million of maturities in the next 5 years, so a long runway ahead of us. We'll talk about our path to profitability plan, we've broken up into 4 components, kind of discrete yet connected components, to help everyone understand internally and externally how we're going to accelerate our return to profitability. We focus initially, I know there was a lot of talk about the No Community Left Behind initiative to drive sales per community. We'll talk a little bit about our progress in each one of these metrics in the coming slides. We needed to leverage our fixed cost, both our G&A and our interest expense. Happily, last year, through the refinancing and the couple of transactions we conducted in July, we'll reduce our interest component of that fixed cost significantly by $15 million. We need to generate higher margins, and we need to gradually expand our community count, which the capital we garnered last summer was intended for. On the sales per community, we see a continued and significant improvement sequentially as we ran through fiscal 2012 and into the first quarter of 2013. We -- on an LTM basis, we hit our benchmark, the low end of our benchmark of 2.5 sales per community. And last November, we set out some targets for each one of these components of our path-to-profitability plan. The sales per community target range was 2.5 to 2.75. You can see that last year in the first quarter, we sold, on an LTM basis, 1.9. So not very robust but certainly continued improvement. The other factor that's a significant improvement is that 86% of our communities are now performing under the metric of at least 1 sale per month per community. Where we were a year ago, when we also had almost 200 communities, 70% of our communities were performing. So 30% of those communities were not even generating one sale per month. So the initiative, the No Community Left Behind, the detailed analysis around the 4 P plans that Allan and I have talked about in the past, promotion, product, price and people, have really gone a long way to improving our operational performance, which then gave us the confidence to ask investors for additional capital last summer.

When we think about going forward, I think we'll continue to trend upwards towards our range. Although, we are really, given our gross margin initiatives, going to be leaning pretty heavily on price as opposed to generating as many sales as we could generate.

We've also achieved significant leverage in our G&A costs. We've already talked about the interest expense, but from a G&A perspective, which excludes commissions, the first quarter, we were at 10.2%, just very little bit above the top end of our range between 9% and 10%. Compared to last year's first quarter, it's a 600 basis point improvement in G&A leverage. I think when you think about going forward, we've got significant backlog, we will be able to attain additional leverage in each of the quarters as we move forward. Even as we expand our community count and possibly a little bit of our G&A, on a dollar basis, we'll attain significant leverage continually as we move forward.

The third component is gross profit. And we've talked a lot about the fact that our gross profit is below our peer group, and we know we have a lot of work to do in that area. And so last November, we set out a range of targets that internally we were going to focus on, that externally to help you understand how we were thinking about driving gross margins, and we converted it to a gross margin dollar per closing basis, which is impacted both by rising margins and rising average sales prices. And you can see, on an LTM basis, which is in the green bars, we've done a pretty good job of moving that number up to $39,000 in the first quarter. Still below our target range of $45,000 to $50,000 per unit but importantly, in the first quarter of 2013, our actual dollars per closing were $42,000. So we're getting closer, and we're on the rise from $40,000 even in the first quarter -- or the fourth quarter of fiscal '12. So we feel very enthused about those prospects.

So as we talk about then the drivers of gross profit per closing, ASPs. Last year's first quarter ASP was $215,000; this year, $235,000. We've had a trailing 12-month improvement of 4.2%. We've also got -- our ASP and backlog at the end of December was $263,000, which if you remember from our November year-end conference call, we had a slide that showed our fiscal '12 quarterly ASPs and closings compared to our beginning backlog ASP at the beginning of fiscal '12, and we were within a range of 92% to 97% of that beginning backlog ASP as we ran through the year on a trailing 12-month basis. So with the backlog at 249 at the end of November and 263 at the end of December excluding seasonal and mix factors, I'm still very confident that we'll continue to see improvements in ASP as we run through the year, especially in the fact that we are leaning on price increases rather than volume absorption growth as we go forward.

The other part of that component is the gross margin percentage. And you can see, the first quarter, we finished at 18.1%, compared -- which is 90 basis points better than our fourth quarter, which is a very good trend, and compared to last year, taking out the warranty recovery, it's about a 490 basis point improvement year-over-year. So significant improvement and proof that the No Community Left Behind initiative and the sales per community initiative actually paid dividends for us to focus on those nonperforming communities that helped raise the tide of the entire communities.

When you think about our operating segments, we had improvement in every segment this quarter, led by our East segment, which frankly struggled last year. We had significant improvement in our execution by our management teams in that region especially. Also in the West segment, additional improvement in our management teams but also aided by maybe a little bit more improvement in the market than we've seen in other segments. We're very excited about the improvement that we've seen and think that we'll continue to see improvement as we run through the year.

The component that requires probably the most work right now that we're really diligent working on and the reason for the capital raise last summer is community count. If you remember back in early fiscal '12, we stated very publicly that we were going to limit our investments in land to the divisions that showed that they can operate what they already had at an acceptable rate. We weren't going to give new land opportunities to operations that couldn't operate what they already had at an acceptable performance level. So we are a little bit behind. But as we got comfortable that our teams were executing at the appropriate levels in the spring and early summer, we asked investors for the additional capital in July, and we're now well in our way towards identifying and acquiring land to rebuild our community count. It's important to note that we are, though, focusing on land that will require some level of development. We are not focusing on finished lots, that are really, frankly, very high priced today, just to juice up the 2013 orders and closings. We are looking for development properties. So we are looking for properties that are still close-in, not out into the hinterlands, but close-in properties requiring some level of development so that we can capture the development profit as well for openings in 2014.

We ended the quarter on an LTM basis with about 151 communities. We've tried to be pretty clear that when you think about the rest of 2013, think about the fact that our new openings will just about compensate for the closings, the close out communities that we have. I'm not quite sure the timing of all that, but we're not looking for community count growth on an LTM basis this year. So what does that mean for orders? Orders in the second and third quarter will be lower than last year. We'll have about 20% fewer communities year-over-year basis in each of those quarters. But we believe that our ASPs will be higher, we'll see continued margin growth, and we are still projecting additional EBITDA over last year's based on the strong backlog we brought into the year and that we've continued to carry forward.

So as we think about the land supply, we realize that from a community count stature, we've got work to do, and we are working to do that. And we'll talk about how much land we put to work in the last quarter here in a minute. However, we still have 18,000 active lots today. So when you think about the land supply with homes under construction and finished lots, we have ample supply just in those 2 categories alone to hit our targets for the rest of the year. We have 4,500 lots under development. Many of them -- or I'm sorry, under option. Many of those are finished. That will add to that current supply. We have 8,000 lots under development. So we feel very comfortable with where we are, and I think the land under development lot count will continue to increase as we continue to put last year's capital raise to work with new assets. In addition, and one thing not to forget about, we do have 6,100 lots land held for development. We brought 1 parcel active in the fourth quarter. It's under development right now. We'll have a selling effort in the coming quarters with that asset as well. And as the markets continue to improve in that equation of do I put development dollars in place versus do I buy land or even finished lots in some place, when that equation improves, we will continue to bring some of these assets back in active status, and I would expect before we get to the end of 2013, that several of those parcels will be in active development status that will add to our community count in 2014. I think the balance of those projects, as markets continue to improve, will come active in 2014 and probably some into 2015. And remember, we do have a significant presence in Sacramento, in the levee of the Natomas Basin, that when that basin is corrected and the levee is completed, we will have projects that we'll be able to bring in to active status relatively immediately.

So when I think about -- if you think about the land spend, in November, we guided to about double what we spent in 2012, which portends to be about $360 million based on the opportunities that we've been seeing. As our management teams continue to improve all their operations, they're actually will be getting better looks at land parcels from the land sellers. We were able to double our land spend in the fourth quarter -- I'm sorry, in the first quarter as compared to the fourth quarter. We've actually increased our guidance, our target range for 2013 to be in excess of $400 million from $360 million 3 months ago. Now one thing that's also important, we have not changed our underwriting criteria. We continue to underwrite using today's sales prices, today's sales absorptions. And we are still requiring a modified internal rate of return of 20% for our parcels. They have to meet those criteria and have to be well thought out in order to work. Now the higher margins you're earning on your current projects and the better rates of sale that you're having obviously make underwriting land for development a little bit easier than it did in the past when we weren't making acceptable returns. So we're very excited about the land opportunities we're seeing, and we're confident that we will spend pretty close to the numbers that we're guiding to as we get through the year.

Having said that, with our capital transactions we did last summer and just recently here in early February, we're very confident about our capital structure. We have no significant near-term maturities. The 2016 bonds are non-callable. They are there for a period of time. And at the right time, with as very little to no cost to our shareholders, we will look for the right opportunity to extend those maturities. But right now, we feel no urgent need to do anything with them. We're very comfortable with where we stand. We have a significant cash cushion as well. We also have generated through the downturn here a significant deferred tax asset. It's worth about $13 a share upon achieving sustainable profitability. And that box hasn't been written for us yet, but we're working very diligent on it, we will be able to bring this asset back on balance sheet.

So to restate our goals for 2013, we believe that we're going to generate adjusted EBITDA of at least $50 million through higher closings, driven by our higher backlog, increases in ASP and further margin expansion, and additional modest leverage to our fixed cost structure. And again, we expect to spend in excess of $400 million in land for fiscal '13.

So with that, I'd like to open it up for Q&A.

Question-and-Answer Session

Susan Berliner - JP Morgan Chase & Co, Research Division

Let me kick it off, and hopefully, you in the audience will join in. I guess want to start, Bob, first with the No Community Left Behind, can you just remind us how many communities are remaining out of that, how quickly we should expect those to go away?

Robert L. Salomon

I don't have an exact number of the communities that were nonperforming back then. But if you think about the fact that we had about 200-ish communities when that initiative started, we're down to about 150. And where our sales pace has increased so dramatically, a very few of them are either remaining in that category or on balance sheet at all. In many cases, in the longer life communities, they're now performing. They're generating acceptable margins and acceptable pace. And it would have to be when you figure 86% of our communities are performing under our definition and our margin characteristics have gone up as well, and I think that would lead you to believe there's very few out there with 150-ish communities and 14 nonperforming under that characteristic, there's very few.

Susan Berliner - JP Morgan Chase & Co, Research Division

And I guess turning to -- I think people are kind of viewing '13 as, unlike most of your peers, kind of a slow growth year, for lack of better term, for you guys. I was wondering if there is any -- I know you came out at $50 million EBITDA, but if there's any, I guess, comfort maybe in the back half of the year, maybe in 4Q, that you can give us with regards to what could be better than you're seeing right now in terms of other land banking relationships you can enter into, is that something you would consider?

Robert L. Salomon

I think as it relates to orders and closings for 2013, there's very little today that we could do that could meaningfully impact those numbers. We believe that we have the capital structure and the cash on hand to fulfill our $400 million target. Should we see opportunities maybe over and above that, that might be interesting, we would look at land banking alternatives. It's not out of the solutions set, it's not something that's a go-to move for us right now.

Susan Berliner - JP Morgan Chase & Co, Research Division

And I guess just remind us with the Sacramento parcel of land, what is the status there with the levee, how early do you think you could monetize that?

Robert L. Salomon

The levee is about 50% complete, and as I understand it, the Sacramento authority is the authority that completed that 50%, and the next 50% is supposed to be completed by the Corps of Engineers and the funding for that project has been tied up in the budgetary wrangling in Congress. The Sacramento authority is trying to get the authority from the corps to complete that on their own, with the understanding that the corps would then fund that upon budget release. But at this point, I don't have anything further than that, and I think the completion of the levee is probably 2 years down the road or so until something gets moving in that. But that's where that stands. There are others who have additional parcels that maybe have a little bit more information, but that's what we have right now.

Susan Berliner - JP Morgan Chase & Co, Research Division

And just on a land banking relationship, has anything changed with regards your appetite for potentially entering into land banking relationships?

Robert L. Salomon

I think we would entertain it. I think we've got a lot of capital. We're seeing a lot of opportunities right now to fulfill our land acquisition needs. Again, if there is something that we see from an incremental basis, and an opportunity with land banking that makes some sense, we would entertain it. We don't have anything active right now, but it's something we might look at in the future.

Susan Berliner - JP Morgan Chase & Co, Research Division

And just going to your customer base, with your 60% focus on first time, what are you seeing out of those customers? I mean, are you seeing a lot more, I guess, pent-up demand in the move-up buyers and active adult versus the first-time home buyers, and any concern of the first-time home buyers with regards to payroll taxes or rising gas prices or anything?

Robert L. Salomon

The first-time buyer for us, I think, tends to be a little bit different than maybe the traditional first-time buyer. And given that we don't have a mortgage company, our visibility into some of these things is a little bit limited. But the FICO scores generally of our first-time buyers are still in the low 700s, 720s. That's a pretty strong buyer. We have not seen any lessening of traffic or demand with the payroll tax increase or gas prices for that matter at this point. But then again, we're not targeting land parcels that are a longer drive than what people automatically have today. But our first-time buyer, I think, is a little bit stronger than maybe traditionally that we've seen.

Susan Berliner - JP Morgan Chase & Co, Research Division

And are you seeing stronger growth out of the move-up segment or the active adult?

Robert L. Salomon

I think we're seeing fairly broad-based success. I didn't say that it's one versus the other. We're seeing fairly broad-based success.

Susan Berliner - JP Morgan Chase & Co, Research Division

And what are you seeing out of mortgage availability? I mean, is that loosening up? Appraisals, kind of behind us at this point?

Robert L. Salomon

It's interesting, I think, with our mortgage initiative, to provide choice to the buyer at the community level. We have found that we've been able to better match the right providers with the target profile of that specific community. So I think we've seen improvement in that, in the capture of those buyers. I'm not quite sure we've seen improvement in the mortgage process at all. I think we've been able to better match our buyers with the right types of programs for them. As far as appraisals, I think we have seen, with all the builders focusing on raising prices and the level of distress maybe muted a bit, that appraisal issues have been less of an issue. At the last minute, they're still out there, but they don't seem to be as pronounced as maybe they were 1 year or 2 ago.

Susan Berliner - JP Morgan Chase & Co, Research Division

And I'm not sure if this is a fair question, but I'll try. Considering the sizable DTA, and I think the rules are you have to be profitable or look to be profitable for 3 years, I don't know if you can kind of tell us when you expect to be profitable, and then is it 3 years after that first full year that you would receive the DTA back?

Robert L. Salomon

Yes, you're right, it's probably not a fair question. But I think that there are many scenarios that would show us getting profitable in the next couple of years. I think from an order growth, community growth based on the land that we're buying and margin growth and additional leverage on our G&A costs and our interest cost, I think there are many scenarios that would show that. As far as the DTA model, I think that model is a bit fuzzy. We have not yet tried to apply it to our circumstances. When we get a little bit closer to inevitability of profitability, we'll have a better handle on that. I'm not quite sure it's going to need 3 years after you attain profitability to get there. But then again, I haven't spent a lot of time with the accountants to kind of look at the black box at this point.

Susan Berliner - JP Morgan Chase & Co, Research Division

And I guess just in regards to the spring selling season, the stocks are off. I'm not sure if that's kind of implying that they don't expect the pace to continue through the spring selling season. We know we had a harder comp in the first quarter, is that it? Is there any deceleration, is there any pick up? I mean...

Robert L. Salomon

We've seen sustained traffic throughout, even our -- the fourth calendar quarter and end of the spring selling season to date, strong traffic appears to be demand. So I'm not quite sure what's going on with stock prices. I can't quite control that. But we're just focusing on trying to convert the highest number and percentage of traffic that we do receive in our communities each and every day.

Susan Berliner - JP Morgan Chase & Co, Research Division

And then I guess just turning to the balance sheet. I guess if you can remind us pro forma for the last bond deal exactly what your refinancing capacity is with that term loan in place?

Robert L. Salomon

Well, with the cash near-term loan, we have the refinancing ability of exactly that amount, which is $427 million at the end of December. And that ability is there as long as the facility is active.

Susan Berliner - JP Morgan Chase & Co, Research Division

And pro forma for the last bond deal?

Robert L. Salomon

2.5 million less than that. That's all.

Susan Berliner - JP Morgan Chase & Co, Research Division

Okay. And then I think I was trying to figure out your comment on the 2016 bond maturity. I know they're not callable. I mean, is there -- and obviously, would be a very high dollar price versus where they are trading. I guess, what would be -- how should we kind of think about that going forward? Is there kind of a magic date that you don't want to see them?

Robert L. Salomon

There's no magic date. I have no angst towards having those outstanding. The coupon is not outrageous at 8 1/8%. We have plenty of time to deal with that. And I fully expect as we continue to improve our operational results and get to profitability, there will be plenty of opportunities at which time we could then extend those maturities at little or no cost for our shareholders.

Susan Berliner - JP Morgan Chase & Co, Research Division

And I guess going forward, in terms of capital raises, what would be the most likely for you to do, would it be convert, I'm guessing equities, on the lower side...

Robert L. Salomon

I don't think we have any desires or need at this point to do anything. We did a very big capital raise last summer. We're not issuing equity. We have plenty of cash in our balance sheet, liquidity even with our revolver to fund our growth. So we don't have any plans or designs of any capital raises moving forward.

Susan Berliner - JP Morgan Chase & Co, Research Division

Great. Any questions from the audience? I guess everyone's very hungry for lunch. Oh, great.

Unknown Analyst

When you look at the existing inventory numbers, they're down 22% year-over-year, they're $1.6 million. They've fallen significantly. If you look at the overall inventory numbers in the industry, suggests that demand is exceeding supply. This is more of a macro question. When you look out over the next 2 or 3 years, do you see a housing shortage today, do you see a housing shortage over the next couple of years, and can your industry bring the homes on fast enough, or are we in a situation where prices are likely going to continue to rise?

Robert L. Salomon

Well, I don't have a very good crystal ball. I threw mine out back in '07. I think that there is -- the largest competitor of the new home builder is still the resell market. And I think the resell market will continue to be significant. But I think as -- if job growth can continue even at its slow pace, the new homes that we offer today are much more energy-efficient. We have mortgage choice for our buyers, and we have flexible floor plans to allow them to somewhat design the house to the way they want to live rather than buying a resale house. I think there's plenty of opportunity for the new home builders to continue to grow, continue to have some level of pricing power. Albeit, I think we will be somewhat constrained maybe in the near-term on the labor side as we rebuild the labor base to build our homes, but we are still building in a very low supply. And keep in mind, though, the private builders, and in some cases, like in Atlanta where what we call the pickup truck builders really drove a lot of the subbase in that city, guys that build 5 to 10 houses a year, these guys aren't around to get. So any labor supply is right now going towards the big builders. I think we will always have the ability to generate that labor supply based on the needs that we have. Anyone else?

Susan Berliner - JP Morgan Chase & Co, Research Division

Any other questions? Well, great. Thanks very much for attending. Appreciate it.

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