Good afternoon, and welcome to the Beazer Earnings Conference Call for the Quarter Ended June 30, 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.beazer.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.

Thank you. Good afternoon, and welcome to the Beazer 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 statements, whether as a result of new information, future events or otherwise. New factors emerge from time to time and it's 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 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 expectation for continued growth in our land position followed by a wrap up by Allan. After our prepared remarks, we'll take questions in the time remaining. I will now turn the call over to Allan.

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 of the fiscal year. Our sales pace in the third quarter was one of the highest levels that we've generated in the last 5 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, share of lots controlled by option, while retiring $14 million in debt. Together, these results perfectly demonstrate our long-standing balanced growth strategy, which is a multiyear 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 this back, we acknowledge the benefit that 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 accesses about a painful correction in the future.The…

Thanks, Allan, 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. Homebuilding 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 homebuilding 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 the sales pace of over 3 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 base we experienced last year. We expect backlog conversion to be in the mid-40s…

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 5 years, we've grown EBITDA by more than 60%, improved our return on assets by more than 5 percentage points and reduced debt by more than $300 million. At the same time, we 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.

[Operator Instructions] Our first question comes from Alan Ratner from Zelman & Associates.

Nice job in the quarter. I'm glad to hear everyone's doing well. 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, 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 basis points, but on a sequential basis, how should we think about the strength that we saw this quarter and the sustainability of that?

Look, you have some timing as it relates to lumber prices and lumber price increases in the -- 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 Allan talked about is the homes and backlog that we have at higher margins if we look into '22, and that's what gives us confidence. So, we 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.

So, just to clarify on that, so down a little bit sequentially in the fourth quarter because of the lumber timing and then reaccelerating next year. That's kind of see right now.

Yeah.

Allan, 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, 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 is talking about building more houses, right, community account, building more specs, building more inventory, building backlog. So, what gives you the confidence that the cost side will cooperate as pricing eventually hit the ceiling?

Alan, if there were ever a compound question, that was it. 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 in their underwriting. So, at this point, it is 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 3 months, 6 months, 9 months, that's not a trend line that people want 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?

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.

Yes. 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 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. 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 notion that there's going to be a lot of additional supply has to be kind of looked at in context. There's a fair bit of additional supply over time, but against a giant deficit. Then you had 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 multiyear advanced 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 just -- we can't get a particular product. Now, that sounds really good. The truth is, in the last 6 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 out 12 and 24 months as I see our community count and other community count ramping, I think our supply chain has got plenty of time and has been making the investments to be able to deal with that enhanced level of activity.

Our next question comes from Alex Barron from Housing Research Center. Alex Barrón: I have a question, I guess, regarding the orders that you saw this quarter. Most builders have said that they're still seeing good demand and that they're 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?

Yes, Alex, when 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 manage our -- 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 Allan gave a pretty good kind of layout on how we see the supply and demand in the industry on a go-forward basis. We think there's real good drivers of demand out there and the demand that we're seeing is sustainable, without giving 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.

We gave guidance, Alex, on Q4, right. I mean we think orders in Q4 will be in the range of about 3 sales per month per community, which would be a little enhanced relative to 2016, '17, '18, '19, but certainly not at the level that we were fortunate to experience last year in the September quarter. Alex Barrón: And in terms of the supply chain issues, everybody has been discussing, what is it that you guys are doing, I guess, that -- 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 away you've always done them? What are you guys doing maybe different to try to bring in the delivery times?

Well, the question is -- it's 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 blackmail 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. At the old adage, if you're in a hole, stop digging. I think 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 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 and a 5 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 15 delivery date, that customer is 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. Alex Barrón: I got to imagine the customer would not be upset if you gave them my realistic expectation, said, hey, your house is going to take 9 months instead of 6 months because of all these issues, I'm sure they could adapt. But I'm guessing the bigger challenge for you guys has been able to have visibility on cost, correct?

Well, timing and costs, they're both big issues. On the timing side, though, where we're really focused right now, I would tell you that there are stages in each market where we set a window. 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 cost, and that's what we've avoided.

Our next question comes from Julio Romero from Sidoti & Company.

So, I wanted to pull the string a little bit more on, I think, the first caller's question on costs and I think you have 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, does that high lumber costs, I think you called out might affect margins in the upcoming quarter, does that stay isolated to the fourth quarter or can that kind of seep into margins in the December quarter at all?

I think there'll be a little bit, look, 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 will still be up year-over-year very nicely.

And are you guys putting or just either put anything like longer price escalators or any material price escalators in your contracts?

We have done that. I know that there is some evidence of it. We've looked at it. There are legal challenges with it. There are communication challenges with it. There are enforcement issues with it. I'm not philosophically like would say, no, never. I just think it's super complicated. It's easy to say it's hard to actually enforce. And I think we have taken the approach of let's just not sell homes where we don't know the cost. And 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.

And I guess just, last one for me and I'll pass it on, is on the preliminary guidance for fiscal '22, I think the pencil looks fast enough. You've got double-digit EPS growth, fiscal '22 SG&A as a percentage of sales below 11% and I think sequential community count grow in the March quarter, did I get that all correctly?

Yes. 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.

Thank you. There are no further questions in queue at this time.

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.

This does conclude today's conference. You may disconnect at this time and thank you for joining.