00:08 Good afternoon and welcome to the Beazer Homes Earnings Conference Call for the quarter ended 31st 2022. 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. 00:37 At this point, I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.

00:45 Thank you. Good afternoon, and welcome to the Beazer Homes conference call discussing our results for the second quarter of fiscal ‘22. Before we begin, you should be aware that during this call we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors described in our SEC filings, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date the statement is made. We do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. New factors emerge from time-to-time and it is simply not possible to predict all such factors. 01:31 Joining me today is Allan Merrill, our Chairman and Chief Executive Officer. On our call today Allan will review highlights from the second quarter, discuss our positioning and strategy as it relates to affordability and announce two exciting developments for the company. I'll then provide more details on our results, expectations and balance sheet. We will conclude with a wrap up by Allan. After our prepared remarks, we will take questions in the time remaining. 01:57 I will now turn the call over to Allan.

01:59 Thanks Dave, and thank you for joining us on our call this afternoon. We had an exceptional quarter highlighted by significant year-over-year growth in our gross margin, adjusted EBITDA and earnings per share. Operationally, we generated new home orders slightly ahead of our expectations, expanded our controlled lot position and reduce debt. Taken together, these results embody the goals of our long-standing balanced growth strategy, which is to grow profitability, faster than revenue from a less leveraged and more efficient balance sheet. 02:34 Given the visibility from our backlog and production universe, we now expect to generate full-year earnings per share of at least $6, inclusive of previously disclosed energy efficiency tax benefits of about $0.40 per share. While our results for the balance of this year will reflect the demand we've enjoyed for the last few quarters. We know investors focus is on whether we're at an inflection point for pricing and demand. 03:02 Rather than trying to make predictions about specific outcomes, let me share with you the major factors we believe will determine those outcomes. Any discussion of the industries longer term outlook should start with the demographics of demand and the practical realities on the supply side. In the interest of time, we've summarized it in two charts: first, there continues to be a structural gap between the demand for housing and the total supply of housing. The age and ownership preferences of the demographics are compelling, but there is no practical way for the supply of lots, labor or materials to meaningfully reduce this gap in the next several years. 03:42 Second, the level of unsold inventory of both new and used homes is at historically low levels. In fact, there is only a quarter of the unsold inventory that existed in 2006, which…

09:32 Thanks, Alan. Looking at the second quarter, compared to the prior year, our sales pace was 3.6 sales per community per month as we continue to manage sales in many communities to match our production capacity and ensure a positive customer experience. This pace was slightly higher than our long-term historical average for the second quarter. Nearly 20% higher ASPs offset lower closings to produce homebuilding revenue of $507 million, down about 7%. 10:03 Our gross margin excluding amortized interest, impairments and abandonments was 26.8%, up approximately 460 basis points. SG&A on an absolute dollar basis was, up $1.5 million as we prepare for future community count growth. This led to adjusted EBITDA of $77.4 million in the quarter, up over 20% and representing approximately 15% of total revenue. 10:31 Interest amortized as a percentage of homebuilding revenue was 3.2%, down 120 basis points. Our tax expense for the quarter was about $10 million for an effective tax rate of 18.4% reflecting the benefit of energy efficiency tax credits. As a reminder, on a cash basis, our deferred tax assets offset substantially all of our tax expenses. Taken together, this led to approximately $45 million of net income from continuing operations, yielding a $1.45 per share in earnings, up nearly 80%. Finally, the value of our backlog was about $1.6 billion, up more than 14%. 11:16 Turning now to our expectations for the third quarter. We expect a monthly sales pace in the low-3s as we managed sales to the old supply chain pressures and anticipate the impact of higher mortgage rates. Average community count is expected to be around 120, closings should be in the 1,050 to 1,100 range, reflecting a backlog conversion ratio in the mid-30s, down from approximately 42% last year, reflecting elongated cycle times. ASP…

14:41 Thank you, Dave. The second quarter of fiscal ‘22 was very successful for Beazer, as we substantially improve profitability, expanded our land position and improved our balance sheet. And despite the ongoing supply chain challenges across the industry, we are pleased to be able to raise our expectations for full-year financial results. None of this would have been possible without our team. I want to thank them for their ongoing efforts and I would like to welcome our friends from Imagine Homes to the Beazer family. I'm confident that we have the people, the strategy and the resources to create growing and durable value over the coming years. 15:16 And with that, I'll turn the call over to the operator to take us into Q&A.

15:21 Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question is from Alan Ratner with Zelman and Associates. You may go ahead.

15:56 Hey guys, good afternoon. Thanks for the time and questions appreciate it. Maybe, Allan first one in this reading kind of your prepared commentary and the release, just kind of flagging your expectation for a more challenging sales environment going forward. I don't think there is too much shock in that statement. But I'm curious how you see it playing out in that regard? I mean, we've heard from some other builders saying, hey, we think the volume side will be fine, it's just a matter of whether we have pricing power and can kind of offset the cost inflation and whether we need to incentivize a little bit more? I'm reading your comments and I'm sensing, maybe a little bit more concerned about volume, but correct me if I'm wrong and just kind of talk me through how you see this playing out over the next few months assuming rates stay at these levels and maybe even tick a bit higher from here?

16:49 Okay. Well, I feel a little bit like an economist where you know, let's get the direction right, and then we'll worry about the timing, because I would tell you, I don't have some crystal ball, so great two months out, three months out. I'd start Alan with the point that I really do believe that there is a structural gap between the supply and demand for housing. And so I'm generally in alignment with what you said some of our peers have commented. I think that the volume opportunity for our industry for new homes is pretty stable. I feel good about that. 17:21 How that plays out when we meet the affordability challenge, I don't know in a given division and a given quarter there may be volume and/or price, but in general, I expect there to be first a loss of pricing power, which frankly I think we will have some opportunities on the direct cost side to go regain pricing power on that side. Before I think we're going to see significant volume risk. I mean, you know, the numbers better than I do in terms of the production universe, it's out there across the industry, you can relate that back, two, three, four years. We're still at pretty low levels and so I don't first think about volume. I really agree with the comment that it's more going to be on the pricing leverage side at least initially.

18:11 Okay, no that's helpful to hear how you're thinking through that. So I appreciate that. Second question on the mortgage side, you've obviously touted your Mortgage Choice program over the years and we're hearing, again not just keep citing other builders, but it seems like rate locks are becoming more of a focal point and some builders are using their internal mortgage companies to provide some incentives to either keep buyers in backlog that might have signed a contract, a few months ago when rates were much lower or maybe on go forward contracts. Just to kind of give some peace of mind, so I'm guessing that's not a tool, you guys really have given you don't have your own internal mortgage, but I'm curious if your partners or you have any programs that you can work out with your partners to provide a similar service to your customers?

19:00 Well, the short answer is yes. And in fact, it's even better spending other people's money on rate locks and when I've been excited to see is the competition among lenders has been on multiple fronts. It's been always about product and service. It's about rate and it is absolutely about rate locks. We've got markets where lenders are going out eight, nine months giving no cost rate locks to customers and I guarantee you they wouldn't be doing that, but for the competitive dynamics, it's embedded in Mortgage Choice. 19:31 So yes, I think rate locks are an important part, particularly for a builder like us that has to be built business that is a big part of our company. So having the ability for lenders to compete with one another to offer those rate locks to our customers is a big deal.

19:46 And are you able to have any visibility into your backlog? What percentage of those buyers actually are locked in at this point?

19:53 No, absolutely, look we talk about our backlog every home, every week. So I would say the absence of a mortgage company has almost nothing to do with visibility into our backlog, we have extraordinary visibility and we are constantly looking at that portion that is locked, that portion that's not locked and we are foreseeing our teams and our outside Choice lender partners to look at where the breakpoints are where those customers may be in trouble from a qualification standpoint. And to the extent that they're not going to qualify up 10, 20, 30, 40, 50 basis points, there is an absolute discussion about, it's time to walk or we are taking a risk, and you're taking a risk that is untenable. 20:35 So that's why I said, we've gone through that, it’s been a consistent practice, but we really formalized in the first calendar quarter, and I was excited that we had very, very, very little drop out from the backlog. But yes, I think that there are pluses and minuses and I can certainly understand what others say about their mortgage companies giving them visibility. But I would tell you I don't apologize to anybody ever about lack of visibility in our backlog. We have extraordinary visibility and we get to have our lenders with that backlog that's not yet committed and frankly, even when they are committed, they can still switch lenders until roughly 60 days out from closing, that keeps the pricing really tight, right? 21:20 I -- if markets move and there is a better rate available our customer can move and our lenders, know that we will do that. Now we only are able to do that, because we don't charge them, right? And that's the benefit of Mortgage Choice in a nutshell.

21:35 Great. Appreciate the thoughts there. Thanks a lot.

21:38 Thanks, Alan.

21:39 Thank you. And next we have Jay McCanless with Wedbush. You may go ahead.

21:46 Hey, thanks for taking my questions. So when do you expect to close the Imagine deal and is it a cash deal, any color details you could give us would be great?

21:58 Yes, it’s going to close, we think at the end of May, so we only have about a month in a quarter this year. It's a small business, it is a cash deal, it's immaterial to our financial results for the foreseeable future. But it's a great growth platform for us with the team that we've known as I said in the script for 16-years.

22:21 I mean -- to play devil's advocate here you and Allan were just talking about things potentially getting weaker near-term and/or builders having to get a little more aggressive in how they go to market. If you're concerned about that why are you going out and making an acquisition ahead of what may be rough or waters ahead?

22:42 Yes, look, I think there is no perfect time when you're in a relationship like we've been in with Imagine, we don't control the timing that one of the founders wants to retire. And that really has created the opportunity. The size of this business is such that it really, it doesn't change. We're still buying land, we're going to spend many, many multiples of the purchase price of Imagine on land in this environment, because we do our underwriting, we are confident in the intermediate and longer term. And frankly we have yet to see and I made this point in my quote, in the press release, Jay. We have yet to really see that adversity, so combination of right now, the environment is good and as we look through a year or two and beyond, we're really optimistic about the need for single-family homes, then you come to San Antonio in particular and you say it's got one of the best affordability pictures and one of the highest growth rates of any city in the country, that’s the pretty good time to be coming to San Antonio.

23:43 Got it. And then community count, are you all still thinking that's going to trend up through the rest of the year? Or how is that playing out right now? And what are you seeing on the municipal side? I think that's been one of the more vocal complaints, we've heard from your competitors this earnings cycle?

24:03 Yes, Jay. So we talk about it in the script, you know, we’re going to see some growth in ‘22. But we're going to see a healthy increase as we move into ’23. And in part some of that kind of when they kind of takes out and when it starts to get that healthy growth in ‘23 reflect some delays that we've had in the development process. So I think you're right off -- you’re right on in the comments, but we've troughed. And you can see, clearly from the land position and from our lots owned and controlled, there are best indicators for future community going out, and we feel good about the healthy increase as we move into next year.

24:37 Got it. Okay, great. Thanks for taking my questions.

24:39 Thank you, sir.

24:42 Thank you. [Operator Instructions] Our next question is from Alex Barron with Housing Research Center. You may go ahead.

24:56 You know, thank you and great job on the quarter.

24:59 Thanks, Alex.

25:00 I wanted to ask about Imagine homes, can you give us roughly what size of operation that is how many communities or how many homes they closed in the last 12-months?

25:11 Alex we're not releasing specific transaction details, but as Alan said, it's a relatively small builder, but we have aspirations to grow the business in San Antonio, because we like the market a lot, we like the economics work, the fundamentals on the market and like the opportunity. And frankly, we know the team and we know the capacity is there for us to grow this business.

25:31 Okay. I know you guys commented about your goal of lowering debt. But right now the stock is that a pretty interesting opportunity relative to your book value. So can you guys comment on your appetite to do some share buybacks here given that it would be pretty accretive?

25:52 Well, I was just going to go over the math again, we had a $50 million Board authorization, we've used about $38 million, there's $12 million remaining on that Board authorization. I would kind of point out, historically, we spent to $38 million very effectively, we bought the stock below $10 and we were buying it. And look I think big picture there is competing uses for our capital and we're finding good opportunities in the land market to bought and do deals. But there are clearly stock prices were it's very compelling for us to go out and buy stuff. And I won’t, kind of, get into the details on that, but clearly we see opportunities out there at certain stock levels. So we're excited about, not just land market, but frankly what time ahead of us.

26:34 Okay. And then if I could ask one last one, we have been given the concerns about affordability, is there anything about your new communities that is addressing that. In terms of are they smaller homes or lower upgraded features? Or in anything that helps on that front?

26:58 Absolutely, and it’s a little bit of everything, then of course in any one location. It's a subset. But I would say square footages, we haven't really seen a big movement there, may be a little bit, but the weighted average numbers, if I look across quarterly or semi-annual sales there isn't a lot of evidence of that. But yes standardization, making sure that we were able to control costs, the best we can. One of the best ways to do that is to use parts and pieces that are in common specification levels, and I talked about that in my comments, we have absolutely streamlined specification levels, particularly in those most price-sensitive areas. 27:41 And then substitution, we have been successful in finding ways to substitute products and either to drive down cost or to contribute to energy efficiency, which drives down the owners cost of ownership, which helps from an affordability standpoint just on the other side. So I would say all three S’s are in play, Standardization, Substitution and Specification Simplification.

28:09 All right, great. Well, best of luck for the year. Thank you.

28:12 Thanks, Alex.

28:13 Thanks, Alex.

28:15 Thank you. And at this time we have no further questions.

28:21 All right, I want to thank everybody for joining us on our Q2 call and we look forward to talking to you in 90-days. Thank you very much. This concludes today's call.

28:29 Thank you. That does conclude today's conference. Thank you all for participating, you may disconnect at this time.