With Beazer Homes USA's fiscal second quarter loss of $54.9 million, or $0.74 per share, exceeding analysts' expectations of a loss of $0.47 per share, company executives focused on explaining to the investor community how the company will get back to profitability during a conference call Tuesday. The plan was three-pronged: Improve efficiencies, create new opportunities, and invest for future growth.
On the efficiency front, management pulled the trigger on another reduction in forces during the quarter, eliminating 130 positions across various business silos. The decision is expected to save the company roughly $20 million, which is likely to be fully realized by the company's fourth quarter.
Most of the cuts were to what company president and CEO Ian McCarthy called "support functions," such as purchasing, marketing, IT, and product development and design. By cutting from those ranks, management is keeping a field infrastructure of mostly salespeople and builders in tact to handle not only the current levels of business but future upticks in volumes as the housing market recovers. However, the head count reduction puts a number of initiatives on hold, including some technology upgrades and new product development.
"We're going to stand still for the moment," said McCarthy of the effect of the cuts on certain programs.
Company executives also offered more detail into management's decision to foray into the rental business by setting up a pre-owned homes division, which buys foreclosed homes, rehabs them, and then rents them out. Citing a "very attractive rental market," McCarthy said the new business was a strategy to act on "an attractive investment proposition" that would yield high single-digit returns to the company without adding significant costs or tying up too much cash.
Through April, the company had either purchased or contracted for a total of 40 homes in the Phoenix market. However, executives stated that they expected the new division to have purchased at least 100 homes by the end of the year.
While the subsidiary began by only purchasing foreclosures in existing Beazer neighborhoods in Phoenix, it has invested in short sales and foreclosures in other neighborhoods as well. So far, the business unit has had few problems finding renters for the homes it controls; executives said all but one property was rented within a number of days, which is below the market's average vacancy rate of two weeks.
This initial success has prompted management to consider setting up similar units in Las Vegas and parts of California that suffer from foreclosure issues. Moreover, McCarthy said with the banks now open to more deal-making, the company could be looking at acquiring one or more portfolios of distressed homes. In addition, if management moves to scale the operation, executives said the company would likely seek external financing for the acquisitions rather than continue to self-fund.
However, when asked by analysts whether the new venture could be considered a distraction, as well as a resource sink, at a time when the company's core operations are struggling, McCarthy replied, "If we could do everything through our core business, we absolutely would. But the market is not strong enough to deliver the financial results we want."
But for as much as the company is investing limited amounts of cash into new opportunities like its pre-owned homes division, it's also sinking dollars into new land positions for its core business. The company spent $61.1 million on land during the quarter, with $40.8 million of it going toward acquisitions. That money added 18 new land positions to its pipeline, increasing its lot grand total to 30,918 under control at the end of the quarter.
Executives anticipated that by its fiscal third quarter, it will have its first increase in community count since 2006 and by fiscal year-end, 25% of the companies closings will be coming from its new communities.
However, analysts remarked on the fact the company's new communities were fetching on average a 6% lower sales price than legacy communities at the same time the basis point spread in gross margins between new communities and existing communities was narrowing and asked whether management was considering reining in its land spend to meet the market.
CFO Allan Merrill said much of the acquisition activity had been concentrated along the Eastern seaboard, where volumes were stronger, and also cautioned about the volatility of quarterly land spend. The company pursues new land deals when they make sense based on local market conditions, he said.
He also added, "We try not to let land brokers create our corporate strategy by running around like chickens with their heads cut off every time something becomes available for sale. We try to be somewhat disciplined about what submarkets do we want to be in and which communities do we want to invest into our growth plan."
But while company executives articulated a cohesive plan for moving the company from losses to positive earnings territory, it was clear that the path to profitability would be wrought with challenges. Even with its cost-cutting measures, new business opportunities in the rental market, and strategic land reinvestment, management was expecting that its gross margins for the full of fiscal 2011 would be a little below 2010 levels. Moreover, with erratic sales and low backlog visibility, it was difficult to get a handle on both trends and a timeline.
"We haven't seen consistency," McCarthy said.