Earnings call: Beazer Homes meets profitability expectations with an adjusted EBITDA of $53.3 million

Beazer Homes USA, Inc. (NYSE: NYSE:BZH) has reported its financial results for the third quarter of fiscal year 2024. The company met profitability expectations with an adjusted EBITDA of $53.5 million and diluted earnings per share of $0.88. Despite a challenging sales environment, particularly in Houston and San Antonio, Beazer Homes made progress towards its multiyear goals and expanded its lot pipeline. The company remains optimistic about the long-term housing demand and is on track to increase its active community count, aiming for over 200 communities by the end of fiscal year 2026.

Key Takeaways

• Beazer Homes reported adjusted EBITDA of $53.5 million and earnings per share of $0.88 for Q3 FY2024.
• The company experienced a challenging sales environment, with a sales pace per community per month below expectations.
• Beazer Homes is optimistic about long-term housing demand and remains committed to its multiyear goals.
• The company anticipates ending FY2024 with over 155 active communities and aims for more than 200 by FY2026.
• Full-year revenue is expected to grow by approximately 20% in FY2025, with an anticipated increase in profitability.
• Beazer Homes spent $200 million on land in Q3 and projects a full-year land spend of at least $750 million.
• The company expects to end the year with a net debt-to-net cap ratio in the mid-30s and a book value per share of around $40.

Company Outlook

• Beazer Homes forecasts similar sales pace in Q4 as in Q3, with an ending community count above 155.
• The company targets a full-year revenue growth of about 20% in FY2025 and aims for profitability expansion.
• Investments in product and supply chain development are expected to reduce costs in the near term.
• Beazer Homes is confident in its ability to achieve earnings growth and deleverage its balance sheet in FY2025.

Bearish Highlights

• Sales in Houston and San Antonio have been weak, impacting overall results.
• Operating margin has compressed due to investments in product development and increased overheads.
• The total number of transactions in the sub-$300,000 price point in two Texas markets has significantly shifted.

Bullish Highlights

• Beazer Homes saw strength in other geographic markets, including the Mid-Atlantic, Southern California, Las Vegas, and Nashville.
• The introduction of Zero Energy Ready homes is expected to increase the average sales price in Q4.
• The company's total lot position grew to over 28,000 lots, mostly through options.

Misses

• The pace of sales per community per month fell short of company expectations.
• There was a dip in Atlanta's community count due to delayed activations of new communities.

Q&A Highlights

• The company's average sales price is projected to be $520,000 in Q4 FY2024.
• Lower interest rates may lead to decreased incentives and increased sales.
• Sales activity in July showed improvement over June, and the company aims to reduce the number of finished specs.
• Beazer Homes has a consistent model for capital allocation and has conducted share buybacks.
• The absorption pace is expected to remain consistent with Q3, and new community activations are anticipated in the latter part of Q4.

InvestingPro Insights

Beazer Homes USA, Inc. (NYSE: BZH) has maintained a steady performance amidst a challenging market, as reflected in its recent financial results. To provide a deeper understanding of the company's financial health and stock performance, here are some insights based on real-time data and InvestingPro Tips:

InvestingPro Data:

• Market Capitalization: Beazer Homes currently stands at a market cap of $863.89 million, indicating its size and significance within the housing construction industry.

• P/E Ratio: The company is trading at a low earnings multiple of 6.05, suggesting that its stock could be undervalued compared to earnings.

• Revenue Growth: The latest figures show a revenue decline of 8.4% over the last twelve months as of Q2 2024, highlighting the sales challenges the company has faced.

InvestingPro Tips:

• Debt Concerns: Beazer Homes operates with a significant debt burden, which investors should consider when evaluating the company's long-term financial stability.

• Analyst Sentiment: Three analysts have revised their earnings downwards for the upcoming period, hinting at potential headwinds or a conservative outlook for the company.

For those interested in a more comprehensive analysis, InvestingPro offers additional tips that can provide valuable insights into Beazer Homes' performance and prospects. Currently, there are 11 more InvestingPro Tips available, which can be accessed by visiting https://www.investing.com/pro/BZH.

These metrics and tips are particularly relevant in the context of Beazer Homes' current financial results and future outlook. The company's low P/E ratio, coupled with its significant market capitalization, paints a picture of a potentially undervalued stock in the face of revenue challenges. The concerns over debt and analyst revisions provide a cautionary note that may impact investor sentiment. As Beazer Homes continues to navigate the housing market's ebbs and flows, these InvestingPro Insights can help investors make informed decisions.

Full transcript - Beazer Homes USA Inc (BZH) Q3 2024:

Operator: Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the Third Quarter ended June 30, 2024. 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 Dave Goldberg, Senior Vice President and Chief Financial Officer.

Dave Goldberg: Thank you. Good afternoon, and welcome to the Beazer Homes conference call discussing our results for the third quarter of fiscal 2024. 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 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 discuss highlights from our third quarter, the current environment for new home sales, our longer-term outlook on the market and conclude with an overview of our progress towards our multiyear goals. I'll then provide details on our third quarter results, expectations for our fourth quarter and full year results, the basis for our confidence in profitability growth next year, our review of our land activity followed by a quick discussion of our balance sheet and book value growth. We will conclude with 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 Merrill: Thank you, Dave, and thank you for joining us on our call this afternoon. Despite the continuing challenges presented by an affordability constrained market, our third quarter reflected profitability in line with our expectations, and significant progress toward our multiyear goals. While our new home orders were softer than we had anticipated, reflecting both macro and market-specific factors that I'll address in a moment, our long-term confidence in the broader new home market and Beazer's positioning, in particular, remains very strong. In terms of third quarter profitability, Closings in revenue matched our expectations and adjusted gross margin came in slightly higher than anticipated. This led to adjusted EBITDA of $53.5 million and diluted earnings per share of $0.88. In turn, book value grew to more than $38 per share. I'd also like to call out 2 operational highlights. First, we substantially grew our total lot pipeline. We now have more than 28,000 lots, up 25% from last year, providing excellent visibility into our growing community count. And second, we reached a major energy efficiency milestone this quarter as we have now closed more homes to the DOE's single-family, zero energy-ready requirements than any other homebuilder in the country. Although we generated strong financial results in the quarter, the sales environment proved quite challenging. Our pace of 2.4 sales per community per month was below our expectations. From a macro perspective, we had many prospective buyers struggle to qualify for a mortgage and others who chose to defer their purchase based on expectations of lower mortgage rates later this year. And weather events in Texas were quite disruptive. These dynamics impacted all builders to some extent. But for us, there were a couple of specific markets were additional factors played an even bigger role. In particular, weak sales in Houston and San Antonio weighed on our results. Excluding these markets, which represent about of our community count, our sales pace would have been around 2.8 sales per community per month, closer to both normal seasonal patterns and our expectations. Houston and San Antonio are among the most affordable housing markets we serve, which is why we remain confident in their near- and long-term prospects. But during the quarter, both markets saw particularly strong demand at price points well below our offerings. While we might have achieved higher sales with more aggressive incentives, this quarter, we chose not to chase volume in either market. That's because we believe it is important to demonstrate the value of our highly differentiated and newly introduced Ready series homes. Given a short period to adapt, we believe these homes and our team can more than hold their own competitively, and we expect Houston and San Antonio to be among our most productive markets. Looking out to 2025 and beyond, we continue to be quite optimistic on new home sales. A decade of underbuilding has left the country undersupplied for housing, and continuing employment and wage growth should underpin demand. While stretched affordability and growth in for-sale inventories likely means that sales patterns will remain volatile in individual markets, we have not seen anything that changes our longer-term bullish thesis. And eventually, we expect lower rates to improve affordability for homebuyers. With this positive longer-term outlook, we remain fully committed to our 3 multiyear goals, which include expanding our community count, deleveraging our balance sheet and delivering a demonstrably superior home. We ended the quarter with 146 active communities, up about 17% year-over-year and up slightly on a sequential basis. By the end of fiscal '24, we expect our active community count to exceed 155, representing annual growth of about 15%. With similar growth expected in FY '25, we have a clear path toward achieving our goal of having more than 200 communities by the end of fiscal year 2026. As it relates to deleveraging our balance sheet, we expect to end FY '24 with a net debt-to-net cap ratio in the mid-30s even as we invest in the growth of our business. And importantly, we're on track to achieve our target of having net debt-to-net cap below 30% by the end of FY '26. Finally, as it relates to our goal that 100% of our starts will be Zero Energy Ready by the end of calendar 2025, we continue to make significant progress. During the third quarter, just over 90% of our starts were Ready series homes. This rapid progress has simplified our construction process so we can now focus on reducing our Zero Energy Ready costs. On the sales side, I remain enthusiastic about our potential to drive value from a product position that is truly unique within our industry. We remain confident in the long-term demand for new homes and believe the achievement of our multiyear goals will position us to create significant shareholder value. With that, I'll turn the call over to Dave.

Dave Goldberg: Thanks, Allan. For the third quarter of fiscal year 2024, we generated 1,070 new orders, reflecting the pace of 2.4 sales per community per month, as mentioned previously. We closed 1,167 homes, generating homebuilding revenue of $589.6 million, with an average sales price of about $505,000. Adjusted gross margin, excluding amortized interest, impairments and abandonments was 20.3%. SG&A was 11.9% of total revenue as we prepare for near-term growth in community count. Adjusted EBITDA was $53.5 million. Interest amortized as a percentage of homebuilding revenue was 2.9%. Our GAAP tax expense was $2.5 million for an effective tax rate of 8.3%. Net income was $27.2 million or $0.88 per share. Finally, during the quarter, we repurchased more than 450,000 shares representing about 1.5% of the company at an average price just above $28. Our guidance for the fourth quarter contemplates no improvement in the macro or company-specific environment. With this backdrop, we expect sales pace similar to our third quarter and ending community count above 155. This would lead to about 1,100 orders for the quarter, up versus the prior year. We expect to close about 1,500 homes, up more than 20% compared to the prior year period. ASP should be about $520,000. We expect adjusted gross margin roughly in line with the third quarter at approximately 20%, reflecting no change in sales incentives. SG&A as a percentage of total revenue should be about 10%, down both sequentially and year-over-year. We expect this to result in adjusted EBITDA above $80 million. Interest amortized as a percentage of homebuilding revenue should be about 3%. And our effective tax rate should be about 12% as we continue to benefit from energy efficiency tax credits. This should all lead to diluted earnings per share of about $1.35. Our Q4 guidance implies that we now expect full year adjusted EBITDA of about $230 million. We note that this is down from our guidance last quarter, reflecting the impact of weaker sales. Finding the right balance between volume and margin is always tricky. But in light of our differentiated product, our substantial growth in community count and our positive longer-term view of the market, we believe not chasing volume is appropriate for now. And context is important. Even at the sales pace, we expect to generate $4.20 of diluted earnings per share representing a double-digit return on equity and healthy book value accretion. While conditions in fiscal 2024 have been even choppier than anticipated, we remain optimistic about our ability to grow profitability in fiscal 2025. Let's start with the top line revenue. We expect to generate full year revenue growth of about 20% next fiscal year. Now many of you will note that our fourth quarter guidance implies backlog entering fiscal year '25 will be down year-over-year. And it's true that in most years, backlog entering the fiscal year is a pretty good signal for full year closings. This year, however, there are some other dynamics to consider. First, as Allan laid out in his update to our multiyear goals, we expect to end 2024 with at least 15% community count growth followed by another 15% growth in 2025. To support this growth, our units under production are increasing faster than sales as we start homes in our newer communities. So regardless of our year-end backlog, we expect homes under production going into fiscal year 2025 will be up at least 10% over the 2,400 units under production we had to begin fiscal 2024. Second, we've seen continuing cycle time improvement, which translates into additional weeks in the spring, where we'll be able to start homes so they can close within the fiscal year. Third, we expect to generate a modest improvement in sales base. Our fourth quarter guidance would result in the lowest full year sales pace in fiscal year '24 that we've experienced in the last 10 years. We don't think this is the new normal. Any improvement will have a meaningful impact given our expanding community count. Finally, we expect our average sales price to be about $520,000 consistent with our guidance for the fourth quarter of fiscal 2024 and up year-over-year. Taken together, these factors should allow us to generate revenue growth of about 20%. And even without improvement in our operating margin, this growth should translate into robust profitability expansion. Now let's talk about margins. Our operating margin has been compressing over the last couple of years for 2 distinct reasons. First, we've been investing in our product and supply chain to develop and establish a differentiated home. It hasn't been easy and it hasn't been inexpensive, but with 93% of our starts of Zero Energy Ready, those costs are now built in. Now we have the near-term opportunity to reduce them. Second, we've increased overheads to support our rapidly growing community count. With these communities coming online, we expect to grow revenue faster than overheads next year. Taken together, in fiscal year 2025, we're optimistic we can generate operating leverage from our revenue growth. Ultimately, any improvement in our operating margin would only enhance our profitability. We realize that these comments don't amount to precise guidance, but we hope they help you understand our optimism for profitability growth next year. Pivoting to our investment in land. During the quarter, we spent approximately $200 million as we grew our land position to greater than 28,000 lots, our highest total lot position in a decade. Importantly, the majority of our incremental lot growth came through options. As such, our option percentage was nearly 55%, up sequentially, and we expect to drive this percentage higher over time. For the full year, we are expecting land spend of at least $750 million. Now turning to the balance sheet. At June 30, 2024, we had total liquidity of $328 million. We expect to end the year with a net debt-to-net cap in the mid-30s, relatively flat versus the prior year with nothing drawn on the revolver. This will support our growth aspirations and give us flexibility to adjust to future market conditions. And as a reminder, we have no maturities until fiscal 2027. On the equity side, based on the earnings guidance we gave, we expect book value per share to be around $40 by the end of the fiscal year with further growth expected in fiscal year '25. We've made enormous progress in growing our shareholders' equity, having more than doubled our book value since fiscal year 2020, but note that we still trade at a discount to book. We remain confident that our focus on delivering both earnings growth and deleveraging will close this gap. With that, I'll turn the call back over to Allan.

Allan Merrill: Thank you, Dave, and I apologize for my cold. Despite the challenges posed by affordability and consumer sentiment, we delivered solid third quarter financial results. Just as importantly, we continue to make progress toward our multiyear goals. As we prepare for fiscal '25, I'm encouraged by our position. We have the strategy, the land, the financial resources and most importantly, the team to create significant value in the year ahead. With that, I'll turn the call over to the operator to take us into Q&A.

Operator: [Operator Instructions] And our first question is from Alan Ratner with Zelman & Associates.

Alan Ratner: I'd love to first drill in a little bit to the pace and price kind of decision that I'm sure ongoing here. So last quarter, you did kind of signal some temporary pressure on margins because you made a decision to kind of burn through some of the legacy product and some spec inventory, and we saw that in 3Q in the margin. And I think at the time you expected it to be temporary. The fourth quarter guidance seems to imply pretty steady margins at these levels. So I'm curious if you did have to increase incentives even to generate these types of sales in the quarter, and because your comments seem to imply that you're not going too hard on the incentives right now. But I guess more broadly, at what point does it make sense to get more aggressive? Is there a certain absorption target that you're thinking about? Or is it more just a timing thing, that it doesn't make sense to do that into a seasonally softer period, and you would wait more for the spring to do that?

Allan Merrill: Alan, and I apologize again for hacking a little bit. I'm fighting through a summer cold here. A couple of responses. I mean there's a lot to that question. As I think about what's really different from 90 days ago, we were intentional about moving through non-Ready series specs. What decision we made in the June quarter was in some of the communities, specifically in Houston, where we have introduced Zero Energy Ready, and we saw a fairly significant shift in demand to that $300,000-ish price band. It just didn't feel like the time to say, okay, we want to get back to our 2.5%, 3% or 3-ish absorption rates and try and play in that sandbox. And it really wasn't in Houston for us, a mix issue between Zero Energy Ready, and in prior series, it was these are new communities, new product, and we need to give it a little bit of a chance. And we can acknowledge that, hey, on the one hand, there's a lot of activity below $300,000. And on the other, frankly, take us out of it, you can look at all of the public and privates that compete in the higher price points. Their paces in Houston in the quarter were in the 1s. And that's kind of where we were. And we decided not to try and bend that curve. I don't think that's forever. I'm probably not going to give it more than 6 months before we start pulling levers in different ways. But that just felt like in the middle of this and especially because we were hearing from a lot of folks, "Gosh, if rates were just a little lower, we'd be able to pull the trigger." Look, just in the last 3 weeks, we've seen almost 40 basis points of movement in the 10-year. And I feel like we might have a little bit of tailwind coming there. So look, I might be wrong, and we may have to adjust this in 30 or 60 days. But in particular, in these newly launched community with Zero Energy Ready, we've been kind of cautious. And in the meantime, we are trying to move through all of that non-Zero Energy Ready product, both the to-be-builts and the specs. And I'd say we're very competitive with that. But we didn't make any big shift to our incentive approach to achieve these results. And as I said, if you take Houston and San Antonio out, I mean, 28 was a little light to where we wanted to be. I think we did find the market slightly tougher, but we would have been within a reasonable distance of our expectations, but for really a set of conscious decisions in Houston and San Antonio. And look, I don't want to whine about weather, but I will say, and I haven't read all the transcripts from all of our peers, Houston kind of went through it. We had our division office closed for a week. We had about 60 employees without power for time periods ranging from 2 to 5 weeks. I think it was just a pretty tough quarter in Houston.

Alan Ratner: And certainly can understand the challenges there with the weather. I guess, hearing your comments about affordability and the $300,000 and the demand there. It's hard to say whether that's a function of that buyer being more constrained. We are hearing more and more anecdotes about softening on the edges among consumers and in the job market as we saw on the data today. You guys are in a fairly unique position because you're opening up a lot of communities over the next 18 months. And I'm sure, to a large extent, at least the near-term openings are kind of fully baked as far as product offerings and things like that. But given kind of what you're seeing on the consumer front, is there any thought or ability to maybe flex some of the product or plans or product types to cater more towards that kind of high $300,000, low $400,000 price point if that's kind of where the depth of demand seems to be today?

Allan Merrill: Yes. And again, every market is a little bit different. But let's stay in Houston for a minute. I think if you pull up our website and see we have a bunch of communities that have base prices in the high 3s. So we're not that far removed from where there was real enthusiasm in this quarter. And in fact, our product mix, and this is now not a Houston comment because I don't have it at my fingertips, but across our portfolio, our deliveries in the quarter were down, what, Dave? 80 square feet…

Allan Merrill: About 3% year-over-year. So we have had a little bit of a twist, if you will, in the portfolio, Alan, where we focused on slightly smaller core plans is one of the many strategies to deal with this affordability challenge. But we are selling a different home. And that's the thing that whether it's 2,100 square feet or 2,200 square feet or some other number on either side of that, we've chosen to take on standing out by offering a home that others can or won't build. And I think we need to just keep pressing that into the market. And it's with consumers, it's with realtors. I'm really optimistic when people see it, when they understand it, it's kind of like how could I live without this. But if they're doing a screen on a price per square foot basis, I don't think there's anything we can do that's going to flip our product. It's going to drop us down into that tier where what I would call the price-oriented builders are really competing, and I'm kind of glad about that because I don't think that's -- even if we wanted to do that, we'd be terribly well equipped to do so.

Operator: The next question is from Julio Romero with Sidoti & Company.

Julio Romero: Allan and David, you guys talked a little bit about Texas and the weakness you saw there. Can you maybe give us a quick state of the union on what you're seeing in your other geographic markets at the moment?

Allan Merrill: Yes. I will tell you that outside of those 2 markets, as I said, kind of 2.8%, there was strength by coastally. Felt pretty good about our Mid-Atlantic business. Virginia, in particular, showed some strength. Southern Cal and Las Vegas were pretty strong. Nashville in the middle of the country or not on either coast was pretty strong. So I would say that there wasn't a theme that I can really say strength versus weakness other than what we really saw is a fairly significant shift in the total number of transactions in that sub-$300,000 price point in those 2 Texas markets, which differed frankly, from what we had seen in prior quarters.

Julio Romero: And then I kind of -- the fourth quarter ASP guidance is a nice step-up from prior quarters. Is that just mix? Is that…

Allan Merrill: Yes. You're starting to see some Zero Energy homes start to come through, and those would sold as to-be-built.

Julio Romero: Yes. And then did you guys mention your land spend year-to-date and what you're expecting for the year?

Dave Goldberg: We talked about for the full year, Julio, we'd be at about $750 million. You can just back up what we've done full year -- what we've done year-to-date to get the fourth quarter estimates.

Operator: [Operator Instructions] Our next question is from Alex Barrón with Housing Research Center.

Alex Barron: So I heard you talk about some weather issues in Texas, but what happened in the southeast orders, seem to be a bit low there?

Allan Merrill: Yes. We -- it's funny -- we found ourselves in one of our bigger markets, Atlanta, between community count. We had a dip in community count. We closed out earlier in the year. We weren't able to pull forward the activations of the new communities. We had kind of a troughing in community count that was among the bigger factors.

Alex Barron: Yes, because we survey your community count, and it looks like it jumped up. So maybe it's just recent openings, I guess.

Allan Merrill: Yes, there's always a timing thing. Like the -- within a quarter, it can be a little bit misleading. If you are open on -- I'll just pick random dates, if you're open April 1, but you're sold out by April 15, well, you had it at the beginning. If your next community opens the last week of June, you have -- but you lost 70 days in between. There is not a demand pattern or a positioning issue. I'm pretty comfortable with our sales paces, and this community count is broad-based that is coming, what we've already had and what's in front of us. It's really distributed across our footprint. So I mean, there'll be quarterly anomalies in the data, but there really isn't a southeast message, I don't believe.

Alex Barron: And assuming the Fed does start to lower interest rates soon and that leads to lower mortgage rates, do you guys anticipate to kind of sticking with your same incentives or decreasing them? Or what's sort of the thought process as rates start to come down?

Allan Merrill: Well, the thing about incentives is the market really tells us where they need to be and what's the market? On the market's buyers, but it's also buyers who are influenced by what other people do, right? We don't exist in a vacuum. So I am hopeful that lower rates could lead to an environment where we'd see lower incentives. And I think that seems pretty likely. I can't predict what everybody else is going to do. And kind of back to my questioning with Alan at the beginning, we're not going to sit back and not compete for sales, right, be too proud to incent. So we will always compete. It's just sometimes you've got to pick your windows. We made that choice. I think if rates start to come down, we and other builders will definitely benefit.

Alex Barron: And If I could ask one more. I was happy to see you're starting to buy back shares. Is that more of an opportunistic thing? Or do you think it's more of an ongoing shift in strategy?

Dave Goldberg: It's Dave. What I would tell you is we have a very consistent model we use for capital allocation, and we consider -- when we look at excess capital in the business, returns and risk amongst share repurchases, debt repurchases and incremental land spend. We did, as you mentioned, buy back 1.5% of the company about that in the quarter. And we'll always be good capital allocators and focus on our models. And again, the model hasn't changed. So not much more to say than that, but it's a consistent model for excess capital.

Operator: Our next question is from Jay McCanless with Wedbush.

Jay McCanless: So I'm just trying to catch up and figure out the -- what you gave on absorption today because if you're going from 146 communities at the end of 3Q to over 155. I mean, are all those back half weighted? Or is there some timing issues as to why, just through the numbers getting bigger, that you wouldn't see a little bit higher absorption, especially with what Allan was talking about at Atlanta and some timing issues there.

Dave Goldberg: Well, I would tell you, Jay, we've assumed the absorption pace in the environment really doesn't change much quarter-to-quarter. I'm happy to take it offline on the math with you, but we kind of assume things look pretty similar to the way they look throughout the third quarter and the fourth quarter. I'm not sure if there's a math you want to kind of go through, but we can do it offline, if you'd like.

Jay McCanless: I mean if that -- if you were going to hit that 155 in the last month of the quarter, something like that, that would make sense in terms of not getting any better absorption.

Dave Goldberg: That's right. I mean the communities come online, as you would imagine, throughout the quarter, and there is some coming on in the latter part of the quarter.

Allan Merrill: Yes. We will definitely have some September activations. And so the average community count will -- I don't know if it will be the exact arithmetic average at the beginning of the period and the end of the period. If anything, it might be slightly weighted to the back half. But you take a number in the middle and use the same absorption rate, and that's kind of where our sales guide came from. And Jay, I think when we start to see some rate cutting. I'd like us to do, and I'm hopeful we're planning to do better. But honestly, from a guide perspective, we wanted to be pretty direct about -- if nothing changed in the environment, here's what the math is, and that's where the 1,100 came from.

Jay McCanless: So is it too much of a stretch to assume that sales activity from June to July didn't get much better? Or any color you could give us on what happened in July?

Allan Merrill: The first part of July looked a lot like June. The last week has been better. But one week doesn't create a foundation for a quarterly or an annual guidance, but I would definitely tell you the last week, in particular, has felt quite a bit better. But we try not to get too enthused about one week or too discouraged by one week. But I would say the back half of July has trended better than the front half.

Jay McCanless: And then the only other question I had in terms of specs, it looks like your finished specs were up a little sequentially, but up a lot year-on-year. I'm assuming there's -- you guys are going to try and blow through some of that. And that's why there is some conservatism around gross margin for the fourth quarter.

Dave Goldberg: I think your assessment is right, Jay, your assessment is correct, Jay. I wouldn't say blow through, but certainly, there's some -- any year, especially on non-Zero Energy Ready specs, which we talked about last quarter. We don't want to end the year with too many QMI, quick move-in homes so.

Operator: And that was our last question. I will turn it back to the speakers for any closing remarks.

Dave Goldberg: I want to thank everyone for tuning in to our third quarter call. We look forward to talking to you next quarter at our fiscal year-end. Thank you very much, and that concludes today's call.

Operator: Thank you. That does conclude today's conference. Thank you all for participating. You may disconnect at this time.

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