Beazer Homes USA Inc (BZH) 2002 Q2 法說會逐字稿

Good day everyone and welcome to the Beazer Homes Earning Release Conference Call for the second quarter of its 2002 fiscal year. Today's call is being recorded. Today's call is hosted by Ian McCarthy, the companies Chief Executive Officer. Before he begins, however, Lauren Bingham, the companies Director of External Reporting and Investor Relations, will give you instructions on accessing the companies slide presentation over the internet, and will also make comments regarding forward-looking information. Ms. Bingham, please go ahead.

Thank you, Operator. Good morning and welcome to the Beazer Homes Second Quarter Conference Call for fiscal 2002. During this conference call, we will be webcasting a synchronized slide presentation. To access the slide presentation, go to www.beazer.com and click on the Earnings Release webcast icon on the right side of the screen. You may also submit questions to us electronically from our webcast site. For those not connected to the webcast, you are also welcome to email your questions to investorrelations@beazer.com.

During this conference call we will be making forward-looking statements which are subject to factors which could cause actual results to differ. Please refer to page 29 of our 2001 Annual Report for details. Ian McCarthy, our CEO, and David Weiss, our CFO, will now give a 15 minute presentation followed by a Q&A session. At this time I would like to turn the call over to Ian.

Thank you, Lauren. Today we will be discussing our record results for the March quarter, including our back log passing the $1 billion mark for the first time. We will also update you on expectations for further growth in 2002 now that we have closed our acquisition of Crossmann Communities. This acquisition closed on April 17th, following the end of the March quarter. So, the March results we are discussing today do not include any contribution from Crossmann.

We are extremely pleased to announce another record-breaking quarter. Earnings per share of $2.56 for the second quarter of fiscal 2002 were up 33 percent from the second quarter of fiscal 2001, and represent the March quarter record for Beazer, as well as matching our all-time quarterly EPS record set in the fourth quarter of fiscal 2001. For the quarter ended March 31, 2002, we reported $503 million of revenue on 2,439 home closings; both March quarter records. Home closings were up 30 percent over last years March quarter, while net income was up over 38 percent. Our average price of homes closed increased 6 percent compared to last March, reflecting the growth in some of our higher priced regions, especially California and the Mid-Atlantic, as well as price increases in many of our markets.

In the March quarter we had 3,142 new orders, an all time record for any quarter, up 4 percent over last year's March quarter. This increase is noteworthy given last year's March quarter was extremely strong, setting our prior all-time quarterly record. New orders for the March 2001 quarter were up 19 percent over March 2000. New orders for the March 2002 quarter were strong in California, Florida and Texas, each of which we believe will continue to see a healthy level of order activity. In each of these states, demographic trends are very positive, fueled by immigration and housing supplier's constraint. In Southern California, in particular, we've seen both a high level of demand and a renewed ability to consistently raise prices. The Southeast region, other then Florida, was down for the quarter. We believe activity in this region has temporarily leveled off after an extended period of extremely strong growth. During the December quarter, new orders in the South East regions had been up 15 percent, and for the first 6 months of our 2002 fiscal year to date, orders in the Southeast are up 8 percent. In fact, for the first 6 months of fiscal 2002, new orders were up in all 4 of our regions.

With the record new orders we have been achieving, our backlog of homes sold, but not yet closed at March 31, 2002, set an all time record of 4,825 homes, up 19 percent over March 2001. While the sales value of backlogs passed the $1 billion dollar mark for the first time at $1.014 billion. We believe that the continued strength of our new orders and backlog reflect a fundamentally high level of demand driven by strong demographic trends, especially in the first time home buyers segment of the market, combined with an extremely low level of housing inventory in nearly all markets. For those who are viewing our slides you can see a graph of population growth in blue, compared to housing starts in red for the last 30 years. From this graph, a number of trends are evident. The first is that contrary to popular opinion, housing starts are not running anywhere near prior peaks. In fact, for the last 5 years, housing starts have consistently been running at $1.5 to $1.6 million, which is only the average for the last 30 years.

The second trend that you can see on the graph is that the gap between population growth and housing starts has widened dramatically during the past decade. This gap is especially evident if you take into account the results of the 2000 census, which shows that population growth during the 1990's, exceeded prior estimates by 6 million people, or 600,000 per year.

This strong population growth has come at a time when the housing supply has been significantly constrained, principally due to land constraints. We believe that housing starts over this decade are likely to average over 1.8 million, or approximately 20 percent higher then current levels. Other economic forecasters are also now coming out with similar estimates. Fundamentally, we believe that housing is going to continue to grow. In addition to strong population growth, another factor that is accelerating earnings trends for the large public home builders is the continuing consolidation in the home building industry. Our acquisition of Crossmann communities is part of this consolidation. On April 17th, we closed the acquisition of Crossmann Communities. With the closing of this acquisition, Beazer becomes the 6th largest home builder, with revenues of annual run rate of approximately $3 billion and a market capitalization of over $1 billion. Crossmann brings to Beazer an experienced management team and a strong land bank in a new region, the Mid-West United States. With an average sales price of under $140,000.00, Crossmann also strengthens Beazer's focus on serving the first-time home buyer market efficiently and profitably.

Both the closing of the acquisition and the initial phases of integrating the two companies have gone extremely smoothly. With respect to the closing, we were very pleased that the vast majority of Crossmann shareholders who made elections chose to receive as much consideration in Beazer stock as our pro-ration calculation would permit.

We begun working on the integration of Crossmann and Beazer during the two-and-a-half months between the announcement of the transaction and the closing. In particular, we have been working on mapping information from their underlying systems into our data warehouse and getting Crossmann up and running on our website, which should be complete within the next 60 days. In addition, we have begun discussions with some of our more significant suppliers, the building products manufacturers, about combining our national contracts and renegotiating these contracts based on the higher volume. We do not yet have good estimates to give out regarding the future savings from these ongoing negotiations, but we expect to provide targets for such savings after the close of our June quarter.

David will now comment on our current financial position and give guidance results for the remainder of fiscal 2002 incorporating the Crossmann acquisitions.

Thank you, Ian. We ended the March 2002 quarter with a debt to total capitalization ratio of 50 percent, down from 53 percent at March 31, 2001. Interest coverage, EBITDA divided by interest incurred for the last 12 months was over 5 times. Our very strong financial statistics reflect our commitment to maintaining a conservative financial position. This commitment remains intact with the completion of the Crossmann acquisition. Our debt to total capitalization and interest coverage for the last fiscal year was maintained after adjusting for the acquisition. In both cases, debt to total capitalization was 53 percent, interest coverage 4 ½ times, and our debt to EBITDA ratio was 2 ½ times, all extremely strong credit statistics. We expect our net debt to total capitalization to improve further the end of this fiscal year. This includes both the impact of the merger, as well as our issuance of $350 million of 8 and 3 percent senior notes due in 2012, which was completed on April 17th. We are extremely pleased that we completed this bond issuance concurrent with the closing of the Crossmann transaction and never drew down on the bridge facility put in place to complete the merger in the event that the issuance of longer term debt was not attractive. With this bond issuance, we were able to pay for the cash portion of the acquisition and fully repay all of Crossmann's debt, while extending the average maturity of our own debt at a lower rate then our outstanding senior notes. After this issuance of senior notes due in 2012, our debt outstanding has an average maturity of over 8 years; an extremely conservative position for a company turning its assets over 2 times a year. This is indicative of our overall commitment to maintaining a conservative financial position and strong credit statistics, even after a significant acquisition.

The rating agencies have recognized this commitment as Moody's reaffirmed the ratings of our senior notes of BA2 and Standard & Poors upgraded our senior notes from BB- to BB. We believe that these actions reflect both the conservatism with which we manage our financial position and the consistency of our performance with our communicated goals and strategies. We meet with the ratings agencies frequently and have always given them specific guidance on how we will complete any acquisitions, stating that we would either finance it in a way to maintain our current credit statistics or put in place a definitive plan to bring back those statistics, back in line in a short period. In the case of the Crossmann acquisition, we were able to do the former, structure the acquisition to completely maintain our current credit status. As a result, S&P upgraded us while the transaction was still pending and as we were in the process of issuing $350 million of new senior notes. We intend to continue to manage our financial position conservatively and to continue communicating with the rating agencies regarding our plans, and we strive to achieve further upgrades to our senior debt rating.

In addition to maintaining our conservative financial position after closing the acquisition of Crossman, we also reiterate our expectations for accretion from the acquisition. We expect that the acquisition will add $1.00 per share to EPS for fiscal 2003, its first full fiscal year as part of Beazer. As previously disclosed, this figure does not reflect any benefits from synergies that we do expect to begin recognizing during fiscal 2003. As Ian mentioned earlier, we expect to provide guidance in our targets for these synergies after the June quarter. With the respect to remainder of fiscal 2002, we expect Crossmann to be neutral to earnings per share, principally due to the impact of purchase accounting adjustments. We expect these purchase accounting adjustments, principally the write-off of inventory, to impact our margins in the June quarter and to a lesser extent in the September quarter. As a result, we expect our housing gross margin for the June quarter to be approximately 50 to 60 basis points below the gross margin in the March quarter, just ended, and in the September quarter to improve by 20 basis points relative to June. By the December quarter, the first quarter of fiscal 2003, we expect our gross margin to return to a more normalized level. Based upon the strong margins that we currently have in backlog, and the fact that Crossman's margins, excluding purchase accounting, are higher than Beazers, we expect margins in the December quarter to exceed current levels by 30-50 basis points.

During the March quarter, our average price of homes closed increased from $191,600.00 to $203,000.00, principally due to mix. With the addition of Crossmann, which has an average price of under $140,000.000, this mix will shift back downward. For the remainder of fiscal 2002, we expect our average price of homes closed, including Crossmann's to be between $175,000.00 and $180,000.00. With the addition of Crossmann, home closings and revenues for the second half of fiscal 2002 will be up dramatically, as we expect to close approximately 4,000 homes in the June quarter and approximately 4,600 homes in the September quarter compared to 2,276 and 3,067 in the June and September quarters of last year.

With that I will turn it back to Ian.

Thank you, David. This is an extremely exciting time to be one of the largest home builders in the United States. The combined effects of strong demographic trends, constraints on housing supply, and industry consolidation have produced, and we believe will continue to produce, dramatic increases in earnings for the top 10 public home builders like Beazer.

In particular, the consolidation trend has risen dramatically in recent years. We expect that to continue, if not accelerate. Over the past 5 years, the market share of the top 10 homebuilders in the U.S. has doubled from 10 percent to 20 percent. We believe it will double again over the next 5 years. We further believe that this fundamental structural change in our industry will continue to drive earnings growth for the large public homebuilders even with variability of macroeconomic factors. Over the past 3 years we have seen significant shifts in mortgage interest rates, which rose 200 basis points during 1999 and 2000, as well as a substantial downturn in the overall economy in 2001.

Over this period, housing starts were relatively flat. In fact, they have been basically flat at approximately 1.5-1.6 million for the last 5 years. During these 5 years, however, the top 10 U.S. homebuilders have gained market share and have increased earnings by a compound annual growth rate of 45 percent. While housing starts grew at a compound annual growth rate of only 2 percent. The earnings increases of the top 10 homebuilders have been both dramatic and consistent over this period, especially Beazer's. From 1997 to 2001, our EPS has grown by a compound annual growth rate of 63 percent. With the strength of our existing markets, and the addition of Crossmann, we are very well positioned for further growth. With our record results in our March 2002 quarter, earnings per share over the last 12 months are now $9.66 per share. This figure exceeds our prior EPS target for fiscal 2002 of $9.50 per share. We expect to continue to report increased earnings over fiscal 2001 for the second half of fiscal 2002. As a result, we are now increasing our target for fiscal 2002 earnings to $10.00 per share. This target represents a 22 percent increase over fiscal 2001 earnings of $8.18 per share. Both our earnings for the last 12 months, as well as our target for fiscal 2002, exceed our previously announced 5-year plan, announced in 1999 of achieving EPS of $9.00 per share by fiscal 2004. During this summer, after the close of our June quarter, and further progress in the integration of Crossmann communities, we intend to update our target earnings for fiscal 2003, which will include growth in our existing operations and estimates of the benefits of synergies from Crossmann. At that time, we also intend to update our longer term strategic targets.

With that, I would like to open the line up for questions and I would ask the operator to give the instructions for registering your questions.

Thank you. Congratulations on a great quarter and as well on the closing of the acquisition.

Thanks Chelsea.

Thanks Chelsea.

Just wanted to get a total lot count, including I know that at the end of December Crossmann had about 35,000 lots. Can you give us what you expect the total to be, kind of running forward?

Yes, Chelsea, the total we have now currently, between Beazer and Crossmann is over 68,000 lots in total. So, and of that, it is absolutely equally balanced between optioned and owned. The owned is 34,239 and the optioned is 34,530.

And Chelsea, overall that represents a little over a 4 year supply now, I would say about a 4 ¼ year supply, with Beazer being at just under a 3 ½ year supply and Crossmann being about, just under a 6 year supply. Again, with 50/50 owned and optioned.

Okay. Would you expect any land sales from either of your portfolio or of Crossmann's?

We really don't expect anything out of the ordinary. As you know, now and again we do have some lands sales from markets where we are developing a tract larger then we need for ourselves and we sell it, but that is just in the normal course of business. Nothing special now with the addition of Crossmann.

Okay.

I would say, however, you can expect to see that a land bank is a portion of the total and most likely coming down a little bit, not from land sales but just, I would say we probably won't be replacing the Crossmann land, replenishing it as much to a 6 year supply.

Okay. Do you currently have anything drawn on your line of credit?

No. There was nothing outstanding as of March and there should be nothing outstanding again at the end of this quarter. Periodically during the quarter we do have borrowings just for seasonal working capital, but there shouldn't be anything outstanding at the end of the quarter.

Okay, and just from an overall view, it looks like you have opened up some subdivisions out West and your order growth was really good there, as well you mentioned pricing is strong there. I am just trying to understand an average price going forward, bringing it down from where we are right now. Are you going to be increasing the level of homes in California, which might bring that price increase up a little bit more then maybe you expect?

Well, no, because, actually, that is what we have actually already seen. As you say, we did open quite a number of communities in the West, really over the last 6 months. That has produced some very strong sales and is currently producing closings which are disproportionate from the West, especially California, and that would account for why the average price is up so much. Going forward, we are opening more communities over the next few months in lower price points, again, really try to expand in the first time buyer segment and here I am talking about really Beazer excluding Crossmann for the moment. So, I would expect the Beazer alone average price would start coming back down again into the mid to high $190,000.00 range.

Okay. Thank you very much.

Your welcome, Chelsea.

Hey guys, congratulations on a great quarter.

Thanks, Carlos.

Thanks, Carlos.

I apologize because you have already gone through this, I kind of got on it late. Can you give us some insight in terms of why the margin was down?

Yes. The gross margin was down versus last year, but was actually up versus the immediately preceding quarter. Last year we had an especially strong quarter in terms of the margins, and there were two major contributors then for that; one was a big land sale which generated, or a couple of big land sales that generated $3 million in profits last year, and we don't have about those profits this year. The second was the options and upgrades of a portion of total revenues and the margins of those options, which again, were especially strong last year and not as strong this year. In remembering that these are the homes that we're delivering now are from the orders post September 11th. Still fairly strong and actually stronger than even we were anticipating at the beginning of the quarter in terms of options of upgrade sales, but not as strong as last year.

So have those options in upgrade sales trended back up?

Yes they have.

Okay. Secondly, SG&A we saw a slight improvement. I would have expected a little bit more given the volume you guys realized this quarter. Why didn't we see a better improvement on the SG&A line?

Well if you carve out the mortgage SG&A, which mortgage is still growing in absolute terms and growing in profitability, but its SG&A is a higher portion of revenues than homebuilding. If you carve that out, SG&A for pure homebuilding, homebuilding SG&A compared to homebuilding revenues, did in fact decline 40 basis points quarter-over-quarter, which is fairly significant.

Just a couple more items to give you, the other income line, that $1.4 million, can you give us some insight into that?

The other income, the biggest individual piece is title operations, which certainly have been growing as part of Beazer, although at this point we are at pretty well a full run rate for that. So, that is a piece of it. There is also some joint venture net income there, but title is the biggest continuing piece.

Okay, and just lastly. Crossmann's new order trends obviously have been relatively down the last couple of months. Are we going to see some sort of change in that, or should we expect the trend we have seen throughout the late 2001 and early 2002 continue for the next couple of months?

Now, you should expect it to continue, and I am glad you asked that and I certainly wanted to make sure we do talk about that. As you say, Crossmann's orders have been down year-over-year for the past few months and that reflects principally, some extremely though counts that they have had from last year where orders were up 51 percent in last year's March quarter and 65 percent in last year's June quarter. Then in the September quarter, that turned down 18 percent and down again in December. They had a number of new community openings in the early part of last year and extremely aggressive sales rate. And, coming against those though comps has certainly been tough. You should expect to see their orders continue down year-over-year through this quarter, April, May and June, although less progressively and then start turning positive in July to August, and extremely positive for the September quarter as a whole and December. So, you should expect that to start turning around. Net-net, and I realize their order trends have been somewhat more volatile then ours have been much more consistent, and that reflects a--we are much more on an even production and they just took advantage of opportunities when they saw to open new products. We'll be getting much closer to an even flow trend as part of Beazer.

Net-net for last year though, orders were still up for the full year even though up in the beginning part and down for the second half. This year we expect to see the flip side of that; down for the first half, up for the second half, and net-net still up for the year.

Okay.

Carlos, if I could just add on. We had an internet question here from Leo Dikimum (sp) which I think relates to this. It talks about can we explain what our strategy is going to be in those Crossmann markets, and I will tell you at this time we do intend to maintain the Crossmann name in the markets that they are building in. We intend to build in two separate product lines, so we'll have the Crossmann products and we'll have the Beazer products and we overlap at this time in Raleigh and Charlotte, North Carolina, but we are looking then to expand that out into, the Crossmann product out into some of our other markets, then also to bring the Beazer products back into some of the Crossmann products. So, we are looking at a fairly influential change in the way that we do business, trying to really push the two product lines out into the respective markets, and I think that will really help the orders, but obviously, that is going to take a bit of time to work on that, and we have to get the organizational structure and certainly the brand structure of how we are going to get that out into the market. We have to get that organized, but I think that will certainly help new orders going forward in the second half of this year and into 2003.

Okay very well. Just lastly, what was the accretive of impact on the Stamford acquisition on this quarter?

Actually, I don't have that in front of me, Carlos, so I'll need to get back to you with that.

Great guys, thanks a lot.

Thanks.

Thanks, Carlos.

By the way, one other internet question, Operator, if I may interrupt that we have related to Carlos' question, is what are the order trends that we are seeing into April? And, you know, we don't typically comment specifically comment on the orders in the middle of the month, but I certainly would say that orders have continued strong for Beazer and have been picking up for Crossmann relative to prior levels. I would note, however, that with respect to Beazer we are up an extremely comp from last year. It was our single best month ever until March of this year, so we wouldn't necessarily expect to see an increase from Beazer on its own.

I would also say that when we do come out with the April new orders, we will have full disclosure of certainly the orders from Crossmann added to Beazer and that impact, as well as showing on a pro forma basis what orders would have been if Crossman were included for the full period last year.

Operator, back to you.

Hi, good morning.

Good morning.

Just two questions. First, what was your cancellation rate in the quarter, and even more specifically, can you talk a little bit about cancellations in the Midwest?

The cancellation rate for the Beazer operations which, obviously are at the Midwest were around 21 to 22 percent, which is pretty well a normal level for cancellations. Cancellation rates in the Midwest is higher, but is down from where it has been in the past months. Their cancellation rates reflecting, I think principally, the lower price points is typically in the high 20 percent range, 28 percent or so.

Great, and then secondly, can you just refresh my memory on where you stand with stock buy-back authorizations and whether you would have an appetite at these levels.

We don't currently have an authorized stock repurchase plan, and have not been actively re-purchasing stock, the last time we did was about a year and a half ago we repurchased about 500,000 shares. I probably don't see us, right now, authorizing another repurchase just because we do see excellent growth in our existing operations and certainly one of our objectives was to increase our equity base as we did with the Crossmann acquisition and now having achieved over $1 billion market cap, that we think was an important objective.

Right, thank you.

Good morning everyone, congratulations on the quarter. Could you give us a little guidance on share count for the rest of the year, how many shares were issued in the deal and where that is going?

Sure. The shares issued in the Crossmann transaction were approximately 3.9 million shares. I would expect that Beazer's shares themselves pre-Crossman would trend up to approximately 9.6 million, which is an increase over this quarter reflecting principally a higher stock price, so combined approximately 13.5 million for the remainder of this fiscal year.

Okay, good, and on your closing status for third and fourth quarter, would you mind breaking those out Beazer and Crossmann for us?

That is not something we are ready to do right now. We are basically providing guidance on combined basis.

Okay, and finally then, what is your appetite moving forward for more deals, you have already worked on the integration and, you know us sale- siders are already looking for the next deal. What would you say, over the next couple years, would you say your rate of acquisitions is going to increase or say the same as it has been over the last couple?

Well Matt, as you know we firmly believe in the consolidation of the industry and there will be, and we believe, very infrequent public transactions and public-public transactions, but we do believe there will be a number of private companies that will be good opportunities for us to invest in. So, we do expect to look at new transactions, as you say, over the next couple of years, certainly, but we really want to make sure that we integrate the Crossmann transaction before we move forward. So, I think if there is an exceptional opportunity out there that we want to take advantage of, we will look at that, but really over the next 6 months I would say for this fiscal year, we really want to integrate Crossmann and get ourselves out into 2003, beyond that, certainly we do see opportunities. But we also see the opportunity to take market share in all of our markets because it is so much more difficult now for the private builders to operate in terms of buying land, getting financed and getting everything they need to operate. So, we are seeing that we can actually just take market share week-in week-out in many of our markets now.

Okay, great. That said, what markets do you think provide the best opportunities to take market share like that?

Well I think all markets really, particularly those where the constraint in land supply is the most visible one. In those I would put the California market we are seeing lots of, obviously, a very difficult market constrain the market around D.C, the Virginia and Maryland markets are very constrained, you know, only the larger players can really play in those markets. We seeing a lot of constraint in Florida, obviously the environmental issues there as well are constraints in those markets. So, I would say those were principally the ones we would look at, but I'd say even in other markets that have previously been very easy to build in, in Atlanta or Phoenix, are very much more difficult now and I think also, those markets, they all represent an opportunity for us.

Very good, thanks.

Thanks Mark.

Good morning, gentlemen. Could you, I think you--I probably missed this, but community count?

The current community count is, for Beazer itself is 290, up from 264, so up about 10 percent. Crossmann's community count, unfortunately I don't have that in front of me, but I know that it is about flat with last year and both we would expect to be increasing in the neighborhood of 5 to 10 percent over the next two quarters.

Okay. In your guidance of $10.00, for this year, what assumptions have you made in terms of pricing?

Well, I don't know if you ever heard during the call, but we did give specific numbers in expectations for average price combining Beazer and Crossmann.

Yeah I heard that, but that is really because of a mix and it seems to me that, you know, having been on a bunch of these calls, and you mentioned it yourself, that you've got land constraints, so the opportunity to raise prices seems to be pretty prevalent out there.

Yeah. Well, what is in the assumptions effectively is the pricing we are seeing today.

Okay.

Which is strong, but not necessarily future price increases.

Thank you. And then one final, probably, comment. The interesting since looking at your kager (sp) over the compound annual growth rate over the last 5 years, I wonder how many companies, public companies have that kind of a growth rate.

Well, I certainly appreciate the comment Tony, you know, we agree with you what's of course especially phenomenal about--that is not just a company that is basically an industry. And of course, an industry that is trading at a nine times PE, which doesn't make a lot of sense to us but, we would agree that we don't think they are--I would challenge anyone to find other companies, sizeable companies, that have that sort of growth rate over the last 5 years.

And, I would also like to point out that those that bank well, there are just temporary phenomena's like that in home building in when fortune ran their 500 listing in the Fortune 500 and showed total return to shareholders over the last one year, five year and 10 year periods, for each of those periods they showed about 50 industries, the only industry in the top 10 in each of those periods was home building. So, certainly, we believe that this is an industry that should be getting a lot more attention then it does.

We have an internet question here which I could just relate to that, which someone is asking about the new homes sales that were issued to yesterday, the fact that they are low and I think that this is affecting the larger home builder's stock price. Our view that is the figures are typically pretty unreliable. There was a--numbers were reduced by about 3 percent with a plus or minus variable factor of about 10 percent, so I think you need to look at these figures with a very skeptical view. But our view, with the level of consolidation going on within the industry, with the top 10 builders doubling market share in a 5 year period, when housing starts were very flat, we believe that only accelerates if the market goes down slightly. So we are very, very bullish on the opportunities for us as a company to maintain that type of growth rate over the next 5 years. That we really see opportunities that we fundamentally believe housing starts will go up over this period, but even if they go down, we think all that does is accelerates the consolidation of the larger builders. So, I think the opportunities are there and I think the

opportunities are there for our stock price as well to reflect that going forward.

And, the other thing about that new home sale figure, in addition to its unreliability initially is January and February are both revised upwards and, and obviously, we are seeing good definitive evidence that contrary to it; our own orders, up 4 percent versus an all time record last year. Most of the public homebuilders showing up orders grouped as a whole should be up. Purchase mortgage applications up, so clearly that data looks a little questionable.

Thanks, Tony. Operator, we will hand it back to you.

Thanks, good morning guys. If we look a little further even into `03, as we look at, I mean your like 2 quarters away from going in there so you probably have some idea as to generally how much you expect to roll out, or how much growth you expect to see in the community count, potentially for both Beazer and Crossmann and if there is any sort of geographical bias to that, that is different from your mix of locations already?

Before I tell you that, over the next 2 quarters we would expect to increase our community count both at Beazer and Crossmann in the neighborhood of 5-10 percent. And, I would expect that to continue throughout 2003, in other words, year-over-year being up in that neighborhood. In terms of mix, I would say that, on the one hand Crossmann will actually be opening more communities at slightly higher price points, especially if we bring Beazer products into their markets. On the flip side, we will be opening communities on the lower price side as we bring Crossmann Communities into our market. On a net basis, I would expect the trend in pricing to be up from the second half of this year, though not dramatically so next year. Geographically, certainly we will continue to open communities in California and then especially in Texas and Florida, both of which we think are significant throughout those markets where we are underrepresented.

Okay, great. And, one other thing, on the thoughts or comments splitting your stock. A number of your compatriots have said the stocks have moved up and have gone ahead and announced them recently.

Yes, Jim we have had the same question over the internet as well. So, just to look at that, we resisted splitting our stock while we were shooting for a $9.00 per share EPS. We didn't want to confuse that. Certainly, where the stock prices today and where we think it will be in the future, we will reconsider that with our board at the next meetings that we have with them. So, we certainly will look at that and we think that the one factor that really held us back from going for that was the fact that we wanted to show everyone, without any confusion that we could make $9.00 a share, the target out there. That's, we've now gone past that we've gone through that vigor, so we will raise that with our board at the next board meeting.

Okay, good. Thanks.

Operator, before you go to the next question we've got a number of internet questions that we would like to address. The first is commenting on where we are currently raising prices. And, I would say we are raising prices in the majority of our communities across the country, the only region where I say that was not applicable is the South East, other then Florida. In Florida we are raising prices, but through the Carolinas, Tennessee, to a lesser extent Atlanta, we are not raising as aggressively, although in some communities we are. Where aggressively we are raising prices is, top of the list, would probably be the D.C. area, which is especially land constrained and very little inventory and we are aggressively raising prices there. Southern California as well, we are certainly seeing price increases come in there.

Also, another question from the same person, about purchase accounting adjustments for Crossmann. What I would say is in giving the guidance that I had gave for the margins going forward for the next two quarters, down 50 basis points for the next quarter and up 20, sequentially for the one after that. That encompasses the Crossmann purchasing accounting adjustments in them. Right now, we don't have the exact dollar figure to go with that, but they are encompassed in there.

Along similar lines, we have a number of questions actually over the internet about how Crossmann will be reported going forward and breaking out Crossmann. What I'd say is with respect to the orders, you will be able to see certainly the Midwest region, it will be a brand new region for Beazer, and that is the bulk of Crossmann. So, you will be able to see that, as well as we will as a footnote present on a pro forma basis what the orders would have been with Crossmann added in for the year before. So, the extent that Crossmann has overlapped with us in some of our markets, that would be Raleigh and Charlotte principally, there it is going to be more difficult to break out because we are going to be combining the communities to some extent. So, the Midwest clearly you will be able to see a pro forma basis and I think you will get pretty full disclosure about Crossmann. With respect to Crossmann's earnings, we don't have the March quarter finalized, and that is basically because it is their final quarter as a public company and is a closing balance sheet requires a lot further review and audits then it typically would. Ultimately, we will be reporting in our financial statements pro forma figures, with or without Crossmann. So, you will get to see the Crossmann figures for the earliest part of Beazer year added into Beazer. So, you're also going to get that as well.

Okay, operator, you can ask the next question.

Great quarter guys.

Thanks, Chris.

Thanks, Chris.

Just real quickly, can you just kind of give an overview on labor, and on material costs and supplies and how that is trending?

Labor is not an issue at this time. It has been very steady now for the last 18 months or 2 years. In material costs, obviously, there has been a lot of concern about lumber prices, and to a lesser extent I would say there is some concern at the moment about steel prices. Would be what is going to happen there with these restrictions that are being imposed. So, I think that basically most of that has been priced in, certainly on the lumber side most of it has been priced in. We were able to lock our back-log, we have been able to do that and we have been able to pass any of those increases through to our customers. So, we feel okay with that. Obviously, we would like to not have import restrictions along with the industry and along with the whole of the industry here. We don't think that this is the right thing to do, passing this onto the customers within the country, but so be it. We have to work within the regime that is there. So, we are looking at how to make sure that we pass those on, where to lock in at the right appropriate time. So, we haven't seen it affecting our margins at this time.

Thank you very much.

Thanks, Chris.

Good morning guys, great quarter. Just wanted to see if you could provide us spec inventory levels for the quarter versus last year?

Sure. In terms of unsold, finished homes, last year we were at .8 per subdivision this year we are at .7 per subdivision, which I would categorize as basically no unsold finished inventory to speak of.

Sure.

So we are down to extremely low level of spec inventory.

What is that on an aggregate dollar basis?

Dollars of unsold finished homes is approximately $35 million.

So basically--.

No, no I take that back that is the wrong period. It is approximately $28 million.

So, basically, gone down on an absolute dollar basis as well as on a percentage basis?

I don't have last years figure in front of me, but yes I am sure it is down.

Yeah, I think it was 36 million?

Yes.

And, then as far as your total lot supply, I know you mentioned it was 68,000 Beazer and Crossmann. Do you have it just for Beazer standalone?

Yes, for Beazer itself it is approximately 33,000, with 16,000 owned and 17,000 under option.

Okay, very good. That is all. Thanks guys.

You're welcome.

Good morning.

Good morning.

Hi Tim.

Couple of questions. First, your average share in the third quarter should be roughly about 11.5 million. Is that right?

No. It is approximately 13.5 million.

But, don't you only get--that will be on the fourth quarter, but on the third quarter, don't you only take the 4 million shares from Crossmann and basically take half of those for your average shares, I'm talking before the calculations?

Well no, because when you say half it does come mid-April, where originally we projected it to close in May, which you would have been right. It is much closer to the beginning of the quarter. So, it may be a little bit below that, the 13.5 for September, but not much because there is only really two weeks there that it wasn't outstanding.

Oh, okay. That is because it closed up. And why did you manage to close it a month ahead of time?

The biggest impact was the fact that the registration statement was--the SEC chose not to review it, which we were certainly happy about, that we could close the acquisition quicker as a result.

Okay, the other question which does puzzle me when I had about the same units that you implied, I don't understand the 4,000 deliveries in the third quarter and the 4,600. I would have thought, given the fact that you normally have a pretty big--I know you jump in the fourth quarter that it would be a little bit less in the third quarter and a little bit more in the fourth quarter. Normally you have a fairly good jump in those two quarters, and plus you have had weak orders from Crossmann, or are they just going to be delivering a lot of homes out of backlog?

No, when I say that there are two main reasons why it is going to be flatter then usual, Tim, and that is, number 1, we have been striving to get to that, to a more even of a flow production. Part of that is with the opening of communities, open some communities earlier so you don't have that big bubble coming through in the second half of the year which is a much more efficient way to operate the business we do with even-flow. The second is the complete lack of spec inventory. We've got that much higher deliveries toward the end of the year's where typically you will sell a lot of spec and you are able to close it in your fourth quarter or in the fall. And, with the complete lack of spec at this point, you are not going to get that increase.

Okay, and lastly, can you give me what you expect the charges or the lack of earnings affecting gross margins of the Crossmann's backlogs for the third and fourth quarter. What will that affect gross margins on a dollar basis?

Well, we gave the percentages Tim.

I know you gave the percentages, but do you have a dollar, I want to back it up to see what is exactly happening.

I'll tell you what your going to need to do is sort of plug to it to get there. We are not giving out the dollars.

And, partially because we have not been able to finalize the determination of the dollars, and there is going to be a lot of mix issue going on but net-net, this is about the margin we expect to produce.

And basically, if I recall it is like down 40 to 50 basis points in the next quarter and another 20 in the next quarter after that?

No, it's the other way around. It is down 50 basis points, you are correct next quarter, and up 20 from that down 50. So, effectively down 30 from today in the September quarter.

Oh, it is down 50 and then it is down 30?

Right.

From the--and your talking both from the second quarter level, not--.

That is accurate.

Okay, what I thought you were talking from the third quarter level.

Down 50 then down 30.

Yes, from the second quarter.

So, up 20 versus the third.

Correct. Exactly.

Byzantine, but I finally got it.

Glad you got it.

Thanks, Tim.

And at this time, there appears to be no further questions. I'll turn the conference back over to you, Mr. McCarthy.

Actually, we have one further internet question which I can not resist attempting to answer. Why do home building industry stocks such as Beazer trade at lower multiples then other industries? Obviously, that is a bit of a puzzle and a frustration to us, especially given the earnings growth of the industry. Certainly, there is an awful lot of debate out there, some of it with a lot of misinformation about where housing is growing and whether or not housing is at a peak, or if there is a bubble. Fundamentally, we think housing will remain strong, and that gets at a lot of the demographics, but unfortunately that is not yet understood. And, as it begins to be understood by investors, we believe that the home building stocks will gain and get back to what is just even a normal margin for our industry, which is sort of a 12-14 times PE. So, we think fundamentally, it is a lack of, unfortunately a lack of understanding and a lot of people trading in the stocks. For instance, the 2 million plus shares of Beazer that are short, over 20 percent of our float. Obviously, people are not studying the Beazer figures and looking at the macroeconomics.

I'll turn it back to you now.

So, we fundamentally believe that our stock prices should reflect the earnings growth that we have been able to achieve as Beazer and as part of this industry that is really consolidating, so we look forward to the future with a lot of hope.

So, with that, obviously, we are going to wrap the call up here. David and I will be available for questions for the rest of the day and the recording of this conference call, with the slide presentation will be available by 1:00 p.m. today in the Investor Relations section of our website at www.beazer.com. And, we look forward to talking to you again on July 24th for our June 1st quarter earnings conference call.

Thanks very much and goodbye.

That concludes our teleconference for today. Thank you for your participation.