Beazer Homes USA Inc (BZH) 2002 Q3 法說會逐字稿

Good day, everyone. And welcome to Beazer Homes earnings release conference call for the third quarter of its 2002 fiscal year. Today's call is being recorded. Today's call is hosted by Ian McCarthy, the company's chief executive officer. But before he begins, Ron Warren, the company's director of investor relations, will give instructions on accessing the company's slide presentation over the Internet, and will make comments regarding forward-looking information.

Mr. Warren, please go ahead.

Thank you, Operator. Good morning, and welcome to the Beazer Homes third quarter conference call for fiscal 2002. During this call, we will be Webcasting a synchronized slide presentation. To access the slide presentation, go to www.bezer.com, and click on the earnings release icon in the center of your screen. You may also submit questions to us electronically from our Webcast site. For those not connected to the Webcast, you're also welcome to email your questions to Investor Relations at Beazer.com.

Now during this call, we will be making forward-looking statements, which are subject to factors that 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 10 minute presentation followed by question and answer session. At this time, I'd like to turn the call over to you.

Thank you, Ron, and good morning. Today we will discuss our results for the June quarter, which set all-time records on a number of fronts, including home closings, net income, EPS, new orders and backlog. And we'll also be discussing our increased EPS target for fiscal 2002, and our expectations for further growth in fiscal 2003. We're extremely pleased to announce all-time record results for the quarter, ended June 30, 2002. Our first quarter including Crossman Communities.

These results demonstrate the growth and improved profitability that we expect to achieve, both from this acquisition and from the expansion of our existing Beazer operations. Net income of $34.6 million was up 81% on a 74% increase in home closings. This net income produced all-time record quarterly EPS of $2.59 for the quarter ended June 30, 2002, up 25% from the June 2001 quarter. This increase in EPS was achieved on a 45% higher [INAUDIBLE] share counts, which includes the shares issued in connection with the Crossman acquisition.

Our closings for the quarter are 3,960, include 1,203 closings from Crossman Communities. Excluding Crossman, [INAUDIBLE] home closings would have been up 21% for the quarter. From these figures, home closings up 21% without Crossman, and 74% with Crossman, you can see that we continue to achieve growth in our existing operations while adding further dramatic expansion with our Crossman acquisition.

During the June quarter, we had 4,227 new orders for homes, a 47% increase over the June 2001 quarter. On June 30, 2002, we had 7,627 homes in backlog, up 65%, with a sales value of $1.4 billion, up 62%. New order and backlog figures for the quarter set new, all-time company records. New orders for the quarter include 1,299 new orders from Crossman operations. Excluding Crossman, Beazer's new orders for the quarter would have been 2,928, setting a new June quarter record. New orders for Beazer's operations were up 2% over June 2001, which was a very strong quarter, with orders up, orders up 31% over June 2000.

We believe that our record new orders and backlog demonstrate the continued strength of the US housing market. We've long maintained that the current strength of the housing market is based on the imbalance between the growth in population and a limited housing supply. Last quarter, we presented census data showing the divergence between population growth and housing supply over the last 30 years. This data demonstrated that demand was far exceeding the house, the supply of housing.

This week, USA Today presented the same information, graphically illustrating that although the nation added more people in the nineties than in any other decade, home construction fell to its lowest levels since the 1960s. The supply of housing is severely constrained by the land entitlement process that limits the supply of permitted, finished lots. The shortfall in housing is especially acute in the affordable price range. At Beazer, we have increasingly focused on this issue, attempting to efficiently design and construct homes and communities targeted for the first time and first move up homebuyer. Our recent acquisition of Crossman reinforces this focus.

With an average price of $136,000 for homes closed during the June quarter, Crossman expands our emphasis on affordability, and will help fuel our future growth in this underserved segment of the housing market. David will now comment on our improved profitability and strong current financial position.

Thank you, Ian. As Ian reported earlier, we achieved an 81% increase in net income on a 74% increase in home closings during the June quarter. The increase in net income was even more dramatic relative to our increase in revenues, which were up 66%. These results demonstrate the continuing improvements that we are achieving in our profitability. Our operating profit margin increased 10 basis points, relative to last year's June quarter, as did our [INAUDIBLE] margin.

This improvement takes into account the $10.8 million, or 150 basis points, negative impact of purchase accounting adjustments related to the Crossman acquisition. These purchase accounting adjustments are included as a reduction for gross margin during the June 2002 quarter, and reflects principally the write-up of homes under construction to fair value. Our operating profit margin before Crossman purchase accounting adjustments during the June 2002 quarter was 8.7%. Up 160 basis points from a year ago June quarter.

In addition, our gross profit margin before interest, excluding the Crossman purchase accounting, would have been accounting, would have been 21%, up from 20.4% in last year's June quarter, and up potentially from 20.2% in this year's March quarter. As the impact of purchase accounting diminishes over the next two quarters, we expect to report significant year over year increases in our gross profit and operating profit margins. We also expect our gross profit margin to improve sequentially over the next two quarters.

This improvement should be approximately 50 basis points per quarter. These increases are a, in our profit margins reflect our continued ability to raise prices in many communities while our costs remain stable, along with a higher profitability that we expect from our combination with Crossman Communities. I would now like to discuss our extremely strong current financial position. At June 30, 2002, our ratio of debt to total capitalization was 50%, an improvement from the 54% level of June 30, 2001.

Interest coverage, [INAUDIBLE] divided by interest incurred, for the last 12 months was 5.1 times, compared to 4.4 times a year ago. We have improved our financial statistics, while completing a major acquisition. This reflects our commitment to maintaining a strong balance sheet at a conservative financial position. Recognizing this commitment, Standard & Poors upgraded our senior debt from double B minus to double B during the quarter, while we were closing the Crossman acquisition, initially $350 million of new senior notes.

We expect our financial position to improve further during our fourth fiscal quarter, and expect to end our fiscal year on September 30 with a debt to total capitalization ratio below 50%, no borrowings outstanding under our $250 million revolving credit facility, and a higher cash balance than at June 30. I'll now turn it back to Ian.

Thank you, David. The integration of Crossman Communities and Beazer Homes is proceeding extremely well, as demonstrated by our strong operate, operating results for the June quarter. We expect the benefits of this acquisition to accelerate over the coming year, and we target achieving profit margin improvement in fiscal 2003 relative to 2002. Given our strong profitability, increased level of backlog, and prospects of future growth, we are now able to both raise our targets for earnings per share in fiscal 2002, and establish a target for significant growth in fiscal 2003. Our target for earnings in fiscal 2002 is now $10.25 per share, up from our previous guidance of $10 per share.

Recognizing both continuing growth in our current operations, as well as excretion from our Crossman acquisition, we are establishing a target of $12 for EPS in fiscal 2003, up 17% from our revised target for fiscal 2002. This EPS target is based on achieving over $3 billion in revenue in fiscal 2003. With that, I would like to open up the line for questions, and I would ask the Operator to give the instructions for registering your questions.

Thank you, ladies and gentlemen. Question and answer session today will be conducted electronically. If you'd like to ask a question, you can press the star key followed by the digit one on your touchtone phone. Again, star one for questions. And we'll go first today to [Chelsea Inginito] at Merrill Lynch.

[Chelsea Inginito]: Hello, good morning, gentlemen, congratulations on a great quarter.

Hi, Chelsea.

[Chelsea Inginito]: Um, going forward, I just wanted to discuss a little bit about your possible uses for cash, stock prices down significantly year to date. And I just wanted to know what, how you were prioritizing, um, share purchase versus, um, land purchase. Um, future acquisitions as opposed to also the debt paydown.

Uh, well, Chelsea, I think as David said, we, uh, didn't have any borrowings under our revolver at the end of June. We don't expect to, uh, in September, either. So really, we're not looking at debt repayment at that point. Uh, we look, obviously, we're looking at the market, and we recognize what's happening in the market, and we have to take into consideration the possibility of a share buyback. As you well know, uh, we have had two, uh, share buybacks, one in 1997, one in 2002.

Uh, we fully fulfilled those commitments at that time, and we will look at this again. What we have to compare it to is, uh, the strength in our business, and the prospects for our business. We've come out with guidance today, uh, that's forecasting a 17% growth next year to $12 a share. We see a lot of opportunities in our business. So we have to compare that against the, the, uh, share back, buyback route. So, we have a board meeting in two weeks' time, and we will discuss this fully at that board meeting.

[Chelsea Inginito]: Can you just remind me if you actually have an authorization in place right now?

We do not at this time. We fully fulfilled both of the authorizations that we had, as I say, back in '97 and then again in 2000.

[Chelsea Inginito]: Okay, and then just, um, lastly on the debt, did you, um, take out any of the term loan, or is that included in the total debt number?

No, the term loan is included in the total debt number. Uh, and we, we didn't pay any of that down. Uh, I think it's that at this point, we've got no revolved outstand, uh, borrowings outstanding. So if we did want to pay down debt, it'd have to be the longer-term debt, and we don't have any, any plans to do that currently.

[Chelsea Inginito]: And the balance on the revolver, the full revolver amount is?

Uh, the, well the full revolver amount could be $250 million, uh, $250 million available, but the, the balance is zero.

[Chelsea Inginito]: Great, thank you so much, and congratulations.

Thank you, Chelsea.

And we'll take our next question from [Robert Manowitz], UBS Warburg.

[Robert Manowitz]: Hi, good morning.

David Weiss. Hi, Rob.

[Robert Manowitz]: My, uh, question is kind of, uh, broad in, in, in nature, I guess, or scope. Um, and that is, I'm wondering if you guys have a feel, uh, for how exposed your buyer or the first-time buyer, uh, is to the equity markets today. Don't know if you collect data, you know, via surveys or, or maybe just in the loan underwriting process. But I'm trying to get a sense whether it's different today than it has been historically.

Well, we don't really collect our data, in terms in it's very difficult for us to know what exposure they have. Obviously, I would say, you know, our buyer is far more focused on their employment and, and the conditions in their local market than I would expect many our buyers, even though they're typically younger, they may well have 401Ks which have been impacted in this. You know, I think that, uh, uh, I don't think the effects of the stock market is really going to have that big an impression, uh, oh our buyers.

I think they, as I say, will be far more focused on their actual employment than the conditions they have there. So, you know, I don't think it's going to affect them very strongly. I think that, you know, we, uh, as we pointed out in the, in the presentation, you know, we're just really trying to catch up in terms of the housing, uh, production levels are really not sufficient to meet the demand. And so I think that there is plenty of, uh, demand there from the buyers. And I think they have the resources. Obviously, they have, you know, incredibly low interest rates at this time.

Making affordability, you know a real, an opportunity for them to get into the housing market. So we, we really don't think that we're going to be impacted in any way by let's call it the negative wealth effect. We really don't think that's going to affect our buyers.

[Robert Manowitz]: Great, thank you for your insight.

Thanks, Rob.

And we'll go next to Steven Kim at Solomon Smith-Barney.

Hi, it's Jack Barren for Steven Kim. Congratulations on the quarter.

Thanks very much.

A couple of questions. I guess first of all here, you raised your guidance for the year, uh, from $10 to $10.25. And if, uh, my math is correct here, it looks like you beat the, uh, third quarter consensus by about 19 cents. So I guess implicit in the guidance for the, the new guidance for the year, you're, you're pretty comfortable with where the 4Q estimates are at this time?

Uh, that's correct. Uh, as, as you inferred, the, the previous guidance we had given was $10, and, uh, we've already, uh, beat the, the third quarter advisement by the 19 cents. Um, so that, that would say that the fourth quarter should be in line with a better than, uh, expectation.

Okay, great. Next, um, in terms of the sub count growth, or community count growth that you're looking for in the next couple of quarters, I was wondering if you could articulate that for us, and also tell us, um, what sort of an order growth assumption is implied in the $12, um, EPS target for '03?

Sure. Uh, in terms of, uh, the subdivision count, we will see that, uh, coming up over the next couple of quarters. I would say cumulatively, five to 10% over the next, um, over the next three quarters. Um, the order growth that we are inferring in, uh, in that, uh, will be actually slightly better than, uh, than say the 5% level there, considering the fact that as we're going through this quarter especially, the comps get progressively, much of the, the comparisons to last year get the full progression, it'll be much easier.

Uh, the month of July, uh, itself is our toughest comp, uh, comparison during the quarter. Uh, and for that, our expectation would be for orders to be about flat, and that is what our experience is right now. Uh, up against a, uh, about 30% up last year. Then, uh, for August, uh, the comparison for Beazer is reasonably strong, and the comparisons for Crossman stocks become progressively much weaker. And we expect to see up orders on a proforma basis. Really from there forward through the end of the year. Uh, probably in the neighborhood of, uh, five to 10%. And that's what's in the, um, the $12 figure for next year.

Okay, great. Thanks very much, congratulations on the quarter again.

Thanks again.

We'll go next to John Stanley, UBS Warberg.

Morning, gentlemen.

Hi, John.

Hey, John.

Uh, a couple of questions. Uh, first on the margin, David, uh, I, I didn't see any discussion of the, the charts that you had, uh, talked about in the press release I guess a week or so ago. Was that also buried in the gross margin?

Yeah, that, that is included in the, uh, $2.6 million of included and cost of sales during the quarter for that.

So even better than it looks. Um, do you have the rough figures for what the purchase adjustments will be in the, uh, in the next two quarters?

I would say for next two quarters, it should probably be about half of what it is currently, so in the neighborhood of $5 million. Uh, in the, uh, first quarter of next year, probably about two to $3 million. And going forward from there, it should probably be about a million dollars a quarter going forward, which takes into account the, the land piece of the purchase accounting.

Okay. Now, even if I add that to purchase adjustments and the reallocation, it looks like your margins in this quarter were, were better than what a blended margin would have been for you and Crossman in the prior quarter. So it looks like both the traditional Beazer business and the Crossman business both had good performances, uh, and from a margin prospective. Is that interpolating correctly?

That, that is. You're, you're, you're correct on them. The margins have come in, uh, better than our prior margins, and reflect, uh, price increases that we're getting. Uh, if, well, two things. One, price increases that, uh, that we're getting in, uh, the core Beazer business, which are raising our margins. Uh, and then the fact that the Crossman margins pre-purchase accounting were better than the Beazer margins. Um, so.

All right. I think most of us expected, you know, maybe this quarter we'd see some margin compression, because of last fall's, uh, slowing in demand. And, and the effect of some incentives that were at least talked about. But it doesn't seem like it's showing up in anybody's numbers, is that true for you, as well? That the incentives really just didn't have that much impact?

Yeah, I would say so. There, there were fairly minimal incentives, and if you remember back to the December quarter last year, uh, our audits were quite strong.

Right.

And what, every time we saw weakness, it was really right, you know, uh, in the month or so after September 11.

Um, shifting to the, uh, the community account, you, you indicate [INAUDIBLE] up 2%, excluding Crossman. What were your community account of ex-Crossman in the quarter?

Our communiqué was actually about flat, uh, ex-Crossman, which, um, which includes the fact that, uh, we had previously expected it to be up more in the neighborhood of two to 3%. We've had some delays in community openings, uh, especially in the mid-Atlantic region, which explains why, uh, and, and the actual subdivision count in our mid-Atlantic region is down currently. But we have a number of communities coming online there. Uh, that happens to be actually a very strong region right now, and we're raising prices quite aggressively, and that is contributing very well to our margins.

Uh, so the fact that orders were down in that region is not at all representative of what's going on there. It's much more the opening of communities.

And, and the five, 10% increase in the community count that you, uh, expect over the balance of the year, is that mostly in the Beazer business or is that going to be spread between you and Crossman?

It's pretty well spread between us and Crossman.

Okay. Um, in terms of Crossman's orders obviously have been down quite a bit, versus some very high levels last year. And as you indicated, the comparisons get a lot easier. But, but [INAUDIBLE], you know, if you look at them for maybe a calendar 2002, are they going to come in pretty much where you had expected? And, and generating the kind of volumes that you had anticipated when you, you looked for a dollar per share accretion to your earnings next year? Or do they have some work to do?

No, that, that's, uh, you're exactly right. And they are coming in, uh, pretty well in line without expectations from the dollar accretion that we had, uh, talked about earlier. And you do really need to look at it, uh, on a full 12 month basis. Uh, their, their business in the past, uh, had been lumpier, I guess you'd say, than, than ours, going through periods of very, very high order growth. Uh, they opened a number of new communities at aggressive sales paces. And then, uh, much lower following it. And looking through that on a 12 month basis, it's right in line, uh, with our, uh, with our estimates.

Good. And lastly, uh, what, what's the, uh, current lot count, David?

Uh, the current lot count is, bear with me one second, John. Um.

Seventy-five thousand, nine hundred twenty-three.

Thank you, Ian, 75,000, as Ian says, of which approximately 36,000 are owned and, uh, approximately 39,000 under option.

Great. Thank you.

Thanks, John.

We'll go next to Jim Wilson, J & P Securities.

Uh, thanks. Uh, good morning, guys. Um, I wonder if, um, you can just sort of follow up on that, uh, unless I missed it along the way. [INAUDIBLE] in your community count currently, and even if you sort of, uh, sort of have it separated between Beazer and Crossman, and then, um, what your thoughts are as to where that might stand, uh, let's just say at the end of the year. Sort of, sort of a sense of a rollout? And I guess ideally, if you have what it was a, a year ago, as well.

Okay, with respect to where it is right now, our, our current community count is 458. Uh, which includes 276, uh, Beazer, and 182 Crossman. Uh, that 276 is, as I said, about flat, uh, for Beazer. Uh, and the Crossman is actually down slightly, about 5%. Uh, the total community count of 458, uh, we would expect to go up between five and 10% over the next three quarters as I, as I said. And probably pretty reasonably spread out.

So, you can expect that to go up, um, 35, 40, uh, communities that end up, uh, around 490 or so communities, three quarters out.

Three quarters out, okay. And, uh, time, timing wise, is that a generally fairly, uh, steady rollout, you know, give or take per month?

It should be. Uh, it should be, certainly. Um, but as I said, we, we are seeing some delays in getting communities online in, in some markets. Uh, like the, the mid-Atlantic. The, um, uh, the process is not getting any easier. Uh, but yeah, but, uh, it should be pretty evenly spread out.

Okay. So, uh, so you'd expect, uh, some reasonable, uh, upward trend as you move forward the rest of the year in, in, uh, order counts, all other things being equal?

That's correct.

Okay. All right, very good. Thanks.

Thanks, Jim.

We'll go next to Carlos Rubiero, Credit Suisse First Boston.

[Carlos Rubiero]: Hey guys, congratulations on the quarter.

Thanks, Carlos.

[Carlos Rubiero]: David or Ian, I just was, uh, hoping that you guys can give [INAUDIBLE] in terms of, uh, letting us know which markets are really seeing some strong results, and then, uh, any other markets that may be kind of soft, or just, uh, slowing down a bit.

Well, Carlos, I'd say that the, you know, the strongest markets, David talked about the, the mid-Atlantic, which is very strong for us, but it's really constrained in terms of supply. You know, this whole discussion about supply and, and the point on community counts, it is getting very difficult for, for the entitlement process. We really see that as an opportunity, though. 'Cause if it's tough for us, it's twice as tough for the, for the smaller builder out there.

So, this is an opportunity for us, and that's holding a very strong market back very slightly there. The other market that has that has that real constraint is southern California. But we're seeing very, very strong orders in California. So I'd say, you know, that's also a very strong market for us. Uh, the southeast is fairly flat. You know, Atlanta's actually been quite strong recently. Uh, the rest of the market there, Florida, quite strong. Uh, the rest of the southeast, though, fairly flat.

Texas is very good for us. We've really moved into a lower price point in Texas, uh, particularly in Houston. That's been very strong for us. Uh, cross the mid-Atlantic, we see, uh, sorry, across the Midwest, we are seeing some strengthening. Obviously, it's very difficult, as David pointed out earlier, with the comparison for Crossman, because they had such high comps for the first half of the year, and such low comps for the second half.

But we are seeing some real strengthening there, and we, we fully expect the second half of the year there, uh, to be very strong against their prior year comp. So, I'd say across the board, uh, a fairly healthy big picture. Uh, we feel, you know, very good about the picture, as we said, at this time.

[Carlos Rubiero]: Okay, in terms of, uh, cancellation rates for the quarters?

Uh, cancellation rates were, uh, up slightly from usual. It's about 22, 23%, whereas we had been running more like 20 to 21%, but nothing out of line.

[Carlos Rubiero]: Okay. And, and just yesterday, one of your, uh, competitors out in the Midwest noted that they, they started seeing a lot more of their buyers or potential customers not getting financing. Have you guys seen that in those particular markets in the Midwest?

Uh, we haven't seen that. We haven't seen that so far. We, uh, you know, we, obviously, we have our own origination company, and we're processing those loans, and we haven't seen that at all. I mean, the fact is the, the rates are so low now, the affordability there, uh, is there for the buyer. So we, we feel very comfortable with that.

[Carlos Rubiero]: Okay, great guys, thank you.

Thanks, Carlos.

And we'll go next to Matt Moyer, AG Edwards.

[Matt Moyer]: Hi. Uh, congratulations on the quarter, everybody. Um, uh, most of my questions have been answered. Could you, um, I'm kind of following up on John Stanley. Speak about SG&A. It was a bit lower than I was expecting. Um, but I would expect maybe some variable compensation costs in the fourth quarter. Um, what kind of levels can we expect moving forward? Is the sub-10 number, sub-10% numbers going to be pretty good, moving forward?

Uh, yeah, that, uh, that, that should be pretty, pretty well the figure, moving forward. Um, uh, as a percentage.

[Matt Moyer]: Okay. And could you, uh, tell me what was in other income that made that also a little bit, uh, um, bigger than, than, uh, I was looking for?

Sure. Uh, other income I'd say includes about, uh, a million and a half of, uh, non-recurring type items. Uh, a gain on sales of approximately, uh, $3.3 million. And then it also includes, uh, for the two weeks, uh, that, uh, we didn't, uh, have Crossman, approximately 1.8 million of imputed interest. So, and they asked for 1.5 million. Uh, the remaining two million is sort of normal recurring items, uh, although they'll have some variability. Uh, things like, uh, our title operations, uh, the income from that. Uh, interest income. Uh, so in general, you should probably, that, that figure will increase going forward from where it's been. It's been running sort of half a million to a million per quarter, and going forward it'll probably be more like, uh, a million to two million, uh, most quarters. Uh, this quarter was, uh, was about a million and a half above that, for one-off items.

[Matt Moyer]: Okay, great. Thanks again.

Thanks, Matt.

We'll go next to Tony Campbell, [Knot Partners].

Good morning.

Good morning.

Uh, congratulations on your numbers.

Thank you.

Um, I, I, I have a couple of questions. One, have you noticed any, uh, uh, change in traffic?

Uh, traffic's good. We, we're seeing good traffic at this time. And it seems to be very well qualified. Obviously, the rates are really helping that. But it's, it's good qualified traffic at this time.

Okay. Um, I'm wondering, um, 'cause I guess one of the things that I kind, uh, I can't, uh, I, I kind of find interesting, uh, I'm wondering if you could kind of address some of your markets, uh, and where I'm going with this, I think the number in California, there's 250,000 family formations, and 150,000 homes are built, which leads to this pent-up demand. I'm wondering if you could give us a flavor for some of the other regions, if, uh, if, if you have, if you know those numbers.

Because, 'cause frankly, um, we all go back to the tech wreck, and there was a great fear that California was falling off, uh, and you know, that basically business was just going to take a, an incredible dive in California, and that's not exactly what happened, uh, uh, albeit northern California did have some impact. Um, but I, I think that might be helpful, if, uh, you could perhaps discuss that. And then I have a further question or comment.

Okay, Tony, I, I don't have those figures. The, the, the comparable figures that you quoted for California are in front of me today. But what I would say is, you know, the point that we reference in the, in the presentation, and the fact that, you know, this whole divergence between population growth and housing, it's a real fact. It's a real market there that is being underserved. We have to, as an industry, house that population growth. And when you saw, uh, population growth in the nineties of over 32 million people, you know, the previous, uh, decades going back to the sixties, you know, the population growth had only been in the twenties.

So this is a real, solid figure that we have to house that, uh, that increase in population. And then when you see, throughout the country, the housing staff, uh, down at levels comparable back to the 1960s, that we built as an industry far more homes in the seventies and eighties, when there was, in fact, less demand, we are absolutely out of line now with, with the supply and demand equation. So, I think the point that you're raising about California is very comparable, particularly in the markets where there's an in-migration effect.

And I've put in there, uh, Arizona, Texas, Florida, Georgia, to the extent of the markets that we build in, there was a real, uh, flow, and this population increase has been really, uh, increased by a lot of in migration. So we see a real demand there, and I really think that people, um, you know, the talk of is this housing surge going to, uh, end, I just don't think it is. I think that the real factor is that we, as an industry, we're underserving it.

The second key factor to, to consider for the investors and the public homebuilders is the public homebuilders are taking market share. We're getting guidance today for 17% increase in, in earnings next year, in 2003. We do not in any way expect the housing market to increase by 17%. But we expect to penetrate that, increase our market share, become more efficient in the size of the operation and the expanded operation now, and get 17% earnings growth at that time.

But it's not based on, uh, expecting the market to be that strong. So, you know, I think that consolidation and therefore all the large public builders is a very important factor as well, in that equation that you're talking about.

And I guess the, uh, I guess I'll make, uh, someone asked about sources and uses of funds, I think early on in the call. Um, I would just point out that, uh, one of your competitors is pretty successful in initiating a, uh, purchase program when, uh, the stock trade is below book. And I'm referring to Standard Pacific. Uh, when everybody thought California was falling off the map. I would strongly urge you go, uh, to step up to the plate and do the same thing.

Well, Tony, as I said to Chelsea, uh, earlier in the call, that we, we always look at that. We have had two programs which we fully, uh, fulfilled. And I think that's an important consideration, that if we go into this, we'll do it with the expectation that we are going to, uh, fulfill it. So, we have to take it very seriously. The other side is that we see so many opportunities. This is, uh, obviously, uh, we believe a short-term, uh, hit to our stock at this time.

We've got real earnings here, we've got a real potential growth there in the future. So, you know, we have to weight that up against this, too. But we'll take you very seriously, and it'll be on the agenda for our board meeting in two weeks' time.

And I, I, I have one question, I hate to let, uh, David get off the hook. So, uh, uh, you mentioned that you thought, uh, very conservatively mentioned you thought your debt to cap would be under 50%. Where do you think it can go, uh, um, in the next, uh, cup, um, by the end of next year? Assuming no acquisitions.

Assuming no acquisitions, uh, well, first off, for the [INAUDIBLE] this year, it's, it'll be somewhat below the 50%. However, unless we were to repay any of the long-term debt, uh, it's unlikely to go below 58% on a pure debt to cap basis. On a net debt to cap basis, it might be more like, uh, 45%. Uh, so, you know, 48%, uh, free cash, 45%, uh, after cash. With respect to, uh, next year end, I would expect that same sort of range. Uh, sort of around 45%, uh, debt to total capitalization. Uh, inferring that, obviously, our equity's going to grow with, with our earnings. Uh, but the debt, at this point, is not likely to grow significantly.

Excellent. Thank you very much.

Thanks, Tony.

We'll go next to John Lynch at Lynch Research.

Uh, hi.

Hi, John.

Um, couple of things. Actually, a bunch of things I had in mind have been touched on. I'm interested in the customer base, and I have your comments on the cancellation rate and traffic. But could we, uh, take a harder look at traffic, and look at conversions month by month in the quarter. Was there any significant change, uh, during the last, uh, uh, three months?

Uh, John, I don't have, uh, that conversion ratio in front of me. As I said earlier, traffic is strong. Uh, we, as you know, uh, use the Internet substantially. Sixty percent of our buyers now tell us that they come through the Internet. They're using the Internet for their research. And during this quarter, our traffic through the Internet was up by 25%. Now, a lot of that was due to the fact that we started listing, we're one of two national builders to list on eBay.

So, we started that program. We actually ran some auctions there. Uh, we sold some homes through that auction process. But more importantly for us is that we're driving good, qualified traffic through our Website. As I say, up 25% there. So there's a, there's a hard figure for you. I don't have, uh, actual conversion ratios here. But we do see good traffic, good, qualified traffic out there. And I think it's showing through in our sales, which are at record levels.

You indicated earlier that, uh, you had, um, uh, a feeling that, uh, your marketplace was, uh, rising, not, not, uh, declining. Uh, a question, and you also indicated your average selling price was, uh, $146,000, I think it was. Uh, and not, not growing. Do you have any insight in terms of the last quarter, uh, as to how much the average selling price was influenced by market, as opposed to product?

John, just to clarify those number, uh, when, when I talked about the Crossman closings being at $136,000, that was the average price for the Crossman closings in June. The average price for the whole company, uh, building in those Crossman numbers, is actually $184,000. But that's down from the prior quarter, where we had a, an average price, uh, which was in, before Crossman at $203,000. So what's happened is Crossman coming in has brought more affordability into our product mix.

Uh, it actually has helped our margins. Obviously, you saw the margins were up. What we're trying to do is bring our, our price down, but not at the expense of margins. We, we're looking at the type of homes we build, the size of homes we build. Trying to make sure we can give that affordability. We see a real, uh, demand at that low end of the market there, and we see a lot of qualified buyers at that point. So what we're trying to do, not at the expense of margins, but through design and through density in the communities, we're trying to give real affordability.

That was the whole reasoning behind getting into the, in, in with Crossman. We're going to be expanding that product into many of our other markets. So, we, we're trying to bring the price down, but it's purely by design and by density, uh, considerations, rather than in any way a consideration of profit. We would, we're actually looking to enhance our profit margins through that process.

Uh, my final, uh, thought is really directed at David, and I'm a little, uh, bewildered. Uh, if you, uh, as a couple of the questioners wanted, uh, were to buy shares back, would that not, uh, take your, uh, debt, uh, equity ratio in the wrong direction?

Well, certainly if we were to buy stock back, yes, it would increase the, uh, the debt to total capitalization.

It would not necessarily be desirable?

Uh, in of itself, that's right. Uh, that, uh, that's not something we're looking to do, in, in of itself. Uh, there are levels at which it makes sense, but, uh, but you're right. Uh, increasing our debt to total capitalization is not, uh, a target for us.

Thank you both very much.

John, thanks, good to hear from you, thank you.

And we'll go next to Gil Alexander, Garfield Associates. Mr. Alexander, your line is open.

Do you have another question, operator?

All right, we'll go.

[INAUDIBLE]

We'll go to [Judd Veren] at Solomon Smith-Barney.

Actually, it's, uh, Steve Kim. Um, I had a little bit of trouble with our lines there, sorry. Um.

Hi, Steve.

Hi, how are you?

Good.

Um, couple of questions if I could, here. Number one, uh, Crossman Communities. Are you, are you actually raising prices, um, as much at the old Crossman Community, uh, locations as you are in your existing Beazer or is there is a little bit of a, a divergence or a bifurcation there?

Uh, I'd say there is a little bit of a divergence, which has more to do with markets than anything else. The, the places where we're seeing the most aggressive price increases are, uh, California and DC. Uh, to a lesser extent, Florida and Texas. Um, uh, but really, California and DC are, are the strong price increases. Uh, the Midwest, uh, is, uh, the [INAUDIBLE] is, is strengthening, but we're not really seeing, uh, regular price increases there. Uh, that's more in line with, say our other markets. Uh, the Midwest. The southeast, other than Florida. Um, uh, are seeing price increases periodically, but not across the board.

California, DC, but you, would you say maybe five, 10% percent [INAUDIBLE]?

No, I wouldn't say that nature. I'd say sort of more like three to 5%.

On an annualized basis?

Right.

And, um, costs? What do you think they're, uh, rising at, uh, you know, right now?

Uh, costs are pretty well flat. Uh, in fact this particular quarter came down slight, uh, slightly. Uh, on a [INAUDIBLE] basis.

And the land, the land probably rose, and the materials and labor probably declined?

Well actually, I, I was, uh, talking about the hard costs of the house at that point. Land is certainly up year over year. Uh, it continues to increase. Um, uh, I'd say in the neighborhood of 10% or so, uh, per year.

Right, which would not, which would not fully offset a, a 3% price increase.

Uh, that's correct.

Because land.

Land, land, land is about 25% of the sale, or a little under 25% of the sale price. So a 10% increase in that.

Right.

Uh, you're right. Would, uh, would not fully absorb a 3% price increase.

Okay. And, uh, so therefore, we can get pretty comfortable that you're adjusted gross margins, which, uh, you had to make two adjustments this quarter. You know, so therefore not necessarily, uh, be falling as, as [INAUDIBLE].

Uh, that, that, that's correct. Uh, and the guidance we did give on the call is that, uh, over the next two quarters, expect, uh, 50 basis points per quarter.

Right. Right.

Uh, and then by the time we're, we come to the next fiscal year, expect, uh, uh, pretty good year over year increases in gross margin.

Right. Going to the guidance, um, you, um, talked about a $12 number next year as a target, and also, um, expressed that in terms of a 17% growth rate. But of course, uh, as, as this game has been going, as we, as we sort of noodle around with the numbers that come out of this call, we're coming up with a, a number for this year, which would appear to be somewhat north of the $10.25. Uh, and I guess what, uh, what that would also therefore imply is that, uh, if in fact things do come in a little bit better than $10.25, you wouldn't have 17% growth if you only did $12.

Well, I would, don't mean to demean, diminish the $12 number. But I guess what I'm wondering is, do you see the ability to grow this business for let's say the next 18 months, uh, and, and to add up 15 to 20% rate, uh, you know, fairly securely? Uh, or do you think that, uh, you know, we should be, uh, casting our eye a little bit more closely to a $12 type number for a variety of reasons?

Uh, well I guess I'll go further even than, than you said. Remember, Steve, that we, we continue to have a long-term objective to more than double our business. Uh, um, over a five year period. That infers that 15 to 20% growth rate over a long-term period. Uh, we don't see this period as being any exception to that. Uh, so something in that range would be reasonable. If we were to exceed the, uh, the $10.25 figure for this year, and if that, uh, uh, excess were to come, for instance, from margins, we would certainly need to readdress the $12 figure for next year.

Okay, great. And then finally, uh, getting to the issue of, um, the buyer demand, and, uh, and, and uh, some people have expressed concern about possibly we are, um, you know, trying to pull, uh, buyers into this market who maybe don't really belong there. Uh, can you talk about the loan to value ratios that you, um, you see. Uh, whether it be for your captive mortgage operation, or, um, however else you, you track it? What are the current loan to value ratios you're, um, you're seeing, and, and have they materially over the last few years?

Um, I don't have that, uh, in front of me, Steve. I do know, uh, that Crossman had a higher loan to value ratio than we did, so that simply is a mix this quarter [INAUDIBLE]. So.

What was yours?

Um, ours was, um, in the um, low 90% range. Uh, in terms of loan, loan to value. Um.

and had that changed much over the last few years?

Not that we have seen, no. Uh, as Ian pointed out before, affordability would, you know, the, the real benefit we've seen is affordability, uh, due to the interest rates. Uh, and people therefore are being able, uh, you know, to afford, to afford the mortgage. But no, we haven't seen really a dramatic shift.

Okay, great. Well thanks very much.

Thanks, Steve.

We'll go next to Gil Alexander, Garfield Associates. Mr. Alexander, again, your line is open. Okay, we'll go to Chris Bowders at Raymond James.

[Chris Bowders]: All right, gentlemen, solid quarter.

Thanks, Chris.

[Chris Bowders]: I just had a quick question. Can you talk a little bit about, uh, your Sanford operations, and how those have been doing?

Yeah, that's, uh, it's going fairly well. We, when we went into, uh, into Denver last August, we saw the market softening. So, uh, we understood that going into that. We were at a slightly higher price point there than we normally build at, but we, we like that market. We like the management team that we acquired through the Sanford operation. What we've done now since, since last August is we have, uh, purchased 10 new communities in, uh, in the Denver market at a much lower price point.

Uh, we Laos have on in Colorado. So one of those is in Colorado Springs. So what we're doing now is positioning that company for future growth at a lower price point. So we're very comfortable with where we are at that, at this point, and we're looking for good growth there in 2003.

[Chris Bowders]: Thank you very much.

Uh, by the way, on the, uh, the topic of Sanford, we are often asked to break out, uh, Sanford or, and Crossman, for that matter, from our numbers. So just so everyone has it, uh, in terms of the new orders, uh, for the June quarter, uh, Denver, which is Sanford, had 56 new orders and 76 closings. Um, and Crossman, uh, for the June quarter, had 1,290, 1,299 new orders. And 1,203, uh, closings.

[Chris Bowders]: Thank you.

Sure.

We'll go next to Barbara Allen, on hold in Blythe Schroeder.

Thank you. Um, forgive me if it's in the press release, but I re-read it and I, I didn't find a capture rate on, um, closings through your mortgage subsidiary.

Uh, the capture rate is around 73%, Barbara.

Okay. And I was, uh, driving on a highway outside of Charlotte last week, and I saw a big billboard that said buy a Beazer home for $1 down. I was wondering whose program that is, and who's underwriting that? And how, how many programs like that, um, uh, do you have?

Um, typically those programs are under a group called Neidermeyer, which um, uh, is a, uh, uh, well it's a quasi-governmental organization that funds, uh, the, uh, down payment assistance for, uh, qualified homebuyers. Uh, I'm not really sure who the underwriting lender is. But there is, there is an agency in the middle that, that helps form the down payment assistance.

Well, how widespread are these programs?

Um, they're sort of not across the board. They tend to be more, Charlotte is one of the biggest markets for it, and, and a couple of other Midwest, uh, mid, Midwest markets.

Um, and also on the, um, uh, the, the problem in Ft Myers, how did you discover that?

Um, the, uh, the accounting issue in Ft Myers was discovered when one particular employee left. Uh, and just during our normal review when that happens, uh, out of our corporate office here, our corporate controllers group, group was going through the books and discovered accounting, uh, entries that didn't seem to make sense. Uh, and then they asked further questions and it turned out they didn't make sense.

Uh, and unfortunately, it involved collusion among, um, a number of former employees. Uh, they're all no longer with us. And at this point, uh, even though, we, we believe we've always had very good control of, control, uh, not necessarily designed to catch collusion, now we do have more specific controls to detect that. Uh, with respect to very detailed review of every journal entry, especially those going through the land accounts.

Um, we've, uh, increased our internal audits, um, departments, uh, and more detailed audits of individual details of entry. So, it's something that based on review, we're one, assured it was an isolated incident, and two, uh, at this point, we take a very high level of assurance it won't happen again.

Well, congratulations on catching it. [INAUDIBLE] those are tough. Thank you.

Thank you.

We'll now go to Matt Moyer, AG Edwards.

[Matt Moyer]: One quick follow-up, gentlemen. Do you have, uh, revenues by region available yet?

Uh, yes. Um, revenues by region would be for the, uh, southeast, uh, 218.2 million. For the, uh, west, 249.3 million. For the central, 43.9 million. For the mid-Atlantic, 100.9 million. For the Midwest, 109, 120 million. Um, and then there's, uh, other income of approximately 11 million. Uh, that should come to 744 million. The breakout, by the way, between Beazer and Crossman for that is 580 million, Beazer, 164 million, Crossman.

[Matt Moyer]: Thanks very much.

We'll go next to Brendan Lee, Cliffwood Partners.

Hi gentlemen. Uh, I just, I might have missed this earlier. But could you repeat your, um, your backlog, in terms of ex-Crossman?

Um, actually we had not mentioned that. The, um, the backlog in terms of units, uh, the total backlog is 7,627. Of that, 4,996 is Beazer, which is up about 8%. And then, uh, 2,631 is Crossman. That's in terms of units. In terms of dollars, uh, the Beazer number is, uh, one billion 078, which is up about 21%. And then Crossman is $369,000,000.

You say it's one billion 078, that was up how much? Twenty-one?

Twenty-one percent.

All right. Thank you very much.

You're welcome.

Thank you.

Again, ladies and gentlemen, it is star one to ask your question. We'll go now to [David Scanlon], Weintraub Capital.

[David Scanlon]: Yes, hello, sorry about that. Um, been in and out on this conference call. But, um, with respect to the, uh, the, the charge that you found in the Miami operation, can you just review, I'm sorry, it wasn't Miami, it was somewhere else in Florida. But could you just review, you know, what you've done in terms of looking at the other units. And, and, and just remind, remind me why that, that's not going to be a more generalized thing?

Sure, uh, David. Uh, I'd say that it wasn't Miami where, uh, it was in Ft Myers. Uh, with respect to the review to assure that it didn't exist anywhere else, uh, we conducted an, an extremely thorough review, along with our outside auditors, our internal audit committee. Uh, our, [INAUDIBLE] rather. Uh, an internal audit going through every single, uh, land accounting and land transaction over the last two years, uh, in all of our divisions, to detect for any indication, uh, that these sort of entries were made anywhere else.

It, it did involve collusion among a few employees, uh, unfortunately, at this one division. Um, that level of review, down to the individual transaction basis, uh, of every single, uh, transaction is now something that we're going to do on an ongoing basis. Uh, out of our corporate controller's group here. Uh, as well as, uh, more detailed internal audit procedures. Uh, specifically to look for collusion. Um.

[David Scanlon]: Okay. And, um, what would you have to do to get, uh, further upgrade in your, uh, in your credit rating?

Um, our view is that based off of our current numbers and the way we currently operate, we believe we, we deserve one more credit, uh, upgrade from, from both of the rating agencies. And going to be pushing hard for that. And I think simply the completion of our, uh, of our figures as expected for this year, the, uh, demonstration that the integration with Crossman has gone extremely well, as it has, should get us, uh, one more upgrade.

Uh, up above that, uh, I think it's going to take, take a bit of a change in, in attitude of the rating agencies recognizing our industry is one that warrants, um, uh, investment grade. Um.

[David Scanlon]: So you're talking maybe going to double B plus.

That's correct.

[David Scanlon]: Not, not triple B.

Uh, not triple B, uh, given that we, we're very comfortable with the figures we currently operate with. And, uh, with the way the rating agencies are right now and their view towards the industry. Uh, they're not giving [INAUDIBLE] figures investment grade. Uh, so hopefully that attitude will change. But I guess what I'm saying is that we can operate the way we currently do. We think we deserve one more upgrade for that. Then after that, uh, we'll just press along with the industry. Uh, than change the way we operate.

[David Scanlon]: Okay. And when, you know when the review would be for the, um, you know, the, the upgrades that you're talking about?

We don't have a currently scheduled review, but it's, uh, it's likely to be soon after we finish our fiscal year end. Uh, report our fiscal year end in early November. We typically go up and see the rating agencies, uh, soon thereafter.

[David Scanlon]: Okay. Thank you very much.

Thank you.

Again, it is star one to ask your question. We'll go next to Wolf Jaffe, JLS Management.

Hi, it's Wolf Jaffe, how are you?

Hi, Wolf.

Yeah, hi Wolf.

Great, great quarter.

Thanks.

Thank you.

Uh, the three billion in revenue for '03?

Mm hmm.

May I ask you what do the assumed deliveries are, and perhaps an assumed price?

Um, that would be, that would equate to roughly 18,000, uh, deliveries at an average price of around $175,000. And actually, that's going to get you a little bit above three billion in revenue.

Okay. Great, thanks.

Thanks.

Thanks, Wolf.

And Mr. McCarthy, I have no other questions standing by at this time. I'll turn it back to you for closing remarks.

Thank you, operator. Well, as usual, following our conference call, David and I will be available for any further questions. I should also tell you that a recording of this conference call, with the slide presentation, will be available around 1:00 PM today in the investor relations section of our Website, at Beazer.com. So, I'd like to thank you all for participating in the call. We look forward to speaking to you again on Wednesday, November the sixth, for our year-end earnings conference call. Thanks for listening in, and goodbye.

Thank you, ladies and gentlemen, for your participation in our Beazer Homes conference call today. You may disconnect at this time, as this does conclude our call for today.