Beazer Homes USA Inc (BZH) 2003 Q1 法說會逐字稿

Good day and welcome to the Beazer Homes earnings conference call for its 2003 first fiscal quarter. Today's call is being recorded and will be hosted by Ian McCarthy, the company's Chief Executive Officer. Before he begins, David Weiss, the company's Executive Vice President and Chief Financial Officer will give instructions on accessing the company's slide presentation over the Internet and will make comments regarding forward-looking information. Mr. Weiss?

Thank you, operator. Good morning. Welcome to the Beazer Homes conference call on our results for the quarter ended December 31st 2002, the first quarter of our 2003 fiscal year. During this call, we will web cast the synchronized slide presentation. To access the slide presentation, go to beazer.com, and click on the earnings release icon in the center of the screen from this site, you may submit questions to us electronically. For those not connected to the web cast, you are also welcome to e-mail your questions to investor relations at beazer.com.

Before we begin, you should be aware that 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 35 of our 2002 annual report for details. Ian McCarthy, our CEO, and I will give a 15-minute presentation after which we'll address any questions you may have. I'll now turn it over to Ian.

Thank you, David and good morning. Today we'll be discussing our results of the December 2002 quarter, which set new first quarter records on numerous fronts, including home closings, net income, EPS, new orders and backlog. We will also reiterate and give further details on the targets for fiscal 2003. For the quarter ended December 31, 2002, we closed 3,482 homes at 47 percent increase over last year's December quarter. Net income was $36.9 million, a 59 percent increase over December 2001. Both of these figures represent December quarterly records. EPS for the quarter at $2.75 per share was also a December quarter record and was up 11 percent over 2001.

Total revenues for the quarter was $700 million. Net income increased 59 percent over the first quarter of fiscal 2002 while revenues were up 43 percent. Once again, we reported a greater increase in net income than revenues, as our gross margin hit an all-time company record. Gross margin before interest was 21.2 percent, up 130 basis points from December 2001. The increase in our gross margin for the quarter reflects the continuing strong housing environment, as well as our initiatives to build more efficiently and leverage our purchasing power based on the increased size of the company following the acquisition of Crossman. David will describe the initiatives later and give guidance on the margins going forward.

During the December 2002 quarter we had 3,141 new orders, a 25 percent increase over December 2001. At the end of the quarter, we had a backlog of 6,178 homes, a 50 percent increase over December 2001. Dollar value of backlog was $1.2 billion, up 52 percent. All of these new order and backlog figures represent December quarter records. New orders on backlog in the December 2002 quarter include Crossman communities which we acquired in April of 2002. Crossman's operation have been fully integrated with Beazer's including merging operations where there was geographic overlap.

As a result we cannot break out Crossman's orders separately from Beazer's existing operations? We can, however, compare the results from combined results last year. Compared to new orders in 3,288 homes on a combined basis for last year's December quarter, orders in the December 2002 quarter were down four percent from December 2001 on a combined basis with a community count that was flat. This reflects delays in opening new communities in a number of markets, as a result of permitting issues and an unseasonably wet weather. In addition, sales were somewhat slower than anticipated in our Southeast and Midwest markets, but remained strong in most markets in the West, mid-Atlantic and Central regions.

The December quarter is traditionally the slowest quarter of the year. We are now entering the key spring selling season from February to April which typically accounts for a major portion of our sales for the year. As we now +enter spring selling season we expect to increase our community count by five to six percent. As a result of these community openings we are extremely excited and optimistic about our sales prospects through the spring. David will now address our financial position and earnings targets for fiscal 2003.

Thank you, Ian. I would like to discuss our extremely strong current financial position. We ended the December 2002 quarter with one of our strongest balance sheets ever. Our ratio of debt to total capitalization improved from 53 percent to 47 percent relative to the December quarter of the prior year. In addition, we ended the quarter with $80 million of cash on hand, and no borrows outstanding under our revolving credit facility, making our net debt total capitalization 44 percent.

Our significant cash balance is particularly notable given that it's the end of a seasonably slow quarter when we typically use cash and borrow under our revolving credit facility. At the end of last year's December quarter, for instance, we had no cash on hand, and had outstanding borrowings of 34 million under our revolver. Our current cash balance demonstrates how we have both grown the business and generated positive cash flow from operations over the past year.

Our strong financial position give us the financial flexibility to adopt to changes in the home building our general economic environment. It also gives us the ability to opportunistically shift between growth in our existing business and expansion through acquisition as we see appropriate. Given the current environment, we believe that growth in our existing business will be the more dominant factor as we open new communities in our current operations.

One of the most notable aspects of our financial performance during the quarter ended December 31st, 2002, was the improvement in our gross margin. As Ian mentioned earlier, our gross margin before interest, of 21.2 percent set an all-time company record. We've been able to achieve this growth margin while our average land cost has increased by eight percent year over year. This produces approximately a two percent increase in total costs relative to sales price. At the same time, we have been able to raise prices, sale prices, between three and four percent, more than offsetting the increase in land costs. In addition, we've been able to control our construction costs through our initiatives to improve efficiency and reduce costs.

As a result, our gross margin improved by 130 basis points during the December quarter, relative to December last year. Initiatives to control our building costs remain a major focus at Beazer. We are working to renegotiate national contracts, improve our efficiency through better communication and scheduling with suppliers and reduce costs through a value engineered design.

This includes integrating Crossman's efficient construction techniques and best practices, across Beazer operations, and leveraging off of our combined size to renegotiate with suppliers. You can already begin to see the benefits of these initiatives in the dramatic 130 basis point improvement in our margins during the December quarter. We believe, however that we have just scratched the surface on realizing the benefits of these initiatives which will accrue to us over the coming years.

For fiscal 2003, we are reiterating our previously announced EPS target of $12.25 per share. This would infer 14 percent growth in EPS over fiscal 2002. The factors behind that target are 16,500 home closings with an average price in the low $190,000 range. Our target for net income is approximately $168 million, which would be a 37 percent increase in net income on an approximately 21 percent increase in home closings. This target assumes that the margin achieved in the December quarter, which was significantly higher than last years gross margins is sustained through the remainder of this fiscal year.

With our unit backlog up 50 percent to December 31, 2002, and a number of new communities coming on line just in time for the spring selling season, we feel optimistic in reiterating our 12.25 EPS target for fiscal 2003. I'll now turn the call back over to Ian.

Thank you, David. The targets that we have laid out for fiscal 2003, a 21 percent increase in home closings and 37 percent increase in net income are extremely strong increases for an industry that investors continue to not regard as a growth industry. Yet, these are the sorts of increases that Beazer and other top ten public home builders have produced during the last six years. Over that period, net income for the top ten U.S. home builders has increased consistently and dramatically with a compound annual growth rate of well over 40 percent and in an environment where housing starts have averaged an annual increase of only two percent. Our own performance during the December quarter with net income up 59 percent demonstrates the continuation of that trend.

As described in our recently issued annual report for 2002, we believe that there are a number of strong, positive indicators that this growth should continue for both Beazer and the U.S. home building industry. The three most significant factors that indicated this growth should continue in the coming years are strong population growth fueled by immigration, land constraints limiting housing inventory, and a dramatically consolidating industry.

Today, we are reiterating our target of $12.25 for EPS in fiscal 2003. That would make this our sixth year of strong, double-digit percentage EPS growth. We recognize that this target is subject to economic fluctuations in the current, uncertain macroeconomic environment. However, we entered this year spring selling season confident in our ability to take advantage of opportunities and adapt to economic changes. Further, we believe that our ability to take advantage of the major positive indicators impacting the home building industry will continue to drive our earnings higher beyond fiscal 2003. Now, I would be glad to answer your questions and I would ask the operator to give the instructions for registering your questions.

Ladies and gentlemen, at this time, if you would like to ask a question on today's call, you may do so by pressing the star key followed by the digit one on your touch-tone telephone. Once again, that was star one. If you are using a speakerphone, we do ask that you make sure your mute function is turned off to allow your signal to reach our equipment. We'll pause for only a moment to assemble our roster. We'll go to Margaret Whelan, UBS Warburg.

Good morning folks.

Hey Margaret.

Good morning, Margaret.

A couple of things. First of all, the closings are down 19 percent. I know you had tough times (ph), will you just explain to us just anything -- anything else that might have been going on there, any delays weather related or anything like that?

Yes. There were delays in getting closings during the quarter, especially in the west where there was -- in northern California where there were heavy rains. So certainly that was a contributing factor to a fairly significant number of closings during the quarter which would then be expected to close next quarter.

Yeah. Have you seen that situation resolve itself over the last couple of weeks of January?

Well, it's early to say we expect it to, and certainly, yes, the bulk of the closings that were delayed from last quarter will definitely be this quarter. But right now, we can't really say that that for the month of January.

How is traffic so far in the month of January?

Traffic has been good in January. In fact, it's picked up fairly significantly. So we are optimistic as we're coming into the spring selling season.

Okay, and can we get your cancellation rate at the moment?

Cancellation rate during last quarter was up somewhat. It was about 25 to 26 percent compared to about 21 to 22 percent over the last few quarters, although actually lower than it was the year -- the year ago quarter which was just post September 11th.

And was there any difference in the regions?

In terms of cancellation rate?

Yes.

Yes. The cancellation rate has tended to be somewhat higher in the Southeast and Midwest which is in fitting with -- those are the places where there's heavier focus on the first-time buyer, and a lower price point.

OK. Did you give the community counts targeted growth rate?

Yes. The current community rate is 468, and that's about flat with the combined community count from last year, up from a Beazer alone of 287. We'd expect that to increase over the coming quarter by about 20 to 25 communities, so about five or six percent. So we do have a number of communities opening over this quarter, and a fair number of those were delayed from expected openings last quarter.

Okay, and then can I just clarify something you said in your prepared comments, David, about - where you were saying that your land costs for home was up about eight percent and that's translating to potentially a two percent higher cost as a percent of the selling price?

Right.

That implies that your land is 25 percent of the cost?

Well, a little below 25 percent. It's actually about 22 to 23 percent.

I had the impression that I had was that the raw (ph) dirt (ph) was about 10 to 15 percent, and then the balance being for improvement and that the improve improvement was actually decelerating. Is that not the case?

Well, that varies dramatically by region. Actually, I don't have the overall figures in front of me. But it would vary pretty dramatically based on where the closings are coming from, what regions. For instance in California and D.C., the raw land cost is significantly higher than elsewhere relative to the development. So, I'm sorry, I don't have those figures.

Okay. I'll follow-up with you on that. Thank you.

Thanks a lot, Margaret.

We'll go to Chelsey Ingenito with Merrill Lynch.

Hello, good morning, congratulations.

Hey Chelsey.

Thank you.

Just to follow up on the community question, how many communities were open and how many were closed in this quarter?

Again, that is a figure I don't have. I would expect probably in the neighborhood of about 15, but I don't have the exact figure.

Fifteen open?

Fifteen gross open and 15 taken off.

Okay, and then just to discuss the margin improvement a little bit. Can you discuss price versus mix versus geography with that improvement?

Well, most of it is -- is not so much mix, when it comes to margins. When it comes to average price there is quite a bit of mix going on, but the margins are not that dramatically different across price points or regions. A lot of it is, as we were saying, that on average we are increasing our prices approximately four percent whereas on average the total costs are only up about two percent - or a little more than two percent and that's almost entirely the land side of it. So it's mostly from raising price -- and those figures are trying to take away mix, the mix part of the equation.

Okay.

I think the other point, Chelsey, to take in there, is the efficiencies that we are now introducing, that we're getting a lot of leverage from the increase size of the company. We are going back and renegotiating a number of the larger national contracts that we had, and then utilizing those throughout the companies. So a lot of a that and also adopting a lot of the ideas that Crossman have used in the past in looking at efficiencies and bringing that into many of our markets as well.

That's the point that we think that has enhanced the margin improvement there and we think going forward is where there's real potential to really have much stronger results in the years to come. As we said, this year, we believe we can sustain the margins but in the years to come we really think that this efficiency is where as we make -- you know, the whole business and as the industry becomes more consolidated, we believe that it's going to be even further efficiency there which is going to sustain us going forward.

Yes. Can you give us a couple of examples of the efficiencies? I can understand obviously, overhead absorption, but are there any other efficiencies in the actual building process that you can explain?

Well, certainly there are a number of those. One is just the first (ph) - the scale, the size of the company right now and the growth that the company has achieved and the consolidation going on in the industry. All the major suppliers are looking at the large -- particularly the large top ten builders and realizing that if they want to be there for the next few years and want to be in the industry, the forefront of the industry, they need to come and work with us and we are getting some very, very strong efficiency gains there in terms of pricing.

We're not doing it just by saying give us a lower price. We're saying, let's be efficient together here, let's look at the whole supply chain. The fact that we have on line scheduling now throughout the company, we're offering that to the suppliers and saying they can access that. They can access our schedules on line. They can be a lot more efficient in the way they deal with us. They don't need to stock inventory for us, issues like that. So that's one massive area that we are just getting into. We've negotiated a few very, very strong deals that we're implementing now.

The other point I think is just efficiency of design and the fact that, you know, as you know in Crossman they were very, very efficient in the product offerings they have, in the number of plans they offered. We had a certain degree of efficiency. I think we're taking both companies to the next level now in terms of looking at those designs, looking at how we build them, and really trying to enhance that. So I would say it's both in our internal design value engineering there and then externally working with the suppliers and subcontractors and positioning both sides of the equation for the years to come.

Okay, and I mean, just looking at the margins over the course of the year, you did mention that they were sustainable. But actually if you look at them over the course of the year, you know, next quarter they do come up a bit. Do you see from the word sustainable, would you say that that trend would actually continue?

No. What we're saying, Chelsey, is that the current margin, the 21 percent -- up 21 percent margin is what you would expect the rest of the year, not necessarily expect it to go up from where it is. But that in and of itself, will be year over year throughout the year. So, it will be current margins sustained which is what we have as our target that would still be fairly significant increases year over year.

Okay. Great. I'll give someone else a chance on questions. Thank you very much.

Thanks, Chelsey.

Bye now.

We'll go next to Robert Manowitz with UBS Warburg.

Hi, good morning.

Hi Robert.

Question on your description of drivers related to the 19 percent decline in deliveries. You didn't mention the idea that December '01 was a fourth quarter - fourth fiscal quarter for Crossman while December '02 is a fiscal first quarter for you. And historically the builders have seemed to establish a track record of, you know, of having a heavily weighted fourth quarter. Did that have any impact to the year over year?

Yes, it did, Rob, and actually when I was addressing the short form closings, it was more relative to prior expectations and guidance and normal deliveries relative to a quarter end. But you're absolutely right. When compared to last year's quarter, on a combined basis, the change of Crossman's year end certainly did make a difference, and you see that if you look at the September quarter which was there at Crossman's new year end they certainly had a significantly higher number of closings proportionately relative to the December quarter than typically they did have. So that change did impact that.

Okay. And then secondly, in the Midwestern markets, can you walk us through some of your inventory levels, however -- in whatever measure you'd like, whether it be community or absolutely community.

OK, well, overall, we have currently approximately one -- or just below one unsold finished homes per community. In the Midwest actually that's a slightly -- it's actually slightly below that. It's about .8 unsold finished homes per community. So proportionately it's fairly similar to the company as a whole. The inventory levels remain very low across the company and we believe across the industry especially in the first-time buyer -- or the lower price points in the first-time home buyer segment. So that's not an issue.

Great. Thank you.

Thanks, Rob.

We'll go next to Ivy Zelman, Credit Suisse.

Good morning gentlemen. Dennis McGill on behalf of Ivy.

Hi Dennis.

You just mentioned the inventory levels on finished homes. Can you give us the spec number on any homes started that wouldn't be sold yet?

Yes. It's on homes under construction not finished it's about 3.3 per community, which actually is dead even with where it was last year at this time, 3.3 and last year, similarly it was about one unsold finished home. All told, it's about 1.3 either under construction or finished.

Okay. Could you outline your lot position right now and secondly, what kind of increase are you guys looking at for inventories for the year?

The lot position currently is we control approximately 77,000 lots, which represents approximately a 4.8, 4.9 year supply. Of that, about 34,000 lots are owned and about 43,000 are under option which would translate to about 44 percent owned and 56 percent under option. When you're talking about increases in inventory, I'm not -- are you looking for dollar values?

Yeah. From your -- let's say from year end 2002 level of 1360.

Yeah. The net increase in inventory should be probably about $150 million, about 10 percent of the total inventory. I would infer a fair amount would be increase in homes under construction. Some out from under land, but certainly we continue that at a significant portion of the land is controlled through auction contracts.

Okay. Lastly, I'll give you guys a chance to maybe hypothesize, why do you continue to feel that you trade under book, especially the other buyers are a little bit higher multiple. Do you feel that the market is penalizing you for the Crossman acquisition and the amount of goodwill that was added?

I have to turn that back to you, guys, the analysts for trying to understand the market's perception, but yes, I do believe playing into that is some caution with respect to the market perception of the Crossman acquisition. And it's pretty, you know, fine shades of different between all the builders are ludicrously cheap. You know, looking at the earnings that we have all been issuing this quarter and looking at multiple -- you know, multiples that are in the five to six times range it just seems crazy.

Thank you very much, guys.

Thanks, Dennis.

We'll go next to Juan Espinoza.

Good morning, I wanted to ask you the following, and I think a lot of the questions previously asked helped understand this point, but if you can just walk me - educate me a little bit when we look at average orders per community it goes down I assume -- contribution to the factor would be the fact that you have -- you have less supply available to sell. So walk me through why these numbers are going down, and also what would make them go up as we move towards the future quarters?

Well, a lot -- the reason they're down, and on a per community basis, they're not really down significantly. Partially are our delay, weather-related delays. Partially we are seeing slowness in some of our markets in the Midwest and Southeast. The reason we expected to increase going forward in this quarter is because we do have a fairly significant number of community openings, and you'll get a much higher sales rate per community early in the stages especially it reaches the highest point a couple of months after the community opens. So that expectation combined with the fact that it's now the real heart of the selling season coming up is why we would expect that to increase going forward.

And a quick follow-up - actually a different question, is you said in your release I believe that you expect to have 16.5 million deliveries, you know in '03.

Right.

In the past quarter you gave a number. Was that number exactly the same or was it a little different? I forget.

It was. Last quarter it would be 17,100. So it is down 1,000. To a great extent that has to do with the blaze we were talking about, some will push community closings out to next fiscal year. Net as we're saying the guidance the EPS guidance of the earnings guidance remains the same because the average price is somewhat higher and we're achieving a better margin than prior guidance.

Thank you very much.

You're welcome.

Thanks.

We'll go next to Stephen Kim, Salomon Smith Barney.

Hi, Jed Barren (ph) for Stephen Kim. Congratulations on the quarter.

Thanks, Jed (ph).

I just wanted to try -- a little bit on the Crossman acquisition here now that you guys are a couple quarters out. If you can talk about some of the cost saves that, you know, perhaps you estimated that you achieved and how you -- how in terms of original targets that you had sort of mapped out for the acquisition how you're up against those right now.

Well, I don't see that we're disclosing specific numbers on that, Jed, but we feel very comfortable that the efficiencies that we have seen through this 130 basis point improvement in our margins this December quarter, part of that is definitely due to the efficiencies we worked into the business now. And we, you know, we're confident that we'll be able to take those forward. But I think it's something that takes time to do this, it's looking at plans, it's comparing different aspects of the business. And just overall, again, size is having a factor here.

I'd reiterate the point I made before, it's not just today's size. It's the fact that we in the larger builders are growing at such a dramatic rate that we're finding now long-term three-year five-year contracts that they with see the potentials into the future. Overall size is very, very important I think, and then the efficiencies within the company, again, I think are important, that both of those are affecting and improving our margins to get this improvement we have had this quarter. What we're saying is we see in the long term over the next couple of years that we want to increase this even further.

So I think we've taken the efficiencies that Crossman have, we've taken the technology that we had in terms of our on-line scheduling, our information system we have there, putting those two together is really giving us a strong benefit. I think that, you know, going back to the previous question of the market is still waiting to see the benefits of this Crossman acquisition, I think it's coming through here in the efficiency that we're seeing in the company.

The market has been somewhat slower in Crossman's markets in both the Midwest and the southeast and we recognize that, but long-term we've got an excellent land bank there, over 6 1/2 years of land bank through the Crossman companies that is going to give us real benefits over the years to come. So, you know, I think it's been somewhat slower than we expected at this time, but I think the efficiencies and the long-term benefit will be there.

Okay. Great. In terms of the sub -- or the community account openings that you were targeting this year, you said five to six percent in the spring quarter. Is that a reasonable percentage increase to be looking for the year as a whole?

No. For the year as a whole, it should come up slightly above that as well. I would expect overall for the year more like eight percent. So it's more community openings than through the June and September quarters.

A point on this, because, you know, we tried to give you accurate numbers and then give the market accurate numbers. What's happening in the market is it's so tight. Land constraints are just accelerating every day now. It's becoming much more difficult. We recognize that's a problem for us, it delays community openings and the like. But at the end of the day, this is where the consolidation is going to be driven. The fact is, we and the larger builders are able to take those delays, continue to fund the zoning process, be able to hold those deals on our balance sheet and that's why consolidation is happening.

But in the short term, you know, some communities that we expect to open as happened last month, happened last quarter. Some of the community we expected to open were just delayed from the process. And that's just something we have to accept that as a fact now. It's a difficulty for all of our operations, but as a company it's a real opportunity for us to overall take market share and drive our position in the market and the larger builders' position in the market. That's why we're gaining so much share, but it does put some difficulties in terms of saying exactly this will open in this quarter. There is going to be some rollover in some the communities.

That sounds like a high-class problem.

Absolutely a high-class problem.

It's Steve Kim, actually, I just hopped on. I wanted to see if I could talk about the issue of land cost, if I could for a minute. Because I think one of the most important things that, you know, we saw in your release was the fact that you felt comfortable enough to go out and sort of confirm the gross margin at this level. And I think that that's something that the market, particularly some skeptics the market have found just difficult to accept and to understand. And key I think in that confusion is the issue of land costs, which everybody knows are rising.

It seemed to me that when we were in D.C. and Vegas you addressed certain ways in which you were able to offset the rising cost in land, so they weren't impacting you that much, as much as people might think. One of those was your ability to put through even modest price increases sufficient to offset the land costs because of the five to one or four to one leverage you had. The second issue was the increasing of density. I was wondering if you could address those two issues again for us, and specifically on the density is there a theoretical limit as to how much we can push density? How do you see that issue playing out over the next years?

Steve, I think actually there are three big factors that contribute to why we can see land costs increasing more than house costs and still see benefits to the margins. One as you said is the fact that the land is only a portion of the -- of the costs and we can reduce that as a portion of the total -- the amount of land effectively used perhaps by increasing the density. The second is by getting price increases and third is by controlling other costs and we're doing all three of those.

With respect to the relative home sales price increase relative increase in home price, we did talk about that on the call and talked about how we're seeing land costs go up in the neighborhood on a like to like basis. And which translates only to a two percent increase in the total cost. And with us being able to increase price it's about four percent. That certainly gives us a benefit on the margin side.

Great.

You are correct at the same time we are increasing the density, building product on smaller lots and building more town homes, and you especially saw that in the D.C. market where town homes -- where land is such a significant piece of -- part of the house cost, and so part of the solution is to use less land by building more town homes and there's a limit to that. But we're nowhere near the limit to that. The average-sized lots in this country and the average-sized homes have increased dramatically over the last couple of decades. As land becomes a tighter constraint, we have to move closer to the cities, look more at reusing land, brown field sites like here in Atlanta, Atlantic station in town which will be town homes on a are redeveloped steel site. A lot of that.

So the answer, there's a limit, we're nowhere near the limit on increasing density and you sort of redesigning our homes to get there. On the other costs, the absolutely to control other costs is also a major factor. We're seeing net -- other costs increase only 1 percent right now which is below the rate of inflation. Other building costs. And a lot of that is through the control of the real costs, the renegotiating contracts through design, more efficient design, through taking costs out of the home and building on its surface more uniform product, making more available to buyers through options and upgrades. And both through that, you maximize your margin by selling the options and upgrades at a higher margin but also through building more efficiently.

Once you can - for instance, at Crossman, they use one window - one type of window throughout an entire market. That will definitely improve your efficiency on being able to use the same product throughout the communities and be just in time have more just in time delivery on the windows. So initiatives like that will absolutely help on the cost side. So you've got increased sales prices to make up for the portion of costs that is land costs. You have reducing the amount of land to increasing density and then controlling all the other costs. And we have seen that -- you see it in the results, and as you pointed out, especially D.C. is a great market and Vegas as well where land costs have increased appreciably, but in both the markets we have seen improved margins.

Thank you very much.

Thank you, Steve.

We'll go next to Jack Kasprzak with BB&T Capital Markets.

Thanks, good morning. What's the pro forma comparison with fiscal '02 to the 16,500 number?

Hi Jack.

Hi Jack.

The 16, 500 number, what's the pro forma closings in fiscal '02?

Pro forma closing in fiscal '02. Actually, Jack, I don't have that in front of me. I believe it's an increase in the neighborhood of 10 percent.

Okay. And with the community count increasing five to six percent by the end of the March quarter and then up towards hopefully eight percent by the end of the year, what sort of organic growth rate underlies the full year guidance once we -- the anniversary of the Crossman acquisition in the back half of the year?

Going forward, we're looking at orders increasing rather proportionately to the increases I have said, which is five to six percent this quarter, and ramping up towards eight percent increases later in the year. We also have -- we do have a significantly higher backlog overall right now with our backlog up 50 percent with the acquisition in, and so we are seeing increases through that. But going forward, we're looking at sort of five to eight percent organic increases.

Okay. And on the subject of the balance sheet, David, you mentioned that your balance sheet's in much better shape than it's maybe ever been and you've got cash on hand. And you also seem to imply you'll be more skewed towards organic growth going forward rather than acquisitions. Are we entering a time where you may be reconsidering -- maybe reconsider or take up an issue of a share repurchase program?

You know, I would argue on the question of relative valuation this could be an issue that could be affecting, you know, your valuation versus some of your peer companies that are currently in the midst of share repurchase program and there shouldn't be any reason why you would be at a discounted valuation to the peer group.

Certainly, share repurchase as well as also dividends, especially given the current proposals, I do van E-mail question about dividends and when we consider dividends so I'll address both of these at once. Both of those, the potential for stock repurchase, it is something that we continually consider and reconsider and it's a topic at every board meeting that we have. Currently, we don't have repurchase program or in place or a definitive decision to start dividends.

But certainly as -- as we give greater clarity on what's happening on from a tax standpoint on the dividends that increases in likelihood that we start declaring the regular dividends with respect to the idea that a stock repurchase would help the -- help the valuation, we are watching others who are doing the stock repurchase and doesn't seem to have an appreciable different. Rye (ph) lands is among the lowest multiples in the industry. So it doesn't really seem to be making that big of a difference. We do think it's important to maintain our capital.

We believe this is a consolidating industry and a capital intensive consolidating industry. We want to act opportunistically both with respect to land purchase if we see any opportunity there, and with respect to acquisitions. So maintaining a balance sheet is important to us, and maintaining an adequate liquidity in our stock is important to us, so that counterbalances the idea of the stock repurchase would automatically work. The bottom line, something we continually reconsider right now it's not something we're doing.

Okay. And are you doing (ph) speed up -- anything to speed up the opening of new communities to the extent you there is anything cow can do?

Jack, we're trying whatever we can. I can tell you for our operations, this is real headache for them. As Steve Kim said, this is a high-class problem and a problem I like to have, because I think it will drive our business in the future. But for all of our operations, they are facing this every day. You know, it's an issue -- a lot of this is education as well for the local municipalities and the cities, that they are facing issues, whether it be smart growth or, you know, sprawl. These issues and they're trying to address them. Often it's a knee jerk anti-feeling there. A lot of them is education back into them, showing them the benefits of perhaps some increased density, looking at different ways of looking at it so we can try to keep it affordable. We're doing everything we can to pull this forward.

We certainly don't want to delay communities. We certainly -- but we do want to also maximize the return we get from each of these communities. As it becomes more and more difficult in every market to get the next entitlement for the next piece of land, we absolutely need to make sure that we maximize the return on the existing communities we have. So I would say, you know, while we continually want to open the new communities with the constraint in the whole market, not just in the communities that we have, but the number of communities everyone has in their individual market, it allows us some opportunities there to maximize sales price, push the margins in that case if we can't get the next development open.

So we're looking at that that's part of the reason for some of the slow down in the deliveries in this period. Part of it was opening new community, burr also we want to make sure we maximize the return we get from the existing communities if we can move straight on to the next one. So a lot of factors in play here. It's difficult in the short term as I said, and I think it will become more difficult. That's why over the last couple of years we have substantially increased our land bank. We recognize that land is going to take longer to go through now from a year, 18 months ago when we had a three to three and a half year land bank, now as a whole company we're up to 4.9 years.

We still keep our balance between options and land owned but something we recognize that's going to become more and more difficult. A long answer, but this is a very, very critical aspect of our business at this time. And I think it the real benefit that we, the larger companies have going forward over the next few years. We are really going to see -- I believe, a dramatic change in the profile of the industry.

That's great. Thanks a lot for your time.

Thanks, Jack.

Does that answer your question, sir?

Yes.

Operator, do you have any more questions?

We'll go to Chris Bauders, Raymond James.

Yes, real quickly, just a question regarding your 8 7/8 senior notes that are callable, that are due in March, can you --have you given any thought to potentially refinancing those with new high yield deal?

It is happening and we'll consider in the high-yield market. It looks fairly attractive to us especially as home builders appropriately are trying to get upgraded to investment grade. So not something we have current plans to do, but something we'll consider. But certainly a factor in doing that is the idea to what extent do we need that capital or additional capital on a longer term basis? And right now with the strength of our balance sheet, no borrowings under the revolver, cash on hand, there doesn't seem to be much of a need to refinance that out longer or to increase the amount. If there were, then there'd be more of an impetus to go ahead and do that.

: I was thinking along the lines because KB did their deal at seven and three quarters and that was a senior sub issue that if you punched out a senior note issue, and you could probably price it at about a 125 basis point discount rate.

No, certainly true. Although at this point we'd have to repurchase the notes at a fairly sizable premium. So over time we think that's only going to improve.

Okay.

Thanks. We do have a couple of E-mail questions that I'd like to address, operator. One of which was as a follow-up to the guidance that we have given on cancellations which we said were a little higher, how our incentives and our additional incentives to get canceled contracts to close, and the answer to that is no, there are not significant additional incentives at all right now. You can see that in the margins that, that if there were significant additional incentives you'd see it on the margins. You would further see it on the guidance we are giving going forward where we expect margins to be --to be consistent with what they are currently which is significantly higher. So the bottom line is that incentives are not increasing appreciably.

Let me just add a point to that. I think there's been some speculation that incentives are increasing. I would say the promotions are out there, and the builders have always used promotions to attract traffic and bring people in. The net result is what the margin at the end of the day? I think we have been able to price those promotions into our pricing strategy. So that we can get the net margin that we're looking for. I think people should not confuse promotions to attract traffic and pull people in with genuine incentives to move inventory. As you can see, we have very little inventory. The industry has very little inventory. Even in the Midwest which has been somewhat slower. Our inventory is down on the overall company average. I think we have to look at the difference between promotions and incentives and the net result. And the net result comes through in the margin.

The other E-mail question that we have is what was the impact of purchase accounting on margins in this quarter? And the answer is purchase accounting is approximately $2.3 million negative impact which is about 30 basis points. And that compares to -- it was 60 basis points immediately preceding quarter and a year ago would have been no impact. So those are the E-mail questions, operator. I'll turn it back over to you.

Operator, any further questions?

We have a few standing by. We'll go next to Greg Nejmeh, Deutsche Bank.

: Good morning Ian, good morning, David.

Hi, Greg.

Hi Greg.

First, I guess the first quarter and several where you have not raised guidance, recognizing the bar has been set high and you have stepped up guidance in past quarters. Is there something you're seeing in the marketplace that gives you reason to not adjust estimates this quarter as well?

Well, as we say, Greg, we set the bar pretty high with 14 percent year over year growth EPS previously and we have a good history of meeting or better the targets that we have put out there. I wouldn't say no, that is (ph) something we're seeing right now is that there's reason to not think we can get there or better that. But certainly we all recognize this is a very uncertain economic environment right now. And we feel good coming into this spring selling season but this is key time we're coming up to. We think it's early to go ahead and raise the guidance for this current year.

Recognizing '04 is a ways away, any preliminary thoughts for modeling purposes as to, you know, how we should think about your prospects in the out year?

Well, the only thing I would say about that is we have said longer term our growth rate where we're targeting is more like 15 to 18 percent, and that remains the idea that we're going to double the size of the business every five years and that remains or long-term prospect. The extent to which we get there through internal growth versus acquisition is dependent upon what we're seeing in the market and that's part of the reason we're maintaining such a strong balance sheet to maintain that flexibility, opportunistically to take advantage of those. So exactly which part that comes from in building that model would be tough for you to do. But longer term that remains our long-term focus getting 15 percent plus growth.

One of the areas you placed a great deal of emphasis on is in the area of web-based initiatives. And when you spoke about designs to improve your margins, I did not hear mentioned specifically of any of those web-based initiatives really contributing meaningfully. If I recall in the past, I thought you had suggested to those initiatives once fully implemented could contribute 200 to 300 basis points in incremental margin gains primarily through the SG&A line. Am I missing something, or have you chosen to emphasize some of the areas that are impacting your numbers more immediately?

Greg, let me answer that in two ways. I know you have been interested in our technology initiatives. We were at the home builders show in Las Vegas this week, and these homes were awarded the award by the national sales and marketing council for the best website for a builder. The (inaudible) home which is a - the website we give to every one of our customers now and we have been rolling this out for some time that is recognized by the industry as the best way of providing customer service and also branding the company to all of our customers. So we're real getting a recognition there. Which is nice to have -- nice to be recognized by our peers there. But also I would say in terms of the efficiency that we're getting, we look back at the on line scheduling that we have, you know, I made the comment earlier that I think that on-line scheduling is really benefiting now in the way we relate the our subcontractors and our suppliers. It is hard to break out and say that aspect of it is giving us X basis points of improvement, but I'll tell you from the negotiations we are having with our suppliers and our subcontractors showing them the tools that we have here, that they can tap into, that is getting us much, much better pricing and efficiency there.

So the results are coming through. It's always been difficult to break out and clearly define, you know, what an internal system is going to give you in terms of basis point improvement. But we firmly believe that there's benefit there, you know, that the external side, the website is absolutely important for our customers, is going to give us more recognition there. That's going to help our whole process. But the internal tools that we have are going to give you efficiency savings there. It's hard to put an absolute number on it, but the reaction we are getting from the people we're negotiating with at this time, they're impressed with the way they can interact with the company.

Through the web tools.

Just a final thought on that. One of the areas that seemingly could be quantified was the ability to generate leads through the web and thereby eliminate or certainly reduce the influence of third party brokers. Is that a cost savings that you've been able to quantify or identify as being meaningful?

Well, obviously, we have to recognize that we rely on the brokers a lot, but the way that it's working now is we are putting more and more emphasis through the web. We're also using -- for people to come in and use some of the advanced tools in our website, they have to give us their E-mail address. We get into very early discussions with our buyers so if they get into the advanced search section of our website which is very sophisticated, it gives the buyer a profile of the communities in the homes that we have. We get a really strong profile of the buyer. You know, our sales agents get that directly. So we think that by catching those people early, it may be before they actually go out the a Realtor and we can get into that dialogue very early with them before they even come out to the model home. You know, it's not something -- what we also do then, the other end of the equation if the buyer doesn't buy immediately, but is still looking, we keep in touch with them and we actually have a manager in each one of our operations now to follow up on those leads and keep in touch with those leads. So we're really trying to do it at the front end of the process within -- staying with them through the whole searching process and staying with them you know, in the rear end of it. It's something that we're not trying to take our cobroker relationship down. We still recognize the benefits of the Realtor community. We market to them extensively as well. But over a long period of time, I think more and more people will come through the web (ph).

The leads continue to go up. We're among 7,000 leads now coming through the web. I think the key for us now is to develop this system for really utilizing -- utilizing those leads and getting that information into the hands of our salespeople to give them more power to be able to close that transaction.

Do you track the number of sales attributable to third party brokers, Ian? And if so, can you give us a sense of the trend line?

Well, we're trying to now and trying to quantify it clearly. It's one of the things we're trying to pick up from the E-mails. As you well know, as people come into -- as people come into a community, often they say, well, they came in because they saw the last sign. That was often the reason they give. More than 60 percent of our buyers are using the website in some form. They're using the website, either ours or using the partners that we have there. You know, our website is now out through Yahoo, through many different opportunities. As you know, we're on E-bay now as well. There are a lot of different leads pulling that all together. It's often difficult to say it came specifically from one website lead, but we are -- our customers are attracted to over 60 percent of our buyers being involved in the process.

Great, thank you.

I think that's moving up, but again, we're not trying to discourage our Realtor partners there from coming to the communities and being involved with the company that's an important focus for us.

Understood. Thanks.

Thanks, Greg.

We'll go next to Mike Kender, Salomon Smith Barney.

Most my questions have been answered. I just had a couple of follow-ups. On land if you're getting the community account up five to six percent, how much -- how much do we expect in terms of capital, that that's going to tie up incrementally?

Well, as I said before, Mike, in terms of absolutely increase in terms of dollar of land, I would expect in the neighborhood of $150 million, year over year by the time we reach the end of the year. The land component of that would probably be about half.

Okay.

But recognize again we're tying up land using options. So, you know to a great extent the future, to the extent we expect to increase in the future that's the use of options.

Okay. With -- RNBC (ph) getting upgraded, have you had any discussions with the rating agencies? Can you give us an update there

Well, we talk to them all the time. And there's -- there hasn't been discussions specifically around the updates, but where we intend to visit the rating agency soon and certainly you know, as we said in the past, we believe just based off the way we operate today, we think an upgrade of one notch, which at this point would still be a notch below NBC and Leminar (ph) would be appropriate. So it's something that we talk to them about and certainly --both rating agencies having upgraded us multiple times from watching our performance, we think that it's something that is warranted in the near future.

Mike, we see that as a real positive for both Lennar (ph) and NBC and also the industry as a whole. So I think that the recognition that it's professionally managed not the same industry as it was 10 years ago, we think that will benefit all of the home builders and we'll certainly take our case to the ratings agency as we do constantly. We'll be seeing them fairly soon to address the company's prospects going forward.

Great. Good luck.

Thanks, Mike..

We'll go next to Gil Alexander, Darphil Associates.

Good morning. Could you do me a favor?

I'll try.

Could you continue reporting your sales on a monthly basis?

Well ...

Changing your reporting system plays into the hands of people who are neutral obeyers (ph) on your stock.

Well, the unfortunate thing, Gil, we have been one of the last remaining standouts on this and we have been reporting new orders. The fact of the matter is we have always held that a single month new orders especially for a single builder is a fairly irrelevant number, doesn't have a lot of meaning and unfortunately the market doesn't take it that way. Taken in the context of a large number of builders it has relevance. Being one of the last few remaining ones and most recently you have seen companies announcing that they're not reporting like NBC and KB Homes, we just find that it's not - you know us standing out there and repeating the -- you know reporting a relatively irrelevant figure just doesn't make a lot of sense.

Okay. Thank you.

We'll go next to Scott Grabine, Shanenkman Capital Management.

Good morning. Just circling back to the margins for a second your 130 basis point increase If we were to try to carve that say (ph) into (ph) three broad categories, buyer options, these (ph) are (ph) operating efficiencies and then just home price increases, I understand you might not know this -- the exact dollar amounts but I guess broadly how would you sort of classify the percentage with respect to the three categories?

Well the easy one that I know is the buyer options because that has not increased significantly. It's about flat year over year both of the percentage of sales pricing and then the margins on the option so that in terms of increment is not -- is not a major contributor. The extent to which it is efficiencies or price increases, I would say it's about 60/40 towards price increases. About 60 percent, 40 percent towards efficiency. As you say, it's not a science. It is tough to break it down to know to what extent you're controlling costs. We do know that sales prices are increasing higher than total increases in costs, and with land going up significantly higher the increase in other construction costs. But I'd say it's about 60/40 between those two.

OK. Thanks.

Thank you, Scott.

We'll go next to Jeff Lignelli, Stonebrook.

Good morning. Based on your 1225 of earnings guidance what's the corresponding free cash flow after investing in land in 2003?

When you say free cash flow after investing in land meaning what you would see say on our cash flows from operations, in the cash flow statement with ...

Less capex.

... incremental investments?

Yes. Less capex. So at the end, based - what should the net decrease, you know, off of the 1225 earnings?

That will probably be in the neighborhood of 50 to 80 million dollars when we reach the end of this fiscal year.

All right. Just based on your stock trading and lessons (ph) really (ph) around five-time earnings, I understand that -- you commented on this earlier, but it seems to make sense to jump start your earnings per share growth which has been good, but what seems to give you a real turbo boost to your earnings per share growth. You have to really be more aggressive in buying shares back at these levels.

Well certainly mathematically that would absolutely be accurate but you need to recognize that giving up capital which is difficult for us to get in a consulting industry has long-term ramifications than a one-quarter boost to EPS. So that's not the sole consideration. At some points we may move more aggressively in doing that, but it won't take into account the long-term prospects of reinvesting. And generating the sort of - that we have been generating by reinvesting in the business.

But just generically speaking, if you spend $50 million on a acquisition versus $50 million on a share re-purchase which is more creative to your earnings?

Well, its going to be acquisition.

Even when your stock is five times the earnings?

Yes. We have been able to buy at times for instance a year and a half ago we bought into the Colorado Sanford Homes at four times operating profit. So we can reinvest through acquisition or buying properties to generate returns on capital similar to buying back stock.

Great. Thanks a lot.

Thank you.

We'll go next to Alex Barron, Franklin Templeton.

Good morning. Congratulations on the quarter.

Thanks, Alex.

Thanks, Alex.

I was hoping you could give us some guidance as far as next quarter, what to expect in terms of deliveries or sales price?

I would expect the --actually both the deliveries and sales price to be fairly similar to this quarter, maybe a little bit up on the deliveries and a little bit down on the sales price as we do get -- as we have been getting the newer communities open in the lower price points. But actually it will be a relatively similar to this -- to the December quarter.

Okay. Great. Thanks again.

Thanks, Alex.

We'll go next to Jason Capello, Osparaie Fund Tudor.

Hi, guys. I mean, it's been talked about already, but I want to readjust -- purchases. You made a comment, David, that there's no evidence that share purchases are working quote/unquote. In the long run it's about a return on the capital and we'll figure in out eventually. But in the short run there's three companies I can see that are actively buying back their stock. (inaudible), KB and NBR. And the multiples of those stocks are 5.7, 6.0 and 8.5. So even if you take Rieland (ph) which is the lowest PE of them all it's .7 times higher than you're trading. And you know .7 times $12 is $8.50 in share price which is a 14 percent return from today. And if I look at, you know, the 20 percent decline in your stock price last year, you know, 14 percent up in this kind of market doesn't look very unappealing to me as someone who's a top ten shareholder of your company. Other than the fact that your board doesn't own much stock, I don't understand why at least having an authorization in place is a bad decision here.

Well, obviously, a number of questions related to that. I continue to maintain that the difference between a five and a 5.7 is a fairly fine shade of difference and both are of course incredibly cheap.

David, it's 14 percent return in an equity market that was down 20 percent last year.

I understand that. But all I'm saying, Jason, is that it doesn't seem to make a -- you know, truly significant difference to the multiple. To the perception of the company and focusing on the long-term growth of the company is somewhat more important than that. The -- I'm trying -- the last point you made about -- which I was going to address directly. Oh, on the authorization. One thing that we would prefer not to do is have an authorization out there that we don't act on. If we do authorize -- we have had authorizations in the past twice and both times we've executed them in fairly short order. Once you put out an authorization, it just seems to me that you should be acting on it. And so the idea of currently with us, without us having a commitment to making that repurchase, I wouldn't want to just have an authorization out there.

Right. I think what you guys are missing on this is the point isn't to authorize and then buy the stock and then look two weeks later, and say "look, our stock is up 15 percent look what a great job we did". The point of the authorization is in place so you can buy your stock and get a return for (ph) your (ph) share hold (ph) in the long run. And I don't think -- you mentioned you're in great position in certain market that are a little slower and you have a great land position. So by buying your stock back, you're just meaning -- you're basically allowing shareholders like myself to own a greater percentage of the business that you already own. Which is intrinsic -- way undervalued on an intrinsic basis and there's a return to that. Simple math is, you know, if you can grow your business organically without much incremental cash flow, it's, you know, return here is like 20, 25 percent and our risk adjusted basis. I don't think you're getting that anywhere else.

No, I do -- I do agree that the -- a repurchase is a long-term decision with respect to buying back at a very low price does have positive impacts from a long-term standpoint as well. That is balanced with long term reinvest in the business. To say that we aren't getting those sorts of returns, we are getting fairly similar returns and have over the last few years by reinvesting in the business.

: But there's a risk adjustment that you have to make. You guys understand your backlog and your balance sheet and your land position better than someone that you are going to purchase. That's how you risk adjust returns.

And I agree with that at well. And that's why at times we will make that re-purchase because our risk adjusted basis just becomes an absolute slam dunk overriding the impact -- for the long-term strategic impact of the business we believe it makes sense to hold on to the capital to help for the future growth.

All right.

Jason, let me add, we constantly look at this, we see the opportunities and our board sees the opportunities for the company going forward. We will look at dividend policy and we have discussed that in the past. If the latest stimulus package moves forward and that becomes more advantageous, we'll look at that. So this is something that is considered very seriously by our board and we discuss it. At the moment, we have seen the opportunities going forward to outweigh that. But again our shareholders' concerns will be certainly taken into consideration.

Okay. I guess the last thing I wanted to mention you mentioned rye land as one of the ones who is buying stocks and not seeing a big impact. It's up 17 percent year to date. I know, guys, there's been a lot of discussion going back between yourselves and the board on this. What you might have to do is have the board listen to the replay of the Rieland (ph) call at the next it is-down because it will turn out to be the model for capital allocation in this industry.

OK.

Thanks.

Thanks very much.

And ladies and gentlemen, due to time constraints, that will conclude our question and answer session. I'd like to turn the conference back over to Mr. Ian McCarthy for any additional or closing comments.

Well, thank you thank you, operator and thanks to everyone for the calls that we have had today and the discussion we have had. As usual, following our conference call, David and I will be available for your questions. We'll be pleased to take any questions that you may have. And the recording will be available at 1:00 p.m. today in the investor relations section at Beazer.com. So we look forward to talking to you again on April 23rd when we discuss the second quarter results for fiscal 2003. Thank you for listening today and good-bye.

Once again, ladies and gentlemen that does conclude today's conference. Thank you for your participation. You may now disconnect at this time.