Beazer Homes USA Inc (BZH) 2003 Q2 法說會逐字稿

Good day, and welcome to the Beazer Homes earnings conference call for its 2003 second 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, and welcome to the Beazer Homes conference call and our results for the quarter ended March 31, 2003, the second quarter of our 2003 fiscal year. During this call we will webcast a synchronized slide presentation.

To access the slide presentation, go to Beazer.com and click on the earnings release link in the center of the screen. From that site you may submit questions to us electronically. For those not connected to the webcast you are also welcome to Email 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.

Additionally during this call we will be discussing earnings before interest, taxes, depreciation and amortization, EBITDA and certain other measures that are derived from EBITDA. EBITDA is a non-gap financial measure. Please refer to our second quarter earnings press release and to Beazer.com for reconciliation of EBITDA net income, the most directly comparable financial measure.

Ian McCarthy, our CEO, and I will give a 15-minute presentation, after which we will address any questions you may have. I will now turn it over to Ian.

Thank you, David. Today we'll be discussing our results for the March 2003 quarter which sets new second quarter records on numerous fronts including home closings, net income, EPS, new orders and backlog. We will also reiterate our target EPS of $12.25 for fiscal 2003 and give details on the underlying assumptions.

For the quarter ended March 31, 2003 we closed 3,297 homes, a 35% increase over last year's March quarter. Net income was $38 million , a 57% increase over March 2002. Both of these figures represent March quarterly records.

EPS for the quarter of $2.83 per share was also a March quarter record and was up 11% over 2002. Total revenue for the quarter was $666 million. Net income increased 57% over the second quarter of fiscal 2002 while revenues were up 32%.

Once again we reported a greater increase in net income and revenues as our gross margin hit an all-time company record. Gross margin before interest was 22.5%, up 230 basis points from March 2002. 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. Initiatives of our home construction costs through increased use of national purchasing contracts and more efficient home design have been and continue to be a major emphasis at Beazer and have continued to yield significant benefits as demonstrated by this quarter's results. Our progress on these initiatives, though accelerated recently, have been able to take advantage of our increased size and enhanced purchasing power with the addition of Crossmann communities during the last year.

In addition, margins are especially strong in our California market which comprise approximately 20% of our revenues for the quarter. During the March 2003 quarter we had 4,579 new orders, a 46% increase over March 2002, and a new all-time company record. At the end of the quarter we had a backlog of 7,460 homes, a 55% increase over March 2002. Dollar value of backlog was $1.5 billion, up 47%.

March 2003 new orders and backlog include Crossmann which Beazer acquired in April 2002. On a pro forma basis, new orders for the quarter ended March 31st, 2002, including Crossmann's orders, would have been 4,717 homes and backlog at March 31, 2002, would have been 7,360 homes. We're pleased with our new orders for the quarter, taking into account the fact that we had targeted opening 5 to 6% more communities during the quarter but were only able to open 2% more due to regulatory and weather related delays.

Most of the openings also occurred late in the quarter. These delays are becoming pervasive in the home building industry and while making it difficult for us to accurately predict new community openings are actually making it providing a benefit relative to our competition the small private home builder.

We enter the second half of fiscal 2003 with our backlog at record levels up 55% from last year. At this point, with 6,079 closings in the first two quarters of fiscal 2003 and a backlog of 7,460 homes we had 14,239 homes closed or in backlog. This is 92% of our 15,500 targeted closings for the year, giving us very good visibility on our $12.25 EPS target for the year.

David will now address our financial position and give further details on earnings targets for fiscal 2003.

Thank you, Ian. I would now like to discuss our extremely strong current financial position. The end of the March 2003 quarter was one of our strongest balance sheets ever, and our ratio of debt to total capitalization improved from 50% to 46% relative to the March quarter of the prior year.

In addition, we ended the quarter with $19 million of cash on hand and no borrowings outstanding under our revolving credit facility. This performance demonstrates how we have both grown the business and generated positive cash flow from our operations during the past year.

During the quarter we also began to prudently execute the stock repurchase plan authorized by our Board of Directors. We were able to do this while still reducing our leverage and maintaining a very strong financial position.

During the quarter ended March 31, 2003, we repurchased 128,000 shares of our common stock for $6.9 million or approximately $54 a share. These repurchases were made pursuant to one million share repurchase programs authorized by our Board of Directors in February of 2003. We intend to continually evaluate prudent stock repurchases along with re investment in the business in our capital allocation decision making process. At all times we intend to maintain a strong financial position and the financial flexibility that we believe will provide us with a competitive advantage in our rapidly consolidating industry.

One of the most notable aspects of our financial performance during the quarter ended March 31, 2003, was the improvement in our gross profit margin. As Ian mentioned earlier our gross margin before interest of 22.5% set an all-time company record. This gross margin is benefiting both from the continued strong home building environment in many of our markets, especially California, and from initiative control of building costs.

With our increased size we are looking 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 Crossmann's construction techniques and best practices across these operations. You can already begin to see the benefits of these initiatives in the dramatic 230 basis point improvement in our margins during the March quarter. We believe however that there remain significant benefits to come in the future as we have just begun the process of renegotiating our national contracts and streamlining the management of our supply chain.

I would now like to give some details on our NPS guidance for fiscal 2003 we are reiterating our previously announced EPS target of $12.25 per share which would infer 14% growth in EPS over fiscal 2002. The factors behind that target are 15,500 home closings with an average price of approximately $200,000.

As demonstrated by this quarter's performance we have been achieving both a higher average price and a higher percentage gross margin than was encompassed in previous guidance-- our reiteration of this target encompasses those factors and takes into account delays in getting subdivisions opened and harsh winter weather are likely to reduce closings from prior targets yet with no reduction to EPS.

I will now turn the call back over to Ian.

Thank you, David. With our current strong back log up at 55% at March 31, 2003, we feel optimistic in reiterating our $12.25 EPS target for 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, the all-time record orders that we reported in the March quarter were achieved during a period of extremely high uncertainty.

It is our belief that the large public builders and Beazer in particular will continue to perform beyond investor expectations even in challenging economic times. We would now be glad to answer your questions and I'd ask the operator to give the instructions for registering your calls.

Thank you. The question and answer sessions will be conducted electronically. If you would like to ask a question you may do so by pressing the star key followed by the digit one on your touchtone telephone. Once again please press star one on your touchtone telephone to ask the question and we'll pause for just a moment.

Our first question will come from Margaret Whelan UBS Warburg.

Good morning folks. Great quarter, congratulations. I guess the one thing that stands out is the gross margin improvement is the same while the earnings margin seems very conservative. Would you just address that?

Sure. As we said during the call and the press release, there was a significant portion of closings and revenue from California. California is seeing significantly higher margins than our other markets. There was about 20% of revenues this quarter; whereas, the relative backlog, it's only about 15% of the dollar backlog.

That being said as the mix changes I would expect the margin to come down in the neighborhood of 40 to 50 basis points but then be sustainable from there, and basically that's entirely mixed not -- no impact of any reduction margins by market.

So we should be assuming about 20% for the rest of the year.

I think that's a fair assumption.

Second thing just in terms of the industry crept up a little bit, would you address that, I guess it was weather?

Well, that's right. Our backlog during this quarter is up about 20% relative to the immediately preceding quarter. Some of that, we saw fairly good sales but a fair amount of that is that the weather caused significant delays in building inventory and getting homes closed. As a result we achieved fewer closings than anticipated and got some homes started later than anticipated, so that is certainly driving the inventory up somewhat. Seasonally it typically does go up at this time. It was up a little more than that as a result of the weather.

And just finally spec. inventory at the moment?

Spec. is about flat year-over-year. Still less than one unsold unit per community, actually, point A unsold finished homes per community and under three homes per community at any stage of the completion from foundation onward that are unsold, so quite a low level of spec. inventory.

Okay. Thanks very much, guys.

Thank you, Margaret.

Our next question will come from Joseph Sroka with Merrill Lynch

Good morning. Ian when you were on TV this morning CNBC, you commented one of the ways you were trying to keep housing more affordable was density and you've given some examples. What are some examples of some other things that you are doing so that you can continue to target that attractive entry level segment that you're going after even though obviously in some of the markets it looks like prices are going up still?

Well, Joe, thanks for the info from CNBC. It was basically in the context of Mark Haynes saying in Score Box this morning, that we’ve been doing this for a long time, you keep coming here, you keep telling us these great results what's out there? What is there that could be a problem? One of the things I said is, affordability, the point you just brought up, really two things that we were trying to do to address that.

The first is we are trying to increase the density that we have in communities so that the land costs, which is the component that is rising the fastest because of short supply, we're trying to use that more efficiently, and we're getting, you know, support in that, in terms of the communities that we're building within, we're trying to do that.

And then secondly we're trying to be really efficient in terms of our build costs. We mentioned that on the call, that one of the principal reasons for buying Crossmann last year was the real efficiency they have at that entry level and even though we're not separating Crossmann and Beazer out in terms of average prices I can tell you that the Crossmann product is still under $150,000 the average for Beazer including that is around $200,000 so you can see it's very affordable and we're now taking up products, efficiency, across other markets. So we're looking at the density, looking at getting the land component down and looking at build costs, trying to get it more efficient and we're trying to really renegotiate our contracts now based on the size of the company. We're 50% bigger than we were a year ago.

We're going back and renegotiating a number of those contracts on today's basis and then on the prospects of future growth within the company, our suppliers and subcontractors are being very understanding there, they know that they can see that growth going forward. They can also use our systems, our scheduling, save costs out of supply chain, so we are doing a lot of things because we see that affordable market as really the market for the future, that's really the market where we want to be positioned and we are doing a lot of things to get ourselves well positioned for that.

Okay. Well, I guess for David, looks like your stock was only under $54 for about six or seven days during the quarter so congratulations for bottom-ticking, now that you're back up in the high 60s, pushing 70, is the share repurchase less attractive here?

Well, first off, we're not going to say, or aren't currently in the market, as we also didn't say during the last quarter and when we're buying. We're not trying to, you know, play the market with our life blood, our capital, so although I appreciate your comments on bottom-ticking and getting that right that's not really the intent.

The intent is to prudently execute the program, to watch it and watch our balance sheet at the same time and time it as earnings come in. So while, yes, the price is higher than the price we were buying it at, and so maybe there's a little less inclination today, we're still going to continue to evaluate as we look at having sales come in, there will be earnings coming in and prudently executing that program while watching the balance sheet.

Is a bigger factor your stock price or is a bigger factor your division Presidents coming to you with, you know, sort of EVA-positive type projects that you would have an interest in funding?

Well, certainly that's true. If you take a look at, we're still generating a 20% return on equity and well beating our internal measures for return on capital and that is a result of those projects coming in as you say are very attractive and provide very good long-term benefits in growing the business which is what we have done over the last few years and intend to continue to do, so yes it definitely is a balance with that, of looking at reinvesting in the business and continuing to grow and achieve an excess return on capital.

Okay. I'll pass to the next person. Thanks for your time.

Our next question will come from Steven Kim from Salomon Smith Barney.

Hi, it's Steve Kim from Smith Barney.

Hi Steve.

Hi Steve.

Congratulations, guys, for the strong quarter. I guess kind of getting to the issue of conservative guidance here which is, you know, certainly something that we should be getting used to from you guys, given your track record but I just want to understand that a little bit better. Margaret addressed the margin issue. Certainly looks like there is some cushion there, but on the volume side it also seemed that the numbers were kind low and the numbers I am referring to are the closings.

It looks to me that you are basically suggesting that you can hit your guidance or your guidance incorporates over the next two quarters delivering no more units than you did a year ago period in each of the two quarters despite the fact that your orders on a year to year basis have been up somewhere from anything like 25 to like 60% for the last few quarters, I assume we're still trending somewhat positively. So I just want to try to understand, are you guys sort of intentionally slowing your production to sort of push units off into '04 or are you just not pushing particularly hard.

Can you just talk to us a little bit about why we might not see closings to be up significantly above a year ago levels? Because the weather impact I wouldn't think would affect you by the time you get to the September quarter.

Yeah. Well there is a lot in those series of questions, Steve. I'll try to hit all of your points.

Let me start with, as you were saying, the closing levels for the remainder of year are up only slightly from year-ago figures even though the orders have been up quite dramatically. Part of that is the fact that we're just now anniversaring the acquisition of Crossmann so it was at this time last year that our closings were in our closings and going forward from here will be fully comparable on orders this year versus last year, et cetera, but really there's some non-comparability in that closing you just did.

The comparability that would be there is in the backlog and the backlog is currently up in the neighborhood of 1, 2% and, yes, we are expecting orders to be up as well. But we are being somewhat conservative about guidance. That being said, our experience has been showing us that the build times both the time of getting development done and getting community open and the time of building homes, getting, pulling permits on homes and getting them inspected and getting them built is definitely lengthening.

And so our conversion ratio of our backlog is being pressured. It's coming down. During the next quarter especially we're still going to continue to see some impact from the weather of last quarter because we didn't get as many foundations in the ground as we were anticipating, so most especially the conversion ratio next quarter won't be dramatically higher, by conversion ratio I'm referring to the closings relative to the opening backlog, that won't be dramatically higher than it was this quarter. It should be higher in the 4th Quarter but probably won't get up to the same level that it was during that quarter last year, and it's those figures that's in the earnings guidance, in the closings guidance that comes behind the earnings guidance for this year.

So net-net your backlog is providing you with greater visibility in terms of future earnings than it was let's say than a year ago?

Yes, that's definitely true. It's just that the timing of it is a little more difficult to predict because the timing of getting closings is getting more difficult to predict.

Right. On the SG & A line, SG & A, the way we calculated it, was up about, you know, 30 basis points year-over-year and then the first quarter it was up 20 basis points year-over-year. I wasn't sure though what the second quarter results were impacted by a somewhat lower closing level than would be considered normal, so my question basically is for the year would you anticipate that your SG & A ratio would be up the 20 to 30 basis points year-over-year versus '02 or do you think you might be able to make up some ground over the course of the year?

I think we might be able to make up a little ground but that's not what's in the guidance. The guidance, as you say, is perhaps somewhat conservative on the units yet we're still trying to get the communities open and therefore to some extent spending money on getting communities open and ultimately the marketing for them.

So there is an anticipation of that trend of a higher SG & A percentage relative to our expectations may continue and effectively the guidance infers about the same SG & A percentage continuing through the remainder of this year as we experience this quarter. And so if it ends up that we get higher closings that will come down but based on these closings that would be the assumption there.

On that topic by the way, one other point I forget to mention, Steve with the timing of deliveries and the merger ratios backlog because we have so few spec. that number also comes under pressure and that's one of the positive things that contributes to that number coming down. To the extent we had higher spec. in the past we were able to close a higher backlog, the spec. levels we can hardly get the homes built that we have presold and want to close and much less have any spec. at this point so the fact that the spec. level is so low ultimately contributes to the reduction in the -- ratio and therefore the reduction in closings and therefore getting at your question a slightly higher SG & A ratio.

Great. Well, strong results. Congratulations.

Thanks, Steve.

Next we'll here from Robert Manawicz with UBS Warburg.

Hi, good morning. I was wondering if you could help us understand the contribution from Crossmann and maybe the best way to do that if you could help us understand what EBITDA and -- were in the March ’02 Quarter.

EBITDA and delivery in the march quarter for Beazer you mean or --

For Crossmann.

Well a year ago we didn't have Crossmann.

Understood but this year you do and I'm trying to --

Oh, you're trying to get what would have been their separate --

Numbers.

-- numbers from last year? I'm afraid, Rob, I don't have that handy. I can certainly go through that with you off line, the figures for a year ago.

Okay.

It's difficult to do that because, you know, certainly in the southeast we've integrated all those businesses together.

Understood. Understood. My second question is on cancellations. Are you seeing any trends by region? Were there any cancellations in the quarter that resulted in lower deliveries or was it all really weather related?

Well, it was mostly weather related but yeah the cancellation rate was up slightly during the quarter. It was about 25% compared to a years ago at 21% and the southeast and Midwest in particular had higher cancellation rates than the rest of the country. 21% and the southeast and Midwest in particular had higher cancellation than the rest of the country.

Looking at your inventory turns they have slowed and that's to be expected given the inclusion of Crossmann which I think is more asset intensive and your comments on weather-related delays, but I am wondering where do we go from here? Are we close to the bottom? Are we at the bottom? What do you expect?

It's tough to predict but I think the answer as a target would be, yes, that the level that we're at right now should be about the asset terms on -- calculated on an LTM basis where we are today.

We certainly are expecting to start to get, to start to improve, especially in the 4th Quarter of this year, the closings relative to the backlog which will improve the asset terms when we get to that quarter. This should be about the bottom of that.

Okay. And one last clarifying question: You made the comment earlier that your specs. in terms of completed, were less than one per community, 0.8 for community and total units under construction were 3 per community. Your community count is up about 65%, so is the logic correct that your number of units is up 65%?

A little less than that, and certainly more like 50%.

50%.

But yes, then that takes into account significant addition of Crossmann during the year.

Perfect. Thank you very much.

Our next question will come from Ivy Zelman with Credit Suisse First Boston.

Hi, guys. How you doing? Good first quarter. Just a few cleanup questions. One of the things that we have noticed is in looking at the weekly that we put out, I'm sure you get that weekly David in terms of the incentives analyzing some markets, you see a lot of advertising by Beazer for minimal down payment ads, you know, dollar-down type ads. What is your -- in your mortgage company right now, what is your average LTV ratio running?

The LTV ratio is still right around 90% over all. And a lot of those ads are run as teasers, especially marketing to the first-time buyer at the lower price points trying to get people into the models. It's not ultimately what you sell them on, but it draws them in.

Got it. And do you think that that has been increasing, though, the LTV ratio, or has it been roughly the same over the last few years?

It has increased slightly. It used to be more like 87, 88%, it's gotten up to 90, 91%.

Okay. And with respect to Indianapolis and Crossmann, we've heard that, you know, you are actually doing some good things there with respect to making some management changes and, you know, becoming more conservative and actually walking away from some land deals that you had locked up from, with option contracts. Obviously, Crossmann has been a challenge, can you just give us some of the details related to some of the strategy on growth there?

From what I understand your permits that you have taken down are down as much as by half and, you know, if you're walking away from options can you quantify for us what that P & L impact was?

Ivy, I think the quarters you're quoting for are calendar 2002 and obviously through the acquisition and prior to the acquisition somewhat Crossmann lost some market share in that market. We really feel it's coming back well. The March quarter was much stronger for us there. And we have as you say repositioned that market somewhat.

We have two distinct outlines there we have the Crossmann products, we're going through a re tooling and bringing the Beazer name into that market and we also have the trinity brand there which is slightly more up-market and we've confined the space between the two. There was a lot of overlap between the two there.

Trinity actually gained market share last year where Crossmann loss it so net-net we didn't lose as much as you might see on the surface. What we have done is we redefined the position where they are not overlapping as much and we have also moved them into certain communities together. So one of the things we're doing there is having multiple price points within communities separating the price points inside the larger community there but looking for more volume going forward.

So we feel, certainly we did lose some market share in Indianapolis last year. A lot of that was due I think to the transition. We are very strong on our systems. We like our systems. It just causes problems when we put the systems in. We're fully integrated in the southeast now. We're finalizing now in Midwest, that does cause some disruption, but net net going forward, we feel very comfortable in our position going forward. We like the position we have in Indianapolis. We have the most excellent land bank there, going forward, it's priced extremely well and we feel very comfortable with opposition in Indianapolis going forward. We'd obviously like it to pick it up as it is this time. Wee don't like to keep market share there. We are positions ourselves to regain the market share we might have lost last year.

Is it true that you have walked away from some land deals and basically had to walk away from the deposits?

No, that's definitely not true. It is certainly true that we have flipped some land deals, we sold some land there, some of which we owned some of which we had under option but no, in cases have we walked away and lost the deposit and in most cases we've made a slight profit.

Okay. Then looking at the good will that you incurred that you had to put on the balance sheet related to the acquisition which, and correct me if I'm wrong, but we're calculating now that your book equity is roughly 30%, would we be concerned that you may have to have a write-off related to some of that land or some of that good will, given that Crossmann has been weak since you purchased it in.

No, Ivy, I don't think you should be concerned. Certainly, it's something that at all times we have to look at. We are looking at. We currently don't believe there's any cause for concern of impairment. Both we are generating an adequate return on capital from the Crossmann operations and overall and we are achieving the benefit that we thought we would achieve from the acquisition in terms of lowering our purchasing costs across the company, so I don't believe it's something of concern.

When you look at the return on capital from Crossmann, can you give us a sense of what it is today versus what it was when you bought it?

That is a little tough to do, but, certainly, the part that I do know is it's beating our overall hurdles of return on capital, so it's definitely above 15% it's generating positive value or EBA as we measure it.

And the net result we're getting across the whole company with margins up this quarter 230 basis points and a lieutenant of that is due to the benefit of scale, the efficiency we're bringing in, these are real benefits we're getting across the whole company and I think that's something that you can clearly see in the margins.

Great. And lastly, if you think about, you know, the strategy for Beazer going forward, having had made an acquisition about a years ago now, do you think that acquisitions are likely to be in the near term for you as part of the strategy about allocating capital? Or do you think you're going to focus on internal growth?

I think we've got a lot of opportunities to grow internally as we take the Crossmann type of product into the Beazer markets and then vice versa, take some of the Beazer products back into the Cincinnati, the Columbus markets, like that, so we're very focused on that at this time. Obviously, we're always aware of acquisitions that are out there but it's not our primary focus at this time. We've got a lot of growth potential within the company, so that's our primary focus but certainly we are aware of those opportunities and we will look at those as they become available.

All right. Let me sneak in one more question but I thank you for that answer, Ian. If you look at the overall Beazer markets today in aggregate and, you know, just percentage-wise, would you say that, you know, there's 10 to 15% that are weak, 50% healthy, 20% strong? Or how would you break it down in Quartiles, if you want to give me more specifics I'd love it but just a barometer of health.

Yeah, I'm not going to give you any more specifics. What I say is the west is very strong. The fact as we've noted here particularly in California, what you have to look at is not just individual numbers but the net return that we're getting and the fact that the margins are up so much when we get into these markets which are constrained, California being an absolute market, the mid Atlantic being a market, if we can't replace those communities we're not necessarily going to sell at the rate we would have sold at, we're going to maximize our return, increasing the margins where we can, what I say is the west generally is very strong. The mid Atlantic is strong, it's a very strong market. We've got a terrific rebound in the southeast. If you look at our orders in the southeast this quarter they're up over 40%. The Midwest and the central markets which is quite small for us which is Texas, about somewhat weak and we're repositioning there in those and looking for growth those markets.

So I haven't given you in quartiles but what I would say is we're very comfortable with all of the markets, Texas down a little bit at the moment and the Midwest coming back. I'm very pleased with the southeast, it's really picked up. As you know the markets around the southeast were very strong for a number of years and have lagged for a while but they have really picked up at this time so I'm very pleased with that.

Great. Thanks.

We will now hear from Salomon Smith Barney, Mike Kender.

One follow-up to Ivy's question about loan to value. Last year the hot topic was the subsidized down payment program and I wonder if you could give us some color in what you're seeing in terms of those out there in your business and also competitors.

I certainly know they're still out there despite as you say it having been a hot topic last year it pretty much died down. The program still exists. They are still supported by HUD and FHA. It's not really something that we track separately because it's never really been a major concern of ours, at least not until it hit the press last year so I don't really have figures for you, internally here, but my sense is it hasn't changed dramatically in the last six months or a year.

Okay. The other question was on share buy-backs, given number as of March 31st, have you bought any additional shares back in April?

No, we consider ourselves to be in a closed period from the quarter-end through the release of our earnings, so we wouldn't be able to buy back shares during that period.

Okay. Great. Thank you.

Thanks, Mike.

As a reminder, that is star one if you do have a question. If you find that your question has been answered you may remove yourself from the queue by pressing the pound key. We will now go to John Lynch with Lynch Research.

Oh, hi.

Hi, John.

A couple of questions about the California market. Is that the toughest market in terms of getting approvals?

It is, but I will tell you that the mid Atlantic markets, you know, Virginia, Maryland, New Jersey are almost the same now. It's very tough in those markets, and I could probably say, possibly even tougher in Virginia or Maryland at this time.

Do you have any insight as to why this tightening is taking place? Is it something out there, that you see change in the ways that communities are making their approvals?

It absolutely is, but, John, as you know, I actually like that. I think the fact that it's getting tougher, it's tough for our guys in the field to work with it but it absolutely gives the change -- this is the real catalyst that has changed the industry and made the larger builders gain such market share over the last four or five years and I think it's the slow growth, no-growth initiatives in these various markets. It's the way that the municipalities have been looking at this. There have been some people elected on this platform. But at the end of the day this is beneficial for the large builders in the industry. This is where we can absolutely use the strength that we have in terms of our professionalism, in terms of our cap Sewell base that we can use that, and one of the moves we first made from our southeast base here was to move into California where it was tough because we saw that as the real opportunity, and I think that we are seeing that now in so many markets that even some of these traditionally easier markets to build in, Atlanta, Phoenix, markets like that, have become very tough. We all as large builders will gain market share and net-net is beneficial for us. It just causes strain on the way, it causes stress on way but it's definitely positive for us in the industry.

I couldn't agree more although I get confused as to whether this is a British company or an American company.

It's definitely an American company. I just have the wrong accent but apart from that it's totally an American company. What I think U.S. companies are having to do now is they are having to look at a longer land bank. It's just not possible to trade on a day-to-day basis and be short on your land bank. We've got to have a land bank. We've got to work on that. And that's where the advantage is for us so this that sense most of the large-share U.S. companies are looking a bit more like British companies. That's the way it is.

Is that one of the problems in Texas, Houston and Dallas are pretty easy to get approvals, are they not?

Yeah. I wouldn't say we have a problem in those markets. I mean, they're just somewhat down compared to the comp last time but of all the markets in the country, you're right, they're probably still the easiest.

The Texas markets are still the easiest to get entry into. We've got a very good position in Houston. We've got a very affordable product line there and a move-up market and we're repositioning very well in Dallas now, so I see that fundamentally in the future as a good market for us, but it's just in this period it's somewhat down.

I mean, it would be necessarily ironic if there are any markets that we've looked to an acquisition, Texas I would say is a market that we need to be larger in that market and we're trying to do it organically, it's a slow process. If there was an opportunity there that might be something we'd be interested in but again it's not high on the rate upstream but it's certainly we'd like to increase our position, we see Texas as a strong market particularly for affordable entry homes with the immigration there particularly from the south so we see that as a good market for the future.

I have one final question and it's going to be harder to answer, I suspect. We've been riding along with mortgage rates under 6% for quite a bit now, a couple of times it's broken above, but it's been moving back down. I have a sense that the economy has yet to reflect the spending strains that are in the government's picture for next year, and if we're going to be running large deficits and we're going to have a significant move, we've seen a couple of months where the inflation number has bumbled up a little, we're going to have a -- next year a tighter money condition. Do you have any thought what the difference between the 6% under-mortgage and the 7% higher mortgage would mean to the number of customers?

Well, John, what I would say is you may well be accurate there in terms of having, a deficit may force some increase in the interest rates. To be honest, if that's the case we really don't think that difference between 6 or 7 is really going to influence our business.

Secondly, if there was an improvement in the economy which forced interest rates up, we would actually like that. That's not a negative for us. We really feel we'd be happy to take a hundred basis point increase in the mortgage rates for an improved economy. That's not an issue. But the other point I would make is that the mortgage industry now is so sophisticated, there are so many products out there in terms of adjustable rate or fixed term, three, five, seven year fixed term and then floating, most of our buyers really don't think they are going to be in their home more than five years, they're going to be moving on, so we really feel it comes down to payment at the end of the day.

There are so many mortgage products out there that we are really -- you know, we are aware of the circumstances, but we would rather see the economy improve and potentially interest rates kick up a little bit. That is not a negative for us. Obviously, your point about the deficit is slightly different, but we still feel we have plenty of room there in terms of the interest rates at this time.

Thank you, Ian.

Thanks, John.

Operator before you bring on another question we have a question over the internet which is, "what is your free cash flow guidance based on the current earnings guidance and can we provide detail build up to net income to free cash flow?"

The answer is, yes, we can, it's fairly simple. The net income that goes into the 12 and a quarter guidance would be in the neighborhood of $160 million net income and that is roughly what we would expect our free cash flow to be this year before considering reinvestments into the business, stock repurchase or pay down of debt.

With that being said we would expect of that $160 million reinvestment in the business in the neighborhood of $80 million to $100 million of that, in terms of buildup of inventory for future growth, opening new subdivisions, purchasing land. So that would leave another, roughly, $60 million to $80 million to either repurchase stock, pay down debt or simply build up cash on the balance sheet. So hopefully that will answer that question.

Operator, I'll turn it back to you

Our next question will come from David Knot with Knot Partners.

Actually this is Tony Campbell, good morning and congratulations on a timely purchase of your stock at 54. I doubt that we will see those levels in the short term.

I am wondering if you could just give us some further detail on this margin, 235th -- 230 basis point margin improvement. How much is efficiency, how much is price, and secondarily if the southeast, which has been weak for you, is starting to come back, which I gather it is, and it's reasonably strong, is there -- where in a sense is it still weak? If you can give us sort of a little more detail there if you wouldn't mind. Thank you.

Sure. When you refer to the margins, how much is efficiency, how much is price, how much is mix, I've already said in the neighborhood of 50 basis points would be mix of California being a higher portion of the total. I would say about another 50 basis points is efficiency, as measured in terms of an actual reduction in our cost per square foot building, of building homes. That's about another 50 basis points. So then I would say about another hundred, somewhere between 100 and 150 basis points would be price, that we have been able to raise prices overall in excess of any increases in our costs including land costs to achieve another 100 to 150 basis points of margin.

So let me take the southeast's question, Tony. Basically, every in our southeast operations is up in terms of new orders in the quarter. So we feel very good about that. That's from Atlanta throughout the Carolinas, Tennessee and down into Florida so we have seen an increase in new orders there compared to the March quarter of last year in every market. We feel very good about that. And we feel that it -- in some of these markets in fact there hasn't been a lot of job growth but it's showing there is strong demand there, underlying demand there particularly for the product that we provide at the entry-level market point

And, Mr. Knot, is there anything further?

No, thank you.

Thanks Tony.

Our next question will come from Gil Alexander with Garfield Associates.

Congratulations.

Thanks, Gil.

Tax rates, should we assume around 35 rate for the year.

No, 39.5%.

39.5%. And can you just update us on the short position in your stock?

It's a bit of a puzzle. I wish I could update you, as I understood it, but I believe it's currently in the neighborhood of 4 million shares which seems to be a rather insane level.

Well, congratulations.

Thanks, Gil.

Thank you.

Our next question will come from Jim Wilson with JNP Securities.

Thanks. Good morning, guys.

Hi, Jim.

If you look forward, and I'm thinking about trying to look at fiscal '04 and growth potential and all that, could you outline a little bit as you talk about internal growth, community count growth, expectations, you know, where you might be at the end of the year and maybe a little regional color?

I know you've said, your folks say around the entry level but regional color, particularly where you expect a lot of community care growth to occur things of that nature that can sort of help shape potential for '04.

Yeah. First of we've learned off from experience that projecting our community count growth on a quarter by quarter basis is a loser's game, that it's very, very tough in today's environment to do that.

Long-term, we've continued to target that sort of up 5 to 6%, mid-single-digit growth over the long-term towards next year. When that will be achieved is tough to say. Will it be achieved by the end of this year, can't say, but longer term we do anticipate pushing towards that.

In terms of where we'd like to see our growth, we continue to target the real heavy growth markets, I would say, California, Texas, and Florida, as areas for significant growth, longer term. On top of that, the mid-Atlantic certainly is a market that continues to be extremely strong. We think there's a continue undersupply there and we would like to continue going through that. So those are the markets where I'd say we would see most of our growth.

In that, and if you, particularly, I suppose, do above average for California, Texas, and Florida with the -- and maybe double digits conceivably, with the Midwest short of might be slinging on a longer term basis for you or not necessarily?

No, I wouldn't say that. As Ian said, we have been in the process of repositioning where we felt necessary, acquiring some land positions purchasing others. We do expect that to contribute positive growth going forward.

Okay. Very good.

Thanks, Jim.

Thanks.

Our next question will come from Orin McClusky with Equity Value Venture.

Good morning, guys. Do you expect the California revenues in your next two quarters to stay at current levels? I think it's 20%.

No, Or-in, I would expect it to be 15% which is what the portion of the backlog, dollar backlog that we have from California relative to total backlog.

Okay. I may have missed this: What was your average selling price for the quarter?

The average selling price for the quarter was 198,000.

Okay. But you are guiding for a 200,000 for the year, if the deliveries are at 15.5; is that right?

That's correct.

Okay. But California is going down, I presume.

Going down slightly. Virginia, the mid-Atlantic will be coming up.

Okay.

We certainly had a lower portion of those during this quarter and that, as a mix, will push it, you know, while California is coming down, Virginia and the mid-Atlantic is coming up.

Okay. Thanks a lot.

Thanks Orin.

We will now hear from Jeff Lignelli from Stonebrook Funds Management --

My question has been answered.

We do have Operator another Email question. How much money was spent on land acquisitions during the quarter we can say where was the land and how many lots did we obtain?

That's always a bit of a tough question because of the gross numbers and the net numbers. On a gross basis we purchased approximately $240 million worth of land and expenditure on land development during the quarter and our net basis, I would say that results in about a $40 million incremental investment in land and land development. And it was pretty well spread out around our markets. Probably if there's any one market that stands out it's California just because the size of the expenditures there are larger than elsewhere but relative to the land balance it was fairly well spread out around our markets.

Operator, back to you.

Moving on, we will now hear from John Stonen with Bank One.

Thank you, congratulations again. Just we've covered a number of times but just to bore in on the coming off of margins, you know, you talk about mix, but I just take it's California, given the answer to the last question. How much of that is, you know, land problems, development opening problems or is this truly a mix across the whole company nationwide?

With respect, when you say mix across the whole company nationwide, with respect to the disproportionate level from California in the quarter?

Right, exactly. Are there really some problems -- you know, you talk about the surge in California and at the same time you're talking about slowdown in development and, you know, just, you know, how much of that trajectory is sustainable? You've just said, follow a share of revenues from 15% from 20.

Right. A lot of that had to do with the shortfall that we saw in the current quarter from deliveries and construction in other markets. California is expected to be in the neighborhood of 15% of our revenues overall as a company. We're a very geographically diversified company and actually still -- even at that 15% is our single biggest state in terms of revenues. So that's sort of where we expect to be on an ongoing basis.

So the come-down in margin would not be attributed to California, per se?

Well, it's -- the 50 basis points, an additional bump-up in margin than usual from California being a higher portion than normal this quarter.

Thank you very much.

You're welcome.

Moving on now we will now here from Tennessee Jones with Wasserman & Associates.

Good morning. First of all, David, you should be doing less reading of Shakespeare and more reading of Bob Dillon. You don't need a water man to know which way the wind blows.

I thought you were going to wish me a happy Shakespeare's birthday.

Anyway, we won't get into that right now, three questions. Your pro forma sales were down 3% I have a feeling that February was especially weak and March was quite strong, part of it weather related. Can you give me an idea on how the percentages went on three months pro forma.

We're not breaking it out but you're accurate in the sense that January started a little slow. February was quite slow. We did certainly slow down in February. A lot of that was weather but then in March we really picked up in March so we felt --

Were you up double digit in March?

Yeah, we were in March, right.

And how is April doing?

Well, as you know, we're not commenting within the --

Well, wink or scratch your head.

Did you see that?

You have to -- okay, I saw it.

The bottom line then is certainly March was a period phenomenal uncertainty, the war had started. We were all uncertain then. It felt very positive and that's how we felt coming out of the quarter.

And part of it was a pickup from the weather, too, I suspect.

Certainly, yes, there was part of it --

Secondly while your improvement in the southeast isn't truly 250 -- 250 or 300 of those home orders basically the Crossmann homes in Carolinas?

It's tough to break out specifically, but directionally that's accurate, in that neighborhood.

And, lastly, what are Crossmann's margins relative to this 22.5% number? What, a rough guess, what is -- is Crossmann significantly above or below or --

Crossmann has traditionally been and continue to be in the low 22% range.

So basically the Crossmann, there was no gain or take-away?

That's right, although net relative to where we were a year ago it's a net gain because absent Crossmann we -- and as of a year ago we were somewhat below that.

Okay. Thank you very much.

Thanks, Dan.

Thanks.

We will now take a follow-up from Margaret Whelan.

Thanks. You've been talking about community delays. Can you talk about it more over the long-term. Is it really the case that the East Coast is going to be as difficult as the West Coast has been, how do you plan for that?

Margaret, I think, as I said before to John Lynch, at the end of the day this is absolutely a positive. What we're wary of is giving out community counts and saying we'll open these in such and such a time within the confines of a quarter because it's just taking such a -- it's a more difficult process and it's more difficult to predict exactly.

Yeah. Now --

What we have is we have quite a sufficient land bank for our operations going forward. It's a matter of taking it through the process.

It's also a case of what absorptions can we get out of our existing communities and I think what we have seen is in areas where we've got existing communities and we're not necessarily opening more and more on the time that we expected, we're driving additional traffic and additional closings out of the existing communities, so I don't think it's something that we should be that focused on in terms of how does this affect the business on a quarterly basis.

What we should be looking at is what's the long-term potential that the company has in its land bank in the various markets that it's in and we feel very comfortable with our land bank. We've worked very hard over the last couple of years to really push out our land bank, really work on, partly with options, we've still got the same balance, within 50-50, within 5% either way of options an owned land. We still have that, but we're working harder at extending our land bank so that we have the right position for the years to come. So I really see this as a positive.

The fact is it's difficult for everyone, in the short term, but the result at the end of the day, and I quoted something else this morning which was that the fact is of the small private builders the fact is 25% of them have less than a six-month land bank. That's just not sustainable. They're absolutely not going to be able to sustain their position with a six-month land bank and we will take market share from those people. There's no question. That's a positive for us going forward.

Yeah. I totally agree with all of that and supply constraint is going to help manage pricing power and the gross pricing power that you have seen but I guess two to three years out as you work through the land and you're saying it is getting more difficult in all the big markets how pro-active can you be in going to the munies and negotiating with them either as an industry or a company?

That's our job. That's what we have to do. We will position ourselves in terms of being able to do that. People we have in every one of these markets and that's why we like to have made these acquisitions of companies who have been there a long time, they understand the market, they've got the people there. That's their job. We work on that a lot. That's a real focus for the company. I'm sure it is for some of the other larger home builders but that's a real focus for us, to make sure the land bank is there for the future and that's how we're going to give shareholders the return that they would expect.

So you would expect to continue to build the land bank through acquisitions more than any kind of organic?

Not necessarily. What I was saying is when we move into a market we like to make an acquisition there to have the team in place and have an original land bank there that we can build on. Once we're in that market then obviously we can build it because obviously we turn that land banks fairly regularly, we want those people there to be buying, optioning, buying land, going forward, so we like to move into that market with an acquisition but once we're there we certainly can build upon that.

Okay. Thanks.

Thanks Margaret.

That concludes the question and answer session today, gentlemen. I'll turn the conference back over to you for any additional and closing remarks.

Thanks, operator. Appreciate that. As usual following the conference call today David and I will be available for questions and a recording of this call with the slide presentation will be available at 1:00 p.m. today on the investor relations section of our website at Beazer.com. We look forward to talking to you again on July 23rd when we will discuss our 3rd Quarter results for fiscal 2003. So thanks for listening today and goodbye.

That does conclude our teleconference so thank you and have a great day.