Beazer Homes USA Inc (BZH) 2003 Q3 法說會逐字稿

You're currently on hold for today's Beazer Homes conference call. At this time we are still admit than additional participants and should be underway shortly. We thank you for your patience and ask that you please continue to stand by.

Please stand by. God day, and welcome to the Beazer Homes Earnings Conference Call, for its 2003 third fiscal quarter. Today's call is being recorded and hosted by Ian McCarthy the company's chief executive officer of before we 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 on the results quarter end June 30, 2003. The third quarter of our 2003 fiscal year am during this call we will webcast a synchronized slide presentation p the access the slide presentation go to Perez.com and click thought earnings release link in the center of the screen. From the site you may submit questions to you electronically. Nor for those not connected to the webcast 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 result 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 say non-GAAP financial measure. Please refer to our third quarter earnings press release and to Beazer.com for a recollection sill case of [inaudible], the most comparable GAAP measure. We give a 15-minute presentation after which we will address any questions you may have. I will now turn it over to Ian.

As most of you know David will be leaving us soon to retire and this will be his last conference calm we have Jim O'Leary currently or and David as successor as in comings CFO.

All three of us will be available to answer questions at the end of the call. Today will we'll be discussing our result for the June 2003 quarter which set new third quarter records on numerous fronts, including revenues, net income, EPS, new orders, and backlog. We will also increase our EPS target to a range of $12.25 to $12.50 for fiscal 2003 and give further detail on the underlying assumptions. For the quarter ended June 30, 2003, we had revenues of $772 million, a 4% increase over last year's June quarter. Net income was $41 million, a 17% over June 2002, both of these figures represent June quarterly records. EPS for the quarter at $3.01 per share was also a June quarter record, up 16% over 2002. EPS includes a 34-cent charge related to the early retirement of our 8 eight and seven eighth percent senior notes due June 2008, which David will describe later. Excluding this charge EPS will have been would have been up 29%. This is our first full quarter in fiscal 2003 with results that are comparable to the prior year's quarter in that both include Crossmann communities, which we acquired in April 2002. The increases we continued to report in earnings, new orders, and backlog, illustrate the organic growth that we are achieving. The growth in our new orders in backlog were especially impressive during the quarter with new orders of 4,734 homes, up 12% over last year's June quarter, and the dollar value of our backlog at $1.8 billion, up 23% as of the end of June, both setting new-time, all-time company records. These increases were achieved on an increase of 7% in our number of active subdivisions during the quarter relative to the same quarter of the prior year. Our increasing sales velocity and the strength of our backlog are the best leading indicators of future growth in earnings. David will now address our financial position.

Thank you, Ian. I would now like to discuss our extremely strong current financial position. We ended the June 2003 quarter with one of our strongest balance sheets ever. Our ratio of debt to total capitalization improved from 50% to 44% relative to the June quarter of the prior year. This performance demonstrates how we have both grown the business and generated positive cash flow from operations over the past year. During the quarter we further am proved our financial position by renegotiating and extending the term on our $250 million revolving credit facility, and our $200 million four-year term loan, which we increase from our prior $100 million term loan.

The proceeds in our term loan were used to retire our 8 and 7/8% senior notes due in 2008. This will refinancing will result in an interest savings of $6 million per year based on current interest rate. The early retirement of our debt resulted in a one-time charge of $7.6 million, 34 cents per share after tax, to reflect the cost of retiring our debt including the write-off of previously capitalized fees. In addition to reducing our current interest expense, one of the motivations for retiring some of our long-term debt and replacing it with bank debt was to increase our flexibility with respect to our debt position. We currently believe that we will generate significant cash flow during our fourth fiscal quarter, and will end this year was an even lower level of leverage than we've just reported for the June quarter.

We further believe that we will continue to generate positive cash flow in fiscal 2004. Based on our past experience and our current expectations for future growth, we believe that the reinvestment of our cash flow into our current home building operations is the best use of that cash. However, we continually reevaluate that choice and may at some point shift to repayment of debt. Maintaining some element of our debt structure in shorter term bank debt, which can be repaid at any time without penalty increases our flexibility in making that decision. I would now the like to address the new accounting pronouncement that has been getting some attention, FASB interpretation number 46 or FEN 46 as it is generally referred to.

FEN 46 requires the consolidation of certain variable interest entities, VIEs. In our industry it has been interpreted to include the consolidation of some of the land we do not own, but have under option. In our June 30, 2003, balance sheet we've included in inventory $28.5 million of land not owned that is controlled with $5.2 million of option deposits. Total liabilities include liability of $23.3 million related to these options. When we file our full balance sheet and our 10-Q for this quarter these will be clearly marked as separate line items in the balance sheet.

The amounts reported as of June 30, 2003, represent those option contracts to which FEN 46 applies that we have entered into since Jan 31st of this year. That's the requirement for initial adoption of this standard. As this September 30th year-end we will be evaluating all of our option contracts and recording the values of those which the statement applies. We do not believe that FEM 46 either at its initial adoption or at September 30th has a material impact our financial position. Further, it has no impact on our income statement or cash flows. We have always disclosed the gross amount of land that we control through option contracts and the amount of deposits relating to these contracts and will continue to do so. Further, well before this new standard has come out we provided even further details on such contracts to our banks and the rating agencies.

As a result, we do not believe that this new accounting standard to have an impact on our credit rating or borrowing capacity. That's about all I have to do say about FEM 46. I'd be glad to answer any further questions during Q&A. As Ian referred to at the beginning of this call and as you all know I will remember be retiring at the end of this year. It is certainly with mixed emotions that I do this. I am excited about the prospect of spending more time with my family and exploring interests outside of finance and home building.

I am extremely grateful to Ian, to Brian Beazer and all those at Beazer Homes that have made this feasible. I am extremely proud of the accomplishments that we've had together. At the same time I will greatly miss the interactions of my colleagues with Beazer, and those of you in the financial community with whom I have developed a relationship over the past ten years. It's been by honor and privilege working with you. Thank you to all of you.

I'll now hand it over to Jim who will be taking over as CFO August 16th to talk about what he has been doing here at Beazer, and his new role. Good luck Jim, and welcome to the new job.

Thanks, David. Needless to say it's fantastic to join Beazer, and the home building industry at such a great time. If you'll recall a year ago, I joined the company's executive vice-president of corporate development focusing on working on maximizing the benefits of our increased size, diversity, and growth prospects by focusing on national accounts initiatives, on opportunities to optimize our supply chain activities, in addition to reviewing M&A opportunities. This fit extremely well with my background on the building supply side of the business with Hansen PLC, as CFO several years ago of US industries and most recently as CEO of USI's commercial and residential lighting group. On that side I saw how dramatically consolidation was changing the supply chain. First in BIY retailing, with Home Depot and and Lowes, some of the customers that we served, and now most recently in the home building sector. And now we're using many of those lessons learned as a supplier to Beazer's benefit, in structuring win-wins with our partners to both of our mutual benefits. Over the past year we've made a lot of progress on these initiatives and we expect much more in the future. In my new role I'll continue to oversee these efforts, but of equal and greater importance, I'll look forward to working with and getting to know you in the investment community whom I don't know already and continuing to update you on our plans and our progress. And finally I'd look to thank David in all of his efforts on behalf of the company and our shareholders over the past decade and wish him nothing but the best in his future endeavors. Now Ian?

Thank you Jim, and welcome to your new position. I'd now like to give some details on our EPS guidance. For fiscal 2003 we are now raising our EPS target on a range of $12.25 to $12.50 per share, instead of our previously targeted of $12.25. This new target range represents 14 to 16% growth over fiscal 2002 EPS of $10.74. A new target range includes the 34-cent charge that we recorded this quarter for the early retirement of our debt. We are therefore effectively raising our target EPS by 34 to 59 cents per share from our prior target. With year-to-date EPS of $8.59 per share, our target range projects fourth quarter EPS of $3.66 to $3.91, up 21 to 29% over last year's fourth quarter. This should be achieved in approximately 4,800 home closings with an average price of approximately $200,000. With our record performance during the June quarter and our dollar backlog up 23% we now feel confident in issuing in new guidance. Lastly, I'd also like to thank David for all his years of hard work and for the guidance that helped us achieve the profitable growth that we have experienced since going public in 1994. In particular, I'd like to thank him for being the principal architect of the value created plan we put in place in 1997, which has been instrumental in driving up profitable growth. Since that time our EPS has increased over tenfold. I know that the company and I will miss his day-to-day counsel and we all wish him the best. We will all now, David, Jim, and myself be glad to answer your questions, and I'd ask the operator to give the instructions for registering your questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by press than the star key followed by 1 on your touch tone phone. If you are using a speakerphone please mute to refer our equipment. We'll take as many questions as sometime will permit. Once again, please press star 1 on your touch tone fell telephone. You may remove yourself by pressing the pound key. We will pause for just a moment to give everyone an opportunity to signal for questions. Our first question comes from Steven Kim with Smith Barney.

Thanks very much, guys. Congratulations, and Dave, we're going to be sorry to see you go, but Jim we're anxious to build a relationship with you, too. I'd like to ask you about the guidance you just uttered about the units and the price, 4800 units closed seems rather light, particularly if you look at a backlog turnover ratio. I know your orders have been strong in the preceding couple of quarters, and that's why I thought your back turnover ratio was a little low this quarter. But can you sort of talk about, you know, why you're not going to deliver more than 4800? Is that some conservatism on your part? Are you seeing something that might keep your turnover ratios down? And then secondly the price that you mentioned I think you said $200,000. That is below what you did this quarter. I was wondering if you could talk about any one-time issues that affected the average price this quarter and, you know, why you think your average price is going to be only $200,000 when your beginning backlog price was 208,000.

Sure. Okay. Well, with respect to the units, Steve, by the way, thank you for your comment, with respect to the units, the backlog delivery ratio, the portion of the homes that we expect to deliver next quarter with the opening backlog is 56%, 55, 56%, which is higher than it's been the rest of this year, so you're certainly right that it's going to be improving but will be down relative to where it was last year, and we have been finding as you know, it's taking longer to build the homes, longer to pull permits, so that is certainly been lowering the turnover ratio. In addition, we have so few units, so few spec units finished or homes under construction that haven't been sold. At this point we're well below one unsold finished unit per community, actually about .7 unsold finished homes per community and only about three and a half in total at any stage of construction from start to unfinished that are unsold, which is pretty much an all-time low, and that figures not only on a community basis, but even down on an absolute basis. So we have really no ability to sell homes and close them in the same quarter, which could would have contributed in prior quarters to higher ratios of deliveries relative to backlog, so, you know, we do feel good about that figure, the 4800. It's higher than where it's been the rest of the year in term of the conversion ratio, but it is down versus last year. With respect to the average price, you're right, the $200,000 is down relative to 206,000 delivered this past quarter, but, again higher than it's been early this year, and that's really a mixed issue. We continued during this quarter to show strong deliveries from California and the mid-Atlantic, especially from California, which as you know has quite a bit higher price than the rest of the country, and it will be more balanced next quarter. The backlog continues extremely strong in California, some of the higher priced regions, but those are pent up deliveries through next year.

I suppose if we're going to go with that, you know, revenue buildup from home sales, that your operating margin that you're looking for or your gross margin you're looking for in the fourth quarter is probably going to be not that dissimilar from what you reported this quarter. Is that a fair assumption?.

That's a fair assumption. Again, for the mix we could be slightly down on that because certainly, again, California has higher margins than the rest of the country right now.

But it doesn't sound like very much.

That's correct.

Great. Thank very much.

Thank you, Steve.

Thanks, Steve open.

Our next question ops comes from Ivy Zelman and Credit Suisse First Boston.

This is Carlos Ribeiro covering for Ivy, actually. It's. David, it's been a learn you're working are with you and Jim looking forward to working with you going forward. Piggy-backing on actually Steven's question, do you guys experience any delays in respect with deliveries particularly in the middle Atlantic market? Seems like your conversion ratio there was a little light, and any delays in the southeast region as well.

Ian McCarthy Obviously there, was a lot of weather, we're not blaming the weather, but there was a lot of weather impact during the Junequarter so that did impact us, certainly has pushed the backlog up in those markets and we're looking for deliveries there in this quarter and then going into next year as well, so the market is very strong in those markets but we were impacted somewhat partly as David said permits which are taking longer and longer to pull now but also there was substantial weather delay on the East Coast. It didn't impact the West Coast at all but it did impact our mid Atlantic and southeast market.

Can you quantify at all in terms of the deliveries that may be pushed to the quarter?

No, I think we've given the numbers for the quarter here, and obviously most of the rest of our backlog is going to fall into the first quarter of fiscal '04 with some just drifting into the beginning of calendar '04, but substantially it's going to fall into December.

Fair enough. Second question, can you give us some sort of -- I know you briefly talk about California, but can you gives a market-by-market update and highlight some of your stronger market and weaker markets that have been prevalent during in past four quarters.

Obviously California is a very strong market. It's our larger market in country, and we feel very good with our position there. Obviously there, had a lot of price increases there, and we're watching that carefully. Obviously, we don't want the pricing to become too unaffordable for our buyers, and so we're constantly trying to make sure we provide affordability for our buyers there. The rest of the west Coast is strong. Coming back into Texas, been a little weaker. We're stronger in Houston, making good efforts in Dallas right now. And then coming from the southeast, the southeast has generally been very strong. Obviously we had a lull back a year or so ago after a number of years of being very strong in the southeast, and we feel good with about that. Again also the mid Atlantic, very, very strong just hard to deliver units up there because of constraints in the market. The Midwest, we're pleased with the integration there. Business is well integrated now. So the market is still slightly soft, and we are looking forward to a pickup in the economy there. We're looking forward to obviously manufacturing picking up there. We still feel good with our position. We've got great land bases there in those markets, and we'll be the beneficiaries of any uptick in that market just because of the range of communities that we have there. Certainly, we're still somewhat weak in that market.

Ian, can you give us some insight in terms of your land sell for that quarter? They were a little bit higher than normal.

In fact, we did, as we talked about during the integration of Crossmann, we did make some land sales in Indianapolis in particular. We've made a gain to that. You can see that coming through there. That was always our strategy, to look at the land bank and bring that back down more into line with the Beazer strategy there, the Beazer land bank there so we've been doing that over this period, and we did see some gain in that period.

And just lastly, your inventory turns have been declining steadily over the last couple of quarters. Can we continue to expect some land sales going forward and trying to wrap up that term back up?

I wouldn't necessarily relate those two questions. One, there should be some land sales but probably not as significant in the current quarter, and we'll continue to evaluate that on an ongoing basis. You're right, the terms have come down. Part of that was the delays we talk about in getting homes built. Part of that is the investments inland is becoming more significant, especially with the strength that we're seeing, and we keep referring to California, but there that has a higher land portion of the ultimate sales price. So I would say we're probably at about the bottom of inventory terms of where we expect. It should come up from here especially here in the fourth quarter but I wouldn't expect it to come up significantly.

Fair enough. Thanks.

Moving on to Joseph Sroka with Merrill Lynch.

Good morning, everyone. Two quick questions. Would you have a subdivision count by regions and at least the way it's been looking in the last couple quarters, the subdivisions have gradually been dropping in the Midwest, I wonder if you'll ramp that back up over the next couple quarters.

Okay. Subdivision count by region, it's 187 in the southeast, 86 in the west, 42 in the central, 39 in the mid-Atlantic, and 135 in the Midwest, and the 135 in the Midwest, that should come to, by the way, 489 in the total. 135 in the Midwest is about flat where it was a year ago.

It's ramped up sequentially in the last quarter.

That's right. We have opened you new communities in the Midwest. At this time we aren't giving projections of where subdivision counts are going either in total or by region. The outbounds, as you know earlier this year we were anticipating opening new communities, had projected community counts to be up in the 5 to 6% range. We are short of that. Here we are catching up with subdivision counts up more like 7% but we're finding that a very difficult figure to project and we're not going to be giving projections of that.

Okay. And then just quickly to on the financial services piece, can you just refresh my memory, do you guys do any refi underwriting in your financial services or is it all just captive Beazer purchase loans?

Captive Beazer purchase. There's no refinacing or even originations for loans outside of Beazer.

Okay. Perfect. Thank you guys.

Thanks a lot.

Our next question comes from Tony Campbell with Knot Partners.

Good morning, gentlemen. David, I just want to say I'm going to miss you. I wish I had an appropriate Shakespearean phrase to give over this call but I haven't had time to think about it.

Give it some more thought but thanks, Tony.

and Jim I wish you all best.

Thank you.

I have actually two questions. Could you give us an idea of where sort of your goal debt-to-cap would be at year-end?

It probably should be, it's going to be lower than where it is right now, and I would guess so it would probably be around 40 or 41% by September 30.

Okay. And my second question is sort of more of a general question. What do you guys think your growth rate can be over the next two to three years? And I guess if I do the quick math, at sort of the kind of growth rate that you had this year, I mean, sort of you're looking at sort of a minimum target of about 14 bucks for the next fiscal year, and I think your growth rate this year is sort of a little lower than it's been historically, so that's why I'm really asking the question, to get some sort of a -- some sort of a feel for the outlook for next year. It seems to me that given your backlog, et cetera, that next year could be a pretty good year.

Tony, let me answer that. As you know, what we try and target is to double the size of the business every five years. That's always been our game plan. We've always had that strategy. The fact is that over the last eight years we've doubled the company twice, so effectively we've doubled in it four-year periods. The game plan, the overall goal to do it every five years. That reflects something like a 17% growth. What we're seeing this year is the range of 14 to 16%. We feel comfortable with that. We're going into next year with good backlog. Our overall goal there is to look for that doubling every five years. You know, at this time we're not giving guidance for '04, but we're working through our budget process. September we're at year-end. When we come out with our full-year numbers in November we'll give an update and guidance for '04 at that time. But we're well within the parameters that we like to be looking at and obviously it's a slightly moving target but we feel there is a lot of very, very positive influences out there for us as we've been able to achieve this growth over a very long, sustained period, and we feel going forward with the consolidation that appears to be happening with the industry, and as we've talked about this before, it's not just M&A; it's a lot of taking market share day by day and all the markets that we're working in that we feel very, very comfortable with that overall goal of doubling every five years, and if the wind's behind us we could even beat that as we have done twice in the last eight years as I said. But a five-year goal doubling our target.

If I could, I might have one further question. I'm kind of interested in this permit issue, and I wondered if you could give us some more color because I think you're one of the few guys that's really made a point of mentioning it, and obviously in some places like New Jersey, permitting is a real issue, obviously California as well, so I was wondering if you could just -- where -- give us some more background detail. I mean, where are you really getting the extension of permitting?

You know, we're not trying to make excuses here, Tony. We're proud of the results we're delivering. We think they're good results for our shareholders. The point we're making is particularly on the land side it's getting very, very difficult to get entitlement: It's always been that way in New Jersey. It's not getting any easier up there. So when we get the right positions we can make very good numbers there. The same back down into the mid-Atlantic, we have some excellent positions that we invested in a couple of years ago that are just going to be coming on stream over the next 12 to 18 months but this process is a longer and longer process for the land side. Now, the other point now is that we're getting even more difficulty in some of these markets in pulling building permits. Again, that's a more immediate issue for us that we may have the land full entitled, we're in the process of building out the community, but we're finding delays in pulling building permits, and it's across a variety of markets, and again we're not making excuses here; we're just trying to give everyone the facts of life and telling them what's happening here. The key factor that it's going to affect is our inventory turn. We're going to have to look at that inventory turn and see if our point from being able to sell the home and then deliver the home is extending because the permit pull time there is longer, then that's going to affect our inventory. Diversity of markets it's happening in Florida, for example. It's happening again in the California markets. And it's somewhat out of our control. I mean, we're trying to work this as diligently as we can with the authorities in each of these markets, but it's somewhat out of our control and we have to work within the constraints that we see there, but it's something that I think we've just got to get used to. We've got to measure our growth to take that into account, and wherever we can, accelerate our build cycle to get our inventory term back to where we want it to be.

Other than Florida could you just give us -- I'm really not interested -- I'm trying to get just some, you know, what other markets, what's going on in Nevada? Are you finding it tougher there? Texas has always been sort of wide open. Have you seen any change there?

Okay.

That's really what I'm trying to get at. I'm not --

It's certainly coming into other markets. I mean, Texas is probably the last stand where it's not as difficult. An example, like we talked about of this before, a market like Phoenix which was always very, very easy to get permits in is taking so much longer now. Nevada, again obviously that's a market that's very, very strong, and I think the building departments don't gear up to accommodate that level of growth. We've also entered markets like Denver, which has a difficult entitlement process and process going through the building department. Those market are definitely increasing their duration times. I'd say Texas is probably the last holdout. Atlanta, here it's getting more difficult. So where we had a easy time it's getting more difficult now. My theory on this is, and we've said it again many times, is as it gets harder, it gets better for us, it gets better for the large public builders who have the balance sheet to sustain these longer periods, have the the professionalism to go through that, and I think it just accelerates the consolidation of the industry.

Thank you, and good luck.

Thanks, Tony.

Thanks, Tony. Operator, we have a couple of e-mail questions maybe I could read for you, before you put on the next question.

Okay, wonderful.

One is what are your free cash flow expectations for 2003 after increases in land inventory, what land inventory growth rates and what long-term EPS growth rates do you feel comfortable with for 2004, 2005. The last piece of it, Ian did answer that,we maintain our longer term expectations of doubling the business roughly every two years, which is about a 70% I'm sorry, five years, which is -- thank you, Ian, which is a 17% --

The guy who's retiring as CFO here raises the expectations.

Exactly. Jim will be achieving double every two years. No, doubling every five years with 17% compounded growth rate. The free cash flow expectations, I would expect we will have generate cash flow from operations pre-investment in inventory roughly equal to our earnings, which is about a little over $150 million based off of the current estimates we've put out. We -- I would expect that the bulk of that, nearly all of it, will be reinvested in the inventory, and in term of the growth in inventory, a fair part of that is simply the growth in our backlog. Our backlog is currently up over 20% in dollar value, and I would expect it to be a similar nature at the end of this fiscal year, so simply growing in inventory, probably about 10% of the -- of increase in inventory or roughly $150 million will be simply building out that backlog. Then I would expect some further growth for reinvestment for further growth in the business. So the bottom line is that for this year cash flow will probably be about flat after reinvestment in inventory. One other question that we have is to Beazer plan to institute a regular dividend. This is a question that cops up basically in every board meeting. We reconsider it or look at that decision. We don't have anything currently to report on that. It will be at on the agenda at the next board meeting and I'm sure thereafter, and so no definitive decision yet but it's something we do continually consider. Operator, you can take the mechanics question.

Talking our next question comes from Todd Vincent of BB&T Capital Market.

Most of the standard questions are answered but a couple of housekeeping items. You can you tell he what your cash rate is in the mortgage business?

It's about 70%.

How does that compare?

It's slightly down from last year but about flat from where it's been.

Okay. What about the cancellation rate in the home building business in.

cancellation rate is at 23% which again is about flat with where it's been.

Okay. In terms of the interest, you guys had mentioned and we talk about that it's going to be done about $6 million at current interest rates.

Right.

On the annual basis. Given the flow through inventory, when should we look for that to hit the income statement?

During fiscal '04.

It would as a result basically Q1 04.

You will probably see some of that this year but the bulk of that since we've just taken on the new debt and refinance it this quarter, the bulk of it will start up next year.

And then I just want to confirm something that we had talked about. Crossmann I know you guys closed I think April 19th of last year.

Right.

But all the numbers for last Q3 were adjusted for.

That's correct. It's included as if it were in there for a full quarter, and there was a small imputed interest charge through other income to back out some of that income but all the gross numbers, the units, the revenues, the margins, et cetera, were in there.

Sales as well?

Sales as well, yes.

That's all I've got. Thank.

Thanks, Todd.

Moving on to Margaret Whelan with UBS.

Good morning, guys. David, I'm very jealous. And Jim, welcome. Let me put you straight in the hot seat. It looks like the EBITA margin of Beazer is still the lowest of the ten builders that we cover anyway. Can you give us some idea of how you're going to improve it over the next couple of years?

Sure. Of the opportunities I think we have, many of which come to us because of Crossmann, leveraging our size, leveraging our diversity both geographic and the price point diversity. Putting together deals with the manufacturers and many of the trades and having the increased size is a huge benefit and enhancing our national accounts. This year alone, since we started this about nine months ago, we probably added about $5m to the bottom lines in terms of easily quantifiable costs, and that's before you get to the direct cost benefits, by narrowing bound down the number of virus that we have, reducing to complexity. My background is manufacturing but a lot of same concepts on using fewer anything, using fewer suppliers, using fewer different moving parts in your house construction, standardizing fees stand possible. Those types of consents as applied to the trade base optimization program we've got, and it's already started to have pretty significant benefits, and that's been really only six months. So you extrapolate that, I would be disappointed in two or three years if that number isn't closer to 20 than it is today which is probably about 5.

20 million on a sustainable annual basis? Is that it?

Absolutely. Absolutely. If you look at the ability to do that, why Crossmann had a big part of it, add thanking the volume was a big part of it, but the reality of a lot of the manufacturers, a lot of the trades we deal with, they're really not national. They don't lend themselves to national counts. They're really multi-regional. No one has a footprint that is a direct corollary with our regional structure or any of the builders. Having Crossmann in a number of different markets and a number of different cross points than we worked previously gives Tuesday opportunity to have win-wins to the manufacturers, and win-wins for the people we do business with, i.e., sell multiple price points, sell more through our design centers. We've had spectacular success over the last year increasing our margins for the option efforts that we've got, and cobbling together multi-regional deals where a lot of manufacturers now do business with us in parts of the Midwest, parts of the southeast, parts of the country where previously our footprint really didn't match up as directly as it does today. And what we've got underway today is through the Coordination our national effort, our national purchasing efforts, and our regional people, we're cock together cooperative deals between regions, between divisions where we're going through the manufacturers offering them more volume in SKUs which relate to our mutual again benefit to sell and then through our design center. So I think there is a huge opportunity there. Beazer's margins are lower. That has a lot to do with the approach we've taken historically on asset turner but there is a huge amount of improvement there and that's one of the thing we're most focused on going forward.

Are you in the first inning here? How is it versus how you expected it when you came in.

We're not in the first inning but we're not too far into the second. And I think this is really what I expected because I came from an environment that is similar to Beazer if in that we grew through acquisition but dissimilar from Beazer in that you didn't have comparable business lines, comparable companies. The opportunity here, and looking at our businesses, standardizing where appropriate, getting our guys to work together through the regional structure that's been put in place from the last year by our chief financial officer, get our guys together is really a phenomenal interest for us.

And then a bigger picture question for Ian, you talked a little bit about traffic currently in some of your bigger markets how it is versus your expectation over the last few weeks.

First of all, let me emphasize what Jim's been saying in terms of overall structure. As I said necessity beginning, our earnings since we put in value has gone up ten-fold I'm extremely proud of that and everyone in the company should be extremely proud of that. Where we are going forward is that we recognize our inventory turn term is not going to be what it has about an in the past and we are focused on all our costs and margins. Going into 04 we're very focused on getting a stronger contribution from that side, and that's what Jim's been working on, but it's not something that we should be defensive about. We purposely decide how we were going forward, and now we recognize that we need to look at that side of the business harder and optimize our margins slightly more because of the inventory slowdown. As far as the traffic is concerned, without making too strong a directive on what's happening in this quarter, you know, we're very pleased with the traffic that we're getting at this time. We are across the country, and we're very pleased. A lot of markets are showing very good traffic periods, you know, in the summer obviously it's slow. There is a seasonal fluctuation to our business. The spring is very much our strongest period. So we're pleased with traffic we see. We're pleased with the orders we're getting in this period. And again we're not giving guidance at this time on where our orders are at this time but certainly I think we're very comfortable where we're heading. We're building backlog now for 04.

I was a bit surprised given that you're already in your fourth quarter that you're got giving us any guidance for '04. Was this a deliberate decision?

I think we just decide they'd David's going to step down after he signs the next 10-Q. Jim is then going to take over, we're in the process of looking at our budget we're looking at the company are where it's going to be. We've got a lot of initiatives coming up in terms how we position in each of the markets. As you know we're taking all the Crossmann product into the Beazer markets and vice versa so we're working on all of that, and we felt was most appropriate to give guidance for '04 when we give our '03 numbers, when the '03 numbers come out we'll give full guidance for '04.

Operator, I've got another couple of e-mail questions here. First given our optimistic view of the future, what are our views on a stock split. I'd say stock split is very similar to dividend, something we do continually consider although I'd say the stock split we consider a notch below dividends or stock repurchase in terms level of importance and things we should be looking at first but certainly a good possibility if the stock start picking up through some of the target out there. Next question which I'll forward to Ian, because I can now do that, I understand that you will not disclose community context expectations but can you indicate to us what markets you plan on expanding into in increasing your presence in? Ian?

Again, as David said before, we find that the number for community account really doesn't affect our business on a quarterly basis in getting the results there. It's a long longer-term position, so we're got going to give guidance to that. David pointed out we caught up quite well in the June quarter by getting 7% increase in community accounts, after a weaker community opening in the second quarter. As far as going forward, we're looking at all of our businesses, and as I just said, we're going through our budget process at this time. We're looking at all of our businesses to grow. We think there are opportunities in markets right across the country, and really the way we manage our business and the real benefit of our looking at things through value-created or EBA is that really our budget is not about setting targets and then just hitting those targets. It's about creating value in each of though markets. What it comes down is the is that each of those markets have more business of so we're really getting into a capital competition at this time with any company, whatever size the company is, has a certain capital constraint, and we have to look at where we best allocate our capital both on a short-term basis and then on a longer-term basis but would I say at this time every one of our businesses is looking to grow. Every one of our businesses has the opportunity to grow. And what we have to do is then allocate that between the various regions. Those regions that may be very hot today and those that we see long-term prospects in, and we where we also see a long-term lead in terms of getting entitlement there. The markets there where we see really good long-term opportunities, and we're going through that process right now. We'll try to give further guidance with '04 guidance. We'll try to give some guidance where we see a real expansion in the future. But I'd say every one of our businesses is looking to grow at this time.

Operator, back to you.

Our next question comes from Gil Alexander with Garfield Associates.

Good morning.

Good morning, Gil.

Question. Could you give us a feel when, on your sales what the average mortgage is? And could you give us a feel what 100 to 200 basis point increase in interest costs, how that would affect your sales going forward?

Sure. With respect to the average mortgage, as I said, our average loan-to-value is currently at about 90%, so an average, with average price of around 200, I would say an average mortgage of around 180,000. 100 to 200 basis point rise in interest rates. We would not expect to any significant impact on our sales mostly because we think that would be accompanied by most likely by an improving economy, which is the more important factor we think right now. The two factors we're watching right now, unemployment and interest rates. It's probably unemployment that we're more concerned about. It is the unemployment we're more concerned about. And we'd rather see that coming down accompanied by a rise in interest rates. And getting rates back towards a 7%, 30-year mortgage rate, we think that's fine, more than fine, still very affordable. If you start pushing the 150, to 200 basis points, there I would expect to see some impact to our sales and our margins because I think what you'd really start to see is we would lose some of the options that people take, and people can still afford homes but they wouldn't be able to afford as expensive a home and put as much in it, and we do achieve higher margins on those, so I would say first hundred basis points we wouldn't expect a significant impact or even a positive impact if accompanied by lower unemployment rates but would be impacted if significant rise over that.

David, I thank you and good luck for the future.

Thanks, Gil.

Gil, let me also just add to that, though, the fact is, and again we said this before, there is such an array of for mortgage prughts out there. We can move our buyers right across the yield could I have. When you look at the rates today, 30-year is about 5.7 but the one-year arm is just over 3, and so we've got a great range there of products. Even the five-year fixed and most of our buyers in the first-time market don't really think they're going to be there for more than five years. Even the five-year fixed adjustable product is under 5 today so there's a very big spread across the yield curve and I think what we would do is manage the process so that the buyers would have a payment that they can they can afford, fixed for a duration that is compatible with the time they expect to live in the home, so I don't think we need to look only at the 30-year fixed. There's a lot of variability there and we can move our buyers from one product to another.

Thank you.

Thank you.

Our next question comes from Jim Wilson with JNP securities.

Mr. Wilson, your line is open. I'm sorry. He did disconnect. Our next question comes from John Lynch with Lynch Research.

Hi.

)) Hi, John.

Ian, David, goodbye again.

Thanks again.

I have a question. Actually, I had some questions about the development process, the entitlements and the land. You answered much of that as you probably can from this vantage, but on looking at next year, what would you expect to be debt repayment levels and what would you expect gearing to be at year-end?

John, I think we have to really put all that together. As I said, at this time we're going through our whole budget process. There's this capital competition between our guys, everyone seize the opportunity to get out and ex pan their business, and I think it's our position toy decide how much of that capital we're going to allocate to our markets. As David said earlier on, one of the things we've done is give ourselves some flexibility,this industry does generate a lot of cash. This is something that people don't realize because we constantly reinvest it. When we're going at this rate, we have to constantly reinvest it. Solve, if we felt the opportunities weren't there to reinvest we could certainly redistribute some of that cash, pay down debt or whatever but I think at this time we see a lot of opportunities in the business, we're trying to quantify that totally, and we'll give some guidance on that in our '04 guidance in November.

John Lynch Thanks, Ian.

Thanks, John.

Moving on to Timothy Jones with because are man & Associates.

Good morning. First of all, David, you've got to be teaching Shakespeare instead of economics, please.

I was expecting to you follow up on Tony's comments that you have the Shakespearean quotation for me..

I was thinking about it, but then again, study up on your Marlow. Anyways, in the. You talked about Florida having some constraints on getting budgetary -- excuse me, constraints per permits. Which specific markets were those?

Tim, what I was really referring to was in Jacksonville. And in Jones county in Jacksonville is probably one of the longest entitlement processes in the country in terms of getting building permits.

That right?

So that was the specific case that I was referring to.

What period? What period? How long.

It's taking now six, eight, nine weeks to get a building permit through there, and then we were just down meeting with them recently, and that's a constraint. This market' got a lot of good growth potential there. We've got a good company there in Jacksonville but it's just taking time and I was using that as an example.

It's not all over Florida, then.

I wouldn't say all the markets but certainly in Saint John's County, it's one of the very constrained markets in the country.

I see your up about 300 units for the quarter in Florida. Florida has been carrying about you but then you did run into some lack of subdivisions.

Well, orders in Florida were extremely strong, Tim. Actually, one of the strongest parts of the southeast region. I would say strong double-digit growth in all the markets in Florida.

And good pricing, too?

Yes.

All right. Again, David, thank for the memories.

Thanks, Tim.

Our next question comes from correct Greg Nejmeh with Deutsch Bank.

Good morning, Dave, nothing but the best. I've enjoyed and Jim welcome aboard. I guess Ian attacking the affordability issue would be from the standpoint of the differential between your average selling price and your base price. Could it be that you're buyers, and I recognize that they're mainly entry-level and first time tradeup, but could it be that your buyers will perhaps reduce the amenities included, therefore bringing down the ASP as a rise in the rates.

That's certainly the case David just mentioned that. That is a factor that could well happen. We might find if rates do push up obviously some people will want to takes a fixed rate mortgage. If they only have a limited amount of payment they may have to take some options out of that. This was the real strategy for us with integrating with Crossmann. They have such a model there that we're talking about Beazer having an average price of around 200 here. The Crossmann product within our company is still around 140 on average across all their markets. So here we have a great differential that we really feel, as we roll that product and that concept of building out across the rest of our Beazer markets, we're going to have a real advantage going forward we're going to have affordable product. Obviously we've had to find the right communities to put in it because Crossmann worked on a very, very affordable lot basis to start with and then affordable building techniques, but we're going to be rolling that out across our market. Jim I think also talked about expanding our price point, moving down into the real economy part of the market. That will serve us well if interest rates do rise somewhat going forward. So I think that's a real benefit. Currently our options are about 6 to 7% of the revenue of the company. In years gone by it was about 8%. It's come down a little, and I think that's partly due to the mix from Crossmann coming in as well, so you're liking at about between 6 and 7% of the business being those options there, so I think even if we lose part that I don't think we should be too worried about that. It's going to be a marginal difference to us but it's something we feel comfortable we can override that. I still think in a consolidating market we will gain market share as the larger builders would, so I think we'll be able to grow through many of those factors. I that I think that there is a rise in interest rates, if there is a harder market out there, that typically is better for the larger players. Typically we'll gain market share in those times. It's an anomaly to gain great market share in such large Markets in such markets. The larger build, are doing it but typically con consolidations happen in downturn. So I'm not worried over too strongly about that, I see interest rates somewhat going up but I think that as an opportunity for us to take more market share.

I presume that that percentage with respect to Crossmann subdivisions is negligible.

Certainly a lot less than that. That was a blended number as you saw that number yesterday. It was between 6 and 7, a blended number across the country, and definitely for most of the Crossmann product. A lot of Crossmann product we don't offer options because we are working through a very standardized process so certainly it would be less, and I don't have that figure in front of me at this time but it's way less than that.

David, again, I pish wish you well.

Thanks, Greg.

Our next question comes from Tony Campbell with Knot partners.

Jim, I think it would be really helpful since you're coming, sort of focusing on a unique vantage point if you could give us some sort of maybe not today at this conference call but maybe a year-end conference call sort of the kind of savings that you think you can make over a period of time and I know there's one of your competitors that make a very big issue of this and kind of monitors it and updates us every quarter, so if you can, that would be very, very helpful.

Tony, I threw out a couple numbers before. I think we'll owe you and do it on the year-end conference call. More specifics both on the dollar savings and the tactics we'll roll out to do it.

Terrific. Thanks so much.

You're welcome, sir.

Moving on to Phil Suky with we Seger (ph) funds.

Thanks for taking my call. Could you tell me roughly what is the average duration of the mortgages that your buyers take out when they purchase from you guys?

Now, I'm afraid that's something we don't really keep a stat on mostly because we don't hold the mortgages ourselves, they are immediately what's referred to as payable funded so an end investor takes them. So we don't really track the average holding period. Sorry.

Okay. Thanks.

Sure.

It appears there are no further questions at this time. Mr. McCarthy I'd look to turn th conference back to you for any additional or closing remarks.

Thank you, operator p as usual we will be available Gower questions and a recording of this conference call with the slide presentation will be available around 1:00 p.m. today in the investor relation section of our web site, Beazer.com, and we look forward to talking to you again in early November when we discuss our fiscal 2003 end results and as we said our fiscal results for 2004.

That does conclude today' conference. Thank you for your participation and have a great day.