Beazer Homes USA Inc (BZH) 2003 Q4 法說會逐字稿

Good afternoon and welcome to the Beazer Homes fourth quarter and full year fiscal 2003 earnings conference call. Today's call is being recorded and will be hosted by Mr. Ian McCarthy, the Company's Chief Executive Officer. Before he begins, Leslie Kratcoski, Director of Investor Relations will give instructions on accessing the company's slide presentation over the Internet and will make comments regarding forward-looking information. Ms. Kratcoski, you may begin.

Thank you. Good afternoon and welcome to Beazer Homes conference call on our results for the quarter and fiscal year ended September 30, 2003. 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 this site, you may submit questions to us electronically.

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 or EBITDA and certain other measures that are derived from EBITDA. EBITDA is a non-GAAP financial measure. Please refer to our fourth quarter earnings press release and to beazer.com for a reconciliation of EBITDA's to net income, the most directly comparable GAAP financial measure.

Ian McCarthy our President and Chief Executive Officer and Jim O'Leary, our Executive Vice President and Chief Financial Officer, will give a presentation after which they will address questions that you may have. I'd now like to turn the call over to Ian McCarthy.

Thank you, Leslie. Today we will discuss our results for the September quarter and fiscal year end 2003. Both of which set records on several fronts, including home closings, revenues, net income, new orders and backlog. We will discuss our branding and strategic growth initiatives and the decision to declare a quarterly dividend. We'll also provide our initial EPS targets of fiscal 2004.

Fourth quarter revenue exceeded $1 billion and we achieved record earnings of $57.2 million on 5,014 closings. An EPS of $4.18, up 38%. For the fiscal year, we generated $3.2 billion in revenues and record earnings of $172.7 million or $12.78 per share, up 19% over last year. We're extremely pleased to end the year with a strong finish, surpassing numerous milestones. Our performance provides evidence of continuing robust industry fundamentals and our ongoing commitment to achieve profitable growth by leveraging our size, scale and geographic reach while implementing specific growth and profitability initiatives.

In the September quarter, new orders totaled 3,862 representing an increase of 4% year-over-year. For the full year, new orders totaled a record 16,316, increasing 20% over last year. In terms of our respective geographic markets, new order growth for the quarter was strong in the West, particularly Colorado, Las Vegas and Southern California, as well as in the Southeast, particularly Florida and the Carolinas. This was offset partially by a decrease in orders from the prior year in the Midwest and Central regions.

Our year-end backlog now stands at 7,426 homes with a sales value of $1.6 billion, up 14% and 27% respectively from the backlog and sales value at September 30, 2002. The sizeable year-end backlog provides excellent visibility as we move forward in fiscal 2004. Our new orders and backlog levels were achieved on an increase of 6% in our number of active subdivisions during the quarter, relative of the same quarter of the prior year.

I'll now turn it over to Jim O'Leary, our CFO, to address in more detail our financial results and recent developments with respect to our profit improvement initiatives. As you all know, Jim joined Beazer about 15 months ago as EVP responsible for Corporate Development in addition to supply chain and national purchasing initiatives. He then assumed the CFO role in the September quarter. Jim, however has known Beazer since his IPO and I'm pleased to welcome him in his first conference call as CFO. Jim?

Thank you, Ian. The quarter ended September 30, 2003, marked the first ever $1 billion quarter for Beazer, representing a 15% increase over last year's September quarter. Home closes of 5,014 for the quarter represented a 4% increase year-over-year and set an all-time quarterly record. As Ian mentioned, my first experience with the company was 10 years ago and I think something noteworthy, this quarter we had twice the revenue the Company had for the full year IPOed and three times the closings. Very impressive growth in a short period of time.

For the full year, home closings increased 13% to 15,409, another annual record and for the first time we generated annual revenues in excess of $3 billion, a 20% increase year-over-year. Net income for the quarter was $57.2 million, a 41% increase over last year and diluted EPS for the quarter totaled $4.18, up 38% from last year. Both figures represent September and all-time quarterly records.

For the full year, net income reached an all-time record of $172.7 million, up 41% over last year on a 20% increase in revenues. This increase in net income generated EPS of $12.78 and 19% improvement over fiscal 2002. Net income for both the quarter and the year increased more than revenue, reflecting improvements in our profit margin, which I will discuss in more detail, shortly.

We continue to strengthen Beazer Homes financial position during 2003. Interest coverage defined as EBITDA divided by interest incurred, increased to 5.0 to 5.4 times during the year and at year-end, debt to total cap improved to 43% from 48% as of last year and on a net debt to cap basis, that was 40%. Reflecting $73.4 million of cash on the balance sheet at year-end.

Now, those of you who are glued to either Bloomberg or Yahoo, recently saw a press release, probably in the last few minutes go over, which I'm going to read from briefly, this reflects a 144 A filing we're commencing today. Beazer Homes today announces proposing to offer $200 million in principal amount of senior notes due 2013. The offering will be made to certain initial purchase shares pursuant to a private placement. The initial purchasers have informed Beazer they will sell all the notes in the U.S. to qualified institutional buyers in accordance with 144 A. The offer proceeds will be used for general corporate purposes.

That's the press release and the script that we were encouraged to stay to while we're marketing. I think an important takeaway from that, this is an opportunistic financing. It is to tap the markets at an absolutely great time, historic low rates and to prefund some great organic opportunities we have to grow the company. So opportunistic financing, great time to be out in the market. And it's a chance to prefund great growth opportunities we will be talking about momentarily.

A couple of things about the balance sheet. This quarter, no share repurchases and I think it reflects our commitment to continually improve the balance sheet as it's going to be integral to our successful organic growth program. Our land position, as of September 30, totaled 79,716 lots, representing a little over a five-year allowance supply based on our last 12-month's run rate. As of September 30, 46% of the lots were owned and 54% were under option, consistent with last year and in line with our longer term strategy, to balance out lots owned and lots under option.

During the year, we achieved significant profit improvement and during the fourth quarter and fiscal 2003 we increased our EBITDA margin by 180 and 150 basis points respectively. This improvement reflected strong industry fundamentals and great emphasis on more focused profit improvement initiatives. These gains were achieved despite higher warranty expenses associated with some construction defect claims from water intrusion in the Midwest and inventory writedowns in the Southeast. So, strong margin improvements inclusive of those two items.

With respect to profitability initiatives, I want to spend a couple of minutes on what we're working on and how it fits into the long-term strategy of Beazer Homes. And the three things I want you to take away from each one of these points is it's about leverage, simplification and positioning the company to capitalize in the things we'll be talking about today and over the next few months.

First, leverage size to create economies of scale and materials purchasing construction. Over the last few months, we've implemented a strategic national accounts program so we could leverage our volume wherever we have critical mass, through national accounts, multiregional and regional accounts and multidivisional accounts so that we can tap into our supply base and get the best deals possible by aggregating volume. In the last year, we've doubled rebate volume from $5 million to $10 million, which is not a big number for the company and it's not a big number relative to where we think we will be. I think a more important number is we're not focused on rebates.

We're focused on reducing a direct home cost. If you look at the price improvement from our suppliers, that number is probably double what it is if you look at the reduced cost on cabinets, on installation, on faucetry and on everything we're buying in bulk from a trade basis consolidating, as well. So, to date, probably a doubling of rebates and more than a doubling of direct cost savings. We expect that to continue, and that's all about leveraging our supply base.

Simplify and standardize best practices. Beazer, for the last 10 years, has had a best practice mentality but now as a $3.5 billion company, we're looking to formalize and institutionalize some of these things to make the best of Beazer best practices top of mind on other operations. So, everywhere we can we can simplify and standardize procedures so we're not making the same decisions 31 different times, we're making the best decision every time and making it consistently across the company.

Streamline product designs and option offerings to maximize cost efficiency. What are we talking about there? I'm going to touch on briefly an initiative called "plan fest, which Ian will develop a little bit further in speck fest. What's plan fest? In a former life when I was in the manufacturing side of the business, plan fest was just SKU rationalization. This past year we went through, we had a multidisciplinary team go through each one of our divisions and review every plan offering the company had.

With an eye toward streamlining and simplifying what we're selling to make back office procedures simplified, to make it easier for our trades to give us the best price on fewer plans and to be sure things we add in our product offering that weren't pulling their weight were gotten out of the product offering. If you think about it, the top five plans, top 10 plans, they probably represent 50 or greater percent of your revenues. So, if we can get a narrower base of highly profitable plans and focus on value engineering, on getting the best bids from our trade base on those plans and using them as a platform for growth, we think the margin benefit and the efficiencies will follow. It has in every other industry and we're starting to see it already here after only a few months.

What's speck fest? Speck fest is leveraging our design centers and leveraging our national accounts programs to the most effective use possible. Originally called the scopes of work project, but we like plan fest so much, we wanted to follow it up with speck fest. That means standardizing our specifications within various price points to the extent the market will allow us. That will help us bid out packages more repetitively, more effectively and get the best price on the base SKU we want to put in various price points. That will help us standardize our option offerings to the best possible package. That way we will know what we're selling, up and be able to effectively negotiate with our manufacturers how we can share with some of that incremental revenue. Plan fest and speck fest, both about streamlining our product designs and improving efficiency down the line.

Finally, leverage our fixed cost infrastructure for strategic growth initiatives. This, I think, is the most important. A big part of what we're going to be talking about, a big part of what Ian's going to talk about in a momentarily, is growing into our overhead structure. Beazer has a great footprint that's been assembled over the last 10 years. We have nothing but exciting internal growth opportunities and we've got the footprint in place now where the overheads are there, we don't have to pay the dumb tax to integrate markets, we don't have to buy companies, just by growing volume strategically, where we are, will have a huge impact on our margins.

All of that brings me to the outlook. Today we're providing our initial financial outlook for 2004. We expect to achieve diluted earnings per share in the range of $14 to $14.75 in 2004. Representing approximately 10 to 15% growth over fiscal 2003. This target assumes about a 10% increase in units with the balance coming from margin improvement.

Now, I'll turn it back over to Ian to discuss our new brand and some of the exciting new growth opportunities within Beazer Homes. Ian?

Thanks, Jim. Our 2003 results mark our 10th annual results as a public company. Over this decade, we've moved from being the 12th largest home builder to the 6th largest. Annual closings have increased from under 4,000 in 1994 to over 15,000 in 2003. Revenues have increased nearly six times and net income increased over 10 times in this period.

At the same time, many things have remained constant. We continuously executed and built upon a strategy of obtaining geographic diversity in growth markets, providing value to our home buyers, adopting conservative land and financial policies and growing both organically and through acquisitions. As we move our next decade of performance, we will continue to build upon the strong foundation we have established. At the same time, we recognize an evolving Beazer and an evolving industry, bringing about change and new opportunities. Such as the initiatives we are discussing today. One thing that has not and will not change is our absolute commitment to delivering outstanding financial performance by providing maximum value to our customers.

Today, I'd like to cover with you what we see as our primary strategic growth initiatives for the next decade. Beazer has grown tremendously over the past decade. Significant opportunity exists to build on the strength we've established today and we'll accomplish this by leveraging our size, capabilities and best practices to achieve improved efficiencies. Jim's already covered this element in some detail with you. By strengthening our brand identity and by capitalizing on our geographic profile through focus, product and price point expansion.

On October 15th, Beazer Homes began rolling out a strengthened brand identity, which is a result of more than two years of work and to building a unified consumer brand across all regions in which we operate. Beazer Homes becomes a more dynamic force when we present ourselves as one company with one name, one logo, one message and one purpose. This undertaking, however, is about much more than a universal name and a new look. The home building industry continues to undergo change and rapid consolidation, with large public builders poised to capitalize on sustainable competitive advantages.

To benefit from these trends and achieve our growth potential, Beazer Homes will build upon its strengths and differentiate itself by providing an enjoyable customer experience, plus value, leading to good recommendations, referrals to family and friends and repeat purchases by loyal customers. While our brand strategy has many components, the customer is the constant focus. A strengthened national brand identity positions us to consistently address the needs of our customers across all of our markets. Our external tagline, some day starts today, reinforces this aim.

Over the years, Beazer has established a presence in major markets across 19 states. This geographic reach provides us with both market diversification and significant organic growth opportunities. At the same time, Beazer has historically focused on a value-oriented product offering, targeting entry level and first time move up owners. While our focus on value has stayed consistent, we've broadened our product expertise through acquisitions. For example, our acquisition of Sanford Homes two years ago in Denver added value products and a higher price point to our portfolio. Last year's acquisition of Crossman Communities enabled to us target buyers where price is the primary driver in the buying decision.

The net effect is that Beazer collectively has a broader range of homes with more diversified price points in our portfolio today. A common thread, however, is that they offer exceptional value to the buyer. As such, we are undertaking a focused effort on a national basis to effectively identify our target buyers in each of our geographic markets and deploy the diverse product expertise we have established across markets. The primary emphasis, therefore, will be on organic growth in existing markets by effectively increasing debt and breadth in those markets. This allows to us meet the needs of more buyers in each market.

We're employing various market research tools to segment our customers, based on lifestyle and psychographic preferences. At the same time, we've conducted a comprehensive review of all of our home plans through plan fest, as Jim mentioned. This cataloged and aligned the home plans to the various customer segments, using uniform national guidelines. This will enable us to more effectively deploy our product expertise to respond to evolving local market needs. Ultimately, we can better leverage local market expertise, existing infrastructure and land positions under this approach.

This morning we announced our intention to begin paying a quarterly cash dividend. Yesterday, the Board of Directors declared an initial quarterly cash dividend of 10 cents per common share, payable December 22, 2003, to shareholders of record of the close of business on December 10, 2003. I'd like to emphasize that the Board's decision reflects our continued confidence to both invest in the company's future growth opportunities and allocate capital to dividends for our shareholders.

In conclusion, I'd like to reiterate that our fiscal year 2003 results are tense as a public company, add to a strong track record of performance. Moving forward into fiscal 2004, our strong backlog of 27% in dollar value, coupled with expectations of continued strength if the housing market, provided confidence in our future growth opportunities. Reflected in our EPS guidance issued today of $14 to $14.75 for 2004.

We believe strong demographic trends, combined with constraints on the housing supply, will continue to drive earnings growth for large public home builders such as Beazer Homes. In addition, our new branding and other strategic growth initiatives will enable us to capture significant organic growth and place us in a strong position for future success. For our customers and stake holders, some day starts today. Jim and I would now be glad to answer your questions and would ask the operator to give the instructions for registering your questions.

Thank you. If you would like to ask a question, you may do so by pressing star 1. To withdraw or cancel your question, simply press star 2. Once again, that's star 1 if you have a question. One moment while the questions register. Our first question will come from Chelsey Ingenito with Merrill Lynch.

Hello, good afternoon, great quarter.

Thanks, Chelsea.

My first question comes looking at the unit growth you're expecting for next year, you mentioned 10%. I was wondering where you're seeing this, from a subdivision growth perspective or boosting -- what your subdivision growth expectations are with that 10%? And then how much are you looking to increase your sales pace in those communities?

Chelsea, let me address that, basically we said 10%. We expect our community growth to be very similar to this year, which for this year in 2003 was around 6%, what we're trying to do now with our new branding initiatives is really look at new ways that we can not only increase the depths of the product that we're -- the customers we're going for, but also increase the breadth. So we're going to be introducing lower priced products in many of our markets, as we said. We've brought that product in from the whole Crossman acquisition and then we will be looking to get adjacent higher price market in many of our markets, as well. So we're also trying to get breadth fares so really tapping a wider range of customers. I would say we expect to get better sales per community going forward to achieve our goals.

Okay. And then just tagging onto that and also from the price perspective of average price, if you're looking for some increase going forward and also it looks like subdivisions closed up for the West region for the end of this quarter, where do you kind of see your average price going in 2004? Sounds to me like it would be going up?

Well, it is going up, Chelsea, if you look at our sales price and backlog, it's well over 200. A lot of that has to do with mix. I think you pointed out, the West Coast region is up substantially. I would not encourage you to expect that sales price to maintain that base through the year. And the other areas where we have not had the subdivision increase come on-line, mix will bring that price point down. I would say it's probably going to be up closer to 210 than to 200, but for now we stay at that 220 range, I would be doubtful. I would not encourage you to expect that in addition to the 10% unit count that Ian just mentioned.

Okay. An then in addition to growing your depth and breadth within the markets you're in, are there other markets that you're not in that you would be interested in looking at or you think would be good from a strategic perspective?

We're always looking, Chelsea and will always take those opportunities as they come, but we really feel we don't need to do that at this time. We have a very good geographic spread. The point now is to bring all of these various products into each of the various markets, to get that whole breadth there and to build on that. That's something we're really focused on. If an opportunity comes, we will certainly look at it. But it's not our focus at this time.

Okay, great. And lastly, is there any dollar amount that you're looking to invest this year in land and also in these initiatives?

It will be up about 20% from this year so if it's in the $1.2 billion to $1.3 billion range, I think that would probably be consistent with what we've been talking about.

Okay. Great, thanks a lot and congratulations.

Thanks, Chelsea.

Thank you, our next question will come from Stephen Kim with Smith Barney.

Hi, it's Jed Barron for Steve Kim. Congratulations on a strong quarter.

Thanks, Jed.

Just a couple of questions if I could. Following up a little bit further on the guidance. If I sort of plug into the model here what you've said so far in terms of the average price and the units, it kind of looks to me that your guidance would probably assume something around a flattish-type gross margin in '04 and just wanted to get your thoughts on how reasonable that sounds?

It's your model so I have a hard time commenting on the assumptions you're putting in, but we have not assumed particularly aggressive gross margin growth. That's a little bit of a question in our forecast. And I do want to point out, a lot of branding initiatives, a lot of the marketing will need to really get this going. A lot of the period costs that are required to invest in the brand, which really for the first time is being done on a nationwide basis, that costs money. There will be a lot of investment spending and period costs this year. So, the benefits from some of this and a lot of the stuff I've been working on for the last few months, while we've seen it to date, you may not see the rest of it until after the initial rollout of the national brand.

Okay. Great. Next, you had commented a little bit on the warranty expenses and the inventory writedowns in the Southeast. I wondered if you could just speak a little bit more to those and perhaps what type basis point impact that had on your margins this quarter?

Sure. Between the two, and I like to be general, I don't think it's -- we don't want to get into the habit of giving out individual pieces for things that individually may or may not be material, but the two of them together are about $12 million for the quarter. And roughly $17 million increase in warranty plus the writedown in the Southeast for the year. And, one of them in particular, the warranty costs, that's a part of doing business. We've seen it in an area where we've had some construction defect claims, we had to take some hits for it. We've finalized our accounts and thought it prudent to make sure we had an adequate reserve going forward.

In the case of the writedown in the Southeast, this is a market where we pushed a little bit further from the hub of our activity into a region that was a little bit more remote than the center of it and it was in, I don't want to mention the particular market, but we got a little further away from where our core business was, and we had to take a writedown for $2.5 million associated with certain parcels of land.

Okay. Great. One final question if I could, do you have the breakdown of your inventory for this quarter in terms of homes under construction and land?

We will have that in our 10K coming out very shortly.

Great. Thank you.

Coming to a newsstand near you.

Okay, great. Congratulations again on the quarter.

Thank you very much.

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

Good afternoon, guys, Dennis McGill, actually.

Hi, Dennis.

I just wanted to follow up with your national branding that you spent some time on. Will we see the Crossman and Sanford names phased out gradually or has it already occurred?

Basically we rolled this out nationwide on October 15, as I said, and we are basically going have a public launch at least to our customers in the spring quarters. So, starting in January and in the meantime, we're transitioning through that, changing the signs, changing the collateral, that type of thing. It's happening over a three-month period and then effectively from January going forward we will have a very strong brand initiative rollout. Which, the fact that we are now pulling everything into the Beazer name, we can really leverage our marking dollars behind that. We will have a very strong drive come out in the spring. Obviously we don't want to be spending a lot of advertising dollars in November and December, so, we're taking this period as the transition period between now and the January launch. Then you will see a very effective large marketing campaign to drive the Beazer name brand across the country.

Okay. With respect to Crossman specifically, there isn't any part of the goodwill that you attributed to that that might be at risk for impairment, is there?

No, there isn't.

No.

Okay. And secondly, could you just walk us through maybe the Midwest market and Central and give us an idea of what the dynamics are there? Particularly the Midwest and what we might expect as far as some positive growth coming out of that segment for you guys?

Well, obviously those are the two regions that were down. We have very strong sales in the other regions. In the Midwest, we are going through a transition. We're now going through a name transition. We've been going through, just transitions in terms of how we do business there, how we bring some new product in there, how we transition our sales force there. So there have been changes there.

We are looking for substantial improvement in this year. We've got a lot of those changes affected. We've seen some good improvement in some of the markets but we would like to see it pickup. We recognize that the market is picking up there, we feel the economy picking up will be good for the Midwest. I think in the Central region, it's really a timing, we're quite small. It's really Texas for us. And we're quite small in the market still overall and so that in a quarterly period, you will get fluctuations. It's not as though we have multiple markets there to cover any cushion. So, a very good year. The year before might look like a down period in this year. So I wouldn't read too much into that. We still feel very strong about our markets in Texas and Houston and Dallas. So, it's really the fact that we haven't got a very large presence in the market yet. We're looking to grow there and over time I think we will.

And, Dennis, I just want to editorialize on one thing Ian said, in a former life, when was I in the manufacturing area, anytime you change from an independent sales force to manufacturers reps or guys who work on commission to you and a bunch of manufacturers, invariably you lose a quarter to sales. It's never easy, it's always painful. You always bounce back if you execute it properly, but you'll always miss a quarter or two of sales.

And that's really what's happened here. If you look at what we've done that was absolutely necessary at Crossman, we went from realtors, basically working for ourselves and others on commission to being Beazer employees. Now, would you have had better sales, if you didn't do that? Possibly, but would you ever have been able to obtain some of the things we wanted to do in the next few years as far as selling multiple price points under the Beazer brand in markets that we think are basically good markets in the Midwest? Probably not. We need to have our own employees carrying the Beazer brand and whether it costs you a little bit in sales for a quarter or two, probably, but long-term this was investment in getting the sales force we need to execute on what we wanted to do for the next few years.

How would you characterize the weakness as far of how much of it would be attributed to just a general weakening in the economy? And how much specific to yourselves that you're addressing now?

My crystal ball is not that good, man.

All right. Well, thank you very much, guys.

Thank you.

Thank you. Our next question will come from John Lynch with Lynch Research.

Hi, Ian.

Hi, John, how are you?

Very well, thank you. Actually my primary question was geographic variance and you've addressed that. I did think that the Central total last year would suggest maybe you need to find something else in that market or drive it a little faster. When you lose money, when you have declining sales in a market you're trying to grow into, do you go into a negative cash flow position?

No, John, this is not in any way a negative, it's a comp to the prior year. We're certainly not in anything like a negative position in those markets. They're both very healthy. I wouldn't read too much into that at all. We feel very comfortable about those markets and we've made investments in those markets. We've got great opportunities there to continue our growth. The point I was making was that compared to some of our other regions, which have multiple markets and have the affect of being able to take the ups and downs, which you will inevitably get, just through timing of opening new communities. Those are going to factor into it. When you've only got two markets in the whole region, there's going to be more fluctuation there, but there's certainly not in any way negative. In cash flow or in earnings term, they're both very positive.

Thanks, Ian.

Thanks, John.

Thank you. Our next question will come from Robert Manowitz with UBS.

Hi, good afternoon.

Hi, Rob.

A couple of questions in light of the new deal announcement and I'm hoping you could give us some updates on your cash position and revolver balance at the end of maybe October or beginning of November?

Rob, I don't think I can, but we were net cash positive at September. Nothing on the revolver and that is not materially different.

Okay. Well, let me ask, maybe ask the question this way. Are there any prepayment penalties on your term loan?

No, but I think, for general corporate practices, the way I described it, we're prefunding some pretty impressive organic investment opportunities. We may be sitting with a substantial cash balance for a short period of time. There is no intention to prepay any existing debt. The longer term debt, the existing bonds, all have prepayment penalties that we couldn't do anyway for several years and are callable. And when they do, it's not economically feasible for us to be buying them out now.

Right, understood.

So there is no intention to do anything other than use the cash to prefund investment opportunities.

Secondly, more on a business point. You gave a little bit of detail on your inventory. Can you talk a little bit about your complete units unsold and kind of compare that to the community count?

It's less than one finished, I think it's .73 or something per finished home per community. If you include models and homes under construction, it's 2 to 3ish and I think our month's inventory is somewhere between 1 and 2.

Excellent. Thanks a lot.

It's still at substantially record lows for Beazer Homes.

Thanks, good luck.

Thank you, Rob.

Thank you. And our next question will come from Todd Vencil with BB&T Capital Markets.

Gentlemen, how are you?

Hi, Todd, how are you?

Doing very well, thanks. I wanted to just drill in a little bit on the pull through for the coming quarter. Last year it was kind of lower than it had been the previous couple of years, the pull through from backlog into closings. And I was wondering if you have any thoughts on how this year might look?

Talking about the conversion ratio?

Talking about the conversion ratio.

Last year wasn't that much different, actually and we expect it to be consistent with where we've been the last few years.

Okay. Seeing some relatively significant volumes of land sales the last couple of quarters, is there any kind of trend to that? Is that representative of any sort of repositioning or does that just happen to be larger numbers.

That was just trimming around the edges in a couple of markets where we've had a sizeable position. We can opportunistically sell it and a lot of that, in some cases it was as much for competitive IE in the market in the regions. If we've got a big parcel of land that we want to have another builder in there with us just for product diversity, it's a pretty sensible thing do. I would categorize it as trimming around the edges, not a change in strategy.

Okay. How has traffic been, during last quarter and then, as much of last month as you want to talk about.

A little bit slower than usual, but I think I'd attribute that more to September 30 as our year-end, guys like to get paid. They worked really hard the last couple of weeks and, I think every company I've ever worked for, all of which were September 30th year-ends, everyone kind of catches their breath those first three or four weeks. So I don't think it's indicative of a trend. Traffic is still pretty good in the hot markets we've been in. Sales were probably comparable to where we were last year, but I think it's a little bit of a hangover you have after a great party, which we had the last couple of September 30ths.

And we're really focused now on changing out the communities, getting everything ready for the spring selling season. As you know, there is very strong sales in that quarter and that's what we're positioning for now.

Right. Now, you said 6%, more or less community growth like if was this year. Is that kind of steady state through the year? Should the year be 6% higher in terms of communities roughly quarter by quarter?

It's another one where my crystal ball is not that good and the reason is, not that we don't plan for it, not that we don't have pretty detailed budgets down through the community level, a lot of that is kind of beyond our control as far as our releases and when we can get communities open because of the required paperwork. I think the thing you should take comfort in and this observation I've seen over the last year, where we've been slower in getting a community open and by the time you had releases, they were a little bit behind what you expected, the pricing buildup has been pretty significant and we've consistently blown away our profit numbers despite community growth and unit growth that was probably a little shy of what we expected historically.

And, part of that is, just the market. Part of it is good management on the part of our divisional guys. We're being judicious about yield management. We could probably build backlog and sell it faster than we've been, but, good yield management just blocking and tackling. If we release a little bit slower, keep the count and keep the orders down, but capture the most price we can, I think that's all to our benefit. We're managing for profits, not orders.

Right, okay. And, a little more sort of, color, if you can, would be appreciated just on what you think in terms of margin increase opportunities? I mean you've talked about a lot of good things today that you're going to be able to do in terms of leveraging fixed overhead and in terms of simplifying your plans and advertising and to the extent., I mean I guess tell me whatever you can about both how much, of an impact that might have and which pieces of those plans you were talking about might have an impact.

Todd, I'm going to answer that one and then we're going to cut you off. Because there are a bunch of other people on the line. I will repeat to you what you and a lot of your peers repeated to me. Beazer's margins are about 200 basis points under the industry median. We focus on asset turns and a bunch of metrics besides margin growth, I think that's been successful, it will continue to be successful. But we don't see any reason why we can't close that 200 basis point gap and be pretty close to the industry median or median, at least in the next few years.

Okay. Thanks very much.

You're welcome, sir.

Operator, we have a call from -- a question, sorry, from the Internet. Will you consider splitting your stock given the current share price? Ian?

Let me answer that, Leslie and say that this is exciting times for the company here with so much going on. We'll talk for the Board. We do look at all of these issues and we are very pleased in our Board meeting of the last few days, to decide to implement a dividend and that was the focus of this quarter and to institute that going forward. We will look at a stock split. We've discussed it a number of times, we're very pleased, the stock price is rising in response to the earnings and the gross prospects that we have, but we don't have a plan at this time to implement a stock split though I would say it will certainly be on the agenda for the future to continually consider that. Operator, back to you.

Thank you. Our next question will come from Tony Campbell with Knott Partners.

Good afternoon. Thank you for taking my call.

Thanks, Tony.

By the way, that was a great purchase under $60.

Thank you.

I have actually two questions, what's your cancellation rate, please?

It continues to be in the 27, 28%, that's historically where it's been, as well.

Okay. And just if I might just get back to the Midwest, we're obviously, with the transition to different sales people, your own sales people, et cetera, frankly, it's been disappointing as we all know and especially in light of the fact that some of your competition is doing quite well there. Give me a flavor of what -- now that you've got your own sales force, et cetera, how many units do you think, I mean what's your goal, to do 1,000 units in the Midwest? I mean, give us some sense of where you think we can get to?

Tony, we're not putting absolute numbers into the individual markets at this time. We don't see any gains by doing that. But what we will say to you is we're very focused on getting great return from the Midwest. We've had a lot of initiatives going there. We recognize ourselves there and clearly recognize that and it's up to us to turn that around. We've implemented a lot of changes there, looking at the product offerings that we have there, widening that out so it's not just focused on one price point, but widening that out. And I think you will see through 2004 a real pickup in those markets. Some are doing better than others, but I certainly think that in Indianapolis, in the Ohio markets, we've got big growth plans.

We have a very, very big advantage in those markets in that we have a terrific land base and it's priced well. So, that's a real investment in the future and that will give us the return that we're looking for going forward. So, I think that we are actively pressing there to get the results we're o'clocking for and with all the changes that we've implemented there, there is some disruption to our business, but they are positive changes and they will net rules in the future.

Thank you, good luck.

Thank you.

Thank you. Our next question will come from Jim Wilson with JMP Securities.

Good morning.

Hi, Jim.

Hi, Ian. I wondered if you could give me a little color as you look at the further diversification strategy, maybe sort of where and how you might target that if you're moving in certain places more up or mid-market. Are you targeting certain locations in California, et cetera, that might be your target to make that move? And how you see that playing out? And I suppose it might tie into that opportunity, I would think, for the higher margins to come into play. Is that part of the thought process?

Good point, Jim. Basically, the way that we've approached this, and it's taken a long time to really get this established, what we're looking at is to provide a real economy product, which is a Crossman-type model, but provide that in all of the markets that we go after. So, across the country we will look at that. We recognize that that economy buyer of a low price point has different requirements. Whether that's going to be a true price point buyer or whether it's a buyer who can only afford a certain amount, but wants a little bit more style to that.

So what we've been doing is, we've established a language across the company that's consistent so we can clearly identify our target by using demographic information, buying the information that all the retail businesses use, clearly identifying our customer, then identifying the product that we want to put in there. So, we will do at the very affordable end of the product. We're going to do that in more of the value point, where Beazer has traditionally played, we'll be expanding that again, really identifying the buyer. Then we will slightly move upmarket, as well, in markets that we think have the opportunity to do that, where we have a good presence. You'll see it's still offering great value, that's why we've put that into our statement going forward. We will continue to offer them good value. But then we will give those buyers the opportunity, at a slighter higher price point, we'll give them the opportunity to go into our design centers and upgrades and up the specification of their product there.

So, it's really segmenting and finding each of those different buyers, not just saying here's a price point, we will put it out there and see who the buyer is to come. We've turned it around and said, the customer is the one. We're going to look at this from the customer's side, not from the type of homes and plans that we'd like to have out there. We're going to turn it around and we've clearly defined that, done a lot of research here and done a lot of segmentation of our product. The whole planned fest concept was really to segment our product and spread it across the country.

So, in my view, it's a fundamental change for us. It's really saying we've got to really segment our buyer, get a much clearer definition of who we're after and by doing that, we can step in both directions right down to the lowest price point and then we can start to move up in the markets that we see opportunities. So, it's something that I think is going to be very exciting, will give us great opportunity to assume that early and leverage our footprint, leverage our overheads and the size we can then get within these markets. I think it's a good opportunity.

Anywhere you've really -- it doesn't sound like it, but anywhere you've really started or introduced or starting to introduce new product?

We've definitely taken it down through the Southeast into Florida, now we're really looking at that and we're looking for opportunities in many markets. Obviously when you get into a California or a mid-Atlantic market, it's very difficult get that affordable product. Obviously we've got to develop townhome plans and even stake plans. We have some four-story units there which we're building, really trying to provide value for our buyers and get some affordability in there, but again, targeting the market, targeting the locations that we are doing there. So, you're going to see us doing it with across the country. It's going to be possibly different price points and possibly a different product as as we attack it, but really are trying to identify each of those buyers in every market that we're in.

Okay. Very good. Thank you.

Thank you. Our next question will come from Kevin Frische [ph] with Basswood [ph] Partners.

Yes. Thank you. Just a quick follow-up question on the Midwest market. I understand that you don't want to give any guidance going forward in that market, but I guess my question is: Is this transition from the Crossman model to the Beazer sales force model, is this complete now? Or should we see another quarter or two before the transition is complete?

No, it's complete.

Okay. And can you also give us just a little bit of color on what causes that quarter to slow down? Is it kind of turnover in your sales force? Or just a matter of retraining your sales force? Or if you could just give us a little color.

It's both. You've got a hiatus when you have to train a whole bunch of new guys to pick up your approach. Remember, the Beazer approach is definitely different than the Crossman approach was. And the guys that we had in as independent reps, they were bodies in our models showing homes. You've got a hiatus when you're moving them out and you're recruiting, training and getting a whole new sales force up to speed on your approach. So, I don't know if it's any different than anytime you have a wholesale change in your workforce.

Great. And one just quick last question on a different topic. Dividends versus share repurchase, you mentioned that you didn't buy back any shares in the quarter, but obviously now you're starting to pay a dividend. In terms of the thought process behind those decisions, is it a one or the other type decision? Or are those considered separately from each other? Can you just talk a little bit about that?

Yeah, we've talked about this quite a lot in the past and we currently have a share prepurchase authorization out there. We have started to use that. We bought shares, Tony Campbell made the point, we bought some under $60, which was certainly a good buy. I think what we are considering at this time were the changes to the taxation policy for dividends and the fact that many of our investors talked to us about the opportunity for the dividends. So, we don't think they're exclusive. We think they're complementary. We've now instituted a dividend. We think that's the right policy. It's modest, we understand that it's modest, we will look to the future and reassess as it as we go forward but don't think it's exclusive and that we can't now use the authorization for share buybacks, we certainly can, and the Board has given us that authorization, so, we think this is the right time in the growth of the company.

I'd reiterate the point, this is a modest dividend and shows the faith of the Board having the Company to both pay a dividend now, to institute that in this quarter and to help us fund, we're going forward, we're going to fund a lot of growth through the branding initiative we have here. So, we see, both, again, are complementary to each other.

Congratulations on a great quarter.

Thanks very much.

Operator, we have another question from the Internet. What are the implications for Beazer should the treasury assume oversight of Fannie and Freddy or do you think it will never happen?

This is a very macro question. I could certainly give my personal comments to that. The fact is that Fannie and Freddie are very important to the housing industry and have been very beneficial to the housing industry. We fully support them in providing the mortgage security there for our customers. If there's a change, if the oversight moves from HUD to the treasury, we honestly believe that they will still survive, they will be there, they will have programs there. Our preference probably will be to stay with HUD but that's just a personal preference, but I would say at the end of the day, I don't think it will make that much difference.

I think if there's talk of privatization and other things like this, I think what we're looking at is the overall capacity within the industry. Whether today the substantial part of that comes from Fannie and Freddie, if it was changed, if there was privatization, we'd look to the major banks to provide some of that capital, which I believe would be there. So, I really think that housing is important to every administration. It's something that I think there will be support of. There is good social values to it and there's good fundamental economic values to it. So, the changes to Fannie and Freddie, we will watch with interest, but we believe that we will still grow within the framework however it plays out. Operator, back to you.

Thank you. And our next question will come from Timothy Jones with Wasserman [ph] and Associates.

Good afternoon.

Hi, Tim.

Hi. A couple of questions. A year ago these independent reps that you had at Crossman, what percentage of the total were they?

Most of it, Tim, it was most of the Crossman sales force.

They're independent contractors, Tim, so they came in and they worked independently, substantially for Crossman, but we've now decided to roll --

Were they 50% or 25% a year ago?

Within the whole company?

Yeah -- well, within the Crossman area.

Well, within the Crossman area, substantially all of them.

Oh, substantially all of them.

Yes.

But you're just doing this really in the Crossman, that's the only place.

Right.

You still sell to outside realtors in the other areas, right?

We've been through this in other markets with other acquisitions, this is just a large piece of our business to make this transition at this time. We transitioned everyone else over the years into that format. This was just a large transition at this time.

So, you're not doing virtually any sales through realtors?

No, we use realtors as co-brokers.

Yes, co-brokers.

Not as direct sales people for our own communities.

Okay, so they are just like the normal builders now, okay.

Right.

And you said that basically your warranties doubled last year from $5 to $10 million and you also said your direct costs they also were reduced from $5 to $10 million. So, roughly you saved $20 million total last year on the volume purchases or roughly $12.50 per home?

I thought you were talking about rebates?

Yes, rebates and direct costs.

Yeah, that's about right.

Each one was $10 million, right?

That was $10 million and I said in aggregate, probably $15 to 20 million. So, another $10 million from direct cost savings.

Okay.

That's on things like appliances, faucetry, cabinetry installation, I'm thinking about the national deals we make this year or multiregional deals. We got two deals on paint, one for the East Coast, one for the West Coast. And the deal we announced I think an important partnership with Masco and the installation side, we're one of two national builders who have established the program with them.

Are they going to do 80% of your homes like Masco?

I prefer not to comment on the terms of that, but they will be doing a lot of our business. It's a quid pro quo.

That's both on the installation and on the cabinets?

No, joust installation. On cabinets we're working on a series of multiregional deals. Rather than go to our guys and say, I only want to use one cabinet company, which is not the smartest thing in the world for to us do, we're trying to establish a national program of five guys who can serve us multiregional needs. Right now we have about 10 to 15 cabinet suppliers. We'd like to get that number down to 5, have preferred vendor relationships with them. I would hope Masco will be one of them, I would hope Timberlake, I would hope Fortune brands, all the logical, national guys. The people we think will be left standing in a couple of years and have them be preferred vendors to Beazer. They will be, I expect about 5 of them and will reduce the number of manufacturers down from 10 to 15 down to five and that's a win-win. It's great for these guys to grow volume, standardize SKUs, both participate in a design center upsells and we'll get better pricing and better rebate dollars in the meantime.

And lastly, a quick question, with your backlogs up 27% in dollars and your community account going up 6% next year, it appears to me that you might be a little bit conservative on your 10% closings.

Well, Tim, I think, we've given guidance here and we've given some overall guidance, as Jim said earlier on, we have got to make some investment in this whole new initiative we're putting in. So we think overall, we've got good numbers there and have given good guidance for the company, well within the framework that we've used for the last 10 years, which is to get around 15, 16% growth overall each year and we think that it absolutely lines up with our growth projections.

Thanks a lot.

Thank you, Tim. Thanks very much.

Thank you. I would now turn the meeting over to Mr. Ian McCarthy for closing remarks.

Thank you, Operator and I'd just like to take this opportunity to thank all of you for joining us today and just to remind you that recording of this conference call with the slide presentation will be available after 3:00 p.m. today in the Investor Relations section of our recently-relaunched website, beazer.com. And we look forward to speaking with you again for our first quarter update at the end of January. Thank you very much.

Thank you, this will conclude today's presentation. Thank you for your participation and enjoy the rest of your afternoon.