Beazer Homes USA Inc (BZH) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Beazer Homes USA, Inc. l third quarter fiscal earnings conference call. Today's call will be recorded and be hosted by Ian McCarthy, the company's Chief Executive Officer. Before he begins Leslie [Krakoffski], 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. Krakoffski.

Good morning and welcome to Beazer Homes conference call on our results for the quarter ended June 30, 2004. During this call we will synchronize a slide presentation. To access the slide presentation, go to the Investor Home Page at Beazer.com and click on the Web cast link in the center of the screen. From this site you may submit questions 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 materially from the results discussed in the forward-looking statements. Please refer to our recent SEC filings, including F4-A filed on April 9, 2004 and our annual report and Form 10K for the year ended September 30, 2003 for details.

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

Thank you, Leslie. Today we're very pleased to announce record financial results for the June quarter, our third quarter of fiscal 2004. Home closings and revenues increased 12 percent and 31 percent, respectively, indicating continued strength and favorable conditions in the housing industry and our strong position in the market.

Our June quarter net income of $59.7 million and earnings per share of $4.31, both represent all-time quarterly records, increasing 47 percent and 43 percent, respectively. This significant improvement in profits can also be seen in our home building gross margin and operating income margin, which increased 70 and 100 basis points, respectively. These strong results illustrate our ongoing commitment to achieving profitable growth by leveraging our size, scale and geographic reach through our national brand.

In the June quarter new orders totaled 4,869, representing an increase of three percent year-over-year. This increase in new home orders for the quarter resulted from strong order growth in the company's West region of California, Arizona, Nevada, Colorado, and in certain Southeast markets, notably Florida, Georgia and Tennessee. This is partially offset by low orders in the Midwest and in parts of the Carolinas. Midwest orders were down 19 percent, compared to the prior year. While orders increased in Ohio year-over-year for the third consecutive quarter, we have continued to experience weaknesses in Indiana, which we attribute, in part, to the issue of construction defects claims from water intrusion that we faced in that market. We're pleased to report that successful remediations are being completed. In addition, as disclosed in our 10Q filed this morning, the parties in the related class-action suit have engaged in a series of mediation conferences and have reached an agreement in principle for a settlement of the cast. The agreement in principle contemplates a settlement that was established in a grief protocol and process for assessment and remediation of the homes.

Furthermore, we are seeing early indications of the initiatives we've implemented in the Midwest market are proving effective, including the introduction of new product in the region with resulting price point diversification and home realtor programs and other marketing initiatives.

Despite a small decline in orders in the Mid-Atlantic in the third quarter, demand in these markets remains strong with closings up 57 percent year-over-year and a continued healthy level of backlog. We're carefully managing our releases in these markets in order to maximize sales prices and not let backlog extend beyond the current 12 months.

Our backlog, overall, now stands at 9,278 homes with a sales value of approximately $2.3 billion, up eight percent and 29 percent, respectively, from the unit and sales value at June 30, 2003, representing all-time records. Our average price in backlog now stands at $248,000, up 20 percent from the prior year. This results from both the strong pricing environment and our efforts in widening our price points as evidenced in several markets, including, here, in Atlanta, certain Florida markets and the Mid-Atlantic. Our increases in new orders and backlog levels were achieved on an increase of four percent in our number of active communities during the quarter, relative to the same quarter of the prior year. The sizable backlog increase provides excellent visibility as we move into the final quarter of fiscal 2004 and enter fiscal 2005.

I'll now turn it over to Jim O'Leary to address in more detail our financial results. Jim.

- - the June record and a 31 percent increase over last year's June quarter. This revenue increase was achieved on unit closing increase of 12 percent. As we've seen in prior quarters, revenues increased at a greater rate than units as we benefit from continued pricing power that we're seeing in most of our major markets and improved mix demonstrated by strong closings in markets with higher average sales prices, such as the West and the Mid-Atlantic, as well as the execution of our price point diversification strategy. Our success this quarter is a testament to those two key components that we've articulated previously, geographic diversification and price point diversification. We were not overly dependent on any single geographic market or any product segment.

Net income for the quarter was $59.7 million, a 47 percent increase over last year. Diluted EPS for the quarter totaled $4.31, up 43 percent over 2003. As Ian mentioned, both aren't only June, but all-time quarterly records.

Beazer's financial position remained extremely strong during the third quarter. Net debt to total cap stood at 45 percent, compared to the March quarter and year ago levels and in line with our overall objective of keeping debt to cap at around 50 percent or lower. As previously announced during the quarter, we renewed and extended our bank credit facility, increasing it from $450 million to $750 million and we successfully completed $180 million offering of 4-5/8 convertible loans, both of which provide us with substantially increased liquidity to further capitalize on the significant growth opportunities available to us.

We continue to prudently and conservatively manage our balance sheet while, at the same time, growing our business and we were extremely pleased with recognition of this by the upgrade of Moody's, up our debt rating to BA-1 and Fitch's initiation of our debt rating at BB+. During the quarter, we repurchased 179,800 shares under our existing share repurchase program. To date, we have repurchased 307,800 under our current $1 million authorization. Our land position as of June 30th totaled 86,838 lots, representing a 5.3 yield land supply, based on the last 12 months closings. 49 percent of the lots were owned and 51 percent were under option, consistent with last quarter and, more importantly, in line with our overall strategy of keeping this mix at about 50/50.

During the third quarter we increased our home sales gross margin and total operating margin by 70 and 100 basis points, respectively. We continue to realize benefits from a strong pricing environment and the execution of our profit improvement initiatives, which include judiciously managing our releases and capturing every dollar of revenue that we can, as Ian talked about a few moments ago. While we recognize that there have been increases in material pricing, we've been able to offset these by realizing significant direct cost savings in most categories. In addition, through our national purchasing initiatives, average rebates collected per home have increased approximately 30 percent over last year's levels. These market improvements were achieved despite the ongoing warranty and legal costs associated with construction defect claims from water intrusion at one of our Midwestern divisions, which totaled $10 million for the quarter. They're included in cost to sales and represent about 100 basis points of margin. In addition, we continue to invest in our brand with incremental marketing expenses of approximately $2.7 million, which are included in SG&A, representing an additional 30 basis points. Operating margin improvement also reflects a 7.6 million pre-tax charge in the same quarter last year, which was associated through a retirement of debt.

Our performance for the first nine months of this year, combined with a record backlog and expectations of continued strength in the housing market, provide us with a high degree of confidence in our continued growth. Absent any unanticipated adverse changes, we're raising our EPS outlook for the second quarter in a row. We currently expect diluted earnings per share to be in the range of $16.50 to $16.75 for the full fiscal 2004, representing approximately 30 percent growth fiscal 2003. This is a significant increase over our initial outlook during the fiscal 2004 and the target continues to assume approximately 10 percent increase in closings with the balance coming from margin improvement and price appreciation.

Now, I'll turn it back to Ian for concluding remarks.

Thanks, Jim. In conclusion, a strong overall performance continued in the third quarter during which we achieved all-time net income and earnings per share records reflecting our commitment to improve profitability and focused growth. As we move into the final quarter of fiscal 2004, our strong backlog of $2.3 billion, up 29 percent, coupled with expectations of continued strength in the housing market, provide us confidence in our future prospects, resulting in the increased earnings guidance that we have issued for fiscal 2004. Our focus in fiscal 2004 to improve profitability continues to drive these exceptionally strong results. We recognize that we are in rising interest rate environment, but we believe strong demographic trends, combined with constraints on land and housing supply, will continue to provide excellent opportunities for large public home builders, such as Beazer Homes. During the quarter we substantially strengthened our balance sheet to take advantage of the opportunities that we believe will drive market share gains for us and the other large public home builders in this current environment.

In addition, our continued focus on strategic initiatives that, one, leverage our national brand; two, capitalize on our broad geographic profile through focused product expansion and price point diversification; and, three, drive best practices to achieve improved profitability. It will all place us in a strong position for continued growth as evidenced by our increase in our earnings per share outlook to $16.50 to $16.75, a growth of approximately 30 percent over fiscal 2003.

With that, I'd now like to open it up for questions and the operator can take your calls and explain the process.

At this time, we will begin the question and answer portion of the call. If you would like to ask a question, please press *1 on your telephone touchpad. If you are using speaker equipment, you may need to lift the handset prior to pressing *1. Should you wish to cancel your question or if your question has already been answered, simply press *2. Once again, that's *1 to ask your question and *2 to cancel your question. Please allow a moment as questions register. Your first question comes from Carl Ribeiro with Credit Suisse First Boston.

Just a couple of quick questions, Jim, can you explain a little bit on the settlement agreement in principle here, what's the potential impact on the margin and does that mean, essentially, that we're not going to see a go-forward impact on the warranty costs and gross margin line?

You will continue to see it and let me explain exactly what the discussions are. It would not be a settlement where we would be able to come and say that the number is X and we're settling with each one of the home owners because the population of home owners is still to be determined. What this would do is establish a framework and a protocol to, basically, address claims that are outstanding. Practically speaking, what does that mean, that we have a number of claims in and - - our 10Q, different than normally, we filed our 10Q consistent with the call so that way you could look through this, read it at your leisure, then come back to us with more detailed questions - - but what this means is that we know what claims we have in - - remember the issue we've had in identifying and calculating the total is we don't know what claims are out there. Each home is considered a unique claim. We may have very few out there. It's, obviously, our expectation that there are more that will require work. They will require remediation. We wouldn't expect that to be as severe as the initial claims. If you recall in our previous discussions, three and four sided bricks were the worst that created the highest average cost to remediate. We acknowledge that there are still issues with customers that we want to make happy.

What this would do, what the settlement and principle would do, it would establish a protocol, it would define what the testing would be, what the remediation process would be for doing that and would provide us with a release at the end. That way, we could come back after people responded to, basically, our initiation of what claims are out there, we contact each homeowner, do you have any issues, they would respond to us and then we go out and test and develop what the remediation costs would be. What I think that gives us, Carlos, is the ability to come back to you in the next quarter or two, assuming this continues, and tell you what that dollar would be. We're showing a very similar circumstance now, but without complete date we can't estimate it because you have [inaudible] that came in first and a population that we don't believe is every home that was built previously, but we can only acknowledge, probably, a little bit bigger than what's out there now. This will give it the framework and the ability, not just to go through everyone of the homes, make sure there are no issues, but to get releases. So this is an issue that continues.

That's fair. I know it's difficult for you to kind of estimate, but in terms of next quarter would you expect a comparable number?

Yes. If you look, Carlos, we've had comparable. It's somewhere in the $5 to $10 million range, probably, at the current run rate. Again, I'm reluctant to say that, but I said it, one of the issues is that people are standing back now, they know we're working diligently with the attorneys representing them, they know that we're out there in the media trying to make the issue as palatable for potential homeowners as possible, but people are standing back waiting to see how the whole settlement goes before they bring their claims in, which is actually something we want them to do and we want this to be part of an agreed upon protocol so that we're not running off homeowners as they come.

OK. I'm going to ask just two more quick questions here. Can you give us a sense of how your order trends progressed during the quarter?

Do you mean during the quarter? Our orders were reasonably in line with our expectations. One of the initiatives - - what we've really been trying to do this year, as we came into our forecast, is to increase our profitability. That's been the key focus of the company. We haven't been trying to drive the top line as hard. We've maintained from day one in this year that we wanted about 10 percent top line growth and that's what we have achieved, but we've consistently been trying to drive profitability. Two real reasons for that, one is that, obviously, in many markets land pricing has been aggressive throughout this year and we don't want to undersell the product that we have. At this time we've been able to get price appreciations. Secondly, we're also putting a lot of new initiatives in place and best practices in there to drive this profitability and that's been our focus for this year. I think when we get to the next quarter and we forecast our position for 2005, we'll give guidance then of where we expect to see growth going forward. As I said in the remarks at the beginning, we recognize the environment that we're in now in terms of a rising interest rate environment, but I firmly believe that this is an opportunity for us and the other large public builders to capitalize on the advantages we have and take market share in this environment. So, I think when we come with our guidance for 2005, we may be able to be a little more aggressive, surprisingly aggressive in terms of what we expect the overall market to do in terms of where we see our position in the market. I do think there are market share gains to be taken at this time.

In terms of this past quarter, did you experience kind of a steady low single digit growth rate throughout all three months or did you have one month that was, maybe, high?

No. It was very consistent throughout the period. There was nothing outstanding there. It was all very consistent.

Lastly, if you could kind of give us a sense of your current product breakdown from the financial services standpoint? What percentage of your originations were homes this quarter and, if you have that number, can you also give us a sense of what percentage were IOs?

We'll check for you. The IO number isn't significant. I think we're up about 33 or 34 percent adjustable and that's, roughly, double from last year.

Great, guys. Thank you.

Our next question comes from Tony Campbell with Knott Partners.

Good afternoon. I have a question about your land position. If we were to take away the Midwest, what would it look like? In terms of future purchases, what are you doing to diversify and get new land positions in some of your other regions?

Our land position across the country is very strong now. We have a very strong basis there. In the Midwest we still have over seven years supply. That's a position that we took when we went into that market. We've added to it over time. We've added in terms of a price point diversification there so that to be able to get into some of these different product lines that we have, partly we've subdivided the existing land that we have. We're putting two, and in some cases now we're looking to put three different product lines into those communities. We've also added communities to that. If you look across the rest of the country, we've got a strong land basis in all of our regions. I'd say the strongest is in our Mid-Atlantic region where we have some excellent positions there that we purchased 18 to 24 months ago, which are now coming through the zoning process. They're fully entitled, but we have to get them zoned and get the process started. There we have a lot of opportunity. We've made substantial investment in those markets with a market that's really appreciated. We've really got some opportunities there. I'd also say, in a market like Florida, we've made some strong investments in that market. We see a lot of opportunities in that market, so we've made some substantial investments there. We've got some additional opportunities coming up.

When I talked about strengthening our balance sheet, we are substantially doing that to take advantage of some of the opportunities that we see, some of them that we've had tied up for a while that we have to commit to over this next 12 to 18 months and others where we see opportunities going forward. I think we're investing in all the markets across the county. We see very good opportunities there and many of them are larger investments. These are becoming larger deals where, entering them with others in some case, this is the key catalyst, in my view, to how we are going to be able to take market share going forward. We're going to be able to tie this land up. It's going to provide the driver for us and, as I say, the other large public builders, to really take market share in this environment.

Thank you and I don't want to let Jim off the hook so I have a question for him. Could you talk about your cancellation rate and how it looks relevant to the comparable period last year?

About 22 percent and down 2, 3 percent. That's reflective of, obviously, a shift in mix to where, not only do you not have standing inventory, you have people lined up for homes. As we move to the mix, the mix to West, Mid-Atlantic, Vegas, you see in the cancellation rate in a couple of those areas has, basically, dried up. We haven't seen any change, however, no material change. The markets are a little more credit sensitive than the ones that we've talked about, like Charlotte and the Mid-West. No changes in terms of individual markets of note and overall coming down, largely driven by mix.

Thank you and good luck.

Your next question comes from Steve Kim with Smith Barney.

Jed Barron for Steve Kim. I think he might have dropped off the line. Congratulations on the solid set of numbers. Just a couple of questions for us, first of all, I think you had said that one of the things that was underpinning the stronger guidance for this year was margins and I was just wondering if you could talk to us about the trajectory that you're expecting in margins based on what you're looking at in backlog right now?

Jed, if you could hold on for one minute, we have a couple of e-mail questions on reconciling and explaining the jumble of numbers I throw at you during the prepared remarks. If you recall, last year, included in EBIT, we had a $7.5 million charge for early retirement of debt, it's a FASB mandated placement of that number, that's when we retire the senior notes. When I talked about last year, it included a $7.5 decrement that was in the third quarter of last year. This year, I was obviously sanctioning it as being non-recurring, but unusual charges associated with - - in the case of the $10 million for warranty - - those are the homes that we acquired from Crossman which will work in the finish - - I think the fellow from First Boston just asked us to go through that - - and branding costs, which aren't really an investment in this branding program. A lot of charges, change over signs, will probably be one-time charges to change out signs, product literature and establish a branding program that go forward. That, in total, is $12.7 million. This year, were you to look at those two numbers, home building gross profit would be about $205 million at 20.7 percent; last year, if you exclude that 7.5, it would be out $141,600,000. When you break that down and you get down to EBIT margin, it's $108,938,000, that's about 10.8 percent; last year that comparable number would have been $73,538,000. That is about 9.5 percent. In terms of roll off, the operating metric that we look at, we're holding our divisional guidance to in total, near 10.8 percent compared to last year at 9.5 percent.

What's the trajectory? We do expect it to continue. Obviously, we've got some high profit levels in backlog. We'll be up another 100 basis points next quarter, it's certainly possible if you exclude these charges. What we're seeing across the company, we're being very judicious in our leases, clearly it has impacted our order growth, but that's intentional. If you look at our standing inventory in a couple of places, like California and Las Vegas, we have no specs for community. The homes under construction, we usually have one or two that have not yet been released. The reason we're doing that is so we get the most prices on every single unit that we put out in the field. In terms of actual cost reduction, I talked about, basically, a near doubling of rebates going from about a little under $10 million to about $15 to $20 million. My hope and expectations will be closer to $20 this year and that's just the sticker price. We're not managing the company for rebates, but that reflects an increase of about 30 percent to what's today is about $900 per home. There's no reason that shouldn't be substantially higher. We had a discussion with some of our field leaders yesterday, people out in the field, about just collecting some of the money that's available should get that number up substantially. That's lesser important to the cost reduction initiatives that we have under way. Some of the standardization efforts, some of the process improvement efforts, some of the things we're doing every day now on the direct cost side are coming through while there have some pretty substantial material cost increases, we believe we're offsetting a lot of that with some category specific improvements, like in the case of cabinets. We've taken what a year ago was 15 cabinet manufacturers that we were using, really on an ad hoc use wherever you want an approach to where, with our people, we've been able to identify the four national guys who can service us and those are huge dollar savings, usually on the average of about $1000 per home. We expect things like that, while they'll abate over time to continue, so we see a lot of margin improvement opportunity. I think the thing we've said in the last couple of quarters or quarters ago, there's no reason for us not to be a lot closer to the industry mien, which is about 300 basis points over the next three plus years. Our charge is to get there sooner, but that remains the case.

Great. That's very helpful. If I could just hit one other line item here, recognizing that your average price in backlog has continued to trend up here, if you sort of look at what you might expect that to translate into for closing prices in 2005? I understand that there might be some mix there going on as well, but if you could just help us a little bit in terms of pricing in 2005?

Jed, I promise I'll help you more in next quarter's conference call about 2005, but on 2004 - - at the risk of having this confuse you - - we would expect that to be a bit lower. Obviously, we've said that every quarter, but we'd like to the Midwest show the improvement that we've been talking about and some of the other markets that have been a bit slow, see Charlotte come back a bit. We'd like to see our price point come down $10,000 to $15,000. That hasn't been the case. It's really been a question of addition, not subtraction. California and the Western markets and the Mid-Atlantic have been so spectacular. It's continued to drag the average price point up, as have some of our price point diversification strategies. If everybody hits on all cylinders next quarter, we'd like to see that come down a little bit.

Jed, just to expand on that very slightly, we talk of price point diversification, it's not all up. It's not as though we're forcing everything up in every market, a number of markets we've gone into now with a town home product and a more affordable product. That was always a part of our strategy so, as Jim says, we're not just constantly trying to push it up. If it was down 10 or 15, we certainly wouldn't feel bad about that, we'd just hope that the effect of the new product that we're putting out there, the more affordable product, is being well received. It's a slightly moving target, each quarter, depending on the mix that we get market by market, product by product, in these markets, so the number is going to move around very slightly as we bring in these new product lines.

Great. Just one, lastly, any update on FICO scores in terms of where at, in the quarter, maybe how that compares to the year ago period?

Jed, I can't give you an update because we've never committed on that. As you recall, our mortgage company is a little unique relative to the industry. We have a partnership with an outside lender. We're, basically, brokering for them. We don't have access to that data that is good enough where we're comfortable putting it out in it's sanctioned form. That said, we're continuing to work in improving that, but we don't have a number for you.

OK. Thanks very much.

Our next question comes from Tim Jones with [Waschmidt].

First of all, I just did the math on the gross margins. I got different margins than you because last year the retirement debt was not included. I get 159 for the gross margin last year and, apples-to-applies, it would be 218.4 this year. Maybe we can reconcile with the numbers that you gave? Basically, you add $10 million to the number reported this year and you don't change anything last year because the 7.5 is below the line.

No. The 7.5 is operating income.

I'm looking here across and it says - - I just took the home construction and land sales and I just subtracted that - -

That final number I gave, $10.8 compared to $9.5, that's the EBIT margin, that's operating margin. The $7.5, you're right, doesn't go into home building gross margin. Those comparables, if you put back the $12.7 and didn't touch the $7.5, it would be about $205 million this year, that's 20.7 percent, and $141,672, which would be 19 percent, so about 170 basis point improvement. You're right, the $7.5 goes into operating income and not - -

We're talking gross and operating income, but I'll get back to you on that rather than taking up time.

OK,Tim.

One question on all these water damages, obviously, you've been paying $5 to $10 million a quarter, a good amount of time on, obviously, a tremendous amount of homes, why didn't all these various inspectors take this up anywhere? There had to be all kinds of inspectors that looked at these homes.

I think the homes passed their inspection when they were built, Tim. What's happened is that there have been various causes that have caused this to happen. Initially, there were some water intrusions through brick. Once we looked at it, there were other issues there. There was a lot of publicity around this issue in the market and that's one of the reasons we felt that we've been impacted there in terms of our marketing position within the market and a number of other people then called us and said that you better come and inspect my home and look at this. Many of them, we have found water intrusion, many of them we haven't.

Was it materials or the construction?

It's a combination I would say. A lot of it is due to detailing. As I say, we started with brick and there were some brick issues. Secondly, there's been some flashing issues around chimneys and windows and the like. It's not one consistent issue, it's a number of different issues. These homes were built a number of years ago and they all passed their inspections. As you say, they were inspected at the time.

How long ago were they built? Just out of curiosity, was it a year ago, three years ago?

None of these homes were built on our watch, Tim. Most of these homes go back around, I believe, closer to 2000, but it's 2002 back, 1998 is about where we think they really started. Not one of these homes was built under Beazer Homes watch.

You're doing this to sort of help the customers because you're not obligated under the warranty for this long, are you?

It depends. If you take the warranty in itself, no we're not, but if you take that is there a construction defect there, we are looking at it under that position. Also, we have to inherit this and we should stand behind these homes in a market that is a big market for us and that we want to do the right thing. That's why - - and I think I said this in the last quarter - - but that's why we're now getting some positive reaction for the way that we've addressed this. The reality to market there is recognizing that we are standing behind these homes and that we're getting positive recognition for that. I do think that it's a big issue for us, but we've addressed it in the right way and the right way, certainly, for the customers, but also the right way for the company to address this and rebuild our position in that market, which we're now doing and we're looking for stronger results going forward.

A quick question, the convertible, the size of it and what is the conversion price?

The conversion price is $154. It's $180 million total and the number of shares is 1.16.

As far as I know, this is the only major convert out in the home building industry, is that correct?

No. [Splendar] has a significantly larger one than we do. WCI did one about 13 or 14 months ago. Horton has one, but it might have been taken out. [Splendar] has a much bigger one out and the [inaudible] not long ago.

I think that's at zero, but it's a very complicated one. What made you decide to go convert versus straight debt?

This is a conversation we have with a lot of our shareholders, some of which recognize a need for this, some of them, obviously, disagree and wanted to see us buy back shares. I think we've done both here. When we look at our capital structure, which was historically fairly short, a little more bank dependent than we wanted it to be, when we look at the term maturity of our debt, and this not equity and, obviously, it's in between, it's a hybrid, it's essentially a dead instrument with an option that buys down the rate a bit. We look at where our investment opportunities are. I don't think you can just look at the debt side, the right-hand side of the balance sheet, without looking at where the money is going. We are obviously investing at a very, very high return, very, very - - and risky is the wrong word - - I think over a five to ten year period, there are older markets that are producing excess profits today, are going to be higher than they are today 10 years from today. Between now and then, a lot can happen. I think we, and our Board, felt a lot more comfortable having something in our capital structure that was longer term in nature and a little bit more equity-like than what we have right now. This was a way to balance those needs. Where we're putting our money is some really high-return markets and we think, from the investment opportunities that we have, something that is a little more equity-like and characteristic made sense.

I agree with you there. Lastly, this Mid-Atlantic region, you're up 55 to 39 in subdivisions, can you tell me what you have in the Washington, D.C. area? In fact, it's down and not up.

Down in terms of communities?

Yes.

As I say earlier on, we invested - - particularly in Maryland within the last 18 to 24 months - - we've been bringing communities on there. They take time to come in. We're now bringing those on line and the effect of those is now coming through. We really do expect to see some strong sales there over the next 12 to 18 months. For us, that's an excellent market. We also moved into the Delaware market out of our Maryland operations. We feel very comfortable that those are very strong markets for the future. We see great prospects there. The reason our orders are down slightly there is we didn't want our backlog to run out more than 12 months. That's just something - - we took a strategic decision there to make sure that we weren't pushing out beyond that. It's hard to get any price protection beyond that point. We wanted to get the backlog back. Closings were up over 50 percent in this quarter in that region so you can see what we're doing there. We're getting the deliveries through because we have got new communities opening, we will be bringing new sales through and we wanted to hold the backlog at around 12 months.

You have the number that whole Washington, D.C. area, all around, North, South, is that up? I don't know of any other builder that has communities up in that region because they sold out of them.

In the Mid-Atlantic, our number of communities now has gone up from 39 to 55.

Yes, but I wanted to find out how much is really the Washington, D.C. area?

It's not actually in D.C., but in Virginia we've - -

Around the areas, I know that - -

I'm just telling you, in Virginia we've gone up by six, from 20 to 26; in Maryland, which is where we've made the substantial investment, and this includes Delaware, we've gone up from 10 to 18; in Jersey, we've gone from nine to 11. Maryland is where we've made a big investment. It does take time. Maryland is probably as hard a market as any market in the country, including California, including New Jersey, to get entitlement through there. These are entitled. It's a matter of getting to the point of building permits. Those, I think, are really going to pay off for us over this next 12 to 24 months.

Thanks very much.

Operator, before you go to the next question, an e-mail question that came in is what was land expenditure for this quarter and the year-to-date? For the quarter, about $301 million and, year-to-date, $883 million, incremental investment in land.

Our next question comes from Gabe Kim of Basewood.

Good morning. Just a follow-up question on your active subdivisions, your Midwest region subdivision count decreased about seven percent year-over-year and I'm interested in hearing how much of that was related to planning, how much of that was intentional and how much of that was just related to the ebb and flow of community counts?

Not of small amount of it was due to planning. I'd have to do a little bit of math to calculate exactly. One of things we have been doing is working down under performing divisions and getting out of a couple, focusing on the subdivisions where the average number of homes is a lot better coming out of there and you're leveraging the overheads a little bit more effectively than we had been previously. Remember, we're in the process of migrating to higher price points in a couple of them, and that doesn't happen over night, and getting rid of - - and, quite frankly, culling the losers, and that's all going on. I think most of it is intentional strategy on our part to reposition the Beazer brand. In a couple of places, Trinity, for example, which is an existing community, a subsidiary where we've had these water intrusion issues, no, we're not opening communities there until we get this issue taken care of. We have a very valuable land position that's a long-term asset, but we'd like to get this perception issue taken care of before we really go great guns in getting back to the market share we should have there.

This is Bennett. In the consolidated inventory not owned where you're the primary beneficiary of certain option contracts, what does that mean that it causes you to put that on the balance sheet?

That is a 1046 issue that [inaudible] and my understanding of - - this is something that we've talked about for years and years - - it is multiple transition hiatus that finally came this year where this is inventories where we have an option. The option is over a level - - and I think our level is 15 percent, depending on whether or not you're taking on development risks - - and the rule is if you're over a certain threshold, you have to consolidate both the liability for future expenditures and an asset equal to it. Practically speaking, these are options that we could walk on in a minute and have no future obligation, but, in some cases, you have to consolidate them because it's over the numerical threshold that the [inaudible]. I think the [inaudible] mandate is part of 1046. I'll be glad to spend more time with you off-line. It's a complicated topic that I have understanding on.

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

Good morning, everybody. With respect to your guidance, I know you only have a quarter left of this fiscal year, obviously you pushed the guidance above your surprise on this quarter and realizing, yet, that your orders have been weak - - I know your backlog is up a lot - - are you getting a little bit more cautious beyond the next two quarters given the order trends or do you expect order trends to pick back up again because of your new community openings or do you imagine they'll stay, roughly, where they've been?

I said earlier on that we came into this year targeting 10 percent top line growth and that's exactly where we are. The whole focus of this year was to improve profitability and that's what we've been doing all the way through. We're not disappointed with our order growth. We certainly would like to see order growth in the Midwest and we're working on that, we have been for the last few quarters, but our order growth in all the other markets as well are well in line with where we expected to be. I also said in the prepared part, if you did hear that, that we understand that this is a rising rate environment and the overall housing numbers may well go down, and we thing there are a lot of demographics to drive those numbers, that this is now a time, I think, for the large public builders to take market share. This is where our land position, our capital structure, as the banks get more sensitive about new deals for the smaller private builders and the private builders, maybe get more sensitive about the market, this is a time for us to take market share. I was forecasting this for next year, when we give guidance for next year, we'll look again at what do we expect to get from top line and what do we expect to get from profitability to drive our growth into fiscal 2005. I think we're very comfortable with where we sit today. As we say, we have very strong backlog to take us through this quarter into 2005 and then we'll give guidance for next year, but I do firmly believe this is an opportunity for the large builders. Consolidation normally doesn't happen in great times, it happens when times get a little tougher, and that's why we've strengthened our balance sheet, that's why we're making investments in land, even larger land positions that we think will take us through into 2005 and beyond.

Thank you. Just a clean-up item, speculative inventory for the quarter, what is it, roughly, as a percent of total inventory?

It is about less than one home per community, Ivy, as far as true finished specs. Homes under construction, it's a little under two, but, again, I think I mentioned before, that it's less than two. It's actually substantially less than two in a couple of markets where we're really holding releases. For example, California, we have a bunch of homes under construction that are "spec", but the second we release them to the field, they're gone because we have a waiting list for them. My guess is, if you exclude those hot markets, it's well less than one per community, both under construction and completely finished.

Thanks, guys.

Our next question comes from Alex Barron of J & P Securities.

Good morning. A couple of questions here, I was hoping you could elaborate a little bit on your savings comments from purchasing? You said it was up like 30 percent.

I said our rebate number is up 30 percent. Let me give you - -

What is it in dollars?

In total, it will up from about, I think, $8 million last year to, as I said, somewhere between $15 and $20 and I expect it to be closer to $20, but just from rebates that's the absolute numbers. We're not focused on rebates. That is what I would consider sort of "the cream on the top". We don't want to manage our cost savings programs to get the highest rebates. That is not a prudent thing to do, but pushing the rebate, pushing the co-op incentives, pushing the things that are part of the total savings is absolutely something that we're focused on. We've seen our rebate per home go up 30 percent to about $900 and that's well less than the average, that's well less than we can do and it's well less than where we expect to be by the end of next year. In total, just from rebates, savings will probably be in the $15 to $20 million range for the year. The bigger dollars you see in the gross margin, they're hard to break out, but, as I mentioned with a category like cabinets, we took 15 suppliers down to four, we went to where anybody can use whatever they want, to an agreed upon selection of four national vendors, all four of them competing everyday in the marketplace. The savings there, depending on where and the product line, anywhere between $500 and $1000, where now you've got four people you can work with on value engineering and getting exactly the right product in the home and it still leaves you some opportunity in the option center. Those types of savings, which aren't rebate driven, but are direct cost driven, we're seeing big benefits from. The other thing that's still to come, but we've got a lot of positive success stories in terms of reducing the number of plans, standardizing where we can value engineer a little bit more effectively and, quite frankly, to just take complexity and cost out of the system everywhere we can, those things are all underway. We can't quantify them right now, but I think you're seeing them in the gross margin and, to a large extent, offsetting a lot of the material price increases that you see coming through from manufacturers and some of our pure numbers.

It sounds like you're just getting started then.

We're at the very early innings of what we think is going to be a very big benefit for us.

OK. Moving on to orders, I know they were up three percent on a unit basis, but I sort of back into a number of 21 percent on a dollar basis so I'm hoping you could elaborate there on what explains the increase and the pricing? Is it just pure pricing or is it mostly mix that you're moving more into more move-up type homes?

It's a combination of the two. Partly, it's mix between the various markets. Obviously, the West is very strong, as we said, and the average price in the West is higher. Also, the Mid-Atlantic is a strong market so that's in backlog, not as substantially in new orders, obviously, but it's impact over this time. There's also this price diversification and part of that is moving up in price. As I said just now, part of it is also moving down in price. In some of our markets where we've had good steady first-time buyer, move-up buyer, we're getting some very economic town home product in there, so in a market, like Atlanta, we've had good diversification here. In Orlando, we've moved our average price down. We've bought a lot of town home community in there, a very strong demand in the market. You are going to see this variable position there, depending on order strength by market, by product line and we said that we expect some fluctuation in that number. We don't expect it just to continue to go up. We're not targeting it just to go up. We've had a strong increase in this quarter, but we will be looking for, possibly, 10 or 15,000 to come down if the acceptance of these new product lines, these new town home lines, these new affordable lines, comes on line as we expect. That number is going to have some variability in it, but it's to be expected as we introduce new products by market going forward.

Moving on to share repurchases, I was happy to see that you've started buying back your shares. Do you have any target there for the rest of the year or what are your thoughts on additional share repurchases?

We've made our share repurchases in the June quarter, as we stated, about 170,000 and, since then, we've been in a closed period. We haven't been in the market and we have a Board meeting next week and we'll be talking to our directors about the capital structure that we have, the position that we have and we'll consider our position after that.

OK. One last one, I understood that you put the $10 million charge for the warranties in cost of goods sold, is that correct?

We didn't put it there, that's where it belongs. Unfortunately, that would be where the FASB, that's where we tell our operating guys, that's where the number goes. It wasn't by choice.

Why does it go there if it isn't associated with homes that are delivered this quarter? I thought you said it was with homes that were built a few years back.

It's associated with homes that, at one point, went through somebody's P&L, the revenue and benefits for which - - even if it's an acquired company - - it goes through the gross margin line as such.

OK. I guess I was just thinking that you'd break it out as something separate and just keep the cost of goods sold associated with homes delivered this quarter, but anyway - -

There's been a lot written over the last couple of years about people doing pro formas and things like that and we, intentionally and for good reason, keep away from that. That's where the FASB and the SEC wants the numbers and that's where they belong.

OK. Thanks. Good quarter.

Your next question comes from Margaret Whelan with UBS.

Good morning. A lot of good questions. I'm just trying to figure out what do you think, as you look out a couple of years from now, will be your product mix, your kind of price point and geographic mix versus right now? What would you be striving towards?

What we're trying to do is take the company from where it was, very much focused on that first-time buyer and move-up buyer, and we're widening it, but in both directions. One of the reasons for the acquisition in the Midwest was to really get into a lower price point so what we're looking at there is what we call an "economy buyer". It's very much an affordable product line. It can be causative to different types of buyers. These are just across the spread, but at very affordable price points. We're looking at that. We're looking at a value buyer, which is very much the market that Beazer had in the past and we're looking, in certain markets, to extend our product line up slightly into what we might call a "style buyer" where we think that there are opportunities to do that. We've been doing it for many years in certain markets, in Nashville and Southern California, in certain Florida markets. What we're doing now is trying to take that product line in those basic three categories and take it across the whole of the company. I think, when you talk about two years, it will take us two years to roll that out into all these various markets. It's not something that's going to happen overnight. We've got to get the land positioning right but, again, one of the advantages in some of these larger land transactions that we've been entering over the last few years is that we can put in multiple product lines into those larger deals. It's not something where we just have to go and buy specifically for it, in many cases we can take some of the larger land deals we have today, put in multiple price points and achieve the product mix that we're looking for. I don't think, today, we're going to give you a breakdown by segment, but I think, going forward, as we look at guidance for future years, we will and delineate that to some extent, looking at a pipeline of land deals that we have, look at the products that we have by market, and we'll try and give some guidance on that in terms of [inaudible] for each of those sectors that we're looking at.

If you think about it, you know your pricing on the West Coast and the Mid-Atlantic is about 100 percent higher than in the Midwest. Are those markets where you have higher pricing definitely higher margin or is it the case where you're more efficient in some of the markets where, even though there's lower pricing, you can still achieve the same margins?

It's a fact that in many, many markets you can achieve very good margins on affordable products, if you are efficient. We said many times that one of the reasons for the acquisition in the Midwest was to buy a company that was very efficient in it's product line there, had very strong margins. Margins and price point don't necessarily go hand-in-hand. We can often get great margins with very efficient product line at lower price points. It's not necessarily the case that a higher price point gives you a better margin. You quoted a couple of markets where there's been a lot of price appreciation and that's the case where - - where you have that price appreciation in the market, certainly the margins will be going up, but if you're building the higher priced product in a market that wasn't appreciating, there's no reason for the margins to be higher than a lower priced product.

OK. In terms of your [inaudible] ratio of your order backlog into deliveries in any quarter, yours seem to be holding up better than some of the others versus your own historic trend and you seem to be delivering more of an even flow model across the seasons on the quarters than some of the others. Do you do that deliberately or is it just the markets that you're in that allow for it?

It's getting better.

Is that what you're targeting in terms of your even flow - -

I would love that we could - - we should take credit for it because we are questioning our guys a little bit harder on even flow. It's funny that you mention it. We've been talking about how we should make that explicitly part of - - as some of our peers do - - some of the metrics we measure our guys by. I think that if you look this year, it is intentional, whether it ends up being - - the numbers probably end up being coincidental - - but the actions taken, if you look at the Mid-Atlantic, that's a place where we had far too much in backlog, we'd let far too much price on the table, and we're going to create customer satisfaction and production issues, so we've been working that backlog down. That's where, I think, you'd see our conversion ratio go up pretty significantly because the orders aren't going in, backlog is coming down, and we're getting it in line with the six month, basically, closer to a six month delivery rate than we have been, historically. In a couple of markets where we've got big backlog, we're just trying to keep up, California, Vegas, and keep the deliveries, again, even with the backlog. Those are explicit actions we're doing to improve the operational efficiencies and make sure that we don't have nine months of backlog, huge order numbers, but we left the price on the table. That's where the fact that it comes down to being a conversion ratio that's about the same. It's probably coincidental, we're not managing to a number.

Can you give us examples of the expected actions that you're taking to manage it?

Sure. In the case of the Mid-Atlantic, we finish our budge meetings and our chief operating officer and the fellows who report to him in the Mid-Atlantic, they have long conversations about not being too far pre-sold, getting our production teams in line and making sure, again, that we're not sitting there with nine months of backlog or more and a bunch of unhappy customers who are missing that delivery date.

Nine months is the cut-off?

No. We like to be six months. That's a market where we had a little bit too much in backlog. A lot of it does have to do with land development delays and the like. Our guys worked on that. A lot of that is explicit action where they've just done a very great job. I'll give you an example that's live today. In the case of Las Vegas, we had a huge backlog, we had phenomenal orders, nothing but good things ahead of us, but in order not to get to the situation where you're a year sold ahead, we had two production teams. Our president in our Las Vegas division went through and staffed up in advance of that, made sure our sub-contractor base was on line and made sure that we had two production teams. Even though our sales pace rate was substantially higher than it had ever been, he basically doubled his business, he had the production teams, the purchasing teams, everybody in his organization aligned. It meant adding some people ahead of demand, but knowing that he would have the land positions in place and making sure that everybody was trained, all the communication protocol was in place out to the sub-contractors. They were meeting our deliveries and having happy customers in addition to big profits.

OK. I understand. Thanks very much.

I think the operator told us that was the last question so I would like to take this opportunity to thank all of you for joining us today and a recording of this conference call with the slide presentation will be available this afternoon in the Investor Relation section of our Web site at Beazer.com. With that, I'd like to say thanks and we're looking forward to talking with you in November with our year-end results.

Thank you for participating in today's teleconference and have a nice day.