Beazer Homes USA Inc (BZH) 2004 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to Beazer Homes USA Fourth Quarter and Full Year Fiscal 2004 Earnings Conference Call. Today's call is being recorded and will be hosted by Ian McCarthy, the Company's Chief Executive Officer. Before he begins, Leslie Kratcoski, the Company's Vice President 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. Kakoswki, you may begin.

Thank you, Maggie. Good morning and welcome to the Beazer Homes conference call on our results for the quarter and year ended September 2004. During this call, we will webcast a synchronized slide presentation. To access the slide presentation, go the Investor home page of beazer.com and click on the webcast 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 materially from the results discussed in the forward-looking statements. Please refer to our recent SEC filings, including Form S3A filed on August 17, 2004 and our Annual Report and Form 10-K 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 would now like to turn the call over to Ian McCarthy.

Thank you, Leslie. Today we are very pleased to announce a strong finish to fiscal 2004 with record financial results for the fourth quarter. Revenues of $1.2 billion were up 17 percent and new orders were up 11 percent, both indicating continued strength and favorable conditions in the housing industry and our strong position in the market.

Our September quarter net income of $80 million and earnings per share of $5.82. Both represent all-time quarterly records, increasing 40 percent and 39 percent, respectively. This significant in profits can also be seen in our home building gross margin and operating income margin which increased 130 and 170 basis points, respectively.

For the full year we generated revenues approaching $4 billion, representing an increase of 23 percent. Home closings and new orders were both up 7 percent for the year. The full year net income of $236 million was up 37 percent. Earnings per share of $17.09 increased 34 percent, both representing annual records.

Home building growth margin and operating income margin both increased 90 basis points for the year. These strong quarterly and annual results illustrate our ongoing commitment to achieving profitable growth by leveraging our size, scale, and extending our geographic and product diversity with our national brand.

Our total closings of 16,451 homes in fiscal 2004 demonstrates our broad geographic diversity with a presence in 20 states, and no single state contributing more than 15 percent of total closings. We view this broad geographic footprint to be a competitive advantage upon which we can drive further targeted organic growth through increased market penetration and price point expansion.

Our 2004 closings also demonstrate meaningful and growing product diversity. Although first-time homebuyers have been an important component of our growth, a review of our closing broken down by square footage illustrates that we have significant contributions across all product categories. With 22 percent of closings generated from our economy homes, 54 percent of closings from our value homes and 24 percent from our style homes.

In the September quarter, new orders totaled 4,276, representing an increase of 11 percent year-over-year. For the full year, new orders totaled 17,481, representing a 7 percent increase. The increase in new home orders for the fourth quarter resulted from increases in our southeast, west, and mid-Atlantic regions. Order growth in the southeast of 19 percent was driven by increases in Florida, Georgia, and parts of the Carolinas, despite hurricane activity. West region order growth of 8 percent was attributed to Arizona and California, and the 34 percent increase in the mid-Atlantic was a result of strength in all markets in that region. Total order growth for the quarter was partially offset by lower orders in the central region and parts of the Mid-west and Carolinas. Overall, the Midwest orders were flat year-over-year.

Our backlog now stands at 8,456 homes with a sales value of approximately $2.2 billion, up 14 percent and 36 percent, respectively, from a year ago and representing fourth quarter records. Our average price in backlog now stands at $264,000, up 19 percent from the prior year. This results from both the strong pricing environment and our success in widening our price points. We believe this sizeable year in backlog provides excellent visibility for continued strong financial performance in fiscal 2005, and I'll comment on that at the end of the call.

I'd now like to turn it over to Jim O'Leary to address more details of our financial results. Jim?

Thanks, Ian. For the quarter ended September 30, 2004, revenues totaled over $1.2 billion, a quarterly record, and a 17 percent increase over last year's September quarter. This revenue increase was achieved on a unit closing increase of 2 percent, which as we've noted, was negatively impacted by hurricane activity in our southeast region, which probably cost us somewhere between 125 and 175 closings.

As we've seen in prior quarters, revenues are increasing at a greater rate than units as we benefit from improved pricing power in all of our major markets, improved mix demonstrated by strong closings and markets with higher average sales prices, such as our west and mid-Atlantic regions, and execution of our price point diversification strategy. Our continued success this quarter reflects two key components of this strategy, geographic diversification and price point diversification where, as Ian pointed out earlier, we're not only dependent on any single geographic or product segment.

Our full year revenues totaled a record $3.9 billion, a 23 percent increase over fiscal 2003, which was achieved on a unit closing increase of 7 percent. Again, impacted somewhat by hurricane activity.

During the fourth quarter, we closed 5,098 homes, an all-time record. We increased closings in all states in the west, which includes Arizona, California, Colorado, and Nevada, and in the mid-Atlantic, which was driven by strong closings in Maryland. Closings were also up in parts of the southeast, notably Georgia and parts of Florida, despite the negative impact of hurricane activity.

During the fourth quarter, we increased home sales gross margin, total gross margin, and total operating margin by 130, 100, and 170 basis points, respectively. We continue to benefit from a strong pricing environment, the execution of our profit improvement initiatives, and the benefits from scale as we leverage our overhead structure through strong organic revenue growth.

These results include $15.6 million in warranty costs associated with construction defect claims from one of our insurers in the Midwest division, which are included in cost of sales. Also, we continue to invest in our brand with incremental marketing expenses of approximately $2.9 million, which are included in SG&A.

For the full year, we increased our home sales gross margin, total gross margin, and total operating margin by 90, 50, and 90 basis points respectively. Margin improvements in 2004 can be attributed to effective pricing strategy and the real--and the realization of significant direct cost savings in certain categories as a result of successful national accounts program and our many best practice initiatives. These full year results include $43.9 million in warranty costs associated with the Midwest construction defect claims, and incremental marketing expenses of approximately $12.3 million associated with the investment in our--in our brand.

Net income for the quarter was $80.1 million, a 40 percent increase over last year, and diluted earnings per share for the quarter totaled $5.82, up 39 percent over 2003. Both figures are all-time records. Net income for the year was $235.8 million, a 37 percent increase over the prior year, and diluted earnings per share for the quarter totaled $17.09, up 34 percent over 2003. Again, both all-time records.

Our land position as of September 30 totaled 90,571 lots representing a five and a half year land supply based on the last 12 months' closings. Forty-seven percent of the lots were owned and 53 percent were under option, consistent with the last several quarters, and in line with our long-term strategy of maintaining a balance between owned and optioned lots.

Future homes financial position continued to strengthen during the fourth quarter. Net debt-to-cap stood at 40 percent, comparable to year-ago levels and in line with our objectives. This past year we focused on positioning our balance sheet for future growth. We extended our overall maturity profile, better maturing the duration of our assets and our liabilities so that we can capitalize on future growth opportunities as they arise.

We continue to believe that one of the chief competitive advantages big builders with access to sophisticated capital markets have is flexibility. As industry dynamics dictate, longer-term and larger land investments will be needed and they'll require innovative financial solutions.

Last quarter, we announced that the parties in the class action lawsuit related to construction defect claims from water intrusion in Indianapolis had reached an agreement in principle. We are very pleased to report that the court approved that settlement agreement on October 20. As reported in our 8-K, the settlement agreement establishes an agreed upon protocol and process for ceasing and remediating any water intrusion issues at homes, which includes, among other things, that the homes will be repaired by Trinity or at Trinity's expense. The settlement establishes a timeframe within which the work must be completed, and most importantly, provides a dispute resolution panel to resolve disputes between the homeowner and Trinity concerning both the plan to remediate the home and the performance of the work. Under that agreement, each homeowner will release the company from any asserted claims.

As we continue to receive claims pursuant to the settlement, we'll continue to implore our estimated costs to resolve those claims as we've been. However, we expect to know substantially the number of claims that will ultimately be filed pursuant to the settlement sometime towards the send of the second quarter of fiscal 2005, so somewhere in the March timeframe.

I'll now turn it over to Ian to provide our outlook and conclude our prepared remarks.

Thanks, Jim. Well, as you've heard me say many times before, we believe the basic fundamentals of the housing industry remain strong. Strong demographic trends combined with constraints on land and housing supply will continue to provide excellent opportunities for large public homebuilders such as Beazer Homes. We will continue to capitalize on these opportunities through execution of an integrated strategic initiative that utilizes our size, scale, and capabilities through profitability initiatives, increase market penetration through focused product expansion and price point diversification, and leverage our strong national ground.

Our focus on these strategic initiatives, combined with record backlog, and expectations of continued strength in the housing market, provide us confidence in our continued growth. Absent any unanticipated adverse changes, our EPS outlook for fiscal 2005 is in the range of $20 to $21 per share. This outlook reflects the inclusion in the diluted share count of approximately 1.17 million shares [unintelligible] upon conversion of our convertible senior notes in accordance with the EITF statement reasonably--recently issued by the FASB.

In conclusion, in fiscal 2004, we continued our strong track record of performance and achieved all-tine revenue, net income, and earnings per share records, reflecting our commitment to improve profitability and focus growth. As we move into 2005, our strong backlog of $2.2 billion, up 36 percent, coupled with expectations of continued strength in the housing market provide us confidence in our future prospects. We believe strong demographic trends combined with constraints on land and housing supply will continue to provide excellent opportunities for large public homebuilders such as Beazer Homes. We plan to capitalize on these opportunities by executing our focused strategic initiatives to achieve earnings of $20 to $21 per share in fiscal 2005.

Jim and I would now be glad to answer your questions and I would ask the operator to give the instructions for registering your questions.

Thank you. (Caller Instructions.) And our first question comes from Mr. Tim Jones of Wasserman.

On your projections, first of all, the write-off. What was it--18.5 or 12.55, I think I can recall. Was that a pre-tax or after-tax number?

Write off, you mean, the cost for the water intrusion and the marketing?

Yeah.

That's pre-tax.

It's a pre-tax number. And you say that you expect the litigation fee problems to be completed by the second quarter? Is that what you said?

In the processes over the next two quarters we'll have homeowners basically tendering their claims. We'll know--and we'll know a number of homes which we have to inspect and basically agree upon what the process--what we're willing to do and we expect to have agreement with most of these people. If you don't have agreement, you go to the dispute panel we talked about. So by the end of the third--the second quarter, that's March, we would expect to have a very good idea what the number of claims is. After that, if--I guess in the next quarter or so, we'd know what the final number would be, because then we'd be able to have reviewed after the dispute panel [unintelligible] and categorized the claims as far as severity and what the ultimate cost will be.

Well, how long will the [unintelligible] take to take those claims to a dispute panel?

I think the process is not particularly long. This will be resolved sometime next year.

Sometime next year. But you have a pretty good--.

--We'll have a very good idea of the number of claims and we'll have a very good idea as far as the dollar amount of severity probably by the middle and towards the end of next year.

Okay, that's--that will be very nice to see. Now what is you--on you're $20 to $21, could you give us--what is your projection basically on your deliveries? And is it gonna be like this year, I mean, mostly growth--improvement in margins, or could you give us a little flavor?

Sure. We came up and--we give a range instead of a point estimate because we mulled a variety of scenarios [unintelligible] back in August, so a bunch of things change. The range of [unintelligible] there about 10 percent unit growth, about 10 percent community growth, pricing not substantially higher. In fact, our hope is pricing will come down. That comes from two things. We'd like the Midwest--the average sales price in the Midwest will bring down the overall average, because we expect substantial improvement there. In a number of places--Denver is one I can think of off the top of my mind, prospectively in California we'll be doing more multi-family. In places like Orlando, we're doing much more affordable product where previously we were in the very upper end. So as we broaden the price point, we expect the average sales price to come down.

Now, if you'll remember, last year we said high single-digits, maybe 10 percent growth. And if you add that 1 percent for Florida where we did a phenomenal job, but we still ended up losing a couple of deliveries, and the conscious action to slow down deliveries in a couple of places--so, you know, we didn't have customer satisfaction issues and we captured the most prices possible. And I think we actually came in pretty close to where we thought, and you know, like everybody, we did benefit from great pricing environments, particularly in the west. But even without, you know, that type of enormous pricing power, we would have beaten the guidance we put out originally at the beginning of this year.

Again, let me get it straight. Ten percent--.

Ten percent, 10 percent, roughly same average sales price--.

--Price, sales price, 10 percent growth, 10 percent subdivisions. Right?

Yes.

Then with--that number probably implies I can figure if average [unintelligible] rise and the margin in the few more shares [unintelligible].

We still think that--we think we're very fortunate. We think we've made a lot of progress and that we still have another 200 basis points in our back pocket relative to the mean and the medium entry, but we're in the process of capturing out. So we think we have upsides in the margins. We have not forecast that. Remember, a year, it's actually a year and a half ago, we talked about the national accounts initiative, the best practice initiatives, and the things we're doing on revenue enhancement. I think they're all coming to bear now, but we did say that was a two or three-year period. We still think it's a two to three-year period, but we're very well into it now.

And does that number include roughly the same, you know, pad of charges for getting rid of these water damages? I mean, you know, I don't want to put you on the spot, I mean, but it's not like something like three times as much or--?

--No, absolutely not. We can't forecast it otherwise, as we've talked about before. If we had the best estimate, we'd accrue it today. But we have to assume something at comparable levels for marketing and incremental charges--.

--[Unintelligible]--.

--Comparable for the year and phased over the same period.

Okay. Thank you very much.

Our next question comes from Ivy Seldman of CSSB.

I'm actually Dennis McGill. [Unintelligible.] Just a couple of quick questions, really kind of on the guidance as well. When you look at how strong the west has been for you guys and you talked about it a little bit and backlog being up and nearly 40 percent to start the year there, it's actually--obviously have a mix benefit going on. And I'm just curious how much of that mix, realizing you probably have a little bit higher profitability out there, you know, is behind the very strong growth that you're seeing for next year? And just trying to get a sense of--from a profitability standpoint, you know, how that--the regions are really breaking out for you.

Dennis, we think that the--you know, the west has been very strong for us this year, as Jim just said, but we do see good prospects there going forward. So we think that the balance between the Company taking the strength we have in the west there is gonna be strong next year. We also see though our mid-Atlantic being very strong next year. We see Florida being very strong next year. So, you know, I think all of that's gonna happen. I think the weakness we've had in the Mid--in the Midwest this year, we don't believe will be there next year. We do believe that's gonna be coming up. As Jim pointed out, the average price there is somewhat lower intentionally, so that will effect our mix going forward. So we'll still have a strong west market. We still think we'll have a strong mid-Atlantic market. Those two are our highest priced mix markets in the country. But again, we think we'll be getting a bigger contribution from Florida and a much bigger contribution--after a weak year here in the Midwest, a much bigger contribution from the Midwest next year. So, as Jim said, balancing that out overall, we don't expect our average price to continue to go up. And in fact, if it did come down a little bit, combined with the multi-family units that we're bringing in many markets, you know, we'd be quite happy with that to come down somewhat in 2005--average sales price to come down somewhat in 2005.

But realizing your average price and backlogs are nearly 20 percent, you'd be looking for a pretty negative mix in the back half of the year, I would assume.

Well, I think it's a case, as you said, of bringing these town home properties in, bringing the multi-family properties in that we're really just getting into now. And I think it's looking for some good expectations from the Midwest. So that's just what we're forecasting at this time. Obviously, if there is continued strength in pricing into the second half of the year, as you say, obviously, we've got the first two quarters pretty well wrapped up in backlog. There might be some upside there, but today we're not forecasting that.

[Unintelligible]--I don't know if I love the term negative mix, you know. If we'd had the same type of year we had in the west, but the Midwest got up 10 percent. You had multi-family come on in places where--just to make the land work, you know, at Denver, brought your average sales price down. That's not negative mix to me. That would actually be a blowout year, I think. Okay?

Okay. Switching gears, realizing you guys are pretty sizeable and big, just wondering if you can just tell us what you're seeing at your price points there and the market at large, and maybe just run through some of your bigger markets--what you're seeing from a demand standpoint and pricing standpoint.

Well, Vegas obviously is a big market for us. We've done a great job there over the last few years in really getting a good position in that market. We didn't push our pricing as far as others. We were pushing the pricing, we were getting a good--very, very good return there, but we were well within the market. We haven't had to make any corrections or anything like that. So we feel very comfortable with our position in Vegas. Obviously, the biggest issue in Vegas is getting the land position to go forward. And I think we're well positioned in that sense as well, that we've been in some of the larger contracts, buying land. And I think we are well positioned to go forward. Demand is still very strong there and, as I say, we've been--our average price there has gone up year-over-year, but it's still quite modest in comparison to some others in the market. So I'm very comfortable with our position there.

So going around the markets, I would say that we feel, as I just said, very confident that the two regions that are going to be very strong next year are the mid-Atlantic, where we've made investments over the last few years and they are really just coming into fruition now. That's the market--this whole--the area between Virginia and Maryland and New Jersey, probably some of the hardest entitlement markets in the country. And our investments are really [unintelligible] proved over the next couple of years. So we really look for a strong contribution there. And I'd say, also, in the Florida market, again, where we've been investing heavily in that market over the last few years. Again, that's coming through very strongly.

I do think though that our southeast markets, which have been somewhat flat, and the Midwest markets will add positively for us. And I think that the smaller central region, Houston has been good for us and is still good. We have some weakness in Dallas, but we're addressing that, we're correcting that. So I really think that, you know, looking out over the future year, we have very few markets which we--Dallas is certainly weak in its price at this moment. And of all the other markets, Charlotte is probably a weak market for us. They're somewhat repositioning in that. We are very focused there on entry-level products and we're spreading our price point there somewhat. So I feel pretty optimistic across the board.

Great. Thank you guys.

Our next question comes from David Nutt of Nutt Partners.

Hi, Ian.

Hi, David, how are you?

Good thanks. The statement you make to the effect that these results include warranty costs associated with construction defects for water intrusion and marketing expenses totaling $18.5 million. Is it just the marketing expenses that are $18.5 million or is it both?

It's a combination. The largest number is for the construction defects, which, as Jim explained clearly, we've caught--you know, we've got it--the class action settlement here has been approved by the court. We expect that process to go through, as we say, over the next couple of quarters [unintelligible] how many claims we're gonna have there. So the larger majority is for that. We did incur some for the marketing. As we repositioned the brand there was some additional cost this year. Going into next year, we're still going to invest in our brand, but we're--but we're, you know, not gonna have such an incremental cost going forward. So, you know, the split is 15 to 3 in that order--15.5 to 3, in that order, between there will be warranty costs and the branding costs. So--.

--Good. The 15.5 would be warranty?

Yes.

And that's net of insurance?

No, we haven't taken insurance into account in this. I think we've said on a couple of calls in the past, we have ongoing discussions with our insurance companies, but at this time, under the accounting rules, we can't take any recovery there. If it comes in the future, we'll certainly advise everyone where that is. But this time, it's net of any recovery.

The branding and marketing costs had been estimated as sort of a one-time event taking place in the year that recently ended, for about $14 million. And now, you're saying it's only been about $3 million?

Only $3 million in this quarter.

Oh, in this quarter.

That's in this quarter. We have been incurring it through this period. It's reduced, from memory, probably 5 in the prior quarter. I haven't got that figure at hand, but I think it was about 5 in the prior quarter. It's about $12.5 million over the whole year, David.

And that's done with now?

Well, as I said, you know, the big incremental cost of changing everything out and a lot of the training we had to--we did a lot of training. We still want to invest in our brand going forward, whether we split this out in the future--I mean, obviously, the Company has a marketing expense. We wanted to point out this year that there was a differential cost compared to prior years, but we are gonna still be investing in the future. We see the benefits of that, but it won't be to the same degree.

And disregarding any insurance you may get, what do you see the trends in the warranty costs being over the next year?

You know, as Jim pointed out to Tim just now, to Tim Jones just now, we can't quantify that fully until we understand the full extent of the number of claims. We expect to know that number pretty well by the second quarter, which--rather, the end of March. I think at that time, we will have a much better idea of what the number will be. But at this time, again, obviously, not fully understood, but at this time, we don't expect the overall cost incurred next year to be any more than this year. That's where we stand at this time. You know, we try and put a box around that, but it's not definitive. I think in the second quarter once we announce--at the end of our second quarter in April, those numbers I think we'll be far more quantified at that time.

And that would be what you're using now in your estimates, your guidance, for the year?

As Jim said, we run a number of scenarios for ourselves, and I'm sure and the analysts will do the same. There's a number of different scenarios there that brought us to that number where we gave guidance today. So, you know, obviously we can't be absolutely specific on everything. We've run some scenarios where there's upside, downside, different comps in close. You know, we've given a range today which we think we are very comfortable with in the range of $20 to $21 at this time. You know, a substantial upside on a fantastic year in 2004. So, you know, we are looking forward to a good year in 2005 even though we know we have to take into account some of these costs going forward for this--for this outstanding claim.

That's great. Tony, my partner, Tony Campbell, has a question, Ian. I'm gonna put him on.

Okay. Thanks, David.

Good after--good morning gentlemen. What would you say your average selling price would be in Florida?

In 2004?

Yeah.

Okay. Let's see if we can find that for you.

And then, my second question is you guys have given us a fair bit of detail in terms of what you are doing to turn around the Midwest and I'm wondering if you could just sort of review that with us and tell us how you're coming on some of these things?

So let me talk about the Midwest first and we'll get you that number on Florida in a second. We've talked a long time about through 2004. We've made a lot of changes in the Midwest with management, positioning in that market, looking at the strategic land bank that we had there, and seeing how we could best utilize that in terms of product distribution. All of those are in hand, you know, all of that's working through. Now I am quite pleased that our orders for the period were flat in the Midwest compared to the prior year. I think that, you know, we're turning the corner in the Midwest and looking forward to the December quarter and future outcomes in terms of orders in the Midwest. That's what I'm looking for, and I think our planning says we can expect that. We know those markets are still somewhat weak, but with the changes we've made, I do think that we can start looking forward to some upside there in the Midwest. So that's, you know, as we're saying, built into our plan for next year is a better return from the Midwest, getting the use of that strategic land bank that we bought there, and getting real results out of that for the Midwest. So I'm pretty confident that's gonna happen in the future.

Let's go back on your question on Florida. Our average price in Florida in fiscal 2004 was $240,000.

Okay. So then if we do some quick math, you basically could have reported an extra 30-odd cents after tax.

How do you draw that?

For the quarter?

For the quarter. If you had, you know--the land, the hurricane--. That's fine.

Oh, I see. Taking the closings that we lost. That's what you are saying.

Okay. Thank you very much.

Thanks, Tony.

Our next question comes from Alex Barrett of JMP Securities.

Thank you. Going back to I guess guidance again a little bit. I mean, I'm looking at you're talking about 10 percent unit guidance by pricing and as I understand it your [unintelligible] would also be going up almost 10 percent.

It's 8 percent, 1.166 million.

Right. So does that imply then the bulk of the increase that is coming from margins? I mean, that's about 200 basis points. Is that correct?

Is it fair? No, that's not--when we're saying margins we are not assuming substantial margin growth, we're not assuming substantial price growth. And next year it goes up by 10 percent. This year is goes down when you compare next year guidance to what the base will be, you're gonna have to dilute last year, meaning the 17.00 down to 16.77 because that--I think the guidance calls for--the accounting guidance calls for retroactive restatement for the shares. So you'll assume they were outstanding from the date of the convertible issuance.

Oh, I see.

Yeah. And I'm glad that--I'm glad you asked that question. You did a great job going through the accounting before, but I probably should have been a little more explicit in the assumptions. When you look at this year's guidance, you're gonna dilute it down by 1.166 shares, a million shares, and you'll compare that to this current year guidance which is 17.09, which when you do the math will dilute you down to 16.77. Okay?

Okay. So then is the bulk of it then coming also from just operating leverage, like lower SG&A then?

Again, as I said, we're not assuming substantial margin improvement. It's about 10 percent--about 10 percent unit growth on 10 percent community growth. You do that, some of that margin improvement you're talking about being offset by what we have to assume, which is a continuation of some of these unusual costs, but they don't flow through because you've got one offsetting the other. And if you wanted to go to the next extreme, had we not had those costs this year, the basis point improvement would have been significantly higher. We still posted 90, 130, and 100 and some change, of margin improvement inclusive of all these costs.

Right. Other question on your community comps in mid-Atlantic. Obviously, it's up quite substantially. Should we expect--you talked about another strong year, so should we expect the mid-east comps to be up fairly strongly again or are you just talking--?

From '04 to '05?

Yeah.

Well, I just said 10 percent.

Mid-Atlantic specifically.

So in the mid-Atlantic?

Right.

Just so you know, the mid-Atlantic, the reason that was up relative to all the other--all the other regions is we had a lot of communities come online in Maryland just at the end of the year or towards the end of the year. So you're not gonna see that type of jump in the mid-Atlantic per se. You've already seen it, but you saw it towards the tail end of this year. And the big jump in orders in the mid-Atlantic and prospectively the big jump in the mid-Atlantic, is gonna come from Maryland where over the last few years we made a lot of investment. We're doing some multi-family. We've got some really great projects that came online towards the end of this year and we'll really benefit next year. And where the 10 percent growth in community [unintelligible] where we'd expect it to come.

And I think if you look at the community listing in the press release, the biggest drop or the two biggest drops were in the west where towards the end of the year we sold out a little early in Las Vegas. We've got a bunch of communities that are coming online now. So you'll get up to a higher level towards the beginning of this year. And in the Midwest where until we got the class action settled, until we got the brand fully rolled out, and until we repositioned the product line, particularly in Indiana, where the biggest unit deliveries come from, it's Indianapolis, there was no great reason to rush out a new product and get communities opened until we had the branding in place, the marketing done, and most importantly, the product position. Remember, [unintelligible] is pure entry-level--pure entry-level focus.

The going forward plan is multiple product lines at higher price points. So the communities that we have in place ready to go in early January don't come online then. There is no reason to rush them this year. That's why you see community downtown in the Midwest where we've got a great land bank, a deep land bank, an underutilized land bank, but we didn't want to rush product out there till we were ready. So that'll come online in January of this year.

Okay.

Operator, before we take the next question, let me just address a couple of email questions that we've had. We've had two related questions, one asking about sales in October compared to the prior year, and then another asking a similar question, but specifically about Nevada and California. Obviously, there is concern about those markets at this time. Let me talk about this generally. Obviously, we don't give intra-month orders. But let me just say that overall in October, we haven't experienced anything unusual in our business in any of the markets that we're in. So nothing extraordinary happening there. Because there is some concern about Nevada and California from what others have said, let me just say, you know, without giving overall context here, that both of those markets are very good for us at this time. And in fact, in October, both Nevada and California are both up in terms of sales. So that's a strong position for us to be in. And I think the point to understand, particularly about California, is that we are in Sacramento, which is a very strong market for us. And in Southern California, our positioning is well positioned there in a lot of strong markets, particularly in the Inland Empire. We are not at this time in Orange County, where I understand there has been some weakness. The markets that we're in the Inland Empire--you know, you need to put this in context. The Inland Empire is now--if taken alone, is the fourth largest market in the whole country after Atlanta, Phoenix, and Houston.

So we are--we are positioned there in a very strong market. I think that's giving a position there. We do have a lot of communities in other parts of Southern California, but the emphasis for us is in the Inland Empire there, and again, in Northern California and Sacramento. So just trying to address those two points that came across with email questions. So, operator, I'll turn it back to you now.

Our next question comes from Joe Lockart of Carlin Financial.

Hi. Great quarter. Just wanted to get a question on your distribution of the $320 million you have in cash, just where that would likely go, whether share repurchases or reinvestment or land or maybe in upping the dividend. Just can you talk me through that, you know, use of the $320 million in cash?

Okay, Joe. Let's just, you know, understand, we are very pleased to have that cash at this time. We worked hard during this last year to strengthen our balance sheet, to be ready to look for opportunities, whether those are organic opportunities, and to decide how we should go forward. So that's a good position we're in today.

In terms of how we are going to use that, we see many, many opportunities to grow our business through the markets that we're in as we continue this expansion of our product line. So you're gonna see us--it's been effective already, but you're see us investing in that going forward.

We will always look at the opportunities for share buybacks if we think that's the right to do. We have an authorization out there and we have about almost $700,000 left under that authorization. So if we think that's appropriate we will do that. And as you know, today, again, we announced a dividend, the regular dividend that we have been paying for the last year or so, and we will again look at that. Our Board--look at that continuously.

So I think throughout the year as we see the market, as we see the opportunities, we'll look at the alternatives for using that cash. But I would say today the emphasis is on building our business. If we're gonna drive these results and drive this Company forward and take advantage of the opportunities that we see, I would say the majority of that will be invested in the business going forward.

And Joe, the 320 is year-end high peak period. And, if you recall, when we did the $200 million earlier in the year, the ten-year senior notes and the convertible, the use of proceeds was in--if you listened to any of those calls, the use of proceeds was pre-funding capital needs in the business. And by the middle of next year, you know, all things being equal, we expect a lot of that to be used on things that we'd already earmarked it for. Land positions we expect, capital needs that we've already budgeted. So it's a little bit of an anomaly to see the 320 sitting there. If it's still there at this time next year, it will be a different answer. But we anticipated this going to pre-fund capital needs with our business.

All right. And just getting back to the land issue, if you were to repurchase a lot of the land with the $320 million. Where do you see the best investment--in what regions? I mean, with the west being up so much and even mid-Atlantic, the land prices being up. Do you see a better value because in the Midwest today--because the land hasn't gone up near as much?

Well we have a very strong land bank in the Midwest. That was the whole part of that acquisition that we bought a very strong land bank there. Now, I think we are looking at all our regions and deciding where to put capital. One of the things that's changing in many markets is that the land deals are becoming considerably larger and that we're finding opportunities which we are taking ourselves individually or we are sharing with others. We've entered some arrangements with others to go in and purchase land which will give us a very strong strategic position.

So I'd say, I don't think there is gonna be a substantial change in the distribution of our land purchases, but I think we will be seeing multi-product type transactions, where we're buying up the attractive land that has multi opportunities on that and we may be sharing that with others. So we're gonna see this considerably larger deals throughout the country. That is a strategic advantage for the larger builders. We are not gonna be able to see-we're not gonna see some of the smaller players able to step up, either wanting to do that or even getting the financing for that. As Jim commented on in the prepared remarks. You know, this is definitely a strategic advantage for the larger builders to be able to access capital through the--through the capital markets and then deploy that in some of these larger transactions. And as we go forward, you know, through the next two, three, five years, you're gonna see a terrific--in my view, a real consolidation in the industry as the larger players take more and more market share going forward.

And I guess just one last question about consolidation, since you brought it up. Any chance of taking over any smaller builders in the next year or in the immediate timeframe?

Certainly we always look at that and there are some opportunities there, no doubt. And we'll look at that. We don't think we need to do that at this time. What we're trying to do is get depths in the markets that we're in, get penetration in there, but also get breadth in those markets. So we think we can do that with the footprint we have, but at the same time, as you see these deals getting larger, as smaller private builders see this happening in each of their markets, there will be opportunities. So at the right time, we'll look to take those opportunities. But we don't need to do that--we didn't bake anything into our forecast in terms of acquisitions this year. But, you know, we'll certainly look at that and take the opportunities as they arise.

All right. Thanks a lot. Great quarter.

Our next question comes from Jim Wilson of GMP Securities.

Good morning. Thanks. I was wondering in the community town growth in your plans if you could give a little geographic--I see you focused on improving results in the Midwest and expecting that to happen. I mean, I was just wondering where you expect a lot of your community town growth to occur? And then even incrementally where you are looking to deploy incremental capital beyond what you've already got in place that's gonna open this year?

The Midwest we're gonna back up to the levels where--if you got back to the levels they were before we started repositioning the product in that market, you know. By the middle next year, you've got a substantially greater number of communities. In the Midwest, in Las Vegas in particular, we're six communities lighter than we though we'd be this time at the end of the year, but because we sold out of it sooner. And I wouldn't say a lot sooner. We got as much price as the market was willing to give us, which I think is the key thing to add there. In Vegas, we priced it exactly right. We sold out a little bit sooner. But we'd see those markets returning back to the levels that we forecasted to be at the end of this year and we expect to be at the end of next year. So I think it will be across the board with a slight spike today, relative to today, in the west to the Midwest.

Okay, and in the Midwest, are there new markets in there or mostly in markets you're already in?

Well, Jim, they are all in markets that we are in already, but they are markets that were probably saturated by entry-level product, but where we think there are opportunities by broadening the price point to see what we categorize as economy in our nomenclature, what's historically would have been, you know, pure entry-level, we're now repositioning it to multiple product lines. In particular, first time move up, second time move up. Our nomenclature would be value there. But we think the opportunities to up sell, get people into our design centers and capture a greater dollar share of those buyers is pretty compelling. I think if you go back to some of the comments Ian made about how to make the Midwest work--when Tony Campbell asked the question. It's gonna be by broadening the price point, doing more than being just a pure entry-level builder, and you know, that kind of starts a virtual circle. You get people into our design centers. You'll be able to capture a lot more value and provide a lot more value to them that way.

So it's not new market, but it's new product and new market segments within places where we already have a land position, we already have the entitlements, and we already have the assets in place. It's just a question of putting them to work.

Okay. And then just one other question, I guess, going back to Alex's and trying to piece together your thought process for the $20 to $21. I think, I guess on the margin side, when we're talking about sort of not assuming any upward trend in margin, that's from Q4 levels as opposed to total '04 blended average?

I think that's fair.

That's--okay. I think that's what--.

So you're starting off point will be higher than if you added that in the first quarter.

Yeah, if you took the whole year--year as a whole and tried to come up with some percentage change. Okay. That's what I thought you meant. All right. Very good. Thanks.

Our next question comes from Sal Zuki of Zebra Funds.

Hi. Thanks. Could you tell us what percentage of your sales were done with--through ARMS mortgages?

Thirty-two.

Thirty-two percent?

Thirty-two percent.

And any change in the FICA scores you're seeing?

We don't report the FICA scores. We don't lend so we don't report that. We only have a mortgage origination company. But the trend in ARMS has been fairly consistent for us at around 32 percent. Our capture rate is somewhat down a little bit at the moment with the end of the refinance boom, you know, there's a lot more capacity in the market. So we haven't captured as much as we traditionally have. Normally, we're in the 70s, low 70s. We're currently down in the 60s. But we think that's--the somewhat short-term--we think over 2005 we'll recapture some of those lost opportunities there through our origination company

Okay. And last question, as far as your guidance for sale growth of 10 percent--unit growth of 10 percent. On a macro level, what do you guys see or are assuming as far as new home sales for next year, for the industry?

Well I think we read the same information that you do. I mean, I think that long-term we feel very confident that housing is gonna benefit from the demographics for integration. I think next year the forecasts are just slightly down. But I think the key to take into account here is the point I made previously, where, I see for Beazer Homes and the other large national builders taking market share. Taking market share far--is far more of an influence for us than the overall number of homes sold throughout the country. I think that's where we have the opportunity there to continue to grow our business. As we say, we're forecasting growing around 10 percent and there's no way overall housing starts are expected to increase by 10 percent. So the key fact for us is taking that market share market by market, and I think we will do that, others will do that, and the long-term trend for housing I think is still very strong. So, yeah, I think the--whatever happens with interest rates, I don't think interest rates will move very much, but if there was a slight move, I think that's still always fine for us. I think that that--the opportunity for us to take that market share is the overriding force that you should consider when looking at the large public builders.

Okay. And the last quick question. Cancellation rate?

Cancellation rate, in fact, was slightly down from last year. I think it's around 23 percent in this quarter, which is slightly down from last year. So that's a good position for us.

Okay. Thank you very much.

Our next question comes from Ivy Zellman of CSSD.

Hi guys. Dennis McGill, again.

You, again?

I just want to get back to this margin issue because I just, if you ignore the dilution, you are essentially calling for a 30 percent growth in net income, and if you're only looking for 10 percent of pipeline because pricing is relatively flat, then the balance has to be a margin. And that would be a 200 basis point move in margin assuming, you know, [unintelligible] services are flat.

I think if you look at, well, [unintelligible] sales will be flat, financial services will be flat, and I think if you look at where we're ending the year relative to the average for the year, and you're gonna have to factor in the offset to that will be--what will be non-recurring, but we're not obviously calling non-recurring--you know, imbedded in our P&L this year, which is 40'ish million of cost that we can't forecast when they're gonna--when they'll abate. That offset some of the margin. Probably not all of it if you start off with where we end the year fourth quarter.

So you're saying 12 percent for the whole '05--operating margin roughly?

I think it'll be 10 percent inclusive of those costs which we incurred this year. We ended up at 10 percent, which includes a fairly health amount of cost at 18 milliohm for the fourth quarter, 50 million for the full year, but of that same type of margin behavior going forward. And we certainly do have the opportunity to beat that. We do have the opportunity to beat that.

Okay. Would you happen, Jim, to have the average selling price by region there in front of you for the quarter?

We don't have it right in front of us. It'll be, I believe, in our 10-K and we'll give it to you at a later date. I think if we close the year around 260'ish--yeah 269 with what we have in backlog. So [unintelligible] what we talked about with the Midwest, I mean, I think it's a [unintelligible][ if it happens. If you just run off your backlog in the west and you keep everything equal and you have the Midwest and some of the places where we're gonna sell multi-family and lower price points, you will end up with a great year. That's where our upside is. Coming from places that haven't performed to date, where we expect them to really come on during the year.

I was just looking for the closing price in the quarter?

232.

But you can't--you're not gonna give the regions until the 10-K?

That's right.

Okay.

This concludes our question and answer session. I would now like to turn the call back over to Mr. Ian McCarthy for any closing remarks.

Well thank you operator and I would just like to take this opportunity to thank all of you for joining us today. And there will be recording of this conference call with a slide presentation and it will be available this afternoon in the Investor Relations of our website, beazer.com. So thanks for joining us and we look forward to talking with you after the first quarter of 2005. Thank you.