Beazer Homes USA Inc (BZH) 2005 Q3 法說會逐字稿

Good morning and welcome to the Beazer Homes' third fiscal quarter 2005 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, 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. Ma'am, you may begin.

Thank you. Good morning and welcome to the Beazer Homes' conference call on our results for the quarter ended June 30, 2005.

During this call, we will webcast a synchronized slide presentation. To access the slide presentation, go to the investor homepage of Beazer.com and click on the webcast link in the center of the screen.

Before we begin, you should be aware that, during this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Such risks, uncertainties and other factors are described in the Company's SEC filings, including Form F-3A filed on August 17, 2004, the annual report on Form 10-K for the year ended September 30, 2004, and Form 10-Q for the quarter ended March 31, 2005.

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. In the interest of time and allowing everyone a chance to ask questions, we request that you limit yourself to one question and then one follow-up.

I will now turn the call over to Ian McCarthy.

Thank you, Leslie. Good morning and thank you for joining us on the call today. Today, we're very pleased to announce record financial results for our third quarter of fiscal 2005. Revenues approaching 1.3 billion were up 28% on a 14% increase in home closings. This, coupled with an 18% increase in the sales value of new home orders during the quarter, reflect continued strength and favorable conditions in the housing industry and for Beazer Homes.

Our June quarter net income of $113 million and diluted earnings per share of $2.50 both represent all-time quarterly records, increasing 89% and 76% respectively. The significant improvement in profits can also be seen in our home building gross margin and operating income margin, which increased 510 and 430 basis points, respectively.

In the June quarter, new orders totaled 5,202 homes with a sales value of $1.49 billion, increasing 7% and 18% respectively. The increase in new home orders for the third quarter resulted from strong order growth in our Southeast, Central, Mid-Atlantic and Midwest regions, partially offset by decreased orders in the West region. Order growth in the Southeast of 13% was driven substantially by increases in Georgia, parts of the Carolinas, and Tennessee. West region orders declined 12% with strong order growth in Arizona, Colorado and Southern California, offset by lower orders in Northern California and Nevada. The declines in these markets resulted primarily from certain entitlement issues, which delayed community openings, in addition to our overall focus on converting sizable backlog in these markets during the quarter.

We achieved substantial order growth for the third quarter in a row in both the Mid-Atlantic and Central regions, up 40% and 20% respectively, with positive contributions from most markets in those regions. Midwest orders increased 19% with positive contributions in Ohio, Kentucky and most of Indiana. We are encouraged by the improved order numbers in the Midwest this quarter. However, soft economic conditions continue, yielding a high degree of competition and a prevalent use of incentives in the entry-level price points.

Our backlog now stands at an all-time record of 10,635 homes, up 15% from a year ago with backlog levels increasing in most regions in units and in all regions in dollars. Our sales value of backlog totals approximately $3.1 billion, up 35% from a year ago and also an all-time record. Our average price in backlog now stands at $293,500, up 18% from the prior year. This results from a strong pricing environment, combined with strong sales in markets with higher average sales prices and our continued efforts in widening our price points. The sizable backlog provides the basis for strong performance as we move forward into the final quarter of fiscal 2005 and into fiscal 2006. It gives us confidence in raising our outlook today, which I'll discuss later.

However, before that, I would like to turn it over to Jim O'Leary, our CFO, to address in more detail our financial results. Jim?

Thank you, Ian.

For the quarter ended July 30, 2005, revenues totaled 1.29 billion, an all-time quarterly record and a 28% increase over last year's June quarter. On a trailing twelve-month basis, revenues totaled 4.4 billion, reflecting the increased momentum we're seeing in our business. This record revenue was achieved on a 14% year-over-year growth in unit closings, coupled with an increase in average sales price to 272,700, a 12% increase year-over-year. The growth in average sales price reflects improved mix resulting from the success we are experiencing in diversifying our product offering and a strong pricing in each of our major markets.

One of the perceptions we are working hard to dispel is a myth that Beazer is strictly an entry-level builder. The growth in our average sales price and the increasingly favorable shift in our mix provides considerable support to debunking that mistaken sound bite we often see about Beazer.

Closings in the southeast increased 11%, driven by strong closings in Florida, Tennessee and parts of the Carolinas, offset partially by lower closings in Charlotte, where we are transitioning to a broader product range and reallocating our asset base and resources, which had previously been committed almost exclusively to entry-level product. Closings in the West were up 14%, with increases in Arizona, Colorado, Nevada, and Southern California. The only market not up in the region was Northern California where approvals for some big, high impact communities have taken a few quarters longer than expected. This is purely a timing issue, where we expect these communities will be open and contributing at a significantly higher average sales price in the coming fiscal year.

Closings increased almost 90% in the Central region with strong performances in both Dallas and Houston, while closings were up 7% in the highly profitable Mid-Atlantic region, where higher closings in Maryland and New Jersey were partially offset by lower closings in Virginia, largely caused by timing delays associated with land-development issues in that region.

Closings in the Midwest were down 3% due to lower closings in Indiana and Kentucky, partially offset by higher closings in Ohio. While the Midwest has yet to show robust improvement, we believe the worst of the decline in that region is behind us and we are continuing to work aggressively on all of the drivers that we expect will benefit us when the market rebounds.

As in prior quarters, revenues are increasing at a greater rate than units, as we are benefiting from improved pricing power in each of our major markets and improved mix, demonstrated by a relatively higher proportion of closings in markets with higher average sales prices.

Our continued revenue growth this quarter reflects a key component of our profitable growth strategy. Increased market penetration for geographic diversification focused on the country's more attractive markets. Through price point diversification in existing markets, we are broadening our product offering to grow marketshare around existing successful operations.

Margin improved significantly during the quarter over prior year with home sales, gross margins, total gross margin and total operating margin increasing 510 basis points, 490 basis points, and 430 basis points, respectively. Margins were favorably impacted by the strong pricing environment in our major markets. And mix continues to improve. While we are investing in those markets, it has the highest impact on results.

In the third quarter of last year, we incurred warranty costs associated with Trinity Homes and increased marketing costs associated with our investment in our branding campaign, both totaling 12.7 million and having approximately 130 basis points impact on total operating margin. Factoring those charges back into last year, the improvement in home sales gross margin, total gross margin and total operating margin was still extremely impressive at 410, 400, and 300 basis points respectively, and reflective of the execution on the profitable growth and strategic initiatives we've been articulating over the last few quarters.

Net income for the total quarter totaled 112.7 million, an 89% increase over last year. Diluted EPS for the quarter totaled $2.50, up over 76% over prior year. This, by the way, has been adjusted for the 3-for-1 stock split in March earlier this year. Both net income and EPS represent all-time records.

We achieved record revenues, earnings and significantly increased margins this quarter, as our focus on profitable growth and accelerated closings yielded significant returns.

Our land position as of June 30 totaled 103,353 lots, 48% of which were owned and 52% of which were under option, consistent with the past and in line with our long-term strategy of maintaining a balance between owned and optioned lots. The mix within markets leaves us extremely well positioned to continue executing our strategy well into the foreseeable future.

As of June 30, net debt-to-total cap stood at 48.2%, in line with our target range. Our balance sheet remains strong and the successful completion of two senior Notes offerings totaling 350 million has increased our ability to capitalize on the significant opportunities available by enhancing the liquidity required to further our initiatives.

With that, I will turn it back to Ian to conclude and to take questions.

Thanks, Jim.

In conclusion, we are very pleased to have achieved record financial results, as our focus on profitable growth yielded significant returns. The fundamentals of the housing industry remains sound (indiscernible) robust 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 remain committed to achieving further profitable growth through the execution of our strategic initiatives that, one, increase profitability by utilizing our size, scale and capabilities; two, increased market penetration through focused product expansion and price point diversification; and three, leverage our national brand, which is built around the customer.

Our expectations of continued strength in the housing market and continued execution of these strategic initiatives give us confidence in our future growth opportunities. Furthermore, our performance through the first nine months, coupled with record levels of backlog, give us a high degree of confidence in our performance for the balance of this fiscal year. As such, we're raising our outlook for earnings per share in fiscal 2005 from a range of $7 to $7.25 to a range of $8 to $8.25. This outlook is before the non-cash goodwill impairment charge recorded in the second quarter but takes into account the charges associated with the Trinity class-action settlement in the first half of the year. This outlook now represents an increase over fiscal 2004 earnings per share of approximately 43 to 48%, reflecting the benefits of the profitable growth initiatives in place across our company, which we expect will continue to provide the basis for ongoing, profitable growth in the future.

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

Thank you. We will now begin the formal question-and-answer session. (OPERATOR INSTRUCTIONS). Michael Rehaut of JP Morgan.

If you could describe great gross margin expansion this quarter and a lot of it, as we said, due to pricing and mix. But I was wondering if you could kind of give us an idea where you're going to end this year on a -- by geographic region, in terms of exposure? Where do you see that trend continuing into '06? Then I had a follow-up.

I think the gross margins -- actually, each one of the margin elements will be roughly comparable to where it is, maybe a bit higher if pricing trends continue. The mix won't be materially different than the way we closed out this quarter. It could be a little bit more weighted towards the West Coast, in particular Arizona, Nevada, Southern Cal, but I wouldn't say much more than a few percent. So I think the mix will be comparable for the fourth quarter and we'll talk certainly about going into next year on our next conference call in November. But I think, for the next six months, when you look at the backlog, it will be in our Q release later today; you'll see that order growth, the closings are roughly consistent with increased shift in mix to the West Coast. Next year, I think you'll see a bigger shift towards Florida, which has equally high margins, but for at least this quarter and for the next six months, this will be consistent with our closings this quarter.

The second question -- you had mentioned that you continue to try and diversify away from the first-time home buyer exposure that you've had. You know, I was wondering if you could also just give us an idea, maybe a year or two ago, what percent of volume was represented by the first-time buyer, roughly where are you today, and where do you hope to be in the next year or two?

I think what we should say on that, Michael, is that we will give you the figures today. The Company historically has been first-time or first move up but we've always had an element of a higher price point in many markets in the country, I would say, in California and the Tennessee markets, partially in Florida.

Today, where we stand, we have three distinct product lines. First is economy, which is very much our price-sensitive line, which is about 20% of our product today; the second line is a wide range which we call value, which is a more up-market entry-level or really a first-time move up. That represents about 55% of our business today. Then we have what we call style, which is really our luxury line, which also represents around 25% of our business today.

So I think you can see we're pretty well diversified across those markets now. We also have a smaller component which is actually going to increase over the next few years in active adult. We do have a part of that coming through now; we've been doing a number of deals in the mid Atlantic in particular. Those can either be an economy value or style but in the future, we will break that out as a separate market. I think we've been very successful in actually quite quickly establishing in this broader price point across the country.

Lastly, could you just give average LTV and cancellation rates for the quarter, and where that was versus last year?

Sure -- 85% LTV, comparable to last year. I think it's 21 and change, which is comparable to last year. As we shift our mix, as Ian just went through, you'll probably see it remain at that level, barring something unforeseen, because our mix of buyers and things that go through Beazer mortgage today is considerably better-quality credit than has been historically. We expect it to be roughly that throughout the next six months as we work off backlog -- about 20%.

I'm sorry, just also average FICO score and percent of ARMs as a percent of the mortgages?

Yes, I'm glad you asked that question. I have to give you a 30-second backlog before the answer. That question has probably been asked on every Beazer call, long before I got here and certainly while I've been here. We historically don't give that information because we don't have it in-house. Our partnership -- and this is different than many other public builders -- we don't have our own mortgage company. We have a joint venture today in partnership with -- it's a company called HFN, who basically -- we are a table-funding broker. They find investors for us, and we are reliant on them for a lot of the information. It's a very manual process, so historically, we didn't have good data on this but, over the last two or three quarters, we are appreciative of the fact that this is a concern for investors; it is something a lot of our peers are giving out. If it's important enough for you and our investors, we undertook the process of going out and getting the information over the last six months.

The only cautionary note is it's a little dated. It went through (indiscernible) went through and pulled six months of files, went through each one to extract this information -- manual process -- so it is as of 3-31. But then we sampled and anecdotally tested it for the next quarter, so I think this is probably not materially different than where we are today.

Our FICO is about 708, 710, which is right in the average of most of the big builders and I think reflective of the improving credit quality of most of our buyers. Our ARMs in total is 48%, and the I/O portion of total mortgages is about 20%. So total mortgages I/O is at 20% and I think a key element of that that you need to know -- the reset provisions, i.e. the lock-in and subsequent reset -- is almost all over three years. So the preponderance of our ARMs that are I/Os are over 3%. Excuse me, ARMs is 42%.

42% and about half of that are I/Os.

Which is 20%, most of which reset after three years.

Stephen Kim of Smith Barney.

Great quarter, guys! I wanted to ask about the SG&A. I don't know if you mentioned this, but the SG&A was up pretty significantly it looked like year-over-year. Could you just -- (multiple speakers)?

I think 11.1 to 11.7; it's up a bit.

I have your SG&A last year as being about 10.4, like 103 million over 990 in home sales. In any event, I have -- you did 11.2 this quarter, right?

11.7 as compared to 11.1.

You are doing it on a different -- you must be doing it on a different basis. Okay, in any event, can you talk to me about, directionally, where you expect that SG&A ratio, whatever revenue you're using, to be going forward?

Stable or down. We've made a lot of investments in the branding initiative; some are structural -- i.e., they are in place. We're doing a lot more national advertising. We're doing a bunch of things that benefit the Company as a whole but are driven from the center. Great examples would be some of the things we're doing in training, some of the investment we are making in the IP area and the like, in upgrading both our systems and our people. Those are structural but as you see, the closings, where ultimately we demonstrated pretty impressive closing growth this quarter. As our price point continues to go up, obviously driving the top line, the percentage will go down but the absolute numbers probably won't go up or down materially.

By the way, Steve, what do you think about the sound bite comments on entry-level buyers? (LAUGHTER).

I like that, yes.

I like it, too!

People definitely have a tendency to use sound bites, don't they?

A question I had for you related to your average price -- your average price looks like it's obviously being affected by some movements in the West versus Texas, but I can't quite see those; I didn't see, in your release, the relative average prices between the regions. I was wondering if you could give us a flavor for sort of what are the average prices in backlog across the various five regions you've got?

In the West Coast, the mid Atlantic, well over 300. I think our average price in backlog is consistent with our closing and ARM pace this period. You continue to see a drop in the Midwest, relative as a percentage relative to every place else. I think what you're going to see not as pronounced in the next six months as you will over the next twelve as these deals come in place, you're going to see a lot more in Florida, where the average sales price may not be as high as the West Coast but it's higher than where it is today. But I think high 3s, high to mid 3s, Mid-Atlantic being the highest; I think we are in the 4s there. Northern Cal/Southern Cal 3s a lot, I think Southern Cal is over 4, and Vegas Arizona creeping up, still affordable in Arizona; we are still amongst the more affordable in Vegas but still a high average price point. As Beazer shifted its mix -- I think that other fellow, Michael, asked a question earlier. As we are shifting our mix from Crossman (ph) Midwest, lower price point, you're going to start to see the average sales price continue to creep up.

Okay. If you look at your ending subaccount this quarter, it was up 3%; it looks like year-over-year. Where do you expect that could be on a going-forward basis, like heading into '05?

Steve, if we think that it's going to be in --.

I'm sorry, '06?

Yes -- single mid digits growth really as we move cat all (ph) around, so we are going to be taking some communities out. Jim talked in his remarks about reallocating capital in Charlotte, as a particular example, so we're going to be actually working out of some deals and moving into other deals. So we don't think it's going to be much more than mid single digit. But I would say we are buying much larger communities these days and so, in many markets, and it's just a function of the market. So I don't think it's right to really focus too heavily on the absolute number of communities.

Really, you've got to look at the absorption we get out of those committees and the overall sales numbers that we can drive. So I think it's not the correlation that perhaps it was in the past. I think you're going to see more absorption coming out of those communities and greater sales pace coming out of those. So I think we should not read too much into that.

Great. Last question I had for you is you gave -- I was glad to hear the I/O data. But can you tell us specifically what is the percentage of your I/Os that are a exactly five-year term? Is that a very prevalent portion of your mix?

We will get that for you. It's I know well over -- I think it's 80% plus is over three year. We'll get you the five-year point estimate in a minute.

Margaret Whelan of UBS.

I will start with a soft ball. What percent of your sales are to entry-level buyers?

We said earlier on something like 20% is what we call economy, but there will be some first-time buyers in our value product range, so we're not distinguishing clearly there. What we're trying to do is built around our brand, monitor around that so we can judge market-by-market how we're doing between economy, value and style. So, I would say it's slightly higher than that; it's probably 15% of the value would still be entry-level buyers, so they are more up-market entry-level buyers than the absolute economy buyers that we define.

How do you actually define them or explain them? Is it just the buyer telling you that this is their first mortgage or their first home, or just the price points?

It's really difficult to get that absolute information. We do it more in terms of what we define our broad product lines by. So every one of our product line is designated in economy, value or style product line or in active adult. We are really monitoring it for ourselves through that because what we want to do is to have that breadth (indiscernible) product line per community. We're not as worried if the buyer is an absolute first-time buyer or a second-time; it's how they fit into our structure.

Okay. Then do you have a goal for your mix shift over the next 12 months?

I think, when we announce our results in November and we forecast for the next year, we will give some indication of that. Because I think that will bring in some active adult. It will still be a small portion at that time, but we will incorporate that into our mix.

The answer I'm trying to get to is how do your cycle times change as you are changing your mix of your product type, your price points, your geographic regions out of the Midwest? Are we going to see your backlog conversion ratios fall?

Well, I think you are going to see it -- it has fallen somewhat, and we've talked about this many times over the past couple of years. But I think you're going to see us work on reaccelerating that. We did a good job of that in June; we're going to do another good job of that in September to increase that conversion ratio there. But by definition in some of the attached product that we have, it's going to take slightly longer, and some of the condo product, even do is still a small part of our business, still only probably 2% of our business, it is actually obviously going to slow down that conversion ratio. But for us, it's not really material at this time.

2% is the attached condo -- (multiple speakers)?

Is the actual condo, and the townhome attached is about 14 to 15%.

Then the conversion ratio in the Southeast seems to be lagging the improvement you are seeing overall. Is that just weather delays?

Yes, it's Florida where a few more roofing tiles, a few more batches of roofing tile would have changed that number pretty significantly. It's mostly weather delays, and as we speak, we are catching up pretty significantly.

Based on the improvements you've made in the last 12 months in resolving the issues with Trinity and so on, do you think you will tend to be more acquisitive going forward?

I think we are always looking and always open to opportunities there. We see so many opportunities in our existing markets, particularly as we move this price point and we get better absorptions through the land bank that we have today, that we're not desperate to get out there and do anything, but certainly we will look for opportunities and we won't be shy if we think they are the right thing to do. But I would say we are primarily focused on the existing markets. We've got some satellites from our existing markets that we are running from our own operation, so that's a growth opportunity for us. So I don't think we are as focused on M&A as we had been a few years ago.

Alex Bearn (ph) of JMP Securities.

Great job. Can you, sorry, go through again what happened in your orders in the West region, given that they dropped a little bit year-over-year?

Yes, we had two markets that were company-specific pull-backs, effectively. One was Northern California, where the market is still very strong, as you well know, but we have a number of large communities there which have been held up in the Corps of Engineers. Many builders have had this same problem; we just have found it very difficult to get these large, as Jim called them in the remarks earlier on, high-impact communities. These are going to drive a considerable number of sales for us, but they now are going to roll over into fiscal '06.

The other market is Las Vegas where, with the tight constraints on the market there, we've really sold out of most of our communities. We want to convert that backlog into closings before we open up some new communities there -- so two specific markets that really were very company-specific. They're both still very strong; you know that well. We compensated for that somewhat because Phoenix is still very strong, Southern California is still very strong, and our Colorado market is coming through with some good orders as well now, so we're very pleased with that. So the West is still very strong for us.

So would you expect those issues to be resolved in a couple of quarters or so?

Yes, definitely. I think certainly California, the Northern California markets, for those communities we were very hopeful of getting them out of the Corps of Engineers, where they have been delayed for a considerable time. When they do come out, they will really add volume for us and obviously profitability, because pricing has improved there since we expected to bring those out. In fact, we do believe we will have some additional improvement in profitability there as well.

Okay, great. Then I think you mentioned the comment about Florida being I guess one of the regions where you expect to grow most next year. So would the Southeast be where we would see the greatest growth in orders next year?

I'm not sure we will see the greatest order growth there, but certainly Florida we've made considerable investments in. We're getting very good results now, and again, we have some of those larger tracts of land that I talked about. Some of those are in Florida and we really expect those to be coming on strong over these next few years -- really very strong growth out of Florida. The fundamentals are very strong there. Our position in that market is now the strongest it's ever been, and we are very bullish on that whole market.

Okay, great. Great job.

Ivy Zelman of Credit Suisse First Boston.

Hello, guys. It's actually Dennis McGill. I just wanted to follow on a couple of the comments on the I/Os, and just wondering. You look at what the duration is of the fixed period in most ARMs and I/Os have that hybrid period, which benefits the previous buyer from rate increases. But I don't really care about what the previous buyer's interest rate lock is. Aside from foreclosures and maybe inventory coming out in the market, isn't the concern more about the incremental buyer and whether they're using this product because they have to or whether they want to use it and whether it will be available to that new buyer going forward in the same form at the same type of risk?

We're providing it because you're concerned about it. There's obviously two schools of thought (indiscernible) that the innovation in the mortgage industry is beneficial. Certainly, it does impact the incremental buyer more, but when you say concerned -- are we concerned about the impact of this on our business? No. We're giving the information because there are people who are concerned; you obviously are interested in it.

I'd like to respond to Stephen Kim's question before. About 49% of our loans are fixed through five and reset afterwards. So, we're not necessarily concerned about it, but you're certainly right and that is a school of thought and that's why people are interested in this topic.

We've said for many years, Dennis, and you've listened to these calls -- we believe people should be in adjustable-rate mortgages; we think people are paying too much to be at the top end of the yield curve. This is something that, when we were taking orders and people had such good thirty-year rates, they were taking that, but with an average tenure in homes of something like five to seven years, during which time with a thirty-year mortgage they're not paying off any principal effectively, we think they're paying too much to be up there. So I think, as an industry, we're doing a better job now with getting people into adjustable-rate mortgages. Certainly, if they want a thirty-year fixed or a fifteen-year fixed, they can have that; it's still very competitive, but I think this is something that analysts are over-concerned about. The credit scores are there; the payments are affordable for our buyers. So I really do think this is something that we should be encouraging some of our buyers to be at that point in the yield curve when they are going to be moving on in, as I say, five to seven years in most cases.

Maybe a better question is do you qualify buyers at the full mortgage payment, or do you qualify them at the I/O payment?

Well, as Jim said earlier on, we, at this time, don't have our own mortgage company. We don't originate these loans; they are originated for us. So I would say they are being qualified -- we don't have all that information. We made a real effort to get this information to pass it on because people are concerned. But what I would say is, you know, I think we've got good qualified buyers, we don't see excess foreclosure in any of our markets within our company, so I think we've got a -- obviously credit scores are being well monitored and the underlying companies who are providing the mortgages to these buyers of ours are getting a good buyer for the product they're offering. So I really don't think there's a concerned there at this time.

Okay, fair enough. The second question I had for you was just realizing you do have some mix shift going on. I'm just wondering if you could maybe go through the regions and just tell us which are above kind of the company gross and which are below from a margin standpoint.

In terms of between the various product lines?

No, between the regions.

Sure. I mean, interestingly enough -- not interesting enough but it kind of makes sense it follows price. Within the whole West Coast region -- well over our company average for our gross margins and operating margins; Mid-Atlantic is well; Florida is probably higher but not as high, and a lot of that has to do with the growth that we are expecting six months-plus out when some of these investments come online. Florida is in the Southeast. Other parts of the Southeast, which are high-volume but have dropped off recently -- we have talked a lot about Charlotte; Charlotte is improving. We are working on diversifying our product offering, but that's still well under the Company average. The whole Midwest is obviously under the Company average.

I am trying to think what we didn't talk about. Texas, which is -- the central region is a small region, relatively speaking, but both of those places have margins that are under the Company average, both on a grows and a net basis.

So just think about the West and the Mid-Atlantic well above -- (multiple speakers) -- Company average?

Yes, yes.

What would you say is your highest margin market right now?

My guess is the Mid-Atlantic or California.

But can you be more specific within California?

Southern Cal.

Tony Campbell of Knott Partners.

Good morning. I'd be very remiss if not to ask you about the Midwest and if you could give us some more details as to why you think that region is picking up. Is traffic picking up? Maybe you could just spend a few moments, because we haven't seen that kind of an increase for some --.

Tony, Ian is going to answer but we didn't say picked up; we think we think it has bottomed, we saw an uptick in orders, and we're doing all of the things to position it for when it does pick up.

Well, but we haven't seen that kind of a pick-up in orders. I mean, that's pretty nice.

Well, we obviously had depressed orders for many quarters there, Tony, and what we are saying now is we've turned the corner with that. We think we've -- we are not seeing it substantially better, but our orders have picked up. Partly that is us getting in there and repositioning that and making sure that we're out of committees that we don't want to be in. So we've got orders up around 19%. Backlog is up about 7%.

Interesting also, the average sales price in backlog is also up about 7%. So I think you can see that we're shifting there somewhat. I think this is good news for the Midwest. You know, one quarter doesn't make it. We know we've got more to do, but we certainly feel we are seeing some improvement there.

I think you also have to put it in proportion in terms of how big the Midwest is in relation to the rest of our business. You know, it's less than 10% of our business at this time, so I think we've got many, many good things going on. I think, if that's turned around and we reposition that and we are ready for when that market starts to pick up, I think that's what we're really focused on now. So I think, over the next 2006 and into that year, we hope to see this come around and see some real improvements there, hopefully see these new orders come through into closings, see good new orders again in the next few quarters as we position ourselves there. I think we're going to see some strength there eventually.

I guess sort of a longer-term question, if I might, if we were to look out three to five years, active adults -- what percentage do you think you'd like to be, if everything went right?

Yes, I think we will give you some indication of that in November. We will give some forecasts of that. As I say, it's still a very small component for us. We've got some large communities coming through, though, and I think we're going to put that in context for you when we give our forecast for 2006. We will put that in terms of our product mix, economy value, style and then active adult and we will put that out there for you in November.

Thank you. Good luck.

Greg Geiber of A.G. Edwards.

Yes, good morning, gentlemen. Let me go back to the gross margin question and have you approach it by your three different product points, economy, value, and style. Are the gross margins there similar or is there a difference in them that's meaningful?

We don't have those numbers to break out for you distinctly. I mean, obviously, the dollar contribution from the style product is substantial, but often the absolute margin can be a lower percentage than in our economy or value, and that's the fact to look at. So where we have, as Jim pointed out, the higher price points, often we're getting a higher margin, but it's not always in direct correlation. So, we don't have a set number to give you today, but I would say we can still get very good margins in our economy and our value products, but obviously the dollar contribution, when you get up into that style, you're getting up into high price points, you know, 600, 700, $800,000 product is really coming in and is really helping us. It doesn't necessarily need to be at the same percentage, though, as in the lower price points.

I assume, as you go from economy to value, you are increasing the lot size within the same market?

Typically but it's really more features. So you know, it might be the size of the home but it also is more features. What we're trying to do with economy is really be price sensitive and make sure that we can get that typically first-time buyer right into that home. As we move into our value range, which is the midrange for us, we're really looking partly at lot size. That's not always the case, because we will look at certain markets that have much higher density -- but it's really the features in the home that it will change.

Okay. Now to go to a different line, your sales for the new orders for the quarter were up 7%. For the year-to-date, they are up 6%. Then I look at the increase in your lots controlled, and that's up 19%. That's a big difference. I'm trying to figure out what inference I should draw from that. Should I expect a good acceleration in your orders going forward, or are you just buying land further out because you think it's a good time to buy now?

Well, we certainly aren't buying land further out, and again, when you buy these larger tracts, it tends to have an effect of increasing the percentage ratio of the lots on hand; they go up much faster as you buy larger communities. Obviously, we can sell them. We sell each home one at a time, obviously as we do that, but we have to buy these tracks in blocks. As they are larger, they're going to have a bigger influence.

We do think, though, that our order growth will accelerate as we go forward into 2006 and beyond but obviously, we are now buying for, I would say, 2008 and beyond. 2006 is pretty well committed. 2007 is substantially committed. What we're buying today will not be coming onstream until 2008 and beyond.

Okay, thank you. One last question -- a very trivial one, but have you given any thought to dropping the USA part from the name of your company and just being Beazer Homes -- (multiple speakers)?

We haven't thought about that. It's a name we've had for the last 11 years and we're quite happy with it, so we don't want to cause any confusion. As you were there on opening day, Greg, you understand that.

I understand that; I understand all the issues behind that. But a shorter name (indiscernible).

David Knott of Knott Partners.

The Crossman (ph) related warranty, not your normal warranties but the Crossman related warranties, what were their effect on this year's quarter and last year's?

0 this quarter -- there were no provisions for that -- and last year was 12. All of that included sales and marketing. I think it was 10 excluding the sales and marketing investment, about 100 basis points in total.

10 million?

Yes.

Okay. This is put in your cost of goods sold?

Yes. Thanks, David.

Operator, do we have any more questions?

One moment. There are no further questions at this time.

Thank you, Operator. Well, thanks, everyone, for being on the call today. I'd like to remind you that a recording of this conference call with the slide presentation will be available this afternoon in the Investor Relations section of our Web site at Beazer.com. So, we look forward to speaking to you in November with our full-year results for 2005 and with our outlook for fiscal 2006. Thank you.