Beazer Homes USA Inc (BZH) 2005 Q4 法說會逐字稿

Welcome to the Beazer Homes fourth 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.

Good morning and welcome to the Beazer Homes conference call on our results for the quarter and fiscal year ended September 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 S4 filed on August 3, 2005 and the Company's annual report on Form 10-K for the year ended September 30, 2004 and Form 10-Q for the quarter ended June 30, 2005.

Today's presentation of financial results for fiscal 2005 contain certain non-GAAP financial measures. For a reconciliation of these non-GAAP financial measures to the closest GAAP measure please refer to our earnings press release issued today or the appendix to the slide presentation, both of which are available in the Investor Relations portion of our website.

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 in allowing everyone a chance to ask questions we do 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. Thanks for joining us on the call today. Today we are very pleased to announce a strong finish to fiscal year 2005 with record financial results for our fourth quarter. Revenues of $1.8 billion were up almost 50% on a 24% increase in home closings. Increases in new orders, units and sales dollar value were 16% and 25% respectively over the prior year.

On September quarter net income of $164.4 million and diluted earnings per share of $3.61, both represent all-time quarterly records increasing 105% and 98% respectively. This significant improvement in profits can also be seen in our home building gross margin and operating income margin, both of which increased 350 basis points.

Our results for the full year also surpassed numerous milestones. We generated home closings of 18,146 and annual revenues of $5 billion, up 10% and 28% respectively; both representing all-time Company records. Adjusted net income of $393 million and adjusted diluted earnings per share of $8.72 both represent all-time annual records increasing 67% and 56% respectively. Both our quarterly and annual results reflect successful execution of our profitable growth initiatives, improved product and geographic mix and strong pricing in most major markets.

We believe our ongoing commitment to achieving increasingly profitable growth by leveraging our size, scale and geographic reach through our national brand will position the Company well to take full advantage of the favorable long-term environment for the home building industry.

I'd like to briefly share with you our current perspective on the industry. We believe that our prospects for profitable growth in both the near-term and long-term are compelling. At the same time it's clear that a number of markets across the country are beginning to return to more normalized levels as it relates to the pace of sales and price appreciation that we all experienced over the past few years in certain markets.

And while we might be seeing a moderation in the overall housing market from the explosive growth over the last several years, we continue to be extremely optimistic about the long-term fundamentals of the home building industry including increased demand driven by demographic trends coupled with increasing supply constraints and competitive advantages for public builders.

Importantly, U.S. employment growth is expected to be healthy in 2006, particularly in our major markets. We've said before and continue to believe that employment growth is and will remain a key factor for housing in the future. Furthermore, we are well-positioned in the market with a diversified presence in the country's strongest markets, a broad product portfolio and a strong balance sheet. We believe that our profitable growth strategy that we have in place positions us well to continue delivering shareholder value within a range of possible industries scenarios in 2006.

I'll further discuss our growth strategy along with our outlook for fiscal 2006 later in the call. But first, let's review our results for the most recent quarter and fiscal year. Our total closings of 18,146 homes in fiscal 2005 demonstrates our broad geographic diversity with a current presence in over 20 states and no single state contributing more than 14% 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 2005 closings also demonstrate meaningful product diversity. One misperception about Beazer that we continue to work on dispelling is that we are strictly an entry-level builder. The increase in our average sales price in closings and backlog for the year to $271,300 and $294,800 respectively and the increasingly favorable shift in our mix provide considerable support that we have greater product diversity than we receive credit for.

Although first-time home buyers are an important component of our growth, a review of our closings broken down by square footage illustrates that we have significant contributions across all product categories with approximately 18% of fiscal 2005 closings generated from our economy homes, 56% of closings from our value homes and 25% from our style homes.

Moving on to orders for the September quarter, new home sales totaled 4,937 homes with a sales value of $1.4 billion, increasing 16% and 25% respectively. The increase in new home orders for the fourth quarter resulted from order growth in all regions except the West. Strong order growth in the southeast of 32% was the result of double-digit increases in most markets. In the West orders declined 14% as community opening delays in Nevada and California resulted in fewer available sales opportunities during the period than previously expected.

We achieved substantial year-over-year order growth for the fourth quarter in a row in both the mid-Atlantic and central regions. Mid-Atlantic orders increased 18% driven by increases in New Jersey, Delaware and Virginia. Orders in Texas more than doubled with significant increases in both Dallas and Houston. Midwest orders increased 16% with positive contributions in all but one market.

We continue to be encouraged by improving order trends in the Midwest this quarter. However, soft economic conditions have continued with a high degree of competition particularly in the entry-level price points. We continue to diversify our product offering in the Midwest and, while not yet celebrating our results there, we are encouraged by our positive order growth this quarter and an increase in unit and sales value backlog of 10% and 20% respectively reflecting average price increases in all markets.

Overall at September 30th our backlog stands at 9,233 homes, up 9% from a year ago with backlog levels increasing in four out of five of our regions in units and in all regions in dollars. The sales value of our backlog totals approximately $2.7 billion, up 22% from a year ago and a fourth-quarter record. This sizable backlog provides the basis for continued strong financial performance in fiscal 2006 and gives us confidence in our initial outlook we have issued today which I'll discuss later. However, before that I would now like to turn it over to Jim O'Leary, our CFO, to address in more detail our financial results.

Thanks, Ian, and thanks to all of you for joining us this afternoon. For the quarter ended September 30, 2005 revenues totaled 1.8 billion, an all-time quarterly record and a 50% increase over last year's September quarter. This record revenue is achieved on a 24% year-over-year growth in unit closings coupled with an increase in average sales price to $283,400, a 22% increase year-over-year.

This quarter's focus on maximizing backlog conversion resulted in the best quarter in the Company's history in terms of units delivered. The growth in average sales price reflects improved mix resulting from the success we're experiencing in broadening our product offering and strong pricing in most of our major markets.

A key consideration which will be important for you in modeling 2006 is worth spending a little bit of time here. In this quarter, largely for operational and risk control purposes, we drove closing pace harder certainly than any time in recent history for two reasons. First, companywide, but particularly in Florida and on the West Coast, we're competing every day for subcontractors to get out to the job sites. The issues with cabinets and meters in Arizona and Nevada in particular have been receiving a lot of press within the home building community.

In our first quarter we will be competing for labor with many of our peers whose fiscal year ends are more closely aligned with calendar year-end than ours. As a result, whenever we had a choice of getting closings this year when we already had the subcontractors on-site, we're letting them fall into Q1 when we'd be competing for labor with trade partner concessions, we opted to close the homes this year rather than risk having them fall into a more competitive quarter which would be our first fiscal, most of our peers' last calendar quarter.

Second, and specific to Florida, we were concerned with the impact some of the recent hurricanes could have had on our first-quarter closings and full-year 2006 production, as was the case industry wide last year where we and most of our peers spent the better part of fiscal 2005 playing catch up. Consequently, whenever we had the option of closing in September as opposed to Q1 of fiscal 2006 we closed in September to get in front of that potential risk.

Together these two items probably moved about 300 closings into fiscal 2005. The Florida impact in particular where we have very high margins, we distributed about 100 units with very high contribution margins and around $0.18 per share to the fourth quarter of our fiscal 2005 from the first quarter of fiscal 2006. That will be important when you model 2006, but we would have still been comfortable if you had a consensus. That's about $0.18 between the two components.

Closings in South base (ph) as I just discussed increased 37% driven by strong closings in Florida, Georgia and South Carolina. This was offset partially by lower closings in Charlotte where we continue to reallocate our asset base away from almost exclusively entry-level product a few years ago by aggressively eliminating underperforming subdivisions and land positions.

Closings in the West were up 12% with increases in Arizona, Colorado and Southern California partially offset by lower closings in Nevada and Northern California as a result of production and entitlement delays in Nevada and, as discussed last quarter, entitlement delays for some big high impact communities in Northern California which have taken considerably longer than expected. This is a timing issue which we expect to be remediated shortly where the communities will be open and contributing at higher average sales prices through the remainder of the year.

Closings increased 58% in the central region with strong performance in both Dallas and Houston while closings were up 42% in the mid-Atlantic driven by increases in New Jersey, Virginia and Delaware. Again, in Dallas we were particularly aggressive about driving closings so as to eliminate some underperforming subdivisions and assets.

Closings in the Midwest were down 4% due to lower closings in Indiana offset partially by increased closings in both Ohio and Kentucky. While the Midwest is yet to show robust improvement, the worst of the decline in this region is behind us and we continue to work aggressively on all the drivers that will benefit us when the market does rebound. Also, we're aggressively reviewing our overall asset position there and we're diligently working to harvest underperformance.

Overall-focused a heightened focus on backlog conversion this quarter yielded a ratio of almost 60% which, along with the unit closings, were Company records. For fiscal year ended September 30, 2005 revenues totaled a record 5 billion representing a 28% increase from fiscal 2004. This record revenue was achieved on a 10% year-over-year growth in closings coupled with an increase in average sales price to 271,300 a 17% increase year-over-year.

For both the quarter and year ended September 30th, revenues increased at a greater rate than units as we benefited from improved pricing power in most 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 focused on the country's most attractive and profitable markets, and through price point diversification within these markets where we're broadening our product offering to grow market share around existing successful operations.

Margins improved significantly for the quarter over the prior year with home sales gross margin, total gross margin and total operating margin increasing 350, 340 and 350 basis points respectively. Margins were also favorably impacted over the prior year by the strong pricing environment in our major markets and improved mix as we invest in those markets and price points that will have the highest impact on results.

Also during the fourth quarter of fiscal 2005 the Company benefited from a favorable tax adjustment which reduced tax expense by approximately 4 million or $0.09 per diluted share. For the full year home sales gross margin, total gross margin and total operating margin, excluding the impact of the goodwill impairment in Q2, increased 290, 280 and 270 basis points respectively.

Net income for the quarter totaled 164.4 million, more than doubling from last year, and diluted EPS for the quarter totaled $3.61, up 98% over prior year. Both net income and EPS represent all-time records. Net income for fiscal year 2005, excluding the impact of a goodwill impairment charge, totaled 392.8 million representing an increase of 67% over prior year. Diluted EPS on the same basis totaled $8.72 for the year, up 56% over the prior year.

We achieved record revenues, earnings and significantly increased margins this quarter and year as our focus on profitable growth and heightened attention to delivering closings yielded significant returns. Our land position as of September 30th totaled 106,394 lots, 45% of which were owned and 55% of which were under option. In line with our long-term strategy of maintaining a balance between owned and optioned lots, the mix within markets leaves us well-positioned into the near term foreseeable future.

As a side note, as some of our peers have done effective with the first quarter of fiscal 2006, we will no longer include community count in our quarterly financial results as we believe the change in community counts from one period to the next does not serve as a meaningful predictor of future results and, in fact, is being misinterpreted. More specifically with Beazer, as we transition to larger, higher volume communities while harvesting smaller underperforming ones, particularly in the Midwest, we believe community count projections can be particularly misleading.

At September 30th net debt to total capitalization stood at 40.5%, in line with a year ago and within our target range overall and for this time of year given the record number of closings that came in during the final quarter. With that I will now turn it back over to Ian to provide our outlook and conclude our prepared remarks. Ian?

Thanks, Jim. In conclusion, we are very pleased to have achieved record results as our focus on profitable growth yielded significant returns. Despite what appears to be a return to more normalized levels of activity in the overall U.S. housing market, we firmly believe that the economic growth in our major markets and the fundamentals of the housing industry remain sound.

Robust demographic trends combined with constraints on land and housing supply will continue to provide excellent opportunities for large public home builders such as Beazer Homes and we remain committed to achieving further profitable growth through the execution of our strategic initiatives -- one, increase profitability by utilizing our size, scale and capabilities; two, increase market penetration through focused product expansion and price point diversification; and three, leverage our national brand which is built around the customer.

Specifically in 2006 and beyond we intend to focus on expanding market share in major markets through organic growth initiatives -- continuing to broaden and diversify our product range by utilizing existing product successes throughout the organization; further driving margin expansion through focused strategic and tactical initiatives which are already yielding benefits; and rebalancing and reallocating capital into those various opportunities that will maximize long-term profitable growth.

Our strong level of backlog coupled with our expectations for further competitive advantages for large public builders such as Beazer Homes and continued execution of our profitable growth strategy will result in continued growth and meaningfully enhanced profitability. As such, our initial outlook for fiscal 2006 diluted earnings per share is $10.50 per share representing growth of 20% over adjusted earnings per share of $8.72 in fiscal 2005.

We expect our closings and earnings to be distributed throughout the year similarly to our historical distribution. This will be particularly pronounced this year due to our exceptional fourth-quarter performance. We expect our distribution in net earnings to be about 40% in the first two quarters with contribution from Q1 lower than Q2 and 60% in the last two quarters with Q4 contributing by far the most to annual net earnings.

Finally, we are presently evaluating our capital allocation strategies including our existing share repurchase authorization of approximately 2 million shares within the current environment in order to optimize the utilization of our capital resources. Any impact this evaluation would have on our outlook will be addressed respectively. With that I'd now like to ask the operator to open up for your questions.

(OPERATOR INSTRUCTIONS). Michael Rehaut, JPMorgan.

Just on your comments regarding the first quarter, I wasn't sure if I heard correctly. You said you estimated the impact of the closings into the fourth quarter of about $0.18. Did you also mention what your view is with regard to the Street consensus of around 220 to 223?

We didn't explicitly, but I think Ian addressed it with the distribution of earnings. It will be about 18% of that and 40% of the year, but consistent with historical averages about 18% of the 1050 will fall into the first quarter and if you look at those two components about $0.18 per share probably fell from next year's first quarter into last year's last. So depending on how you treat that, that would have been $0.18 that fell into that, probably would've taken the distribution earnings up to about 20%. And again, we didn't comment on consensus but -- we haven't commented on consensus before. This is really the first time we're discussing distribution of earnings within next year.

Fair enough. And just in terms of some of the regional color. You had mentioned that the Mid Atlantic was led by New Jersey and Virginia as well as Delaware. I was wondering if you could comment on what you're seeing right now in terms of community sell-through rates and pricing.

In the mid-Atlantic obviously the market has been red-hot particularly around D.C. What we're seeing there is more of a normalization in that market, we're still selling but it's certainly not -- we don't have the pricing power that we had over the past year. So we're seeing some normalization there. I think what we're looking to see is probably a lack of investors although we don't sell to investors whenever possible. I think some of the investors have come out of that market and I think we're going to have to just look for that to stabilize over the next let's say two months.

But we really feel very strongly that that's a market with good prospects. We have a very strong position in all of those markets. It just happened that in the fourth quarter Maryland did not give us stronger results, but in fact we're very well-positioned in that Maryland market. So I'd say all around D.C. and then up into Delaware and New Jersey we're watching our situation but we think it's going to come back to more normalized as opposed to exceptional markets that we've seen over the last couple of years.

Thank you. And just to follow-up on that -- with regard to pricing right now are you seeing prices flattish sequentially or are you actually seeing any price declines? And if pricing just kind of stabilizes here and doesn't move, just continues where it is, doesn't go up or down, what would you expect that to have on margins in '06?

I think what we should say on pricing power is certainly we don't see the very rapid double-digit price appreciation across the country -- maybe Phoenix has still got some of that. But what we're expecting, what we would like to see is effectively what happened in California, what happened in Las Vegas as well is where very high strong double-digit growth in pricing flattened out, came back down to a manageable level but didn't pull back. At this stage we're not seeing pull back on pricing in any market, but we're certainly seeing a flattening of pricing.

So I would say that at this state we don't see any declines, we feel comfortable with that. Certain markets still do have pricing power, as I mentioned Phoenix, I'd say Florida as well certainly has that. And I think that looking at margins over the next year I don't think we can expect to see margins increase at the same rate that we've seen during the last couple of years. I think that as an industry we're going to see less pricing power, we are going to see some cost pressures; I think we all know that.

But I think what we look at in terms of Beazer Homes is we still have some ability in catch up terms. The profitability initiatives we have in place, which is the balancing out from our asset turn, moving it more towards profitability initiatives. So I would say we are hopeful that we do actually have some margin expansion in fiscal 2006. Although in our outlook today we're really not putting a lot of store in that. We're forecasting much flatter margin levels over the next year.

And just to continue on that thought. With flattish type pricing, let's say it just keeps at a flat line for a while, you would expect margins in '06. In this region I'm talking about in particular would you expect margins to hold even though perhaps your land as a cost basis would continue to grow up or what exactly are you saying?

I think for not just this region but with normal pricing or flattish pricing we think our margins will be about the same as where they were this past year. And absent continued improvement with the strategic profitability initiatives, which we do expect. We've talked historically about a 200 to 300 basis point differential between ourselves and the peer, which ignores pricing. We're talking about relative comparison. We've narrowed that considerably, we think we're somewhere under 200% depending on who you include in the peer group. That will continue to offset some of the margin pressure you might experience if pricing went in the direction you're talking.

And you've got to remember, the issue on the impact on margins depending on when you bought the land, how much appreciation is there and we're not yet eating into land banks that are recently purchased. So there is some embedded appreciation, particularly in places where I think we are very smart about investing like Maryland, like Florida, like Arizona where we do have some embedded appreciation that's pretty substantial already.

Thank you.

Dennis McGill, Credit Suisse First Boston.

I just wanted to touch on your share repurchase comments. Obviously with the stock suppressed we're seeing a lot of builders come out and talk about potential share repurchases. I guess I'm just trying to understand what's different today than the last multiple times we've seen the stock suppressed and at this level. Why are -- and you can speak to yourself -- are you potentially willing to be more aggressive on share repurchases and pull back on land relative to any other time we've seen the stock valuations here?

Let me just make a comment on that. We wanted to remind everyone that we do have a $2 million authorization -- I'm sorry, a 2 million share authorization. Obviously we put that in place before our split this year as a 1 million; we've used about a third of it. So post split that is 2 million outstanding. We just wanted to remind everyone that that was out there.

Certainly there is an undercurrent from many of the large shareholders that we should be looking at the valuation today and we should be reviewing that and we are certainly doing that. That's something that we listen to all of our stakeholders and we will certainly take notice of that, we'll review it and we'll take action at the appropriate time.

I have to say that when you announce results which are up approximately 100% from the year ago you have to be feeling somewhat comfortable that you've made the right strategic moves in investing in the land and we feel that we've invested in land for the next few years. I can't say that we can guarantee 100% growth every year, but certainly that is how we should run the Company.

But having said that, when there are opportunities to look at it and when there are opportunities to say is this the right time to look at a repurchase, then we will certainly do that. And we are currently in that position of analyzing what we expect to get from the market going forward, investing in future land positions and the alternative strategy particularly in the short term of looking at a stock repurchase.

Again, just to put it in context though, our stock currently sits within 10% of its all-time high. Also if you look at it, over a year ago it's up 62% and if you look at it over a three year period it's up 180%, and none of that is through margin expansion. It's all through delivering outstanding earnings. And I think if we feel that we can continue to deliver outstanding earnings then certainly I would say that's a strategy we should follow. If on the other hand we think the market is turning somewhat and we ought to look at the opportunities within our own stock repurchase authorization, then that is something we will seriously consider.

I think a lot of the dynamics you just mentioned the larger shareholders probably were asking you to step up your repurchases in previous times when the valuation has been down. And at that time I think you've probably been vocal that land was a better purchase. So are you not comfortable saying that today because of the market changing?

If the remember the history of the Company, this is our third share repurchase authorization. We completed two prior to this. So in our 10 or 11 years as a public company, we're now into our third authorization. Both of the previous two were fully completed and I think that's an important point.

But this has been in place for what, two years?

It's been in place for about two years, yes. But during that time we have seen the opportunity to invest in land and get the returns on that. What we will do is -- and we always do -- we constantly evaluate the opportunities in investing in our business and the opportunities to invest in repurchasing our shares. And I think that's -- we have a history of trying to invest in our business. We see the opportunities. The remarks I made today basically say we still see opportunities out there.

I think if there is a normalization of the industry, I do think the public builders will take more marketshare. Obviously we've taken enormous market share over the last five or seven years. I think we will continue to take market share and I think that's an opportunity we have to look at, not just the fundamental top-line numbers for housing, we have to look at what market share can we derive through, one, our existing land bank; and two, future purchases in what might be a slightly softer land purchase market so that we have to weigh all that out.

But again, again that and as we have done in the past, if we think it's the appropriate time to repurchase shares we will absolutely do that and we have a history of doing that. So I think it's something that we are currently working through and we will analyze that with our Board. We are currently doing that with our Board now.

How do you typically compare the potential return on your share repurchase versus the potential return on reinvesting the business? How is that done internally?

Can I spend a second just on another comment? You asked before "why now". And I think it's important to look at it in context of circumstances always change. Over the last two years while we were working on turning around Crossmann, when we were working on and obviously had an issue with respect to Trinity, that could have been a funding issue which it was not -- aggressively repurchasing shares probably wasn't the right thing to do. And step one on capital allocation -- you have to look within your own portfolio and say which markets do you want to invest in.

I think we have been trying our best in having some success at turning the Midwest around. You're starting to see some improvement with respect to relative comparisons and backlog building and the sales improvement. But I think you heard on our comments, we're harvesting underperformers, we're reallocating capital out of there, we've been reallocating capital into positions -- as I mentioned, Maryland and Florida where we've got huge pent-up appreciation and returns that are well into the 30%.

And over the last two years when you ask how do you allocate capital, our weighted average cost of capital depending on what data and what metrics you use is somewhere in the low teens. And obviously, depending on which services you use, it could be higher. Internally, we used 14% and have over the last few years, and that is not far off. It is probably within the mean of what the different models would give you. When we compared that to land purchases the last few years, it has been substantially higher. And now when you look at where we have got the land, how well positioned we are for the next few years, and the opportunities we may have to harvest underperformers and reallocate capital within our portfolio, we're absolutely sensitive to the fact that share repurchases may make sense at this time, and that is why we are considering it.

We are not insensitive to what our shareholders say. We are not insensitive to what the economics would suggest, given the position we are today. Everything changes with circumstances, and I think you heard we are reallocating portfolio -- capital within our portfolio, and we are absolutely sensitive in listening to what our major shareholders think is appropriate as well.

Thank you.

Alex Baron (ph), JMP Securities.

Great job this quarter. Wanted to talk about, I think you guys had recently mentioned implementing rebates and so forth and starting to collect on that. So I'm just kind of wondering what impact you think you had on margins this quarter and what you see for next year?

Sure, and just to step back; two and a half years ago we probably -- rebates is not the story. What we try to do is maximize the value of our national accounts program, and part of it is rebates, but we never want to collect a rebate at the expense of direct costs upfront, nor do we want to create issues where we're going to lose closings and have production issues because we're trying to force a national program on top of our divisions.

That said, in the very easy places where we're able to structure exclusive campaigns across the country -- there are four or five categories where you can do that -- preferred, and preferred would be where there are four or five guys, none of whom can do all your business, but all of them together can, we have preferred agreements which is a different level of rebates. And then after that it becomes preferential and recommended but certainly not mandated where it cost a little bit of rebate money but we don't feel that strongly about it because the relationship between Beazer Corporate and the manufacturer really can't be strong enough to make a significant impact on the divisions.

Two and a half years ago we collected about $5 million in rebates; this year we collected about 24 million in rebates. And I will tell you, we meaningfully reduced direct costs in a couple of categories like refrigerators, faucets, cabinets. So the benefit to the national accounts program is substantially greater than the 24 million, but the really easy number is we've gone up fivefold in two plus years.

What's not factored in there, and I think it's important to mention because the people in our divisions and the people who work for me here on the national accounts side did a phenomenal job, is the value in places like Las Vegas, Arizona, we had a couple in Orlando. This year where there were supply shortages, trade shortages, tiles and vendors in the cabinet side in particular could have cost us a lot of closings this year.

Because of the relationship we have with some of our trade partners we were able to get a lot of closings that I suspect some of the smaller and mid-sized builders were not able to get because the second we had a production issue I heard about it, the fella who works for me heard about it and he was out there pounding on doors and getting things done so we were able to close homes. So a couple of benefits, five to about 25 this year, we're at about a $1300 to $1400 per home rebate number, that's probably going to go to 2000 shortly. And again, the direct cost savings is what it's about and we think we're having a considerable success there.

Okay. And also wanted to talk about where you guys are deploying capital. It sounds like the Midwest is still somewhat challenged due to jobs. So I'm just kind of wondering where you guys are seeing better opportunities to put your capital going forward?

In the prepared remarks and then again Jim just made the point that in certain markets where we have too much exposure to any one sector of the market we are looking to redeploy that. So if we can do that through opening up separate price points within a community so be it. If we need to sell some of those communities and move into different locations then we're certainly doing that.

And again, I would reiterate what we've said in the past is that certainly in the Midwest we have an abundance of entry-level products -- land for our entry-level products. We're looking to move some of that, redeploy capital into higher price points there the same as we mentioned in the prepared remarks in Charlotte. I would say in Dallas we’re in that position as well.

Apart from that I would say we're looking to, again, invest in the proportion of product that we're looking at and I explained earlier on the side there. So we have got markets where we don't have exactly that portfolio and I would say in the Southeast we're looking to -- which is really quite strong at this time -- we're looking to make sure that we have the value and style product in those markets as well. So we're certainly looking at all that.

And again, just to reiterate Dennis' question earlier on. We're going to put all of that discussion in the context of should we also be looking at share buybacks and I think that was your question as well. So we're going to put all of those in context. We currently have a land bank which is substantial; obviously it's currently around six years, again, about 45% of that we currently own.

So certainly we can look into that, we can look into eating into that. But again, the other point I made just now is if we do see any specific local weakness in any markets and we see opportunities there, then we've got to factor that in as well. Because at the end of the day we have to sustain this business over the long-term and we want to make sure that we've made the right investment. But we're going to look, as we always do, at all of the various investments that we could look at at this time.

(OPERATOR INSTRUCTIONS). Larry Taylor, Credit Suisse.

Thank you and good afternoon. I wonder if you could spend a moment talking about your balance sheet and credit quality and how you would weigh improving your balance sheet as you think about capital allocation and possible share buybacks here?

Sure. And Larry, remember, we're 41% net debt to cap today, it was roughly the same as last year. That's in line with our long-term targets and the rating agencies are very comfortable with that, with our current credit rating. And I think they'd be very comfortable with it at higher levels because we have been at higher levels recently. And remember that September 30th, big cash on the balance sheet, 40% debt to cap. I wouldn't say it's an optical illusion, but it's a couple of day phenomenon.

We raked in enormous amounts of cash, particularly in a quarter when we close as many homes as we do. And a lot of it's committed and goes out the door for various initiatives over the next few months. That is not unusual, it's not unusual to us year-over-year -- not unusual to any of our peers but I know you guys all know that.

One of the things we'll look at first and foremost, and I think I mentioned it when Dennis asked a question before -- the first thing we're going to do is look at underperformers within the division, look at areas where capital spending today -- or excuse me, land spending which is essentially capital spending today, could be curtailed without impacting the business and I think the key caveat is without impacting the business.

And I think you heard in the comments, there are three or four places where we have pretty aggressively over the last year -- I think we might not have gotten credit for it because of the side show with goodwill and some of the other issues we've been wrestling with, but we've been pretty aggressively harvesting underperformers. If you look at the community (indiscernible) went down dramatically, we're working on it in the Midwest, we're working on it in a place like Dallas. We're wringing cash out by increasing absorptions.

First and foremost we do that which will help the balance sheet free up funds, and we think we can accommodate all of our stakeholders within the context of spending money for internal growth and looking at what we know is something our shareholders think is important and we are going to consider which is share repurchases. We think we can do that without impairing our credit quality. Because at the end of the day, and you and your constituents know it as well as anybody, our credit quality has a lot to do with our lifeblood which is access to funds.

Todd Voigt, Cliffwood Partners.

I was wondering if you could all give us a sense of incentives and how incentives are trending going forward?

I think you're asking about incentives -- it was a bit hard to hear you there. But let's just say that we don't see a substantial increase in incentives. Incentives are part of our business. Through good times, bad times we use incentives to drive customer behavior. So in particular we use incentives to drive customers into our mortgage company because we want control of the process. So we much, much prefer having the buyers go through Beazer Mortgage which is currently in the high 60% of our customers use that. So we always use incentives there to drive that process because we think that's right.

Certainly in some markets there are incentives out there. But again, I think the customers have just become used to expecting certain incentives and I think it's something that we just have to manage. We have to look at the net margin that we're achieving per closing. If that means we have to put some incentives in there and use that as a sales tool so be it.

But at this stage we don't see anything excessive out there, but I think people should really understand that there will always be incentives of some sort and they're nearly always linked in our case to making sure that we use Beazer Mortgage there to keep control of the process and deliver to the customer the experience that we are building our brand around.

Stephen Kim, Citigroup.

Good quarter, Ian. I guess I had a question regarding the margins, in particular the impact of a couple of things on your gross margin in your SG&A. You had mentioned in our opening remarks about how you had accelerated closings. I think you said 300 closings and you said $0.18. I was curious as to what impact you think you had on a basis point basis in your SG&A as a result of having accelerated closings.

And then the other thing that you mentioned that caught my ear was the fact that you have this issue with your Northern California division where I assume not only the average price but the margins are also very strong there as well. And so I was wondering whether or not the Florida margins -- while you said they were strong, I was wondering if perhaps there was an issue there where your margin as you head into next year on the gross margin side may actually be stronger because of a California influence into the midyear '06.

I'll answer the first question and then I'll let Ian answer the second question because that was too complicated for me. He'll dissect it while I'm filibustering. Either you or -- actually I don't think you, I think Ivy had a piece out this morning where she specifically commented on the gross margin sequentially and that we're down 100-ish plus basis points and actually speaks to exactly what you were raising.

In Florida I don't think we gave up any gross margin. The homes were there, they were ready to close and you're literally talking the difference between a few things falling into October relative to September. And the operational decision we made because is let's get them now because if Wilma or another hurricane comes we'd be right back into the same game of playing catch-up all year.

Honestly I'm not sure we or the industry has yet caught up from last year. We didn't want to do that again. It definitely doesn't come through SG&A because we didn't give incentives or there was no (indiscernible). We're talking closings, not sales. And there was no additional stiff (ph) there. That was 100% just moving dollars. And other than overhead absorption, it wouldn't really change and 100 units isn't going to make that big of a difference.

The big impact on margins, though, from getting the closings was in places where we don't have the type of margins that we do in Florida. And I'll give you a couple of examples. We closed the living heck out of homes in Dallas. We did the same in the Midwest -- although closings were down, we closed a lot of home that were spec homes where we're trying to clear out underperforming communities and move into new product lines. Georgia traditionally a market where you have opportunities on the market all the time because it's a relocation market.

We closed a lot of homes in September and those are historically lower margin markets particularly relative to where we've been making all our money which is the West Coast, mid Atlantic, Florida -- all through that kind of -- those three grids of high profitability. We're getting great profits in the other markets, but at a much lower contribution at the gross margin line. So that had a lot to do with why sequentially your gross margins were down a bit.

It helps a little bit with the absorption, but particularly in a place with the Midwest where we're just trying to clear out some product that is not consistent with our go-forward plan. That's that. And the Florida issue had nothing to do with it. And even though you snuck in the second question when you weren't supposed I think Ian and will answer it.

Your point there was that we've lost some closings in Northern California through the timing on the entitlement process and they'll roll into next year. And yes, they are high margin deals. And yes, they will help us next year. But I think we've baked that into our analysis. We've obviously got those in our budget process that we have and so we've baked that into it. But you're right in the sense that they are higher margin closings and they should come through in 2006.

This is not a problem that we are having in isolation; this is a problem that many, many builders are having. In particular this is working with the Corps of Engineers and in the (indiscernible) area, we've been one of the premier builders in that area just outside downtown Sacramento. It's been extremely strong for us but it's all in a former floodplain and everything has to go through the Corps of Engineers. And when they're depleted in their efficiency at this time through other commitments and we are just finding it very difficult, and others are as well, to try and get that through. So it's a timing issue, and yes, those will be better profitable closings into 2006.

I guess what I was trying to get at at the bottom line was it seems to me like the margin in your backlog might be indicating a somewhat higher level of gross margin than maybe what you reported this quarter.

I guess you wouldn't necessarily disagree with that.

As Jim said, the effect on SG&A for pulling the closings forward -- I see where you're going there, but it's minimal in terms of the overall 18,000 closings. I think I'd say the same for the few hundred in Sacramento that we're talking about against the number that we're expecting for next year. So it's an impact but it's a very small impact.

There's no question, by the way. I think we've got 292 or 293 in backlog which is higher than what we closed during the quarter. And it's a bit higher than what you're back into, certainly most of the models out there it's a bit higher. We could actually do better than the 290 during the year when you guys run your numbers, but if we do it's because we're not getting the closing growth in the Midwest.

There, even though pricing has gone up, we're talking 140 to 160 average sales price which would bring I'd expect our average sales price this year to be in the 280's. If we don't get the growth in a couple of the places that are lower margin, lower contribution and we get all the community openings that we expect in the West Coast, we'll do a heck of a lot better than 290. But I think that's more upside today. I think when we're closer into the second quarter we'll be able to give you a much better view on that.

Sure, why not leave more upside. My second question was --.

That's your third questions, by the way.

-- was related to your comment about migrating your product mix to be a little higher I guess (indiscernible). I guess my question is in that kind of an effort, which I assume is one that's going to be ongoing for the next couple of years, do you think that that's the kind of initiative that might lend itself more to an acquisition type strategy? Or do you think that it's something that you can very capably do just simply through organic means? Can you talk about how you weigh those two?

Absolutely. The strategy we have in place today, and I think we've been fairly specific about this, is that we really do believe that we can do this organically. We've been building what we call style, call is luxury homes in many markets for a number of years. From Phoenix, we were building in Scottsdale in the early '90s, in Nashville, in Southern California to a degree, in Florida, and certainly the mid Atlantic. We've had this capability in the Company and we've been using it for many years.

What we're now trying to do -- and it came through the launch of the branding. What we said is we're going to be one company here and we're going to replicate this across -- that model across all of our markets. So what we're really doing is taking the skill set that we've had in the upper price point markets and taking that back into the others. Equally we're taking the very affordable what we call economy product into some of the markets that we haven't had historically.

So what it's really doing is spreading the overall Company distribution amongst every one of our divisions. It will add breadth to every one of our markets and we really think we can do that organically.

Now the fourth leg of this, and it is explained clearly in our annual report -- we didn't talk about it a lot on the conference calls because it hasn't impacted earnings to a substantial degree yet. It's certainly the active adult component which we see coming in the future and which we have completed a number of active adult communities, particularly in the mid Atlantic, in New Jersey, Maryland, into Virginia now. These are typically smaller, more -- certainly sometimes more urban type active adult communities. But as we go forward what we expect to be able to do is have active adult communities in many other of our markets and they could fit into economy, value or style.

So again, we have the opportunity here of targeting that market which is very much a mantra for us these days. We want to target our market, not just have a total shotgun approach. But when we can do that I think we'll also be able to do that organically. Now if at some point in the future we thought there was an opportunity to add some capability there and it came through acquisition, then certainly we would look at that and that's no secret there. But today we fully expect to be able to achieve the growth rates that we're looking for through organic growth. Stephen, I hope that covers your question.

Jeff Liganelli (ph), Stonebrook.

Congrats on a good quarter. Your earnings per share guidance at 10.50 implies net income of 475 to 480 million. Just on the cash flow for fiscal 6000, as of right now what are your planned increases in land inventory and then how does that fall into the free cash as I'm assuming your CapEx and D&A are roughly equal?

And D&A is negligible, there's no CapEx, it's inventory growth. I'm going to evade that answer for one reason because we're reevaluating it right now. We're looking at -- right now by the way this year our capital spending was about 2 billion. What it ends up being next year, I think it's going to be viewed in the context of how we're doing as far as harvesting some of the underperformers we've been talking about, an overall reallocation strategy within that 2 billion, and alternative uses of cash. So beyond that I think we'd like to have a little bit of time to work on it, but I hear your message there.

Obviously -- we've talked before. I do fall under the camp that I think you should take 100 to 150 million of the net income and use it to buy shares back. But my real question was if you actually only increased land inventory by 350 to 400 million what would that allow you to increase your closings kind of year-over-year going forward?

Your closings, again the big issue is mix of markets. You probably could increase your closings by -- if we're saying the guidance we give is anywhere between 15 and 20%, we historically have trended around 10% -- you could be in the single digits and probably be less profitable on the net income line and hold it or do better at EPS. Your math isn't wrong and that is something that we're looking at right now.

Thank you.

Joel Locker (ph), Carlin Financial.

Good quarter. Just wanted to get your color on the California markets in general, just Northern California and Orange County and L.A. and just talk about pricing power since May/June in each one of those markets.

We are still seeing good results in California, but Northern and Southern California, as we talked about extensively on this call, and Northern California for us is constrained by the development delay we're having. So where we see opportunities do sell we're selling. As an example, we have not had model homes in that market I'm going to say for probably two to three years now. The market has been so strong we haven't had to spend on putting model homes in there and we're still seeing good sales there. So I do expect when we open these large communities that we have there to see good sales and good prices.

Are you seeing something similar to the D.C. market where prices have been flat since July or so and just kind of not decreasing but not increasing at the robust pace they used to?

We are still seeing pricing power there. We are very focused in that market on being affordable. In fact, our whole strategy in California is making sure that we're affordable. We have not played in the very highest prices there in either Northern California and we are only in Sacramento. Sacramento and the regions around that, and then we're actually down into Fresno now where we've seen a very good opportunity down there. But I would say we're not seeing flattening, we're still seeing some pricing appreciation.

And in Southern California, again, we've focused on affordability. We've been in extensively in Riverside County, we're over into the Coachella Valley, we're in Bakersfield. We literally do not have anything today in Orange County and we have very little in San Diego because pricing became too aggressive there. And again, focusing on affordability in those markets has given us good results and we're still seeing good results in Southern California.

So I'd say we are actually pleased at the pricing power that we had over the last few years has moderated somewhat. And as I said to an earlier question, the fact that we appear to have had a reasonable soft landing there from very aggressive pricing is very encouraging to us. And I think obviously the underlying demand there is strong. What we don't want to see is extreme variability in pricing. We're much happier now to see this come down, flatten out, but still giving us good returns.

Right. And just one final question. On the gross margins, I know they're -- maybe a Company high in California. Do you expect them to be maintained just with the higher cost of land maybe working through in '06 verses '05?

I think what we're forecasting is reasonably flat margins. Obviously we made the comment that -- and again, I think should apply specifically to California as it applies generally to the Company that we're not looking at the highest of pricing power. We don't expect to see that. And we certainly do expect to see some cost increases. There's no question that the fuel effect, the natural gas effect is going to pass through and the transportation effect there is going to pass-through and we are going to have to absorb some of those costs. But we do expect to be able to maintain our margins is the prediction we're making today. And then Beazer Homes specifically, we have a number of initiatives under process that have been giving us some of these benefits. And so we do expect -- we hope to see some improvement there. So we are looking for some margin expansion, but today we're not baking that into the numbers.

All right, thanks a lot.

Ivy Zelman, Credit Suisse First Boston.

It's actually Dennis again.

Hey, Dennis, how come you come on as yourself and then come on Ivy later, is that a way to get two questions in?

No, you're going to have to talk to whoever is putting me on there. I just wanted to touch on the comment we hear a lot now is that the market is returning to normal. In your opinion what would you say is the last time we were at a normal market?

I would say that the last couple of years have seen some abnormal appreciation in some markets. I think that it was reasonably short-lived in those markets. We saw it obviously in California, we saw that flatten out. We saw Las Vegas go through a real spurt, we saw that flatten out. And now we're seeing Phoenix having that. But offset that against the vast majority, I would put the mid-Atlantic around D.C. in that let's say somewhat abnormal conditions as well in terms of pricing power.

But if you look at the vast majority of the country, whether they saw Southeast markets, or central Texas markets or our Midwest markets, they're certainly not abnormal on the upside. And I think that is where we have taken the strategy position over many years that we need to be diversified, that we don't want to hang our hat on one runaway leader today at the expense of tomorrow.

And so I think we feel very comfortable with our position. I think you can take my comments there and certainly you can analyze them and prove me right or wrong. But I think I'm sensing that those abnormal markets which were not the total of the Company by any means -- obviously the Southeast is one of our biggest markets and for the last few years has been very flat. The few years before that it was very strong.

So I think we expect to see these ups and down. We're making somewhat encouraging noises about the Midwest which has been very tough for us over the last few years, but eventually those are very big markets and they will give us some benefits. I think the strategy we have and the strategy we want to implement in the future is making sure that we're not just chasing today's winners, but we're positioning ourselves for tomorrow as well.

So if we thought about it in general if you went back to say '02 there weren't any markets that you would call abnormal?

'02 -- I think probably California was in a hot phase at that time. I don't think it's really relevant for us to try and dissect what was strong or what was not strong. What we're saying today is what we're seeing today is what we think are reasonably sustainable numbers across the board. Today we're not seeing any pricey depreciation, we're not seeing anything like that.

But what we are seeing is a return to levels that we feel are sustainable as opposed to -- we've said this many times -- whereas we can certainly benefit from high double-digit growth, it comes through in the land price as well. We don't think that's a good thing. We like to see sustainable long-term price appreciation at the top line because that feeds back down into all of our costs as well.

So I think we're at a level that we are forecasting today is sustainable -- as normalized and sustainable and we believe within that we can still get good results going forward into 2006 and beyond.

Thanks again, guys.

Thanks very much. We I think have cut the questions off at this time. We'd just like to thank you all for joining us on the call today and there will be a recording of this conference call with the slide presentation available on the Investor Relations section of our website at Beazer.com. With that we'll sign off. Look forward to speaking to you after the first fiscal quarter for Beazer which will be in February 2006. Thank you.

Thank you. That concludes the Beazer Homes conference call for today. You may disconnect at this time.