Beazer Homes USA Inc (BZH) 2006 Q1 法說會逐字稿

Good morning and welcome to Beazer Homes first fiscal quarter 2006 earnings conference call. Today's call is being recorded and will be hosted by Ian McCarthy, the Company's Chief Executive Officer. Before we begin, 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. Ms. Kratcoski, you may begin.

Thank you. Good morning and welcome to the Beazer Homes conference call on our results for the quarter ended December 31st, 2005. During this call we will webcast a synchronized slide presentation. To access the slide presentation, go to the investor home page 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 its annual report on Form 10-K for the year ended September 30th, 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 do request that you limit yourself to one question and then one follow up.

I would like to turn the call over to Ian McCarthy.

Thank you, Leslie, and thank you all for joining us on the call today. We're pleased to announce record results for our first fiscal quarter. Revenues of $1.11 billion were up 21% on a 7% increase in home closings. New orders increased in units and sales dollar value 9% and 11% respectively over the prior year.

Our December quarter net income of $89.9 million and diluted earnings per share of $2.00 both represent first-quarter records increasing 29% and 27% respectively. Our first-quarter results continue to illustrate the effectiveness of our Profitable Growth Strategy now in its third year aimed at achieving greater profitability by optimizing efficiencies, selectively increasing market penetration and leveraging our national brand. We believe that our ongoing commitment to executing this strategy will position us well in both the near-term and long-term environments.

As we have discussed before, in the near term it is clear that a number of markets across the country are beginning to return to normalized levels as it relates to the pace of sales and price appreciation that we've experienced over the last few years. While we are seeing a moderation in the overall housing market from the explosive growth of the last several years, we continue to believe there are significant opportunities for us to achieve market share gains in the near term and we continue to be very optimistic about the long-term fundamentals of the homebuilding industry.

These include increased demand driven by demographic and employment trends coupled with further supply constraints that strengthen competitive advantages for public builders. Furthermore, we continue to reallocate capital to those markets which show the greatest potential for future growth and to those investments which provide the greatest potential return. 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 with the Profitable Growth Strategy we have in place today we are well-positioned to continue to achieve revenue and earnings growth while delivering increased shareholder value within a range of possible industry scenarios in 2006.

I'll further review our growth strategy along with our fiscal 2006 outlook later in the call. But first let's review our results for the most recent quarter. For the December quarter new home sales totaled 3872 homes with a sales value of $1.1 billion, increasing 9% and 11% respectively. Strong order growth in the Southeast is 31% with the result of double-digit increases in most markets with particular strength in Florida and South Carolina.

West region orders declined 9% as higher new home orders in California and Colorado were offset by declines in Arizona and Nevada which resulted from moderating incremental demand and timing issues associated with community openings. The decline in the mid-Atlantic region resulted both from low orders coupled with higher cancellations in Virginia and Maryland as demand has slowed from extremely high levels during the previous year.

We achieved substantial year-over-year order growth in both the Central and Midwest regions. In the Central region where orders were up 51%, significant increases were realized in both Dallas and Houston. In the Midwest, orders were up 64.4% with growth in all but one market led by a significant year-over-year increase in Indiana. With three consecutive quarters of positive order growth in this region, we continue to be encouraged by improving order trends.

The entry-level price points continue to experience high levels of competition as economic conditions still remain soft. Nonetheless, we continue to diversify our product offering in this region and remain encouraged by positive order growth and an increase in unit and sales value backlog of 41% and 54% respectively.

While we experienced order declines due to moderating demand in some markets in the West and mid-Atlantic, we continue to believe that the fundamentals of these markets remain healthy. Furthermore, the fact that overall new home orders were up 9.2% illustrates the strength and benefits of a broadly diversified geographic and product profile where we are not overly dependent on any particular region or product segments.

Overall at December 31st our unit backlog stands at 9276 homes, up 10% from a year ago. The sales value of our backlog totals approximately $2.8 billion, up 18% from a year ago. Our average sales price per unit in backlog is approaching 300,000 and up 8% from a year ago. This first-quarter record backlog level provides the basis for strong financial performance in fiscal 2006 and gives us confidence in our outlook to meet or exceed earnings of $10.50 per share.

I'd now like to turn it over to Jim O'Leary, our CFO, to address in more detail our financial results. Jim?

Thanks, Ian, and thanks for joining us this morning. For the quarter just ended, revenues totaled 1.1 billion, a first-quarter record and a 21% increase over last year's December quarter. This revenue level was achieved on 7% year-over-year growth in unit closings coupled with an increase in average sales price to 280,300, an 11% increase year-over-year. The growth in average sales price reflects improved mix relative to last year resulting from the success we're experiencing in diversifying our product offering and favorable pricing year-over-year in our major markets.

The average sales price realized during the December quarter was approximately 1% below the September quarter. This reflects a number of factors notably the increased contribution for lower average sales price markets such as the Midwest, and Texas which in particular performed strongly; continued growth in the more affordable multifamily product which carries a lower average sales price inherently; and the long anticipated but healthy moderation in price appreciation experienced in most of the robust markets in the country.

Previously we've talked about the time when our average sales price growth would slow down for good reasons -- that is starting to happen. We're having a healthy moderation in the hotter markets and you are getting a bigger contribution from places that are inherently lower average sales price and a bigger contribution from more affordable multifamily product as we diversify our product offering.

Closings in the Southeast increased 12% driven by strong closings in Florida and South Carolina. This was achieved despite closing almost 100 homes in Florida during the previous quarter as discussed in our last conference call to avoid potential delays associated with hurricane activity. Both Florida and South Carolina continue to benefit from the powerful geographic trends we've often discussed while continuing to be relatively affordable.

Closings in the West declined 4% with higher closings in Arizona and Colorado offset by lower closings in California and Nevada. These declines resulted from ongoing community opening delays coupled with a moderation demand from a year-ago levels. Closings in this region were particular impacted by continuing entitlement delays in Northern California which we discussed previously which led to slower than anticipated community openings.

Closings increased 77% in the Central region with strong performances in both Dallas and Houston while closings were up 22% in the mid-Atlantic resulting from increases in all markets. Closings in the Midwest were down 11% due primarily to lower closings in Indiana where prior quarter sales had been relatively modest. However, as Ian noted based on recent order trends, we'd expect recently improved order flow to translate into improved closing levels in the future.

Also we are continuing to work down our overall asset position there and are diligently working to harvest underperformers as evidenced by the number of land transactions completed this quarter in that region to further our product repositioning efforts in the Midwest.

For the quarter ended December 31st, revenues increased at a greater rate than units as we continue to benefit from favorable pricing, year over year in our major markets. Our revenue growth this quarter reflects increased market penetration in the country's more attractive and profitable markets and price point diversification in those markets where we are broadening our product offering to grow market share around existing successful divisions. A great example of this growth that we've achieved in orders and closings is in Florida where we are realizing the benefits from great investments made over the last few years that are coming to fruition today.

Operating margin improved for the quarter over the prior year with total operating margin increasing 40 basis points. Margins were favorably impacted by strong pricing year-over-year in our major markets and the execution of profit improvement and price point diversification initiatives that resulted in improved mix in those markets. Also worth noting at the end of this quarter, our per home rebate figure has almost doubled to over $1600 from this time last year as our national accounts program is generating benefits from managing and consolidating our spending without compromising up front costs.

Some of these margin benefits were offset by a year-over-year increase in SG&A which is primarily attributable to period cost investments related to specific initiatives aimed at improving quality and customer satisfaction and achieving operating cost reductions in the long run. For example, two of these programs -- focus, which is focused on customers' ultimate satisfaction; and case, construction and audit safety evaluation are a continuous improvement process where our employees are working and intensively upfront with our customers and our trade partners to continuously improve safety, quality and customer satisfaction. While these programs are an investment in period costs today, we expect them to have long-term benefits from greater repeat and referred business and reduced back-end costs in areas such as warranty and customer callbacks.

Net income for the quarter totaled 89.9 million, an increase of 29% over the prior year and diluted EPS for the quarter totaled $2.00 per share, an increase of 27% over the prior year both representing first-quarter records. We achieved record earnings growth this quarter as a result of our ongoing focus on the specific initiatives supporting our Profitable Growth Strategy.

During the quarter we continue to review opportunities to minimize underperforming investments and provide capital to support our strategy while providing a meaningful return to our shareholders in the form of our previously announced share repurchase program.

Our land position as a December 31st totaled 107,487 lots representing a slight increase over the September quarter. 45% of the lots were owned and 55% were controlled under option in line with our long-term strategy of maintaining a balance between owned and optioned lots.

We continue our capital reallocation process by focusing on those investments that will optimize our overall returns while returning capital to our shareholders. During the quarter we monetized approximately 25 million of land while at the same time slowing land purchases and terminating options in certain markets that are providing returns below our expectations.

We repurchased a little more than one million shares for approximately 67 million or $66 per share during the quarter. At the same time we maintained net debt to total capitalization at 47% within our previously stated prior target of approximately 50%. We expect this previously announced and subject to the market condition and other factors to repurchase somewhere between 200 and 250 million of stock during fiscal 2006.

And to save the analysts out there some additional brain damage, for the quarter the EPS program delivered about $0.02 additional accretion because it was timed out throughout the quarter. So $0.02 incremental to our original guidance this quarter.

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

Thanks, Jim. In conclusion we are very pleased to have achieved record revenues and earnings in the first quarter of fiscal 2006 by continuing to focus on our integrated Profitable Growth Strategy. Despite what appears to be a return to more normalized levels of activity in the overall U.S. housing market, we firmly believe the opportunities for increased market share gains are compelling. And that the long-term 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 that, one, increase profitability by utilizing our size, scale and capabilities. Two, selectively increase market penetration through focused product expansion and price point diversification. And three, leverage our national band which is built around the customer.

Based on the execution of this strategy and the strength of our current backlog we expect diluted earnings per share for fiscal 2006 to meet or exceed $10.50 per share representing growth of 20% over adjusted earnings per share of $8.72 in fiscal 2005.

We continue to expect our distribution of net earnings to be about 40% in the first half of the year and 60% in the last two quarters with Q4 contributing by far the most to annual net earnings.

In closing, we remain committed to our stated goal of enhancing margins and profitability by executing our Profitable Growth Strategy. And as part of this strategy, we will continue to reallocate capital to those investments which will yield the highest return and return capital to our shareholders through our share repurchase program while always maintaining a sound financial position.

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

(OPERATOR INSTRUCTIONS) Stephen Kim with Citigroup.

Thanks. Good quarter, guys. I wanted to see if you could comment on your -- first of all housekeeping thing. Your share count at the end of the quarter, where was it right at the end of the first quarter?

I'll grab that for you. It's 40, the diluted count -- I thought it was right in the press release.

I didn't see it, maybe it is.

We will grab that for you, Steve.

Okay, that is fine. And then the second thing I wanted to see if you could comment on the DC market specifically. You talked about how the cancellation rate increased. Could you talk about first of all can you throw numbers at us in terms of what the cancellation rate normally is and where it went to? And then maybe more importantly where are you seeing these people canceling? Are you finding that it is within the first month or two or is it typically later -- several months after they've signed the contracts?

Steve, let me address that. In terms of cancellations we don't give out specific guidance for market by market. But let me tell you that the mid-Atlantic in general is in total still less than the Company average. The Company average today is around 26.4% which is up 0.4% from the last quarter. And year-over-year it's up from 25%. Overall even though we've got a slightly softer market overall, our cancellation rates are still very comparable. In DC they are higher than that, I will tell you that. At this time they are higher.

What we are seeing though is during the process of the quarter we had more cancellations in the first in October. It's come down somewhat in November and December. And we feel at the moment the market is a little better. So I would say we're definitely going through a correction. We feel that investors came out of that market -- there were obviously a number of investors -- we tried not to sell to them but there were a number of investors in that market. And I think they've come out of that market and that has caused that correction in the market.

I can't tell you here when those people are coming out of it but as you know for a very long period of time we've had a very high backlog in Virginia. It has taken us a long time to deliver homes there. We've had over six and up to nine months of backlog which at one point we had to work down. So a number of our customers have been with us a long time.

I think though this is just something we're going to go through. We've seen this kind of shakeout in other markets. It happened in Las Vegas. It's definitely happening here now.

Just anecdotally this week we opened up a condominium project that we have for sale which is located right next to the [Vienna] Metro station. We had 500 people turn up. So there's 500 people turned up for the preopening just before we start sales. Now that to me shows we're well positioned in that market; we've got good locations; we've still got reasonable pricing -- this starts in the 300s; we've got around 250 units there to sell. We only want to presell about 30%. But with 500 people coming up and getting appointments to sale, coming in to see us to buy, I really feel somewhat encouraged. I'm not saying the market is back but I'm saying that if you were well located and well priced, I think that market is still going to see good absorption.

And in the long term, this is a market that has got great fundamentals, job growth in those markets is very, very good and again, as we said so many times that is the key that we believe. So I think we've seen some softening in the market but we're seeing some improvement right at this time.

It would seem reasonable to assume also that most of the speculators are probably not in the market right now if you are actually seeing them canceling at this point. So probably 500 real buyers there.

Look at the listings that are in the market. I mean they went up substantially through last year. They've actually come down very slightly now as well. So again, that is the right direction that we want to see the number of listings come done, hopefully the investors have been out there if they've bought already and they are trying to move out of that property then they've done it already. So I tend to agree with you.

There may be another six, nine months, who knows -- of change in the market. But fundamentally we still believe in that market.

Now in the past builders, recent past, builders have actually mentioned that cancellations are scary on the one hand but on the other hand they actually give you an opportunity to resell a house that often times is maybe even better priced than it was originally sold for. Are you taking a beating on these homes that have canceled that you are now trying to put back up on the market? Relative to where you originally sold them?

We are giving some incentives in that Virginia market, there is no question. But we're not taking a beating, as you say. We're still profitable in those markets and if we've got inventory which cancels then certainly we will look at some incentives to move that on. But generally overall the margins there are still quite reasonable.

Okay.

Steve, the 2 point estimate you were looking for are 40,574,000 for basic and 45,250,000 for diluted. And for other detailed questions, our 10-Q will probably be filed either later today or tomorrow morning.

Great. Thanks a lot.

Margaret Whelan with UBS.

It is actually Dave Goldberg on for Margaret. Congratulations, good quarter. Quick question on the guidance for '06. When you guys gave 10.50 guidance last quarter, that didn't include any share repurchases, right?

That's right.

And then so this year does that include additional share repurchases or just kind of at the level that we're at now?

Well it definitely, the 10.50 is pre share repurchases and I think our policy historically has been we don't raise in the first quarter. We didn't raise this quarter but we did suddenly change the words to expect to meet or exceed the 10.50. So some recognition to the fact that the share repurchase program will obviously be accretive. But we're not changing our base guidance today because we're one quarter into it. And if we are $0.02. $0.03, $0.04, $0.05 smarter today, I don't know if that's necessarily a relevant data point. But the 10.50 is our original guidance. Share repurchase would be incremental and that is why we said 10 to meet or exceed.

If I could get a follow-up question. For the homes that are being sold in the Midwest today, what are the margins on those homes? And how does that kind of compare to where do you've been historically there and what is being delivered today and then I guess those against the Company average?

Dave, do you have the beginning -- we lost you for a second, what was the beginning of the question?

It was just about the homes that are being sold in the Midwest today, what the margins are on those homes?

Those continue to be at lower margins because remember we're still chewing through some of the old inventory. The sales that are in backlog are largely new product that's coming out. The sales that we're closing currently are lower margins because a lot of them were product that we discounted, old Crossman product or older entry-level product that we wanted to get rid of. And of the 25 million in land sales, a great proportion of that was in Indiana, where again, we don't want to be the biggest entry-level builder in Indiana. So we sold some of those pieces to guys that will do that basically working for themselves. We want to be in a broader product line, different margin structure. And you'll see that prospectively.

And then if I could just get one final question. The financial services business -- where do you guys see that going over the long term?

It will be better than this quarter. Remember this quarter, and that's a $3 million swing from this time last year to today, we're transitioning from a relationship we had with HFN to where we're taking on more of the lending relationship ourselves. So you had duplicated costs for several months where we're transitioning off of Fidelity, working off of our pipeline and getting up and running our new relationship. So if you look at the financial services section of the press release, you have a $3 million negative swing year-over-year. That will dissipate over the next few quarters and we expect it to be at least as profitable as it was. And I say that because obviously the mortgage business has changed dramatically in the last year or two. But it will be better than what you saw this quarter.

Thanks.

Michael Rehaut with JPMorgan.

I know it's very corny and very -- but Mr. Smith goes to Washington?

Are you talking to us or are you watching a movie?

Ivy Zelman with Credit Suisse.

Actually paying attention. Sorry, Dennis McGill on for Ivy. Just a quick one actually. On the community count you guys referenced it a lot in the press release with regards to orders. I'm just wondering if it's not a disconnect to not disclose it to us because we are I guess misinterpreting it but yet refer to it quite a bit on respect to order basis?

You know, Dennis, I actually think it's completely consistent. I'll give you an example. In the last couple of years everything sold no matter what and you were closing out communities faster than you could open them. And we've seen a moderation in that demand. At a place like Sacramento where we talk about community entitlement issues, delays, final map issues, we would have had a couple of communities out of the ground this quarter for Phase III communities which would have been bigger communities, new product, great location, deep waiting list, would have sold great. And let's say our community count was 10. Those didn't get done.

Now if we still came out and published 10 but included in there with three communities where maybe you had five to 10 units left; they were not the best lots -- a year ago they would have sold no problem whatsoever. You know, it's a little bit tougher unless you are going to go into the details of every community, the ins and outs, I think what we're doing even though talking about community entitlement issues and delays is very consistent with that because 10 today is not the same as 10 last year had you gotten everything you expected into the number. I think that's completely consistent.

I think I would appreciate that if we were really talking about 10 but we're talking about hundreds of communities and certainly 500 in aggregate. So maybe the right answer is not break out the region but even within a region, you are talking about 100, 150 communities. And I would think that you have a lot washing out in that number of communities.

Dennis, I think the other point is the business is changing so much and we're getting into a lot more multifamily product, we're getting into condominium product, and we're getting different absorptions. We're putting multiple price points into many communities. How do you define that? We really think that it's becoming a misleading figure. And people were putting too much store into that number. We would rather give just direct guidance and talk about the business overall rather than giving something that we just don't think is as material and is not as relevant as it used to be in the past.

You're saying you would give direct guidance with respect to orders?

We're not giving that guidance; we're giving overall earnings guidance.

Right. So kind of separate --

Yes.

-- from our standpoint. But I understand I guess. Just something to consider that it sounds very incremental to how you talk about the business given how much it was discussed in the press release but yet it is pulled back from a disclosure standpoint.

Got you.

My only other question was something theoretical kind of looking at the optioned land that you have. I'm curious on the closings that you did in '05, for example, how many of those would have been on land that you had optioned under option contracts still at the beginning of the year? In other words, how many were done on land that you closed the option on and constructed the home all within the year?

That is going to be hard to give you an exact answer on that. We are consistently at 45% owned and 55% optioned. When we talk about varying that 5% either way, but for many, many quarters now we've had that basis. So I mean that is the best number to go by to break that down into one year's closings we certainly could go around and do that. But it moves from the option category into the owned as we take it down. So it's a lot of work to get there. So I think you've just got to look at our overall our position as a Company as I say 45/55 optioned -- owned against options.

I guess a better question may be how many options do you take down that are finished versus still needing development?

Again, we can work through that. We don't have that to hand, Dennis. We can come back. We've got a lot of analysis on that. We can probably give you a number but we don't have that to hand right now.

Okay. I would appreciate it. Thanks very much, guys.

Todd Vencil with BB&T Capital Markets.

Thanks very much, guys. Can you tell us just to drill down in the mid-Atlantic a little bit, can you kind of break out in whatever way you are comfortable with of the decline in net orders, how much of it was due to slower absorptions or a decline in gross orders versus how much might have been due to the cancellations?

I think if you're trying to back into the cancellation number, we just can't get there. I think it's a combination of both. That's what we tried to say up front. We're not saying it's all cancellations. We're not saying it's all lower demand. It's the combination of the two. And certainly cancellations have definitely gone up. As I said in the answer to Stephen Kim, we actually had more cancellations in October and it trended down through November and December. We're just early into our Q2. But we see some reasonably healthy traffic as we start into the new year here.

We are looking to the spring to see how that works out as we talked about earlier we think a lot of those investors may have already got out of the market. I think in terms of trying to break that down, I don't think we have a good number that we will feel comfortable giving you and then repeating that quarter after quarter. So, Todd, I'd just say that we fully acknowledge demand has gone down there and cancellations have gone up. But we've seen this in other markets in the past. And we still believe in that market.

That's fine. I appreciate that. I wasn't really trying to pin you down. Just a follow-up on something that you said though. You've seen reasonably healthy traffic. Can you even tell yet if that traffic is converting at sort of a normal rate or if that conversion rate of traffic is depressed at all?

We can't tell. All I can tell you is that the trend is better from October to now. And obviously, as you know, we go into the spring -- that's our biggest selling season. So these next few months are going to be important. I gave that anecdote about the sale -- the presale event just because to me that is encouraging and that happened this week. So there is an encouraging anecdote from this week. And we haven't converted those into sales yet. We're going to start taking sales this weekend. We are looking to see some pick up in sales in that market.

Great, okay, I appreciate that.

[Tony Campbell] with [Beazer].

Good morning. A couple of questions if I might. Any change in the financial profile of your buyers -- FICO scores and sort of a breakdown of financing that they're doing? And then I've got a more general question.

The overall FICO score not materially different than the last time. It's in the low 700s. It is about one third ARMs, and of that third, about 33% of our total mortgages are ARMs. 20% of our total mortgages are I/Os. But of that 20%, 85% of that -- both 80% of our total -- excuse me 18% of the total which are I/Os, we said after five years. So if anything I'd say it's marginally better. And you have seen a shift more people are taking out fixed, which you expect with the yield curve where it is.

On average just because our buyers in the Midwest and the Central division are a little bit more entry-level focused, although at a different price point than you would see in California or DC, and that may have a little bit of a factor but not much. I'd say marginally our financial profile of our buyer is the same if not a little better.

Okay. One of your competitors on a conference call actually mentioned that they were going to withdraw from the market because they were seeing -- they were getting lower returns for one reason or another. Maybe they didn't have much of a market position or whatever. Have you given any thought to doing that in any of your markets?

As Jim mentioned in the prepared markets, we have sold some positions so we've made some land sales where we're not getting the right return. And that is part of our strategy to reallocate capital as part of our strategy in terms of giving back through the share buyback program. So we are certainly looking at that. Today we are not looking to exit markets but we are certainly -- that could be a consideration. That is always something that we should bear in mind if we don't get the returns.

But what we're looking at first of all it is are there individual pieces or are there options that we don't want to take up? And again, we spoke in the prepared remarks about not taking some options up and deciding we weren't going to take those and taking the hit on the deposit on that. So again, we just decided that was the right thing to do. We will continue looking at that as we go through '06 and that's a strategy we will use going forward. And when we think that we've got to make sure we allocate capital to the right locations and to the right market -- markets overall.

If its pier I'm thinking about what they said was they are gradually withdrawing through a limiting investment. And you, every deal that comes up here we looked at it compared to historical trends, our overall weighted average cost of capital and share repurchases. By proxy you're going to end up withdrawing from certain markets if they're not better than all of the above and strategically important. I think you saw that and heard it in our prepared remarks.

Unfortunately I spent 12 minutes waiting to get on your call. I apologize. Good luck, thanks a lot.

(multiple speakers) We sold about $25 million in land most of it in Indiana; entry-level positions we're not long-term committed to. We also slowed land purchases again in markets that weren't providing sufficient returns relative to our weighted average cost of capital.

Thanks a lot.

Alex Barron with JMP Securities.

Hoping you guys could discuss a little bit why the SG&A ratio went up this year compared to last year?

Sure. A couple of reasons. Some of it is just the math. You've got 25 million of land sales in there with no contribution. But the total cost of sale -- and by the way, we did make money on the land, but as Ian pointed out, in a couple of places we took the decision to offer some options not where we compromised ourselves with the market or the sellers but it just wasn't the right thing to do to take down the land. But you do have 25 million in the revenue number, no contribution at the bottom line.

I think one of the fellows before had asked a question about mortgage. We're in a transition period. So you've got no contribution from mortgage. It was 3 million last year and nil this year. 100 sales at very healthy contributions from our Florida market -- let's say it's 100,000-ish for home contribution which would have been in this quarter absorbing overhead. I think our guys in Florida made the right operating decision. We didn't want to be at the mercy of hurricanes so if we are able to close them last year, units got closed last year, that would have contributed to this quarter -- they just didn't. But I still think it was the right operational decision.

And if you listen to our remarks, we're investing somewhere between -- and it depends on how you redeploy people or added new people -- but my guess is anywhere between 50 and 100 basis points. But what I think are period cost investments can capitalize them but I firmly believe that focus, case are going to reduce warranty, reduce callbacks, improve quality and hopefully drive the top line for repeat and referred business in the future.

So you add all those things up and factor in it's our weakest quarter anyway. So you're not going to get the type of overhead leverage that you normally get.

Okay. Do you guys have any sort of idea as far as what the amount of land sales we should expect for the rest of the year? And are the majority of those going to be in the Midwest?

Alex, I don't think we're going to give any guidance on that. We're looking at every market to see where there's opportunities. I can't tell you today what it is going to be. It depends on willing buyer, willing seller. And that's what we have to work through during the next few quarters. I wouldn't say it would always be in the Midwest. There's certainly easy opportunity there because we want to reposition some of that markets. We will report on that as we get through the next few quarters.

Okay. And in terms of the share count, how much was that influenced by rise in stock options?

(multiple speakers) material this quarter.

I'm sorry?

We'll get that for you but I don't -- you're talking about how much options was in those numbers I gave?

I guess what I'm saying is, you guys said you purchased one million shares but the share count didn't go down so much. So I'm assuming some of it is due to the timing of when you purchased it. I just wanted to get a sense of how much of it was due to --?

(multiple speakers) associated with options. But the difference you are talking about is almost all timing.

Okay.

I think if I were you guys, what I'd assume is a $500,000 decrement per quarter because we're doing it relatively opportunistically. We have a 10-B5 program and I think the best assumption you can make is that it will be purchased throughout the quarter. So it's 500,000 deduction in each quarter and you'd start out one million lower at the beginning of the next quarter. Does that make sense?

Yes. Okay, great, thanks.

[Joel Locker] with [Carlin Financial].

Hi, guys. Just had a question on how these sales orders might relate to gross margins. I just noticed that 90% of the order growth came from the Central and Midwest regions if you combine those two. And could that negatively or adversely affect the margins say in the third quarter or so when those come to close just because it's a greater percentage from the lower margin regions?

It probably will bring it down a little bit. And remember our growth there on the growth in backlog, this quarter was -- you are still working through some old product but it is newer product in markets that are inherently lower priced essential -- meaning Texas and Houston in the Midwest. We're still working off backlog by the way. If you look, we've still got pretty healthy backlog over the next couple of quarters in places like the West Coast and the mid-Atlantic which will offset that.

The mix will go a little bit more towards lower-priced points than it had been. It will bring the margins down a bit but it won't be a huge number. And if sales come back, as we expect they will in the mid-Atlantic, we're still expecting a normal selling season. And the communities get opened in places like Las Vegas and Sacramento in particular, we will start rebuilding that backlog at higher average price points and balance it out between the higher margin markets and the Midwest and Central. So a little bit in the short term. I wouldn't expect it to be a huge issue past the quarter or two.

Right. I'm just saying if this trend continued though, how much would it cost you on a gross margin like 100 basis points or 50 if the same percentage of your order growth came as it did this quarter? If things are still slow in the West and mid-Atlantic?

It would be 100 but one of the things that we're focused on mainly is in fact you have noticed in our press release, we dropped gross margin and a couple of things that are classification issues or change depending on the type of product. We're very focused on that operating margin. We'd expect that to keep trending the way we've discussed which is up 200 to 300 basis points over time and right up to where the peer group is. We've articulated we want to be in the top quarter. There is no reason we shouldn't do that over time.

All right, thanks a lot.

Operator, I think I heard you say that was the last question. So I'd just like to take this opportunity to thank all of you for joining us today and just mentioned that a recording of this conference call with the slide presentation will be available this afternoon in the investor relations section of our website, beazer.com. Thank you and goodbye.

Thank you. At this time that does conclude today's conference. All parties may disconnect.