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

Good morning and welcome to the Beazer Homes second 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 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. Ms. Kratcoski?

Thank you. Good morning and welcome to the Beazer Homes conference call on our results for the quarter ended March 31st, 2006. 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.

Today's presentation also contains non-GAAP financial measures. For a reconciliation of these to the closest GAAP measure, please refer to our earnings press release issued today or the appendix of the slide presentation both of which are available in the investor relation's portion of beazer.com.

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 kindly request that you limit yourself to one question and then one follow-up. I would now like to turn the call over to Ian.

Thank you, Leslie. And thank you all for joining us on the call today. We are pleased to announce record results for our second fiscal quarter. Record revenues of $1.27 billion were up 30% on a 19% increase in home closings with an average sales price of $292,400, up 10% over the prior year and reflecting our increasing price point and product diversification.

Our March quarter net income and diluted earnings per share totaled $104 million and $2.35 respectively both second-quarter records. In a number of markets across the country we've seen the pace of sales decline and price appreciation moderate relative to that experience over the past several years. This is evidenced by the lower net orders this quarter although we do maintain a substantial backlog of 9227 homes with a sales value of $2.8 billion, representing an average sales price of over $300,000 for the first time in the Company's history.

While we are experiencing a moderation in the overall housing market from the explosive growth over the last several years, we continue to be 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 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 these factors coupled with our commitment to profitable growth and the optimal allocation of capital through our extended profitable growth strategy position us well in both the near and long-term business environment.

I'll further review our fiscal 2006 outlook later in the call. But first, let's review our results for the most recent quarter. For the March quarter new home orders totaled 4224, representing a 19% decline from the prior year. Increases in several markets in both the Southeast and Central regions were offset primarily by significantly lower new home orders in the West regions. In addition, the Company experienced an increase in the rate of cancellations from the prior year.

In the Southeast, orders declined 5% with increases in the Carolinas and Tennessee offset by lower orders in some Florida markets which resulted from moderating demand relative to the extremely high levels experienced in the prior year. In the West region, sales declined in Arizona, California and Nevada resulted from both moderating demand and delays associated with community openings. Both of these issues were practically pronounced in Sacramento where the new order declines were the most significant.

Also of note, while orders in the mid Atlantic region were lower than year-ago levels, it appears that market conditions are improving in this region sequentially from those experienced in the December quarter. Midwest orders were down 17% in part due to our decision to exit two markets in Indiana. Orders in the Central region were up in both Houston and Dallas as Texas has continued to perform well demonstrating the benefits of a broad geographic profile.

At March 31st, our unit and sales dollar backlog stood at 9227 homes and $2.8 billion, down 8% and 4% respectively year-over-year but comparable to levels in the December quarter. As I mentioned previously the average sales price in backlog was 302,800, up 5% from the prior year and for the first time exceeded $300,000.

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. For the quarter ended March 31st, 2006, revenues totaled $1.27 billion, a second-quarter record and a 30% increase over last year's March quarter. This revenue level was achieved on 19% year-over-year growth in unit closings resulting in a backlog conversion ratio of 46.1%, an improvement from 42.7% a year ago as we focus on operational efficiencies in getting homes in backlog closed as expeditiously as possible. This is particularly important now in a period where rates are on the rise and you're focused on converting backlog.

The average sales price was $292,400 representing a 10% increase year-over-year. The growth in average sales price reflects the successes we've experienced in diversifying our product offering and relatively favorable pricing year-over-year in most of our major markets. It also reflects the disciplined approach to discounting we're taking in order to preserve the integrity of our communities and the value of our assets.

Closings in the Southeast increased 25% driven by strong closings in Florida, Georgia and South Carolina. Closings in the West were relatively flat with higher closings in Arizona, Colorado and Nevada, offset by lower closings in California. California was particularly impacted by the continued entitlement delays in Sacramento which have resulted in delayed community openings. In addition, the Sacramento market has been impacted by a decline in demand and increase in resales which has been very well publicized in that market.

Closings increased 39% in the Central region with strong performances in Dallas and Houston. Closings were up 37% in the mid-Atlantic with increases in all markets. Closings also increased in the Midwest by 33% due primarily to higher closings in Indiana despite the recent actions to exit some lower potential submarkets. We've achieved both record earnings and improved operating income this quarter as we continue to focus on profitable growth. We've also reduced investments in underperforming markets while investing for the future in our most profitable ones.

During the quarter, we exited two submarkets in Indiana, Fort Wayne and Lafayette, and formally curtailed single-family homebuilding operations in Memphis with a focus solely on profitable in town development projects. We expect to redeploy this capital into higher returning opportunities including share repurchases prospectively.

Our operating income margin was 13% in the second quarter, an improvement both from the first quarter and year-over-year. Year-over-year comparisons are difficult as last year the margins were negatively impacted by $130.2 million goodwill charge and the $45 million of expenses associated with the Trinity class-action settlement. Excluding these factors operating margins still improved approximately 100 basis points evidencing profit improvement initiatives such as our national accounts program, where national accounts savings nearly doubled from the year ago.

Our current rebate per home prior to savings on categories where we buy direct is now approaching $2000 per home compared with just over $1000 a year ago substantiating our success in an area where we've committed to making significant measurable improvements a year ago.

SG&A is up 70 basis points year-over-year largely due to lower than budgeted revenue against period costs associated with a number of strategic companywide improvement programs still underway. A number of them, CASE, which is construction safety and audit safety evaluation and FOCUS, which is a focus on customers' ultimate satisfaction and the support of our national brand should produce considerable strategic benefits going forward.

It's worth noting that we've recently streamlined a number of functions that were resident in corporate, our regions and divisions to reduce SG&A and improve the effective coordination of our initiatives. It's also worth noting that SG&A discipline is an ongoing process here. And at the moment, we're focused on cost but don't want to cut muscle prematurely or shortsightedly.

Net income and diluted EPS for the quarter totaled $104.4 million or $2.35 per share respectively. This compares to an adjusted net income and a diluted EPS of 45.9 million and $1.04 in the prior year excluding the impact of a goodwill impairment but including the impacted the Trinity cost.

Our land position as of 31st totaled 104,169 lots representing a modest decrease over the December quarter. 45% of the lots were owned and 55% were controlled under option and in line with our long-term strategy of keeping a balance between owned and optioned lots.

During the quarter we were purchased a little over 1 million shares for approximately $66.2 million or in average cost of $65.73. Year-to-date, repurchase have totaled $2.02 million for a total of $133.2 million. At the same time we've maintained net debt to total capitalization at 49%, which is within line with our stated commitment to the rating agencies and our fixed income constituents of 50%. We will continue to focus on those investments that will optimize our overall returns while returning capital to our shareholders.

During the quarter we monetized approximately $20 million of land while at the same time slowing land purchases and terminating options in those markets that have provided returns below our overall cost of capital and our expectations.

I will now turn it over to Ian to provide our outlook, conclude our prepared remarks and then take questions. Ian?

Thanks, Jim. Well in conclusion we are very pleased to have achieved record revenues, earnings and operating margins in the second quarter of fiscal 2006 by focusing on our integrated Profitable Growth Strategy. Despite moderating levels of activity in the overall U.S. housing market, we firmly believe that we have an effective operating strategy in place that is sustainable in both the near and long-term business environment.

Furthermore, 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 the large public homebuilders 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 brand which is built around the customer.

Furthermore, we expect our current redeployment of capital into higher returning opportunities including the meaningful commitment to share repurchases will result in continued growth and enhance shareholder value in the long run. However, the current sales environment in many markets is more difficult than previously anticipated. In addition, as we proactively optimize our capital base by exiting markets and land positions that return less than our overall cost of capital, we incur some incremental period costs. As such, we have now broadened our range for fiscal 2006 diluted earnings per share to $10 to $10.50 per share to explicitly address these factors. This represents 15% to 20% growth over adjusted 2005 earnings per share of $8.72. This outlook assumes no further deterioration in new order trends during the remaining spring and summer months of this year.

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

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

(OPERATOR INSTRUCTIONS) Margaret Whelan with UBS.

Good morning guys. I only really have one question at this point. You are saying that your guidance assumes no further deterioration in new order trends. Can you give us a sense for what the trend was through the quarter into April, please?

Margaret, as you now we don't give individual months but let me tell you that -- and again don't read too much into one month but the numbers have been better than they were in the March quarter in the sense that they are about 5% down from last year. So that's an improvement over the March quarter. So again, don't read too much into that. It's only the first month of the quarter. But we're seeing it slightly better at this time.

So the delta is narrower than it was?

Absolutely.

And is that because you have a meaningfully different comp in April versus March of last year? Or is it that there really is no improvement?

I think it is a typical seasonal comp that we have. Obviously March, April time is our peak selling season. I think we feel slightly more comfortable that the as you said, the delta has closed somewhat. We're only being down 5% over last year I think is an achievement. But again, I don't want to forecast that is what we can deliver for the rest of the quarter.

Okay, thanks. And then as a follow-up to that, the EPS guidance, what is the share count assumed in the 10 versus the 1050, please?

In the perspective we obviously were at $2 million down which will have an impact both on the third and fourth quarter. We're assuming about 1 million per quarter purchased pro rata between the first month and the last month of each quarter. It should give you about 5% pickup relative to where we are today at each quarter.

Okay, thank you.

Ivy Zelman with Credit Suisse.

Good afternoon, gentlemen it's Justin Speer in for Ivy. Just a follow-up question and I had a couple of other questions as well. You mentioned that things, the delta had changed to the favorable side. But have your incentives or concessions changed or are you inferring that the current quarter demand is improving relative to last quarter?

Justin, to address the issue on incentives, as we noted in the prepared remarks, we want to try and preserve the integrity of our communities and preserve the integrity of our backlog and the value of our assets. But that is not to say we're not discounting. We are discounting. But we are doing it somewhat more quietly than some others who are really blasting it out there. So we recognize we have to discount at this time. I wouldn't say today we're substantially discounting more than we did in the March quarter but that's not to say we're not. We are absolutely discounting at this time to reflect the market.

But we are trying to do it in a way that preserves the integrity there of our communities for the buyers who are there and also so that we can preserve the backlog. You saw that we really converted our backlog well in the March quarter and we'll continue to do that to deliver those homes that are in backlog today because going forward obviously there is some discount in the new orders. (multiple speakers)

Sure. Also on the pro forma margins on your projects that you are doing now how do they compare to the margins that you enjoy on your current deliveries?

They are not materially different. And I think that is reflected I think you should draw your attention to -- our average sales price went up a bit and as Ian said, we are discounting the reality in some of the markets. We're trying to be disciplined about discounting with the exception maybe of one notable market, we haven't seen our margins or the ASP in what we're modeling on pro forma deteriorate. That said, we're not expecting major appreciation and we're being a heck of a lot more aggressive about going back on terms and conditions, price, financing, on virtually every deal. So if you didn't enjoy the type of appreciation from that perspective we were trying to address it on the land purchasing side as a relief valve for what we've experienced recently.

I do think it is worth looking at the ASP. We've only had a few markets closed down. Our average sales price on average has gone up. And while the Midwest has been beaten up a bit, our average sales price in the Midwest is up a heck a lot more as we are trying to diversify away from that entry-level. Still serve it but not be wholly dependent on it. And I think you see that in the numbers.

My last question. Just wanted to know what you guys spent -- and there's two pieces of this -- but on land replacement in 2005 and then on top of that the incremental land spend, and what your expectations are for 2006?

We will talk about 2006. We will look at the first one for you but that is so timing related. It will be roughly flattish or down, Justin. And that is based on the current economic conditions. And obviously if things did deteriorate, we'd cut back on the land spending and I can't [comment] in places where we're considering curtailing investment or certainly drawing in our horns a little bit. But flattish year-over-year and we'll take a look at the quarter today question.

Thank you.

Michael Rehaut with JPMorgan.

Thanks. IT was a question related to guidance. You had mentioned that in exiting some of the markets you incurred some additional costs. I was just wondering with regards to the now 10% to 10.50 range versus before exceeding 10.50 meeting or exceeding, how much is due to some of those additional costs versus perhaps reducing expectations for a gross margin or units for the full year?

We're talking nickels and dimes. Actually we're literally talking a nickel and a dime. If you looked at our original guidance we expected a contribution in roughly less than a nickel from the markets where we decided even though they were profitable, they weren't returning our cost of capital and didn't have prospects for beating our cost of capital in the long term. So you lost the contribution from those markets. And the reality of severance, providing for warranty, we did take some deals. We took some offers on some deals that just weren't up to our standards collectively between absence of contribution and severance losses, the like. Anywhere between a nickel and a dime came out of our original guidance.

When you say our revised guidance, we widened the margin to reflect the reality of the market conditions I think. It wouldn't serve as well because it looked like we had our head in the sand given the current sales condition. But our guidance is still we think very strong year-over-year. It's still a record any point in the guidance and it does include some things that weren't contemplated at the beginning of the year. So about a nickel or a dime, Mike, depending on how you look at the contribution that was in the original forecast.

Okay. And just in terms of the exiting for certain markets. Could you just remind us which ones you've exited so far and given the tougher conditions in some of the regions across the country today, are you done with that process or are there markets over the next quarter or two that you are considering?

Let's talk about what we've done which is really it's mainly in Indiana in Fort Wayne plus Lafayette we sold some other land in the Indianapolis market as well. We are certainly committed to the Indianapolis market where we sold some pieces there that weren't returning. So it is mainly in the submarkets there in Indiana. But we've also sold land and repositioned and we continue to do this in a market like Charlotte which again we're heavy in terms of the entry-level position and we want to broaden our product portfolio there.

So it's mainly those Midwest markets and to a degree Charlotte. But again we're looking at all of our markets. We're not saying today that we're going to exit any other markets. But we're looking constantly to make sure that we are getting the right return from each of the markets and specifically the individual deals that we have there as well. So that is what we are up to at this point and we have made a commitment to achieve profitable growth that is what we're about. We've also made a commitment to our shareholders to repurchase a substantial number of shares. And that program is continuing. You saw that we bought a further 1 million back this quarter and we intend to continue that as well. So it's a case of rebalancing and making sure that we get the best return on the capital invested across the country.

And one last question if I could. The exited markets that you've described, do you have an idea how much that impacted your order growth for the quarter?

It's not a material number at this point. I should have also mentioned again we mentioned in the prepared remarks that we've exited the suburban market in Memphis. We have a profitable community in downtown and we're committed to that. But we are out of the suburban area there. But we don't have a material number on that today. It is really overall, as Jim said, we've taken $0.05 or so out of the forecast for the year for those markets that we'd expected profitability but that has come out. But we don't have all the numbers to give you today.

It's not more than a point or two, Mike.

In terms of the 2Q '05 orders that you booked in the exited markets, is that going away this second quarter -- that wasn't any material difference?

Probably a percent or two. These were not big markets and we probably started to see the slowdown in sales at the beginning of the quarter because it was pretty evident I think to the people who would be in the affected markets that we would be withdrawing. And we also don't want to be selling homes to people we'd have to service warranty for prospectively. So we slowed down our sales efforts once we identified those markets.

Thank you.

Stephen Kim with Citigroup.

Thanks, guys. Don't know if you have addressed this already but did you comment on what your anticipation was for the gross margin and the EPS for 2Q? And if not, could you make some commentary?

We didn't. We don't typically and I think our expressed goal is what we see a difference between ourselves and the peer group about -- used to be 200 to 300 basis points now it is between 100 and 200. We think that will continue to narrow and something along the lines of where we are year-over-year consistent relative to the quarter. Obviously it's a very volume sensitive number and again we speak in operating margin, net operating margin. We typically haven't talked to gross margin but it will be in the mid to high 20s.

Got it --

Heavenly impacted by mix obviously. We do have some expectation that the West and the mid-Atlantic will perform a little bit better as a percentage basis of deliveries going forward.

Mid to high 20s, sounds like it -- that means that basically you are not looking for any gross margin deterioration as you go forward in the year? Is that a fair statement?

No further, that is right.

Okay. You made a comment in your press release which was very interesting. You talked about the mid-Atlantic market conditions improving sequentially. That is obviously a pretty important market for a lot of folks including yourself. Can you talk a little bit about more granular maybe about what you are seeing there, what gives you the confidence to put that in the release? Price point, is it a price point issue? Do you think it is a cancellations diminishing, that sort of thing?

I think that is the key point, Steve. That is why we put it in there. We talked a lot last quarter about in December we had very much higher cancellation rates. We had substantial cancellation rates specifically in Virginia which is a most important market for us in the mid-Atlantic. And very high cancellation rates there of over 40%. This quarter they've come down to around 20%. So we're seeing a substantial improvement there. I think what happened, again we talked about it last time, is there were investors in that market and not only did the stop buying but they put their units back into the market, a lot of the (indiscernible) market particularly and they put them into the market to sell. I think we're working through that -- were working through that overhang, if you8 like, in the market now. And even though we're not seeing necessarily a substantially improved market, I think seeing the cancellation rate come down is definitely a positive there. And we wanted to make that clear.

Yes, no doubt. Is that just limited to the market in terms of cancellations or is that something you can say more broadly?

It's reflective across the whole of the mid-Atlantic in fact where we did have substantially higher cancellation rates than we've experienced in the past. And across the board there it has come down in terms of all the mid-Atlantic. The Virginia market was the one that was excessive and that has moderated substantially and come back into line with normal expectations.

Great, thanks guys.

Alex Barron with JMP Securities.

Thanks. One of my questions has already been asked. I wanted to ask you what -- as you guys kind of look out over the next twelve months and until the market sort of fully stabilizes, what do you guys perceive as the full peak to trough sort of change in margins that you guys will experience?

Again, we have -- we recognize the fact that it's a very volume sensitive number particularly in that operating margin. We look at it relative to the peer group because we're all experiencing the same pricing trends. Although again, our average sales is up a bit. We have yet to see a material differential, in fact we continue to see improvement because we thought and I think it's being borne out that we have more opportunities. Maybe it's given that we get started on this a little bit later. Maybe it's given that until we added the volume that we have over the last two or three years we didn't have the necessary raw materials to get the national accounts savings to do the best practice that we are doing.

The peak to trough is probably not much more than a few hundred basis points if it goes down substantially more and we look at our sales relative to a peer group. It used to be 200 to 300 basis points. Now it is 100 to 200. And I will tell you, I think we're doing national accounts as well or better than anybody given the volume and size we've got. When you look at the improvement we've made just over the last two years in particular, the last year I go back and I look at what others had done in preceding years when they were working on it. I think we we're right at the top. Again I think we're as good or better than anybody.

And today, not today, but in the last quarter we've made a number of changes that we think are going to bring us the much bigger savings. We're in the process of aligning our planning and design operations with our purchasing. And the big savings are going to come through integrating things we've already done as far as planned rationalization, we called the "plan fest" on earlier calls and presentations. Spec fest which is making sure we're overspecing product and aligning that with our purchasing effort. So we can value engineer. We can eliminate plans. We can go back with our trade partners and get best deals for common SKUs and then repetitively sell those best plans after they've been value engineered. We're just that now.

You had to have an effective national accounts program. You had to have gone through your planned library. You had to have those building blocks in place to do this next phase and we're just starting it. We're in the process of across the country having planning and design work for and with i.e. report to purchasing and we're starting to see some big improvements. We're excited about it and that's all I'm going to comment.

I guess maybe I didn't ask my question correctly.

You did but we're not giving guidance on that and we typically don't. You guys have got to model the margins however you see fit and I think we've delivered on what we said we would do historically. Peak to trough, if you believe what the last couple of years were the peak, we don't. That would be your peak and you'd have to assess what your trough is. We've looked at your research. You obviously make a forecast on it. We forecast EPS. We don't forecast every component to the income statement.

Alex, obviously we've looked at what we see in the market out there today and I think that it's -- we don't give guidance on margins like that anyway but it would be difficult to come out and say this is categorically what we believe because there is some discounting bids that are going through the markets at the moment. But as I just pointed out the Stephen Kim, we're seeing in some markets that overhang coming down considerably and that should certainly reduce the kind of discounting that we have to make. In other markets, it may still be going on.

It's a point where we feel comfortable with the guidance we've given today. We've widened that range because we do, as Jim said, we've come into this quarter with lower sales than we expected at the time but we are fairly confident going forward that with that wider range this is what we're looking at today. That is what we will work on delivering between the volume we can achieve and the margins we can achieve.

Right. Now what kind of deliveries is your guidance sort of based on?

Low to high single digits depending on whether or not you're at the low end or the high end. Heavily influenced by mix obviously.

Okay, got it.

Greg Gieber, A. G. Edwards.

Good morning, or good afternoon to where you are. Could you give us an actual unit number on closings for the current quarter and your expectations for the year? Kind of like what you give as a dollar number.

We said top year-over-year closings on an annual basis, up low single digits percentage or high single digits percentage if you are at the high end of the range.

Okay. The question I wanted to ask is for Ian, you know for a long time you talked about the advantage all the large public builders have and how you will do better than the private builders. However, with the results now for the March quarter, it is just the other way around. You are down double digits in unit orders to other who reported this morning the same thing though not quite as bad. And if I look at the overall number from the government it says that new home sales were only down 8% in the quarter. So is the consolidation stories that a lot of us have been talking about still valid?

I think it absolutely is Greg. And I think that the point here is this doesn't happen in one quarter or maybe even two quarters. I think what we are going to see now is that I guarantee the private builders are having to look at the sales position that they are in and I'm sure that as they need to sell and move onto the next term, they fund their business as you know by selling homes and getting a loan onto the next business. They have to keep that moving so they will definitely be discounting probably quite substantially to move their homes.

But are they going to buy the next piece of property? Have they got the will and have they got the financing behind them to buy the next piece of property. Their land bank is extremely short compared to ours and the other large public builders. We've made those commitments. We've got that land there -- we will be moving forward. I think over the period of the next two to three quarters, you will see this come through, this consolidation will come through. That is why we feel that we're not going to go out there now and chase every single deal just to absolutely keep the numbers up. We're going to be disciplined, we're going to be disciplined for the community's sake. We're going to be disciplined for the relative assets that we own because we believe in the long-term we will get benefit from that.

But having said that, we are discounting in certain markets and that should be clear. But I really feel that private builders can't continue to do that because certainly they won't get the support of their bankers. Again, we have our land bank, we have our financing in place. We will get through this and we will all be stronger for it. I think that this consolidation will definitely happen but it doesn't happen in one quarter.

Okay. Are there any markets where you are seeing the private builders really slash prices to the point where you decided not to compete and you just decided to sit on your inventory? Are you just assuming that are they just more moderate standard discounting that you are matching?

We take it case-by-case. Every community is different and every market is different. I think what we have to do is we have to look at every one in the market whether it is a private builder, a public builder or resale. We look at all of those because that is what our consumers do. So I wouldn't say to you today that any one market has got substantially more discounting by the private builders. But my point is I think that they cannot sustain this for a long period of time, being in my mind this year. I think that as we get through a few quarters here, those private builders are they going to have the commitment to go there and buy the next piece, get into the next deal? I don't think so to the extent that they are today.

So I think we've achieved as a company and as a group of public builders we've achieve enormous growth in market share over incredibly good times when any private builder out there was still do well. As we get into tougher times none of us want to wish for tougher times but at the end of the day, we're going to come out of the leaner, meaner and I think have a stronger position in the market.

Fair enough. One last question. You talked about your operational efficiencies you are now putting in. What would you expect just pure contributions on average over the next couple of years, those operating efficiencies to be incremental to your gross margins?

We think, again, we talk about it relative to the peer group. It used to be 200 to 300 basis points below. We have narrowed that considerably. We don't see any reason why that shouldn't add relative to the peer group 100 to 200 basis points and if not better than that going forward. We've had an expressed goal in our press release when we announced the share repurchase program of being in the upper quartile of margins and we're moving in the right direction. I think this next step will do it. But I think you do have to look at it relative to the peer group whether it's obviously impacted by pricing and a host of factors that are beyond just the pure cost side.

Thank you.

(OPERATOR INSTRUCTIONS) Timothy Jones with Wasserman & Associates.

Hi, Ian. Nice answer on the last question. Congratulations on getting out of Fort Wayne.

Thank you.

Okay. A couple of questions. In Sacramento, you said that you had delays on bringing on some subdivisions. Roughly how many -- that may have been a godsend for you given that that's probably the toughest market in the United States. Are you going to in fact delay the openings of these communities? What are you going to do there given the market conditions?

You are certainly right that Sacramento probably is the toughest market at the moment. In that market we are at the lower end of the price point which has held up slightly better than the higher price point but they key point for us is these community openings, we have a substantial investment in an area called Natomas which is very close to downtown Sacramento but it is in the floodplain there protected by the levees. And we've been building there for a number of years. It is a terrific community many other builders are building in there. But we have a few communities in there that have literally been held up for years now by the Corps of Engineers.

And it is just -- it's really frustrating to us but when they do come through they will be very valuable because we bought these a number of years ago now. And so we're not delivering today in today's market. If we were we probably would be discounting heavily in those markets. We're having to accept substantially reduced sales in that market. Now we have addressed our SG&A costs in that market. We're trying to right size it. We did grow from Sacramento over the last 18 months or so into the Fresno market and that is actually quite successful for us. So we are doing quite well there and we are piggybacking off Sacramento. So using some of the SG&A out of Sacramento to grow into Fresno and get a return there.

I'll tell you at the moment it's very frustrating we can't get deliveries through these entitlement delays in Sacramento. And it's not just in Natomas, there are some others there. It's become from a market that was substantially easier to build in than say Southern California, it has become notoriously difficult now to get entitlement there. So we are being substantially delayed there.

Do you have any idea -- I mean can you give me a guess is it six months more, a year more, two years more? I mean I know Corps of Engineers is giving everybody fits in that area.

It is years more. It is literally years more and we are just getting very frustrated with it. We've been to see people in Washington about it. We've talked to the Corps about it. We've done a lot of things and it is just not coming through.

What is their answer to you?

It's the government. They don't give an answer. You don't get an answer from the government, you just get delayed unfortunately. But again long-term these are great assets that we are going to deliver very substantial profits from. But in the short term that is with no question our most difficult market today.

And second question is, just you talked about doing discounts and obviously a lot of people are doing it. You seem to be doing it more quiet. Given the fact that your average prices were up it looks to me that you are giving more incentive, more in the terms of additional items, freebies and financing rather than actually taking the price off the top line. Am I correct there?

Absolutely. That is the way we like to do it. Now that is not to say that we'd don't advertise discounts in the paper, we do. So I don't want people to be in anyway under the misapprehension that we are not discounting the top line, we certainly are. But we're trying to do it in a way that, as you say, brings people in through that and then we'll negotiate further through our design studios and obviously we chose a number of years ago to put a comprehensive design studio plan in place across the country where as you know our margins are about twice the margins that they are on the base house. So we've got some flexibility there to look at that again as Jim talked about earlier with our national contract. We've worked really hard with our trade suppliers there to look at base pricing and option pricing. Obviously getting the very best base pricing we can and then having some flexibility with our suppliers and through our options there with the customers.

So we've got room there to work with that and that is what we are doing and certain to a degree financing but I would say it is more through the option plans, lot premiums again. We've worked very hard in terms of getting our margins up to look at good base pricing for the homes but then using lot premiums on absolutely every lot that we possibly can and that is again another strategy we can use that we can now look at discounting against lot premiums and that kind of thing.

So as say I don't want to have any misapprehensions that we're not discounting. We are but we're really trying to do it in a way that makes the existing buyers and the existing backlog feel comfortable that they should close the homes going forward.

Appreciate your candor. Ryland gave a 4.6% number on their deliveries and maybe 1% higher for the level of discounts. Have you calculated any similar number?

Well, I would say we are currently showing it something like let's call it sales incentives overall for us is about 3% this quarter. But even a year ago it was about 2%. This industry uses incentives. It's a way to pull people in. We want people into our mortgage company. It's much better control for us to do that. So we've always used incentives so they've probably gone from about 2 year ago to about 3 today.

That is extremely low.

Hopefully we can keep it there. We will have to look at the market as we go forward. Again, we aren't immune to anything that happens in the market so we've got to look at that as we go forward and decide what the right level is going forward, community by community.

Thank you, Ian.

David Knott with Knott Partners.

Ian, hi. Are you seeing any anecdotal evidence that local banks upon whom the local builders may be dependent are starting to tighten up or turn down loans as land comes up for entitlement? (multiple speakers) OR that they are having a harder time or higher rates over and above what the Fed has done?

When we look at the number of banks who want to be in our line that doesn't have full usage all the time they can get a commitment, David, not utilization of the fund, you know that they are coming into our line, they are knocking on our door. Much smaller banks than we have dealt with in the past and we hear from them and from others in the banking industry that they are closely looking at it. That the regulators are also looking at all of these banks and looking at what level of exposure they have to real estate in the market conditions today.

So anecdotally we definitely hear that in the market that they've got to be sensitive. The bankers have to be sensitive to their exposure to real estate but we're seeing them coming to us and I'm sure the other public builders are seeing that as well. By default I'm sure they are cutting back their exposure to the smaller builders. And we all knew this is what would happen. And I think that if I was a private builder today I would be in a lot more sensitive putting my network on the line in a market that I see sensitivity in and I think the bankers in the same way are going to say do I want to put my financing there behind these smaller private builders? I just don't think they will.

And I think the question earlier on from Greg Gieber is why isn't this happening now? Well it takes some time to work that through. You've got to work through the pipeline there. But I firmly believe this is going to happen.

David, this is purely anecdotal but when we do project specific financing and we do a fair amount of it, this is the way it plays out whether it is you are buying and selling companies, you are buying and selling land, you're buying and selling anything when you hit an inflection point. The first thing that happens is the due diligence gets a lot tougher from your banks and from your counterparties.

The second thing that happens is you get in a lot more leverage on terms and conditions. And the next thing that happens is pricing gets a lot better or people walk on deals. What we see where we're doing project specific financing is the banks are doing a lot better due diligence, they are being a lot more rigorous, they are being a lot more thoughtful, all our deals still get to the finish line so that is typically because you've got a big corporation standing behind it. And sometimes there are guarantees and sometimes there's is the support of a Beazer Homes behind it the same way any of big peers would be behind their deals.

If you were a private guy who would typically capitalize pretty thinly, you typically take out your money on a deal by deal basis, you're going to have a really tough time with a much more rigorous level of due diligence and that is happening. And as I said before on the cost of land side, we are now able to go back, terms and conditions, get pricing concessions to an extent, get financing concessions. The banks my guess is the banks are doing that at construction and acquisition financing level the same way. If you don't have a big balance sheet behind it my guess is it gets a heck of a lot tougher.

Right. Great, well thank you.

Susan Berliner with Bear Stearns.

I apologize, I might have missed this but can you give us some details or just remind me on the cancellation rates for the quarter versus last year? I know you mentioned Virginia.

We gave the cancellation rate there. The overall cancellation rate has gone up -- it's in the low 30s at this time around 32% compared to a year ago when it was probably at its all-time lowest, around 20%. So we have seen overall cancellation rates go up and that is just as inventory coming through the pipeline. The opposite I gave for Virginia was because it was considerably higher in the December quarter there. But overall, our cancellation rate has gone up this quarter. And that's certainly affected new orders which were down overall 19%.

(indiscernible) strip out last year which as Ian said, 20% was an anomaly. That is not a sustainable rate. We've historically been up in a high 20s, low 30s and as we've migrated our mix to more than entry-level particularly in the Midwestern markets, I think the stable rate for us after you clean out some of the backlog that's not as strong it's probably in the high 20s. So it's a spike but it's a spike after a historic trough and it probably gravitates toward high 20s, 30-ish after you've had the cleansing which we have had in Virginia. And you drop right back down to a normal level for them after they cleaned out the weaker orders in backlog.

Okay, that is really helpful. One question I guess for Jim. In terms of you have some callable paper and I was wondering if you could let us know what you are thinking about tapping the unsecured debt market, the bank market, etc?

We will absolutely be to market at some point soon and my guess is -- we'll have to look at it. I think right now it's borderline it's one that I should be called but in terms of managing our overall term structure, if it's borderline that still doesn't mean we might not do it. My guess is we will. But we're looking at it right now and we will make that decision in the next month or so.

Okay, thank you very much.

Gary Freeman with GEM Realty Capital.

Thanks. Just a couple points of clarification. Firstly, you mentioned that incentives relative to sales were about 3% this quarter. Was that on deliveries or new orders?

On deliveries.

Can you give us a sense of what the number would be on new orders for the quarter?

I don't have that to hand at this time.

Any general guidance in terms (multiple speakers)?

I think it would be similar, somewhat similar.

Excuse me?

Similarly, marginally higher, not dramatically different.

Okay, thank you. And then a comment you referenced earlier in the call in terms of sale trends in March being better on a year-over-year basis. Sorry, not March but April. Can you give us a sense if your incentives increased generally in the month of April to drive those better sales versus the quarter?

I haven't got that number either because I haven't collected it for the sales. Obviously we look at it and we measure it on the closing. I don't have that but as Jim said, I think that it is going to be comparable maybe very slightly higher in this month. I don't think the better sales relative to the last quarter are driven by substantial discounts but I do think it may be slightly higher. But we don't have that number to hand.

Thank you.

Thank you. I will now turn the call over back over to Mr. McCarthy.

Okay, thank you operator. I would like to take this opportunity to thank you all for joining us today. And just to remind you the recording of this conference call with the slide presentation will be available this afternoon in the investor relations section of our website at beazer.com. So thank you and goodbye.