Beazer Homes USA Inc (BZH) 2009 Q4 法說會逐字稿

Good morning and welcome to the Beazer Homes fourth-quarter fiscal 2009 earnings conference call. Today's call is being recorded and will be hosted by Ian McCarthy, the Company's Chief Executive Officer. Joining him on the call today will be Allan Merrill, the Company's Chief Financial Officer, and Bob Salomon, the Company's Chief Accounting Officer. Before he begins, Leslie Kratcoski, Vice President of Investor Relations, will give instructions on assessing 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 September 30, 2009. 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. 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 our SEC filings, including our annual report on Form 10-K.

Any forward-looking statements speak only as of the date on which such statement is made and except as required by law, we do not undertake any obligation to update or revise any forward-looking information, whether as a result of new information, future events, or otherwise. New factors emerge from time to time and it is not possible for management to predict all such factors.

Ian McCarthy, our President and Chief Executive Officer, and Allan Merrill, our Executive Vice President and Chief Financial Officer, will give a brief presentation, after which they will address questions you may have for the duration of this one-hour conference call. We are also joined by Bob Salomon, our Chief Accounting Officer. In the interest of time and allowing everyone to ask questions, we do 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 McCarthy.

Thank you, Leslie, and thanks to you all for joining us this morning. Following difficult market conditions throughout fiscal 2009, we were pleased to finish the year with a fourth-quarter year-over-year increase in net new home orders from continuing operations, improved gross margins, and a significant cash balance.

During the fourth quarter, we experienced some moderation in negative market trends with attractive interest rates, historically high housing affordability, and the federal tax credit attracting more prospective buyers to purchase a new home. Nonetheless, elevated unemployment and rising foreclosure activity make it difficult to predict when and to what extent the housing market will sustainably recover.

In light of the difficult market conditions, we will continue to maintain a disciplined operating approach focused on gradually improving profitability and protecting our liquidity. On a positive note, uncertainty around the future of the homebuyer tax credit was eliminated with the president signing the bill extending and expanding it late last week. We believe this development combined with other factors that make this an excellent time to buy a home will continue to entice a growing number of qualified buyers into the market.

Our financial results for the fourth quarter and fiscal year reflect the difficult market and economic conditions that not only we and our peers faced but many other industries and companies as well. We continue to execute on operational and strategic priorities to move our business forward for the benefit of the Company's stakeholders. These priorities include generating and maintaining sound liquidity; effectively allocating capital and resources; addressing our capital structure; positioning for a return to profitability; and differentiating Beazer to our customers, all with the aim of generating profitable growth and shareholder value over an entire housing cycle.

As it pertains to capital allocation, we continue to exercise discipline in land acquisition. That said, our belief that market conditions will modestly improve in 2010 does necessitate the need to begin securing additional land positions in certain markets. In all such cases, we are closely adhering to our strategy of concentrating on specific buyer profiles within each submarket in which we operate.

Our current emphasis is on controlling additional rolling option deals at favorable prices and terms. However, we have seized a less traditional opportunity to significantly increase our footprint in our home market of Atlanta. You may have seen our announcement yesterday that we have been chosen by Hearthstone to build and market homes on 462 homesites in six existing new home communities within Metro Atlanta. We and Hearthstone have shared a strong business relationship for many years involving numerous successful communities across the country. We are pleased to once again partner with Hearthstone in this endeavor that will both increase our local presence and enable Hearthstone to realize more value on their investment.

Now let's review the results for the fourth fiscal quarter. As noted in our earnings press release this morning, commencing with the first -- sorry, with the fiscal quarter ended September 30, 2009, we have classified the results of operations historically included in the other homebuilding segment as discontinued operations for all periods presented. These results relate to markets we previously determined to exit and where homebuilding operations are no longer taking place.

For the fourth quarter, total revenue declined 42% from the same period in the prior year as a result of lower home closings and lower land and lot sales. Total gross profit margin for the quarter was 14.6% before impairment and abandonment charges, a 750 basis point improvement from the fourth quarter of last year and a 670 basis point sequential improvement from the third quarter of this year.

Even after impairments and abandonment, we generated a positive gross margin of 6.6% for the quarter compared to a gross loss of 0.7% for the comparable period of the prior year as a result of lower inventory impairments and option contract abandonment charges.

In absolute dollars, SG&A declined 35% year-over-year but was still higher as a percentage of revenue due to lower revenue volume. Income from continuing operations was $0.87 per diluted share including a pretax gain on extinguishment of debt compared to a loss of $11.77, per share in the prior year, which included a substantial non-cash deferred tax valuation allowance.

For the fourth quarter, home building revenues declined 31% resulting from a 24% decline in home closings, which were lower in all segments and a 9% decline in the average selling price compared to the same period of the prior year. Net new home orders of 1012 for the quarter represented an increase of 2.4% year-over-year. As indicated in my opening remarks, we believe that sales in the quarter continue to benefit from increased demand resulting from attractive interest rates, historically high housing affordability, and homebuyer tax credits.

In the East segment, new orders were up 36% with strong performance in our mid-Atlantic markets and Indianapolis. We also saw positive comparisons in Houston, Los Angeles, Nashville, Charleston, and in two Florida markets. As expected, we did achieve a positive year-over-year new order comparison for the fourth quarter and expect to do the same for the first fiscal quarter of 2010.

While we may not achieve positive year-over-year new order comparisons for each quarter of fiscal 2010, we do expect full-year orders to modestly increase as compared to fiscal 2009. The cancellation rate for the fourth quarter improved to 35% compared to 46% in the prior year.

Resulting backlog as of September 30 was 1193 units, with a value of $281 million, a unit declined of 9% from the prior year.

I will now turn it over to Allan to further discuss our financial results and other items. Allan?

Thanks, Ian. We continue to be very focused on increasing efficiency in our business and diligently managing overhead expenses. Total SG&A as a percentage of revenue declined to 15.5% of revenue in the fourth quarter compared to 22.1% in the third quarter as a result of both higher revenue and continued realization of overhead efficiencies.

As provided in previous quarters, slide 11 provides a breakdown of our SG&A expense since the reported aggregate number is significantly impacted by the various legal, severance, and settlement expenses we have incurred over the past several quarters. By removing commissions, which are a purely variable component, as well as G&A costs related to severance, legal and professional fees, and stock compensation, we arrive at an operating G&A totaling 7.7% of revenue in the fourth quarter and 12.4% of revenue for the fiscal year. Based on the sequential progression through the fiscal year, we have seen real improvement due to the overhead reductions we took in January and expect to see further improvement in the full-year ratio this year.

Next, I would like to spend a few moments on the various non-cash inventory-related charges incurred during the fourth quarter. As with our previous filings, you will find additional disclosures as it relates to impairment charges by segment in our 10-K, which we expect to file by tomorrow morning. Inventory impairment totaled $29.7 million in the September quarter. Of that amount, $26.8 million related to properties held for development and $2.9 million related to land held for sale. Impairments on held for development inventory were primarily in our Las Vegas and South Carolina markets. The September quarter impairments represented 1318 lots in 13 communities. Lot option abandonment charges were minimal at less than $200,000.

Our land position as of September 30 totaled just under 31,000 lots, 83% of which were owned and 17% of which were controlled under option. This reflects reductions of approximately 23% from the levels as of September 30, 2008. Our total controlled lot count as of September 30 is less than a third of what it was at the peak in 2005.

Excluding property held for sale, approximately 38% of our remaining owned lots were either finished lots or lots upon which home construction had commenced. Fewer than 50 lots were in the form of raw land.

Throughout fiscal 2009, we have exercised caution and discipline with regard to land and land development spending. Land and land development spending for fiscal 2009 totaled just under $200 million compared to $333 million in the prior year. While this was consistent with our previous guidance, land and land development spending in the fourth quarter was about $9 million higher than in the fourth quarter of the prior year. Our increased land spending in the quarter reflected two things. First, taking advantage of opportunities to improve our position in certain well performing communities, and second, using a small proportion of our strong cash position to materially reduce exposure to JV debt and related guarantees.

Looking to 2010, we currently expect cash expenditures on land and land development to be below 2009 levels, although significantly improving market conditions or very compelling opportunities could change our plans.

We continue to maintain strong discipline with respect to new home starts and speculative inventory. As of September 30, we had only 270 unsold finished homes and 417 unsold homes under construction representing declines of 34% and 27% respectively from year-ago levels. With a cautiously optimistic outlook, we do not contemplate further significant reductions in our unsold home inventory levels but rather the resumption of more normal seasonal patterns.

As previously reported, during the quarter we issued and sold $250 million aggregate principal amount of 12% senior secured notes due 2017. This resulted in net proceeds to the Company of $220 million, which were used to replenish cash that had been used to fund open-market repurchases of outstanding senior notes.

During the fourth quarter, we repurchased about $270 million of outstanding senior notes for an aggregate purchase price of $190 million or an average price of approximately 70%. These repurchases resulted in a pretax gain on the extinguishment of debt of approximately $75 million. The remaining $14 million of pretax gain on early extinguishment recognized in the quarter was the result of a previously reported discounted payoff of our largest secured note payable.

For all of fiscal 2009, we repurchased $385 million of senior notes for an aggregate purchase price of $248 million or an average price of 64% resulting in a pretax gain on early extinguishment of debt of $130.2 million. Slide 17 provides a summary of the face amounts of senior notes repurchased during fiscal 2009 by issue.

At September 30, our total debt stood at $1.5 billion, decreasing about $240 million during the fiscal year. Stockholders equity and consolidated tangible net worth as of September 30 were $197 million and $137 million respectively.

We are not announcing any additional recapitalization transactions at this time but expect to continue to take steps consistent with our primary objectives, namely to protect our liquidity, increase our net worth, and reduce total indebtedness. In keeping with these objectives, today we announced our intention to file a Form S3 Universal Shelf Registration Statement under which we may offer from time to time various debt or equity securities.

At September 30, 2009, we had total cash and cash equivalents of $556 million, including restricted cash of approximately $50 million to sufficiently collateralize outstanding letters of credit under our current LC facility. In the prior year, a slightly larger dollar value of LCs was secured by real estate.

With total year-end cash of approximately $560 million, we comfortably exceeded our previous year-end cash target of $525 million despite the slightly higher than originally planned land and land development spending during the quarter.

I would now like to comment on the recently amended tax loss carry back legislation. While our estimates are still preliminary, we expect to apply for a cash tax refund of approximately $50 million later this quarter related to our 2004 tax year. That is approximately $25 million less than the maximum refund technically allowable under the carry back legislation, but it is a result of the section 382 tax ownership change that we suffered in 2007.

Our efforts to generate and maintain liquidity over the past three years have been quite successful. We have significantly reduced land and land development spending, reduced our level of housing inventory, cut both overhead and direct costs, retired debt at a discount, and had the benefit of tax refunds. Most of these initiatives will contribute additional liquidity in fiscal 2010 during which we expect to generate a smaller but still material loss from continuing operations.

We appreciate the importance investors place on our cash position and we continue to place great emphasis on maintaining significant liquidity. Absent the impact of any recapitalization transactions but reflecting our cautiously optimistic outlook, our current expectation is that we will only use a modest amount of cash during fiscal 2010. However, it is important that investors understand that whether we ultimately use cash or generate cash in fiscal 2010 will be a function of many market conditions that are very difficult to predict.

For example, if the market improves more strongly or more quickly than we currently anticipate, we would likely see requirements for increased investment in both land and homes. On the other hand, if the market takes a leg down and home closings are comparable to 2009 levels, our strong finished lot position should enable us to protect our existing liquidity.

It is impossible for us to speculate about every potential macro and operating scenario, so let me finish with this comment. We believe we have plenty of liquidity to operate the business this year in the range of scenarios we can foresee.

With that, I will turn this back over to Ian.

Thanks, Allan. We've been encouraged by some signs that negative housing trends may be moderating both at the local and national level and further encouraged by our recent improvement in sales and margins. We believe that we are positioning ourselves for the eventual recovery through our strategic initiatives. The question is when and what form that recovery will take. We will continue to use caution and discipline in running the business, but expect to see further modest recovery in 2010.

Finally, I would like to again express my appreciation for the support of our many stakeholders as we continue to work through these challenging times. We are committed to returning the company to profitability upon a market recovery for the benefit of all these stakeholders.

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

(Operator Instructions) Dave Goldberg, UBS.

Thanks, good morning. Congratulations on a great quarter. First question, Ian, you mentioned in your comments about expecting some improvement in 2010 in terms of base. And I'm just wondering if you could talk about mortgage rates in that environment and how you think about mortgage rates if the Fed kind of follows through on its commitment to stop purchasing MBS and margins. What do you think would happen if rates went up 30, 50, 75 basis points in terms of demand?

That is a good question and I think that there's actually a correlation here between the tax credit being reinstated last week and what the Fed are now saying is something like six more months before they will come out of the market. So I think we've got a six-month runway here of a tax credit, great affordability, and great mortgage rates. And I think it is the industry's job and certainly our job to convince buyers that this is now a great time to buy a Beazer Home.

That's what we are going to do over the next six months. We're going to try and use the benefit of all of those together to try and get some impact back into the market as we go into the spring selling season. And I think those are actually aligned together. I think people will see the end of the tax credit. They will see that coming; effectively that's going to end in April but two further months there to close their homes, they will see the potential of interest rates rising.

I don't like interest rates rising, but I like the prospect of people having an urgency to get in inside that boundary. So I think there's a few positives we can work with as we go through the next six months. We try and get the momentum back in the market. What we would love to see is some stability in home prices in that time. We would like to see some additional purchases trying to buy the same home, trying to get some competitive elements there so that we can actually get urgency from the buyers and pick this level of new homes up.

We are at historically low levels right now and I think we know there is demand there. It's being suppressed for whatever reason, unemployment, foreclosures, the like, but I think if we put all of these positives together, we are hopeful the next six months will bring some real activity back into the new home market.

Great, the second question I had was about the relationship with Hearthstone and the communities in Atlanta. My interpretation is that is a fee-building arrangement with you guys and I am just trying to get an idea of I guess, one, what kind of operating margins and return on capital you look at in kind of the fee-building business as opposed to owning the land? And if you guys are looking for other opportunities to go into those kind of relationships where you are not necessarily owning the land but building through from a fee structure?

Yes, well we have had a long relationship with Hearthstone over many, many years and this was an opportunity for Hearthstone to realize more than selling it outright at the first moment. It is an opportunity for us to retool our opportunities in Atlanta. This is a great opportunity to take these communities that are completely ready to go. We will be immediately on there. In fact we were this weekend back in there resigning those opportunities.

You are right that it is a fee-building arrangement but at this stage, we are not going to disclose where we think that's going to come out. It depends on costing, pricing. It's a lot of different elements there that we have to take into account. But we do think this is a way of doing business that we could replicate in other markets either with Hearthstone or with others. This is an opportunity and certainly something that we think some of the banks may look at as an opportunity rather than selling outright and realizing a loss on day one, that they can work through an arrangement like this with someone like us.

And so that's something certainly we would like to take this model and show it to a few of the banks that we have been talking to in some of the other markets. So we think we can replicate this in a number of markets.

Maybe if you don't -- and I understand you can't get too much into the profitability at this point because it's still too early to tell, but can you talk a little bit about how the contract has been arranged? Is it like a percentage that you pay back to Hearthstone in terms of the finishing -- the ending price? Maybe just give us some idea of how the contract is arranged so we get an idea of how you guys get paid and what the profitability is based on.

David, as I said before, there is a contract. It is a firm contract, but there's a lot of variables as we just walk into this. Today -- this weekend was the opening of this. We costed these homes but certainly Hearthstone wants to realize -- [cancel] out of these deals on a rate that they feel is correct. So there is a variability between price and volume and that will affect the return that we get through this.

So there's a whole series of parameters there. I will tell you certainly acting as a contractor with limited capital involved, limited risk involved is certainly a lower margin than we would expect if we had all the risk and all the capital invested. No one is going to be surprised at that.

But it's definitely too early for us to say this is the parameter because we've got some variables that we intentionally built in to the contract so that we can decide whether to accelerate pricing or accelerate volume. So I am sorry to be elusive on that, but there is just no fixed equation at this time.

No problem. Thank you very much for the thorough answer.

Michael Rehaut, JPMorgan.

Hey guys. This is actually Ray Huang on for Mike. A couple questions. First question on the growth margins, pretty strong improvement both on year-over-year and sequential basis. I'm just wondering if you could kind of go through some of the drivers of that and also where your thoughts are on the sustainability of that margin improvement is going into the next couple of quarters and into 2010.

Ray, it's Allan. I think one of the things we said last quarter and I guess it was an omission that I didn't say it again this quarter is I think it is important that investors understand that there is going to be some variability in margin trends quarter to quarter because you get down to at relatively small volume levels the ability to be influenced as we were for example last quarter by warranty issue in Chinese drywall affecting gross margins. And so it creates a skewing from one period to another. So I do want to offer that caution.

I think structurally what is happening is prices have stopped falling at a rapid rate and so the impairments that we have taken are now flowing through and you are seeing that in the form of profitability. At the same time, we are able to continue to take and all through 2009 we did and we expect to continue in 2010 to take direct costs out of the homes as well.

So if prices are stabilizing, you are getting the benefit of prior impairments and direct costs are headed in the right direction. Margin opportunity going forward continues to be pretty good.

Do you have an idea of what on the direct call side how much you guys have taken out on a year-over-year and also sequential basis and how much further on that front there is to you?

It's a magical question. I ask that of our operating folks all the time and whether you look at it on a per square foot or a percentage, the trick always comes back to compared to what? We rarely build exactly the same home over multiple years without some feature changes or characteristic changes. And so making that direct comparison to do that percentage change is tough. But I would tell you it is in the several dollars per square foot that we continue to target as additional opportunities from where we are today.

Okay, just a [follow-on] question. I was wondering if you could give a little bit more color in terms of regional granularity in terms of which markets did better, which ones did worse? And then also give some recent trends. I know it's only been a week but with the new extension of the tax credit, have you seen any increase in traffic this past week?

So, Ray, what we said is that let's talk about orders here because that's more of a forward indicator. The mid-Atlantic was strong for us in the September quarter and that includes New Jersey. Indianapolis was also strong for us and we also pointed out a few of the markets across the country, literally between Los Angeles, Houston, Nashville, Charleston, and a couple of markets in Florida, that was specifically Orlando in northwest Florida, our operations there around Panama City and in the Panhandle. So those were the markets that did well for us in the September quarter.

What we saw in October was somewhat of a slowdown. I think there was definitely a negative impact of the tax credit running out and our orders in October were less than we expected I will say because the comp is weak, they are still ahead of last year. So when we gave guidance just now that we expect to be ahead of last year's orders for December, certainly we started in that vein in October.

This weekend, I would say it's mixed. In many of our markets we saw increased traffic. There was increased traffic from the people aware of the tax credit, but in some other markets they don't seem to have picked it up yet. So I think there is still work to do to make sure the buyer fully understands all of those points that I was mentioning earlier, the affordability, the tax credit, and great interest rates. I think it is up to us now to really capture that.

But I must say I am very pleased that the uncertainty has been taken out of that. That is the key thing for us I think that buyers were not sure of what was going to happen, so I think now we can clearly market what's out there, what's available till next April. And I would fully expect that there will be increased demand based on those stimulus effects that are in the market.

Okay, great. Thanks.

Dennis McGill, Zelman & Associates.

Good morning, Ian and Allen. Allan, just the comment you made earlier about based on the assumptions you laid out for 2010 expecting to be met, modestly cash flow -- used a modest amount of cash, would that include the expected $50 million tax refund?

It would.

Okay. And then just some clarity on the land purchases. Thanks for breaking out the difference between the land development and the land itself. When we look year-over-year '08 to '09, it looks like it was down about 15% on just the land piece, which I think is probably down less than some of the peer group.

Can you just go through kind of what type of land that is? Is that mostly options that you are already contracted for and maybe where it is?

Sure. I mean -- trying to stop short of reviewing the whole land pipeline, most of the land purchases during fiscal 2009 would have been exercising lot option agreements. But in the fourth quarter, we had a fairly significant transaction that we had talked about with one of the lenders to several of the JVs that we were in that involved kind of them bulk purchase of some physicians in existing communities and the payoff of a note on another asset. And those amounts flowed through -- not to note payoff but the buyout of our partnership interest there flowed through the landline. And that's really what's spiked up that land spending in the fourth quarter.

I don't know if there is a more specific question in terms of the nature of the deals that we are doing. Just so I am responsive, what specifically do you want me to speak to?

No, I think that's helpful. It sounds like -- I didn't realize the fourth-quarter number flowed through there, but aside it's not really reflective of deals that you might have negotiated during the year. That's fair to say.

Yes.

I would say going forward, we are looking at a few deals. In addition to Hearthstone that we just announced this weekend, we have got some traditional rolling option deals that we are working on right now. There are certain markets that we do need to supplement in. So you will see us look at a few new deals but as Allan said, most of it was picking up options in communities that we were already building in.

And you also highlighted that even with those deals that maybe come to fruition even if the market kind stays with in line what you were looking for, you will see that number lower year-over-year though.

Yes.

Okay, and then, Allan, without going into too many specifics, when you think about sort of the recapitalization options, how do you in theory debate either your willingness or the ability to get it done of something like a debt for equity as opposed to just doing a straight debt, straight equity offering.

Well, there are a lot of complications associated with any of those strategies, so I guess the simple answer is how do we debate that? The answer is a lot, with ourselves and with our advisors. I think we have kept open the full range of options and our acknowledgment today that we intend to file a shelf is directionally I think indicating that we continue to take steps towards the recapitalization. But I really can't speculate on the relative merits of the different approaches. It's about protecting liquidity, increasing net worth, and reducing debt.

So far, we are kind of six months into this. We really felt freed up as we got to the tentative and then definitive settlement with the government in the May/June time period, so we have been at this about six months. And I think we've made reasonable progress in that amount of time but we've got a lot of work left to do.

And would you say just thinking about the operational losses next year that you highlighted on top of where you sit today with equity and some of the covenant restrictions you have, that it would be likely that you would see something in the first half of 2010 to make sure you are in front of any potential violations?

Well, we've talked a lot about that, the covenants you are alluding to, which has to do with our senior notes. And it is something we've kept our eye on, and I think we've managed in the third quarter and in the fourth quarter to not give much ground in that regard. And I think it is something we will continue to pay attention to.

As you know, that's a test that requires two quarters of testing or a covenant requires two quarters of testing. So it's not something that has imposed a level of urgency on us that we have to act immediately. We're clearly keeping an eye on it.

But as we've said from the outset, even the consequence of that covenant is not what we would have called an existential problem for the Company. It is something that is manageable. So we have to be careful, and what we tried to do is avoid getting put in a situation where we are absolutely forced to take a particular action at a particular point in time, because I don't think we'd end up serving our stakeholders very well if we get to that point.

All right, thanks a lot, guys.

Susan Berliner, JPMorgan.

Good morning. A couple questions. I guess just starting on the land, and I know you probably are not going to want to give us exactly where your own land is. But I guess if you can, I guess, talk about is it in the markets that you guys kind of alluded to that were doing a lot better? Are you happy with those positions?

And then also what type of land deals -- I mean everyone seems to be talking about option land deals, and it seems like it's slow to come. So I was just wondering if you could give a little color on that.

That's a good question. Certainly in Georgia, here in Atlanta, we'd run down to very few communities left. So when this opportunity came up with Hearthstone, this was a great opportunity for us to bolt in these existing communities and immediately get activity from them.

So this was a great opportunity. There are a couple other markets where we are seeing an improvement partly in the mid Atlantic we're seeing that where we've got positions there. We're selling through those now but we are looking for some additional because we have felt for a long time and we are now seeing it, a real improvement in that market. So it's markets like that that we're looking at.

Other markets where we are seeing some pickup, we are seeing some pickup in markets out west in Phoenix -- we have seen a lot of pick up there and there's a little more activity in the market. And if we are able to go out and structure a deal were we can take a rolling lot option, open a new store, and take advantage of the increased activity, that's what we're looking for.

So our expenditure levels are not too high, as Allan pointed out. We are trying to be careful how we invest in land going forward, but in certain markets, we would like to open some new stores and that means that we've got to take some opportunities there, take some positions, but they are typically very soft positions at this time.

Okay, great. And then Allan, just one question specifically on the capacity for secured debt. I just was wondering if you could kind of run through -- I know there's 150 million for first lien, 700 total, but what is taken out of that numbers? Is it the bank line, the secured notes as well as the model homes?

The model homes don't count in that, and they are running off almost fully this year, fiscal '10 as well. So really you start with the $700 million. You take out the $250 million that we issued and frankly everything else is available to us. The term in the senior notes that we have or the secure doubts that we issued was that we can prime them with up to $150 million of first lien notes. We are not required to do that, so we still have $450 million of availability under that secured debt basket.

There is just a small dollar amount, single-digit million of secured debt on a parcel in Florida I think that counts against that, but if that in any way got kind of in the way of what we were otherwise trying to do, we would get rid of it. So it's a real rounding error.

The way to think about it is it is really $700 million minus the $250 million.

Okay, okay, and then just one other question I guess because you did do a really good job in reducing the model homes as well as the secured notes payable. When you talk about I guess a little usage of cash next year, is that including kind of winding down the model homes as well as the secured notes payable?

Yes, it's a tricky discussion to talk about, because it is kind of everything we touch or everything that we do touches it. The cumulative effect of all of the things that we expect to happen during the year led to that expectation that we would be a modest user of cash. That does include further reductions in the model home financing obligation. I think the secured debt amount if I remember correctly it's not changing materially next year, but it is not a material number to start with. So that's not a significant influencer of cash.

Great, thanks so much.

Alex Barron, Agency Training Group.

Thanks, guys. I was wondering how you guys are thinking about your strategy now that the tax credits have been extended or how have you been doing it so far? Are you guys kind of starting specs in anticipation so that people can close more on time or are you kind of more towards the build to order or half and half?

Certainly for the previous tax credit that expired or is expiring at the end of November, we did have some inventory through September that we built for that purpose. We have very limited at this time, but I would expect that we will look market by market as we go forward, we will try and see the activity that the new tax credit is generating.

Typically we are building to order wherever we can, but certainly we may well look in certain markets to have some available inventory as we go into the spring. So I think it's something we don't need to give a blanket answer to. We'll take it market by market. But we would like to take an opportunity there if we see real activity.

I must say that even for the previous existing tax credit, it has certainly helped the market. We see many buyers coming out, talking to us about the tax credit. What we now need to see is what is the effect because this has been expanded into the resale market, I think that is going to be the interesting factor. How is that going to help the resale market and how is that going to impact back down to the new home market?

So I think we've got to wait and see a few weeks of activity here, see what the buyers are saying to us, but I wouldn't be surprised if we do -- we see the opportunity built somewhat into that with some inventory as we go into this spring.

Okay, great. My second question had to do with your SG&A. Thanks for the breakdown. I was just kind of wondering as we look into fiscal 2010, do you guys anticipate that the legal part is going to come down substantially or remain somewhat flattish? And if I could sneak in a small one on the tax credits, did you guys quantify what percent of the people use tax credits?

We didn't and part of that is we don't have a mortgage company and so some of that information that may be available to other builders would be available through the lender and we don't have a lender.

On your prior question as it relates to SG&A, I think one of the reasons we provide slide 11 is because of our abject inability to forecast the legal line. It results from our agreements that are broad-based to cooperate on a variety of matters and it gives rise therefore to irregular and unpredictable requirements and expenditures on our part. So rather than trying to guess and then apologize or take credit, we've said, look, we'll tell you what it was as soon as we know and then give you an analytical framework so that you can evaluate how we're doing otherwise. But that is one that for the foreseeable future I just don't put any stock in our ability to forecast.

Okay, thanks. That's helpful.

Joel Locker, FBN Securities.

Hi, guys. On the community count, I know you don't give a specific number, but what do you think it was down year-over-year if you include the discontinued operations from a year ago?

Taking disc ops out of both sides, the number is down almost 20%.

Almost 20% or so. Then just quick question on your customer deposits. Where did those stand at the end of the September quarter?

It's about 2%.

About 2% of backlog or so. All right, thanks a lot, guys.

Jim Wilson, JMP Securities.

Thanks. Good morning, guys. I was wondering on the margin improvement you've been seeing, can you separate out, Allan, at all the difference between pricing and what has just come through from benefits from prior impairments? Or maybe a better way to word it is anywhere you are feeling you've got some price latitude upward in your markets across the country?

Well, yes. I have looked at this in the last few weeks and we had actually raised prices in several dozen communities. That is a little bit misleading, though, because that could be $500. It could be $1000 and you can't be absolutely certain that as a part of a marketing program, it isn't partially or wholly offset by incentives.

What we have seen is that incentives as a percentage of revenue have declined through the year ending at about 12% in the fourth quarter, which was down from a 15% level for the full year and the trend in the average selling price moderated in the fourth quarter. But, Jim, as you know, it is so hard to pull that apart and really understand, but it does feel like as you talk to our sales agents and our division presidents, it does feel like there are communities where we have the courage to stop lowering prices and to start to show the potential for price appreciation. And I think that is a very delicate art. It is one of the things that is really important to get right, but it's a microclimate kind of an issue. It's not at Case-Shiller kind of an issue. It's really what is happening at that intersection, essentially, and what the competitive dynamic as opposed to some more macro driver.

Okay, and then my other question, from a debt reduction strategy standpoint, what about any form of asset sales or any strategic larger chunks or even small divisions that you might be contemplating getting out of just -- [elaborate on that] a little further?

We exited nine markets. We've successfully exited those markets from an operational standpoint and we successfully extracted an awful lot of capital from those markets including from a couple of markets before they had really been badly hit by the downturn, so I think being early there was helpful.

We don't have plans to exit any other markets at this time. We took some lumpy assets and sold those off over the last few years. We had a couple of big kind of middle to higher-end condo buildings in the mid-Atlantic market that we sold to apartment owners rather than selling them out ourselves. And those generated cash of over $100 million.

We had a similar condo project in Southern California 2 1/2 or three years ago, so we've kind of pruned the portfolio for those kinds of asset and I think we've also done that at a market level, so I don't contemplate other than the land held for sale, which is in the $40 million to $50 million range, significant asset divestitures as a part of the cash strategy.

Okay, great. Thanks.

[Timothy Jones], Westermann Associates.

First question is can you give me what your debt repayments are for the next three years each year?

There is a schedule in the presentation which shows our outstanding debt, Tim. I would refer you to that rather than trying to pull it off the top of my head. So we put in there what is outstanding under each of the tranches, slide 17. So you can see there that the 11s have an outstanding of 127, 12, 303. It's all detailed out there for you on slide 17.

I'll look for that. Thanks. Now the other question is -- can you give -- you said you had a dramatic improvement in your gross margin between the last quarter and this quarter. Can you give me some kind of a figure or percentage that you were hit by the warranty in Chinese drywall costs that you -- are not ongoing, hopefully.

Yes, we had $2.4 million in the previous quarter, in the June quarter, and we didn't have any further warranty to take in this September quarter.

Was it $3.4 million you said?

$2.4 million.

$2.4 million, okay. And that includes the Chinese costs too?

That was the Chinese cost.

Basically related to Chinese?

Yes, we have 37 homes there that are affected and then we've had -- we've taken no further assessment in the September quarter.

You mentioned that you had some markets -- I know this tax thing has just changed in the last couple of days, but you said you saw some improvement in some markets and some -- and not in others. Can you give me some flavor on where you have seen sort of improvement in traffic or interest and where you haven't?

I think it's too early to say market by market, Tim. The reports we had on Monday morning from many of our markets, I would say I was surprised they weren't all positive. I thought that the news was strong enough that they would all be positive, but I think local factors in each market, I think it's too early to draw any conclusions from one weekend. That's all we've got today.

But I do think over the next few weeks we'll start to see a pattern there. I really do think -- I think it's up to us. We changed our website on Friday night as soon as the bill was signed to give the buyers more information about what's available not only now for that new home first-time buyer, but also for the resale market. And I think that's important. The customer needs to get educated now.

So I wouldn't like to be market-specific based on just one weekend of results. But I think over the next few weeks, we will see more and more activity as people realize what a great opportunity this is when we release some of that pent up demand as we go into next year.

We are being modestly optimistic here. We've got to be cautious if this doesn't work, if there are other factors there, we've got to be careful, but we would like to be modestly optimistic about going into 2010.

Actually one last question. You said something very interesting. You said when you were -- you are getting $50 million back from the deferred taxes being extended but you slipped in that there is a -- that's $25 million less than the maximum allowed. Is that -- in other words, if a company has $400 million, they can only take $75 million?

No, Tim, it relates to -- you can only apply for credit up to half of the -- that relates to half of the taxable income that you had in the year for which you are applying for the tax credit. And if you work back through the numbers on our 2004 year, that math would work out to about a $75 million refund in our specific situation. It was limited in our case by this crazy Section 382 ownership change that we had, so we're not able to fully avail ourselves of that. We will be limited to the $50 million rather than the $75 million, but --

(multiple speakers) company specific, okay, I didn't quite understand that.

Yes, its company-specific.

Yes, thank you.

Vikas Singhal, Travelers.

Thanks for taking my question. I have a question related to your cancellation rates. I know it's down to [34.7]%. Why is it still high relative to other names? Is it different accounting or how it works?

I don't think it's different accounting. I think it is just company-specific. Typically in the fourth quarter, we've had a higher number. It's just we have a lot of closings in that period. What I would do is compare it back to the prior year more than comparing it sequentially. But I think that you just have to look at the company, our accounting policy, how we take cancellations I think is consistent in every period. So I think if you look at the company and look at the comparison there, that is to me a better measure than looking at others.

I can't tell what others do in that. We are very, very careful to make sure that we do everything completely accurately. If there is a doubt, if we have to cancel that contract, we will cancel that contract. And we want to make sure that we follow that very carefully according to the rules that we set in place.

Okay, my second question is how much improvement in the gross margin is driven by deflation in building products? I know it's tough to do that calculation, but do you have any estimates?

Well, as Allan said earlier, it is very hard to break out exactly the constituent parts of this. We've made a real effort over the last year to really look at our purchasing, look at our direct costs, look at the plans that we are building, and we have really taken a lot of costs out.

Now you are right that in some parts of that equation, we have been helped by the market, so there's certainly some benefit there in some of the commodities and the like, but I think that the actions we are taking are more important to the cost savings than the actual deflation in cost in some of the costs of the materials.

So I think we also need to be sensitive that at some point they may well turn around again, so we've got to be very sensitive to that. We've got to take action to get costs out of our homes to get a very competitive position for the consumer.

So I would not say that -- I look at what we've done and the actions we've taken are more important than any cost savings we have been able to generate through fluctuations in say, commodity prices.

All right. Thank you.

Carl Reinhardt, Wells Fargo.

Ian, to that question you just answered, does your 2010 guidance assume that your per foot construction costs or direct costs are going to fall or rise?

We are certainly hopeful that they are going to fall. We don't bake everything into the forecast that we have. We obviously need to be a bit careful there in case we can't realize it. So some of the forecast there is going to take part of that cost saving in, but we are -- our expectations are for more as we drive forward. Certainly as we get the full effect of some of these implementations.

You know, I think we have said before that we have rationalized our purchasing into four real centers, here in Atlanta and then into the three regional accounting centers, so we are finalizing. We're just consolidating the last regional accounting center there in the Midwest and mid-Atlantic, so we still see some benefits coming through from that. We haven't fully baked that into our forecast going forward.

So if I said to you that part of it is baked in and I would be hopeful that as we fully integrate that last region, which is a large region and a growing region for us, big markets up there, then we will get further savings as we go into 2010.

Okay, great. And Allan, you have -- slide 11, I appreciate very much. Thanks for putting it together. Your operating G&A, your core, would you expect that you are running about $31 million a quarter averaged over the year. Is that the kind of number we ought to use for 2010? Do you think that could come down and how much volume, additional volume, do you think you could hang on that core G&A before you needed to start to see it go higher?

It's a good question. The way I was sort of thinking about it is that I think for the full year next year with just modest revenue growth, we will see further reductions in that ratio but on an aggregate dollar level, I think that's a reasonable annual run rate. There is a little bit of -- not a lot, there is a little bit of seasonality in that core number and we can hang an awful lot of volume on that. There is a tremendous amount that we can hang on that.

I don't know how to quantify that, but I think we feel pretty comfortable in that because places where you are going to incur costs that are really variable have been squeezed out of the way this is computed. So I feel pretty confident we have got a lot of leverage in that number.

Okay, terrific. I appreciate it, guys. Thanks much.

I would now like to turn the call back over to Ian for closing comments.

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

Thanks for joining us and we will talk to you again soon. Thank you.

This concludes today's conference. I would like to thank you for your participation. You may disconnect at this time.