Beazer Homes USA Inc (BZH) 2010 Q1 法說會逐字稿

Good morning, and welcome to the Beazer Homes first-quarter fiscal 2010 earnings conference call. Today's call is being recorded and will be hosted by Mr. 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 we begin, Jeff Hoza, Vice President and Treasurer, will give instructions on accessing the Company's slide presentation over the Internet and will make comments regarding forward-looking information. Mr. Hoza?

Thank you. Good morning, and welcome to Beazer Homes conference call on our results for the quarter ended December 31, 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 statement speaks 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 statement, 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 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.

Thanks Jeff, and thanks to all of you for joining us this morning. In our first quarter, we were pleased to generate substantially higher new home orders from continuing operations compared to the prior year, helped by our lower cancellation rate as well as improved gross margins and lower operating SG&A costs, also compared to the prior year.

We are also pleased with the progress we made in improving our balance sheet, both during and after the end of the quarter. The increase in equity and reduction in debt better position us to fully participate in the eventual recovery.

During the first quarter, we experienced very high volatility in our sales patterns, with October and December relatively strong and November quite disappointing. In part, we can attribute this pattern to the initial expiration of the housing tax credit on November 30, which was subsequently extended until April 30th.

More broadly, we see home buyers caught between the factors that favor a resumption of growth in the new home market and those that weigh against a meaningful recovery in the near term.

As we have previously noted, attractive interest rates, historically high housing affordability, and the federal tax credit are attracting more positive buyers to purchase a new home. And recent signs of home price stabilization are very encouraging.

On the other hand, elevated unemployment, the overhang of foreclosures, and the threat of rising mortgage rates as the Fed withdraws from the MBS market make it difficult to predict when and to what extent the housing market will sustainably recover.

While our visibility remains quite low, we continue to be cautiously and patiently optimistic about this fiscal year. As I noted, we have made significant progress in improving our capitalization, but we will continue to maintain a disciplined operating approach focused on gradually improving profitability, while continuing to protect our liquidity.

While our first-quarter financial results show signs of improvement, they still reflect the extremely difficult economic and homebuilding conditions we and our peers have been dealing with for the past three years.

We continue to execute on our 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, differentiating Beazer to our customers, positioning for a return to profitability, and addressing our capital structure, all with the aim of generating profitable growth and shareholder value over an entire housing cycle.

As it pertains to capital allocation, while we continue to exercise discipline in land acquisition, we are cautiously exploring opportunities in many of our markets. We had the benefit of owning a good supply of finished lots, so our efforts are really aimed at controlling positions that can generate home closings in 2011 and 2012. As such, our current emphasis is on controlling additional rolling option deals at favorable prices and terms.

We've acquired several distressed deals, finished lots well below their improvements costs, with a view to supplying our needs over the next several years. We aren't contemplating any speculative land banking. Each deal we have approved, whether rolling option or bulk takedown, has fallen within our target nodes represented by the buyer profiles we serve in very specific submarkets.

As we anticipate improving conditions for selling new homes, we are focused on creating a home buying experience that differentiates Beazer in the eye of the consumer. A great example is the recently-announced expansion of our industry-leading eSMART program. We have committed that every home we build will be a high-performance home that saves energy, conserves water and improves indoor air quality.

Through our four-year investment in Imagine Homes in San Antonio, we have been able to develop award-winning technology and then incorporate that technology into every home in every market across the country. The investment we have made in the envelope of our homes by enhancing the insulation and ceiling gives our homes a competitive advantage compared to other new homes, resale homes, and importantly, foreclosed homes.

In addition to the expanded range of features included in every home we build, we have developed integrated advanced packages called eSMART Plus and eSMART Green that our customers can purchase. I would encourage you to review the eSMART features we offer on our website.

Now let's review the results for the first fiscal quarter. Beginning last quarter, 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 completed.

For the first quarter, total revenue was essentially unchanged from the same period in the prior year. Income from continuing operations was $1.09 per diluted share, including a significant tax benefit, compared to a loss of $2.05 per share in the prior year.

For the first quarter, home closings increased 8% year-over-year to 961 units, while the average selling price of $222,600 was 8.8% below the same period in the prior year.

As previously disclosed, net new home orders of 728 for the quarter represented an increase of 36.6% year-over-year. This increase was primarily due to a significant reduction in our cancellation rate, which was 26.9% this quarter compared to 46.1% in the prior year.

Home sales benefited from attractive interest rates, historically high housing affordability, and homebuyer tax credit. In August, we expressed confidence that we would generate positive year-over-year new home orders for the September quarter and again in the December quarter. This proved to be the case.

We have also said that we expect fiscal year 2010 orders to exceed fiscal year 2009 levels, although not necessarily in each quarter. We still believe that. But the caveat relating to quarterly variability is important. We cannot fully anticipate the impact of the extended tax credit that will have that on our home sales, or the extent to which any increase may simply reflect a pulling forward of demand.

As such, the seasonality of our order pattern this year is likely to be somewhat different than in prior years. It is worth noting that at these very low levels of new home activity, it is not a foregone conclusion that home sales will slow appreciably with the expiration of the tax credit.

An improvement in employment coupled with stability in home prices could improve buyers' confidence, which in turn would sustain higher new home order levels compared to last year. Having said that, we are planning for a second -- a softer second half of the year, but hoping for something better.

Resulting backlog as of December 31 was 960 units with a value of $232.3 million, essentially flat in unit terms compared to last year. The average selling price in backlog did improve by about $7,000, but this was entirely due to a change in the mix of backlog units away from the Southeast segment toward the higher priced East and West segments.

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

Thank you, Ian. We continue to be very focused on increasing efficiency in our business and diligently managing overhead expenses. In absolute dollars, total SG&A declined 15.1% year over year. As a percentage of revenue, total SG&A declined from 24.7% in the first quarter a year ago to 20.9% of revenue in the first quarter of this year.

As provided in previous quarters, slide 12 is 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 12.1% of revenue in the first quarter compared to 15.9% of revenue a year ago.

In dollar terms, operating G&A is now at a level that is sustainable until we see material increases in home closings.

Total gross profit margin for the quarter was 12.9% before impairment and abandonment charges, a 160 basis point improvement from the first quarter of last year, but a 170 basis point reduction from the September quarter.

As we said last quarter, gross margin trends are difficult to evaluate over short periods of time. We expect our gross margin for fiscal 2010 to be higher than our full-year gross margin for 2009, but there will continue to be some volatility between quarters due to differences in mix and volume.

In the December quarter, we also had a $1 million warranty charge for water intrusion in a condo building. We expect to recover a portion of these costs from subcontractors, but our policy is not to record it until we collect it. Since we don't attempt to predict these major warranty items, we have to live with some margin volatility.

After impairment and abandonments, we generated a positive gross margin of 8.8% for the quarter compared to a gross profit of 5.6% for the comparable period of the prior year, as a result of lower inventory impairments and option contract abandonment charges.

Inventory impairments totaled $8.8 million in the December quarter. Of that amount, $7.8 million related to properties held for development and $1.1 million related to land held for sale. Impairments on held for development inventory were primarily in our Las Vegas and Florida markets.

The December quarter impairments represented 392 lots in 8 communities. Lot option abandonment charges were minimal at $3000. In our discontinued operations, we had a $2.7 million joint venture write-off.

We cannot say that the impairment cycle is done, but we can say that improving absorption rates and firming prices are currently reducing the probability of significant additional impairments. Of coarse, if prices or absorptions deteriorate materially, our impairment calculations will reflect those factors.

As with our previous filings, you will find additional disclosure as it relates to impairment charges by segment in our 10-Q, which we expect to file later today.

Our land position as of December 31st totaled just under 30,000 lots, 83% of which were owned and 17% of which were controlled under option. This reflects reductions of approximately 19% from the level as of December 31, 2008. Our total controlled lot count as of December 31 is less than one-third of what it was at the peak in 2005.

Excluding property held for sale, approximately 39% of our remaining owned lots were either finished lots or lots upon which home construction had commenced. None of our active land was in the form of raw land.

Over the past several years, we have dramatically reduced land and land development spending. Last year, our total land spending was just under $200 million compared to $333 million in the prior year. In the first quarter, land and land development spending was approximately $30 million compared with $59 million in the prior year.

For the full year, we now expect cash expenditures on land and land development to be similar to 2009 levels, although this could be adjusted up or down based on market conditions.

While we continue to maintain strong discipline with respect to new home starts and spec inventory, we modestly increased starts this quarter, reflecting both anticipated seasonality and our better selling results. At December 31, we had 641 unsold homes under construction, representing an increase of 7.5% from year-ago levels. Despite the increase in starts, we had only 291 unsold finished homes at the end of the quarter, representing a decline of 42% from last year.

We do not contemplate further structural reductions in our unsold home inventory levels, but rather the resumption of more normal seasonal patterns.

Over the last year, we have stated that the primary objectives of our recapitalization are to protect our liquidity, increase our net worth and reduce total indebtedness. We are not announcing any new recapitalization plans today, but I will spend a few minutes describing what we have accomplished since the end of the quarter on the next slide.

At December 31st, our total debt stood at $1.5 billion, decreasing about $235 million during the past 12 months. Stockholders equity and consolidated tangible net worth were $247 million and $189 million, respectively. These figures include the book value pickup from our $101 million cash tax refund, but not the receipt of the cash. The refund is reflected as a receivable which we expect to collect prior to March 31.

As Ian mentioned, since the end of the quarter we have made substantial additional progress in our recapitalization efforts, which we have reflected in a pro forma column on the slide. First, we issued both common stock and a mandatory convertible subordinated note. These transactions resulted in net proceeds of just over $150 million and substantially increased our equity.

Since the mandatory convertible debt will automatically become equity within three years, we have treated that as prospective shareholders equity in the pro forma column.

Second, we used the bulk of the proceeds of the two offerings to redeem our unsecured 2011 senior notes totaling $127 million.

And third, we modified our previously-issued subordinated notes. The modification of terms resulted in a one-time non-cash gain of between $54 million and $61 million. This gain, which is represented by a reduction in the carrying value of the notes on our balance sheet, will amortize against income over the next 26 years.

The pro forma column reflects all of these transactions plus the receipt of the cash from the tax refund. With more cash, more equity and less debt than we had just three months ago, we think these steps significantly improved our ability to capitalize on future opportunities.

Going forward, our attention will be on managing our remaining near-term maturities and accelerating our return to profitability. Between cash redemptions and secured or unsecured refinancing transactions, we believe we have the means to manage these remaining maturities and still fully participate in the eventual housing recovery.

At December 31, 2009, we had total cash and cash equivalents of $480.5 million, including restricted cash at $47.7 million to sufficiently collateralize outstanding letters of credit under our current LC facilities. The September quarter is historically a high watermark for us as it relates to cash balances because it is generally our strongest quarter in terms of home closings.

Conversely, the December quarter is traditionally a significant use of cash quarter. Despite the seasonality in cash, on a pro forma basis for the items discussed a few moments ago, we will have the largest cash balance in the history of the Company.

We appreciate the importance investors place on our cash position, and we continue to place great emphasis on maintaining significant liquidity. As such, our current expectation is that we will end the year with a cash balance similar to the balance at the beginning of the year. This expectation is before the impact of any potential incremental recapitalization transactions, but does reflect the financing transactions we completed, the repayment of our 2011 unsecured senior notes, the receipt of our tax refund, and land spending roughly comparable to last year.

It is important that investors understand that whether we ultimately have a higher or lower cash balance at the end of the year will be a function of both market conditions and the decisions we make with respect to potential recapitalization and investment strategies. Since we can't speculate about every potential macro and operating scenario, I will simply say that we believe we have plenty of liquidity to operate the business in the range of scenarios we can foresee.

With that, I will turn the call back over to Ian.

Thanks. We have been encouraged by the early signs of improvement in our business, which started in the September quarter and has continued since. We expect that 2010 will remain challenging, and we realize that the housing market will be heavily influenced by the homebuyer tax credit and other forms of governmental stimulus this year. Nonetheless, we believe we are taking the right steps to position the Company to benefit from improving conditions in the years ahead.

Finally, I would like to again express my appreciation for the support of our many stakeholders as we continue to work diligently through these challenging times. Importantly, I would like to extend a special welcome to our newest shareholders whose support allowed us to substantially improve the Company's balance sheet last month.

We'd now be happy to answer your questions. Operator, could you please give instructions to our participants so that they may register their questions?

(Operator Instructions) David Goldberg, UBS.

Thanks. Good morning, guys. Congratulations on a good quarter. (inaudible) happened substantively. I wanted to maybe start by asking you about digging a little bit more into your comments, Allan and Ian, on the slide 6, the Venn diagram chart.

I am just trying to get an idea, now that the balance sheet is maybe shored up a little bit, how you guys are thinking about strategy wise maybe looking at focusing on margins. What do you change about the strategy to maybe bring the margins more in line with peers, and what kind of time frames are you thinking about in terms of being able to do that? And obviously, it depends a lot on the macro environment, but just trying to get an idea how the strategy changes at this point.

David, I think what we are going to try and do is execute what we really started through last year, which is taking cost out of the business still, in terms of our purchasing deliveries. We were very successful last year in taking cost out. We didn't have the benefit of a full year of that, but we are going to see that coming through as we go into this year. So I think that's one of the primary goals for us there.

We are also seeing in some markets some real stabilization in pricing. So I think we are able where we can to actually look for very small incremental improvements in pricing, I think both of those factors are going to help profitability, and certainly we are very focused on that. We are very focused on enhancing our margins.

I will say also, though, we do believe that we will be able to capture some market share as we go through this period. We have said before that it is certainly going to be difficult for the private builders to get financing here, so I think the public builders and certainly we fully expect to capture market share.

We are also extremely excited about the introduction of our enhanced eSMART program. We are getting a terrific response from the market to that. So I think that's really giving us a position there where we can add some value to our homes for our buyers, but enhance the position of those homes.

So it's all with a view to firstly gaining some volume gains there, and then we certainly know we have to work on profitability and bring that up. But that process is certainly in place.

Do you think your incentives are in line with peers?

I do, they are. They have certainly come down over the last year. That's the first thing that we see is that incentives are coming down. We still have to negotiate with buyers. They expect to negotiate and we've got that built in, but I would say we are definitely, I would think, in line with our peers.

Great. And then just a quick follow-up if I could sneak it in here. It might be too early to tell, but I am trying to get a better idea if there was -- presuming there was a change in ownership in the stock issuance, trying to get an idea of what that did in terms of potential limitations on the deferred tax assets and how we should be thinking about that on a go-forward basis.

David, this is Bob Salomon. At this point, our advisors are working through whether we have actually had a change in ownership under Section 382. But if we did have a change, we certainly would have to revalue the carry-forward limitation based on the calculation. And it is certainly possible that it will change and potentially decline somewhat.

We were already, as you know, David, subject to a $17 million cap from the prior ownership change, so if we've had one, that may come down a little bit, but we don't know. As you said, it's a bit early yet.

Okay. Thanks, guys.

Michael Rehaut, JPMorgan.

Thanks. Good morning, everyone. The first question just goes to a slide, I guess slide 7, where you are talking about differentiating Beazer Homes and some of the initiatives. I was wondering if you could describe, I mean you guys -- it's always been a goal to kind of create a Beazer brand.

And I was wondering if you could share any statistics in terms of how you measure the success of that, either in terms of if you have consumer recognition statistics, or I think ultimately the goal would be to be able to charge a premium relative to your competitors in a given market. That is my first question.

You certainly recognize that we have worked on a brand very much for our marketing, for our Internet strategy. We wanted to have a consistent message that we delivered to our homeowners and prospective homeowners. Over the last four years now, it's a full four years, we have been working on differentiating ourselves and taking a leading position there in the green position.

As you know, we invested in the Company in Imagine Homes in San Antonio. We've used that as an R&D lab. We have developed ideas there. We have won Homebuilder of the Year twice, 2008 and 2009, with that company, and we've now brought all of those ideas over into Beazer Homes.

We don't integrate every idea into our basic eSMART package, but we do as you move up to eSMART Plus and eSMART Green. eSMART Green is the total package from San Antonio. No one else offers this on a nationwide production basis. So I think we certainly have differentiated ourselves there.

We only have one month's results of that. We spent the December quarter focused internally, making sure every one of our investors within the Company understood this program. We did training for our sales team in San Antonio. We have had building science experts talk to our managers, our production managers, our division presidents, and we launched it at the beginning of January.

So it's very early to say on the success, but I am very pleased with the response so far. So I think we really do have an opportunity to differentiate ourselves and help us increase pricing going forward, as I was mentioning to David just now.

I think we will be able to do that. We will be able to show the homeowners a substantial improvement in terms of their energy costs going forward, and the total cost of ownership between a Beazer home and another non-energy-saving water-conserving home in that way.

So I think we will be able to show them how much they can pay for our home and what the total cost of ownership is going to be.

Michael, one other thing, just a bit more of a numeric reaction which is I look at one of the big objectives of the Beazer brand and the eSMART program to lower the acquisition cost to customers. It is not entirely about raising prices or charging more, but if people are generally aware of us and we are attracting that customer base into our models and onto our website because there is recognition of what we are doing that is different, lowering that acquisition cost to customers is also an important aspect of the program.

That's great. Look forward to hearing more from that in the future in terms of different other details. One other question on the SG&A. You've broken out some of the different components of that, and just trying to get a sense -- number one, it does seem like the JV accrual reversal is probably more of a one-time item. That is kind of the first comment or if you had thoughts on that.

The other is when you break out the commissions and the legal professional and stock compensation, it appears that those are to some degree ongoing costs. And perhaps you can talk to those numbers going forward, because otherwise it doesn't seem to me why I wouldn't just look at them all together as part of the overall SG&A.

Fair enough, and we have not tried to over-dramatize this. We just wanted to provide more clarity so that people could kind of evaluate it. But let's talk about a couple of things on that page.

On the legal and the professional fees, sadly the case that those do appear to be recurring. So they're certainly not labeled nonrecurring. I think the magnitude of those does diminish over time. We do have our continuing cooperation with authorities that reflects in that line item, but there are settlements and other things that are lumpy that I do think we will get beyond.

So I would expect going forward that that line will come down and will come down materially.

The severance, as you can see, has sort of run off, and I think we are kind of out of that phase unless again there is another significant leg down.

The stock comp number is, as you point out, kind of it is what it is. I would tell you that 70% plus of that relates to grants that will never be vested. It is just accounting. We have to live with it and we will.

Then finally on this JV accrual reversal, I didn't spend a lot of time in the script -- I didn't spend any time in the script talking about it. But what we wanted to make sure of is that we didn't take undue credit for an operating G&A that was even lower than was probably sustainable.

We did have in the quarter an interesting situation where we restructured a liability or a potential liability in the form of a guarantee on one of our very, very few remaining JVs. We had already reserved for that potential guarantee exposure. But when we got through, it turned out we needed to reverse the accrual because the value of the position that we have was entirely defensible.

We had over accrued essentially, and so that had to come back into income. So that's why I added that back, just to try and be as clear as we could about those things that were consistent quarter to quarter.

And I think -- we made the comment we think we are down at a level that is sustainable. There may be a little more opportunity for savings, but I don't think that we are trying to send a message that reductions in this operating G&A are really going to be the important component of our resumption or moves towards profitability.

No, I appreciate that, Allan. And just to finish this off and I'll move back out of the queue -- or into the queue again. But the legal and professional, given that you have concluded a good part of the actions out there, the issues, when would we expect to see that come down and what type of a level do you imagine that should be in two or four quarters?

The reason we have and will continue to break it out is the only high thing I could do is look silly trying to make that guess. I just don't know. I am confident that it will come down going forward, but trying to put a date and a dollar amount on it I think is silly for us, because we can't control all of the factors that give rise to that line item.

So we will continue to show it to folks and we will be judged accordingly, but I really am uncomfortable trying to make an estimate.

Okay, thanks.

Nishu Sood, Deutsche Bank.

Thanks, good morning. I wanted to focus in on the topic of land purchases. Obviously, it has been a main theme through the earnings reports in the last couple of weeks. Now just drawing a contrast, Ian, between how you were describing your land purchase strategy and some of the other builders. You were describing looking at new lots that would support your growth looking out to 2011 and 2012.

There certainly is a longer timeframe than we have been hearing from some of the other builders who are talking about turnaround times of even as slow as several weeks and picking up some of these distressed finished lots. So that may be overstating it, but certainly it sounds like you're being somewhat less aggressive than what we have heard from some of the other builders.

I just wondered to run through a possible list of reasons as to why that may be. Maybe if you could just let me know which of these is more accurate. That could be, for example, because you are not facing as significant lot shortages in a lot of your markets. Obviously, that is driving some of the builders.

Perhaps the liquidity, even despite the capital raisings, is still an issue. You can't be as aggressive in deploying land. Maybe you don't expect the growth to be as robust as some of your peers. You're not being as ambitious in terms of market share. You're really focusing more on profitability.

So just throwing a number of possibilities out there to just get your sense on how you are going to approach land purchases.

Well, Nishu, you probably answered the question yourself, but let me just kind of give you our position exactly on that. As you well know, we only really address the capital structure at the beginning of this year. So in January, we were able to get to the market and we had very positive response there. We got the full effect of realizing what the tax credit was going to be. We restructured the sub debt. So we've really done a lot in terms of capitalization here in January.

Before that, we didn't want to be too aggressive. We had to do that; we had to make those moves; we had to get that behind us before we could be that aggressive. Now we have been looking for some time, but we haven't pulled the trigger on too many deals.

The other point you make is we have 9000 lots already to hand. In most of our markets, we are well covered for 2010. That is the point I was really making. So the investments we're making today, we don't have to rush at it, we don't have to scramble and fight. We can look selectively for deals that are going to position us well as we go forward.

And certainly again, coming back to the very first question, it will enhance our profitability. That is another way we can do that going forward.

So I would say we are not holding back. We've got the resources now. Through the last year, we certainly had to hold back. We had to be very cautious and protect our liquidity. Now we feel slightly more inclined to move forward and take positions where we think we can bolster our position going forward profitably. And I would also say, though, you talked about market share. I do expect us to take market share. And if that means we use the existing lots we have faster, which I hope is the case, then certainly bringing these new deals in place now, they may supplement some parts of '10 but we are really looking forward.

To us, it has been a cautious strategy. It has picked up substantially since we were able to change the capitalization structure of the Company. I would expect going forward, we will certainly be a participant there.

Ian, suppose growth comes in much stronger than expected and the recovery is not drawn out but it's a little bit sharper; your current land bank as it is positioned, would that be able to support a sharper growth trajectory or would that force you out into the market to pick up substantially more lots?

Well, I hope that what you are saying happens. I hope that the market certainly does improve. We are seeing signs of that. We have seen it through September; we have seen it through December. I'll tell you momentum has continued in January. So that is very, very positive.

In addition to addressing new deals, what we can also do is address the deals, the land positions that are held for future development. And I am very pleased to say that a number of these deals now are coming back into active development, active homebuilding areas there. So as the market improves, we also have that portfolio which is -- outside the lots that are finished already, we can also bring those back in as well.

So we have firepower in that way that is going to come in. As each individual market responds and starts to come back, we will be able to bring those back in.

Great. And just one other theme if maybe I could ask you about as well. Obviously, some builders have been making statements about profitability. Some statements are bolder than others, of course. I was just wondering if you folks would be willing to make some kind of -- to give us some kind of sense of your thinking on your trajectory of your return to profitability.

Nishu, we are not giving guidance right now, but we are not stating that we will be profitable this year. That is not a statement that we are making at this time. Certainly we want to see how the market comes out, but getting back to profitability is certainly our primary objective.

Okay, thanks a lot.

Alex Barron, Housing Research Center.

Thank you very much, guys. I had a question here, I guess regarding your view or analysis of the shadow inventory that I guess there's been a lot of discussion of. Is that something that you guys are analyzing in your communities, and is that something you are concerned about?

Alex, it's Allan. In certain markets, yes. In other markets, it hasn't been a real issue. We have looked at the data that we can get our hands on. And clearly one of the ways it manifests itself is the appraisals that come back in homes when we sell them, and whether or not there is a large population of foreclosures within the solution set of comparable transactions.

That is a pretty good indicator of places where there are issues, and oftentimes is an indication of where there will be issues. And where we anticipate any significant effect, we have to do two things. We have to be effective and competitive on price, and then we have to be very clear about what our [points of dation] are.

Because being competitive on price is not the same as matching price, and that puts pressure to really differentiate. I think it wouldn't surprise you or anyone else to know that Florida is a grave concern to us from a shadow inventory perspective. So it's an area where we have been particularly cautious, and it's one that I think will probably be somewhat longer in recovering as a result.

So it is very much on our minds, but it is not the -- it certainly isn't a lone or a singular issue that we are focused on.

Okay, that is fair. The other question I guess was wondering if you had a couple of percentages here in terms of your units. One was what percentage of your homes got FHA, what percentage are entry level and what percentage are eco-series?

The entry-level is, as we have kind of consistently been over the last year, two-thirds are homes under 2000 square feet. It is very hard to know what people's definition of entry-level is, but I think that's a pretty good standard.

I think in terms of FHA, we have some visibility through our relationship with BofA who is the mortgage provider. We have a marketing agreement with them. We are not in the mortgage business, but over half of our activity right now is FHA.

And your new type of e-Series, or what do you guys call it?

Well, there are three levels. There is eSMART, eSMART Plus and eSMART Green. As Ian said, we have unveiled this, particularly the Plus and the Green, here in the last 30 days. So I think it's a little bit early to be counting percentages. But the fact is that the base house that we build in every market today, 100% are eSMART.

Okay, great. Thanks, I'll get back in the queue.

Dennis McGill, Zelman & Associates.

Just one question around the spec. You guys mentioned that your spec was up a little bit sequentially in anticipation of the tax credit, and others have talked about that as well. How do you guys analyze it internally to understand what the right threshold would be of making sure you have enough to satisfy potential demand, but not raising too much risk should you have excess inventory after the tax credit expires?

Dennis, what I would say on that is that in December, we did release additional spec inventory to look at the tax credit period. But we were very cautious in how we did that, going back again to the fact that we hadn't really gone through our recap at that time. So we are now releasing additional specs there based on sales that we saw in January and sales that we expect going forward.

So it's really a case-by-case. We look at it community-by-community. We do have visibility of that from here. We know exactly where the specs are being released so that we can monitor the cash that is going into each of the markets in each community.

But I would say it is seeing how the market is reacting, seeing where the opportunities are, and we are being a little bit more aggressive now. There is an opportunity here, again, to capture some market share over these next few months, and that is certainly what we are after.

I think the other piece of it is margins. If we were witnessing really significant reductions in margins in order to make specs move, that would be a pretty good indicator that we had too many specs. We are not having that problem.

But the concern is not necessarily today, it's in the back half of the year. And I guess it's difficult to know where demand is going to be at that point, but you feel comfortable that you are managing that balance well, obviously.

We do, and I think we are being cautious here in February and March, and I think we will be more cautious as we get into April and May. But the build time is small enough or short enough that risks at the end of the year are things we can still control.

Okay. And from an industry standpoint, are you seeing your competitors balance that risk as well?

I think that some people have got slightly more out there than we have, and I think we expected that. We'd have to take a slow start to this. But I think we are quite comparable, and I think we've worked quite hard on our cycle times. We get our cycle times down as tight as we can in many markets, and I think that's going to help us as well.

Okay, great. And Allan, just one accounting question on the mandatory converts. On the pro forma, you had shown them within the equity bucket. Is that how GAAP requires it to be treated or how should we expect that?

No, it's going to show up as debt. It's subordinated debt, but three years from the issuance date it's going to flip into equity automatically. So I was at great pains to call that both pro forma and prospective. On a GAAP basis, that is debt.

Understood. And same issue on the share count, it won't hit until late --?

Yes.

Dennis McGill Okay. Thank you, guys.

Joel Locker, FBN Securities.

Hi, guys. Just on the tax evaluation allowance, just where does it stand now?

Well, the valuation allowance right now is about $372 million. Because we released roughly $100 million due to the carryback.

Right, $372 million. And your gross margins kind of -- they are pretty choppy. They were up 600 basis points last quarter, and now they came back down about 180 basis points or 170 basis points just on the homebuilding side. Where do you expect -- what you see in backlog, should that start being a little more smooth?

Joel, smooth is not the goal, and I said two things. I said I think this year for the full year, our gross margin will be higher than it was last year. And last year it was up almost -- it was over 200 basis points from the year before that. So I think we're moving in the right direction.

I think between quarters, we absolutely flagged that there will be some volatility mix, and volume will play a role in that. And we've got a fairly strict warranty program where we are not trying to estimate things that happen. So there will be an element of volatility in our numbers from that.

So I am not going to take any bold stance quarter-to-quarter sequentially, but we have said we think for the full year we will be up.

Right. And just last question, on January net orders, do you have a number for that?

We don't, but I think I was pretty clear that the momentum we've had through December was certainly continued into January. So we feel very good that the buyers are coming back. Unfortunately, there is some bad weather on the East Coast that is going to affect numbers, but we are very comfortable with the amount of traffic and the conversions that we are getting at this time.

Is it safe to say they were up year-over-year in January?

It is safe to say that the momentum we had in December continued.

Got you. All right, thanks a lot, guys.

Jim Wilson, JMP Securities.

Thanks. Good morning, guys. I think most of my questions have been answered. But on the land side, I missed, Allan, your comments about what you thought spend would be on new lots this year. And then I guess tied to that, are you -- or where are you targeting acquisitions in particular, strategically, and/or where you could pick them up geographically in the last three to six months?

So a couple of questions there. We targeted today that our spend for fiscal 2010 would be in the range of or similar to fiscal '09, which was about $200 million. And in terms of where -- we have contracted for deals in all three of our segments, actually, but I would tell you that the mid-Atlantic markets and our Western markets are certainly areas of higher focus.

As Ian said, the mix includes more rolling option type deals than purchase deals, but it does include a few purchase deals where we think the margin opportunity is significant. The carry is not material. We are not buying thousand lot tracks or anything like that just because they're cheap.

And as you well know, there are certain markets where the land conditions are such that option terms are readily available, and others where that's less the case.

So I think that is enough spend to have us be well-positioned through the end of this year into '11 and '12. But as I also said, it could go up or down a little bit based on what we are seeing.

Great. And any comment that you could make on the relative margin levels that you expect and what you have acquired compared to what you're reporting?

I would say that generally, the newer deals are higher on average than existing deals. Clearly, the purchase deals have higher margins necessarily than the option deals, and I think that is also the case. So trying to dial in the right mix of those things within our capital capabilities to accelerate the return to profitability is really the objective.

Great, thanks.

Alex Barron, the Housing Research Center.

Yes, thanks for taking my follow-up. I think last quarter you guys indicated you expected a tax refund of roughly $50 million since you were limited by the Section 382. And I was hoping you could help us understand what changed. Then my second follow-up was if you had the benefit from previous impairments to gross margins. Thanks.

Alex, the difference in the tax refund from $51 million to the $101 million was that as we began preparation of our tax returns, we made the determination to avail ourselves under the tax law that went into effect in early 2009, that allowed us to defer tax payments on COD income generated from the bond purchases that we made last fiscal year. That was roughly about $148 million from a gain basis that we were able to defer, which translated to the $51 million difference.

And on the gross margin, what was the impact from the previous impairments?

Alex, that's not a number that we give out every quarter. I would tell you it is clearly significant. When you've got as few dollars of gross margin on the small volume of business that we are doing and the magnitude of impairments we have taken in the past, it is not a number we look at as particularly important or material. I know it's a big number, but I don't have that at my fingertips.

Okay, thanks a lot.

Operator, do we have any more calls?

We have no questions in queue at this time.

Okay, thanks, 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 very much.