Beazer Homes USA Inc (BZH) 2010 Q3 法說會逐字稿

Good morning, and welcome to the Beazer Homes third quarter fiscal 2010 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, 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 the Beazer Homes' conference call on our results for the quarter ended June 30, 2010.

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 and 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 the 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 concerning our results for the quarter. Following the prepared remarks, we will take questions in the remaining time.

I will now turn the call over to Ian McCarthy.

Thanks, Jeff, and thanks to all of you for joining us this morning.

Our third quarter was an important quarter for the company in several ways. First, we completed a series of capital-raising transactions which served to both reduce our leverage and extend our debt maturities. Taken together with our other recapitalization transactions over the previous 12 months, we have substantially reduced the risk profile of our balance sheet and created the financial flexibility to fully participate in the eventual housing recovery.

Second, we enjoyed a substantial increase in home closings, due in large part to the now-expired new home buyer tax credit. Our home closings were up over 70% compared to last year.

Third, we continued to exhibit year over year margin improvement, with gross margins, excluding impairments, 540 basis points higher than last year, and our operating G&A margin demonstrating the leverage we expected from increased closings.

Finally, and on a more challenging note, we experienced a significant reduction in new home orders once the qualification period for the tax credit expired on April 30. While we anticipated a pulling forward of demand, the overall weakness in new home sales since May and our 20% reduction in community count year-over-year, resulted in our orders being down more than 30%.

We continue to believe that home buyers are caught between the factors that favor a resumption of growth in the new home market and those that weigh against the meaningful recovery in the near term. As we've previously noted, attractive interest rates, historically high housing affordability, and evidence of home price stabilization are very encouraging.

On the other hand, the expiration of the federal tax credit, sustained high unemployment levels, and the overhang of foreclosures make it very difficult to predict when and to what extent the housing market will recover.

From a competitive standpoint, we've seen a dramatic reduction in activity by privately funded builders. The bank financing these builders rely on is essentially nonexistent, meaning that we and the other publicly financed builders have a significant opportunity to increase our market share, even as selling conditions remain challenging.

In some markets, such as Phoenix and Orlando, this dynamic is less impactful, simply because the cumulative market share of the public builders is already quite high. But in other, more fragmented markets -- notably Atlanta and in the Washington, DC, metro area -- we are seeing clear improvements in our relative position because the private builders cannot finance their activity.

While our visibility remains quite low, we continue to be cautiously optimistic about this fiscal year. Year-to-date our new home orders are up approximately 8%, and our closings are up over 30%. We've previously said that we expect fiscal year 2010 orders to exceed fiscal year 2009 levels, although not necessarily in each quarter. Despite the weaker selling conditions since May 1, we are still comfortable with that estimate, although it's clear that our margin for error is somewhat smaller.

While our third-quarter financial results show some signs of improvement, they still reflect very difficult economic and homebuilding conditions. As such, during the quarter we continued to execute on our operational and strategic priorities, which continue to be -- generate and maintain sound liquidity, effectively allocate capital and resources, differentiate Beazer to the consumer, position for a return to profitability, and address our capital structure -- all with the aim of generating profitable growth and shareholder value over an entire housing cycle.

Addressing these issues, I will begin with comments on our capital allocation, our differentiation initiatives, and our financial results. And Alan will follow with a discussion of our capitalization and liquidity.

As part of our annual business planning process, we evaluate macroeconomic data, the competitive landscape, and our existing positions in each market. One of our important considerations is to understand the employment dynamics in our markets. We attempt to identify positions which are levered to the most likely employment generators within a market.

Another part of our process is determining whether our investment level in a particular market is large enough to enable us to establish the critical mass necessary to sustain profitability, but small enough to ensure that we can generate attractive returns on the capital employed. We call this balanced approach "asset smart."

We have the benefit of owning an ample supply of finished lots in most of our markets, so our efforts are really aimed at controlling positions that can generate home closings in the second half of 2011 and beyond. So far this year we've been successful sourcing in sourcing new land positions which meet our risk/return requirements in most of our markets.

This slide highlights the markets where we've acquired new positions this year.

Through June 30 we've approved 47 new communities for purchase or option, 25 of which were approved in the third quarter. However, these new committees generated less than 10% of our orders and less than 1% of our closings in the June quarter.

Each deal we've approved, whether rolling option or bulk paydown, has fallen within our target nodes, represented by the buyer profiles we serve in very specific submarkets.

While we do not provide an external metric related to community count, we think the number of active selling communities has likely stopped shrinking and will grow modestly from this point forward.

As we anticipate improving conditions for selling new homes, we are focused on delivering homes that differentiate Beazer in the eye of the consumer. A great example is the continued expansion of our industry-leading eSMART program. We've 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.

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.

In addition to contributing to our overall environmental responsibilities, our eSMART initiative is focused on lowering energy usage and other ownership costs for our customers. As an example, our eSMART Green home in Phoenix saves homebuyers an average of $131 per month in energy costs versus a comparable-sized resale home.

In turn, our homebuyers have the opportunity to put their eSMART savings to work. For example, under typical financial scenarios, a buyer could increase their mortgage by $22,000 to buy a larger home or select more upgrades and options; spend $6,000 shopping for furnishings for the new home; or set aside savings that could grow to over $45,000 to help cover the costs of a child's college education.

The total cost of ownership of an eSMART home creates a powerful competitive advantage compared to other new homes, resale homes, and importantly, foreclosed homes, which should allow us to increase sales at our communities and grow market share.

Now let's review the results for the third quarter.

For the third quarter, total revenue from continuing operations was up 51.7% from the same period in the prior year due to substantially higher home closings, partially offset by a reduction in average selling price that I will discuss in a few moments.

Our loss from continuing operations was $0.41 per diluted share, compared to a loss of $0.65 per share the prior year. The loss reflected a substantial tax benefit -- cash tax benefit, but also included non-cash impairments of our inventory and our joint venture investments, as well as a non-cash loss on the recapitalization transactions.

For the third quarter home closings increased 73.3% year-over-year to 1,643 units, while the average selling price of $206,200 was 12.3% lower than the same period in the prior year. This reduction in ASP is obviously substantial and requires explanation to avoid misinterpretation.

The ASP was down for several reasons.

First, the mix of closings was much more heavily weighted to our markets that primarily serve entry-level buyers. The slide illustrates that we've seen a substantial shift in deliveries to those markets with lower ASPs. At the far right you will see that our divisions with the lowest ASPs saw a significant increase in their share of deliveries this quarter. This mix change accounted for a reduction of nearly 8% in ASP, or two-thirds of the total variance from the same quarter a year ago.

Second, as the tax credit neared expiration, sales of completed or nearly completed homes represented a greater share of overall sales. As a result, our buyers selected fewer options and upgrades. This reduction in option revenue impacted ASP by an additional 2.3% and had a modest impact on gross margins as well.

Finally, setting aside both the mix change and the lower option and upgrade revenue, selling prices were approximately 2% lower overall. This undoubtedly reflected market conditions but also was impacted by shifts in deliveries within divisions. Again, looking at the slide, you'll see a significant variance among divisions in their ASP from a year ago. In fact, four divisions actually generated ASPs that were higher this quarter.

While it is tempting to extrapolate these changes into a broader market commentary on home prices, we would caution against doing so. Many of the changes reflect differences in product mix within divisions, rendering straight ASP comparisons difficult to interpret.

Net new home orders of 1,037 for the quarter represented a decrease of 32.5% year-over-year. This decrease was attributable to order declines in all of our segments and a slight increase in our cancellation rate to 28.9% this quarter, compared to 23% in the prior year. In spite of the uptick, the cancellation rate remains well within our historical norms.

In our fiscal year to date, the cancellation rate has been 23.1%, versus 30.3% in the comparable nine-month period a year ago.

Resulting backlog as of June 30 was 1,175 units, with a value of $288.2 million, which represented decreases of 37% in units and 33% in dollars compared with the same period last year.

Due to the much higher concentration of closings serving first-time buyers in the third quarter, the remaining backlog at the end of the quarter reflects a much higher average selling price than a year ago. The average selling price in backlog increased by over $14,000 or 6% to $245,200. This is further confirmation that attempting to extrapolate market dynamics from a single quarter's ASP is quite difficult.

I will now turn it over to Allan to further address 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 increased $5 million or 10% year-over-year, due primarily to variable costs related to the increase in closing activity. As a percentage of revenue, total SG&A declined from 22.1% in the third quarter a year ago to 16.1% of revenue in the third quarter of this year.

As provided in previous quarters, slide 15 is a breakdown of our operating SG&A expense, since the reported aggregate number is significantly impacted by the various legal and settlement expenses we have incurred over the past several years. By removing commissions, which are a purely variable component, as well as G&A costs related to severance, legal and professional fees, stock compensation, certain JV charges, and carrying costs related to land held for future development, we arrive at an operating G&A totaling 8.1% of revenue in the third quarter, compared to 11.5% of revenue a year ago.

Starting this quarter, we have broken out the carrying costs related to land held for future development, to highlight the potential impact on profitability as we migrate these assets back into active production over time.

In dollar terms, operating G&A as we define it here is now in a range that is sustainable until we see material increases in home closings.

Total gross profit margin for the quarter was 13.3% before impairment and abandonment charges, a 540 basis point improvement from the third quarter of last year, but a 500 basis point decline from the March quarter. Remember that the second quarter included a 220 basis point benefit from a nonrecurring warranty recovery.

As we said last quarter, gross margin trends are difficult to evaluate over short periods of time due to differences in mix and volume. This quarter a significant change in our geographic mix that Ian McCarthy described impacted margins, since these lower-priced homes generally carry lower gross margins.

Having said that, we continue to expect our gross margin for fiscal 2010 to be higher than our full-year gross margin for 2009.

After impairments and abandonments, we generated a positive gross margin of 11.8% for the quarter, compared to a gross margin of 2.6% for the comparable period of the prior year, as a result of lower inventory impairments and option-contract abandonment charges.

We have been asked how gross margins in our new communities compare with our older communities. While we have generated fewer than a dozen closings thus far in new communities, we expect the new communities to generate margins 2 to 3 percentage points better on average than our existing communities.

Inventory impairments totaled $4.5 million in the June quarter, all of which related to properties held for development. Impairments on inventory involved three communities totaling 131 lots, all in our West segment. Lot option abandonment charges were minimal at $538,000. We also recognized impairments totaling $12.5 million in two large Florida joint ventures. With this quarter's write-off, we have reduced our total investment in JVs to under $10 million.

We cannot say that the impairments cycle is done, but we can say that market conditions so far this year have reduced the probability of significant additional impairments. Of course, if prices or absorptions deteriorate materially, our impairment calculations will reflect those factors.

Our land position as of June 30 totaled 29,768 lots, 80% of which were owned and 20% of which were controlled under option. This reflects a reduction of approximately 9.5% from the level as of June 30, 2009, and is basically unchanged since March 31.

For context, our total controlled lot count as of June 30 is less than a third of what was at the peak in 2005.

Excluding property held for sale, approximately 36% 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.

I am pleased to point out that we moved approximately $28 million in land held for future development into active land this quarter. This event enhances our base of revenue-generating assets without having to use cash to buy new land.

Over the past several years we have dramatically reduced land and land-development spending, but that trend is now likely to gradually reverse. In the third quarter, land and land-development spending was approximately $57 million, compared with $31 million in the prior year. Year-to-date we have spent $131 million, approximately 10% below the comparable period in fiscal 2009.

Last quarter we estimated that our land spending in 2010 would be comparable to 2009. We now believe it will be slightly higher than last year, due to our success in finding attractive opportunities, as well as slightly higher development activity on our owned but not finished land.

At June 30 we had 797 unsold homes under construction, representing an increase of 293 homes from year-ago levels. In addition, we had 319 unsold finished homes at the end of the quarter, representing an increase of 85 homes from last year.

In most of our markets we are comfortable having approximately 3 to 4 unsold homes in various stages of completion within each community. In certain condo or townhome projects, the number can be somewhat higher, and in slower-turning, higher-priced communities the number is generally lower.

We had a small spike in home starts in the third quarter as we got underway in many of our new communities. Just over 100 or about 10% of the total inventory was related to new communities. Even still, because May and June sales were softer than we had planned, our inventory position is slightly larger than our target level.

We have modified our fourth-quarter home starts accordingly and expect to be back to a more traditional inventory level by year end.

During the quarter we finalized and filed our 2009 tax return. In doing so we identified approximately $32 million in additional tax refunds, which we received subsequent to the end of the quarter. At June 30 we had a gross deferred tax asset, or DTA, of $384 million, all but $11.6 million of which was subject to valuation allowance.

With respect to these DTA's, we have now determined most of the consequences of the Section 382 ownership change which occurred in connection with our January equity transaction. The most important conclusion is that we will be subject to an $11.4 million annual limitation arising from NOL's and built-in losses that existed prior to the ownership change.

While the tax rules are extraordinarily complex, we estimate that this limitation means that up to $174 million of the gross DTA may not be available to offset future taxable income.

On the other hand, we are confident that upon a resumption of profitability, the remaining DTA, plus any losses arising after the ownership change, will be available to offset cash tax liabilities.

As we have said throughout the last year, one of our key operational priorities has been to address our capital structure. Under this initiative we have focused on three primary objectives -- protect our liquidity, reduce our total indebtedness, and increase our net worth.

To that end, we've had a very busy last 12 months, which included raising over $850 million in new capital. I won't repeat the full list of transactions we have completed, but I will summarize the results by reminding you that we have maintained over $500 million in liquidity while at the same time extending our weighted average debt maturities, reduced debt by $460 million, and increased shareholders' net worth by over $580 million.

At June 30, 2010, we had total cash and cash equivalents of $514.6 million, including restricted cash of $42.6 million to sufficiently collateralize outstanding letters of credit under our current LC facilities. This balance does not reflect the receipt of an additional $32 million tax refund which we received subsequent to the end of the quarter.

Our total debt stood at $1.2 billion at June 30, and stockholders' equity and consolidated tangible net worth were $455 million and $405 million, respectively.

As Ian mentioned, during the quarter we made substantial additional progress in our recapitalization efforts, which were reflected in our June results.

First, we issued both common stock and tangible equity units. These transactions resulted in net proceeds of just over $142 million and substantially increased our equity.

Second, we issued $300 million of senior notes, which generated net proceeds of $295 million.

And finally, we used the bulk of the proceeds from the offerings to repurchase debt, including our 2012 senior notes and our 2024 senior convertible notes, totaling $459 million.

We believe we have taken the right steps to capitalize the company so that we may now pursue opportunities for investment and growth for the benefit of the company's stockholders. Our cash position at June 30 is over 3 times the principal amount of debt coming due over the next four years. Beyond that our maturities are nicely laddered through 2018, leaving us with a manageable maturity schedule and plenty of capacity for refinancing with either secured or unsecured debt.

While we may take additional opportunistic steps to refine our capitalization, our primary emphasis going forward will be to invest wisely to accelerate our resumption of profitability while maintaining a significant liquidity cushion.

Our current expectation is that we will end this year with a cash balance above $500 million. It is important to understand that our actual cash balance at the end of the year will be primarily a function of our fourth-quarter closings, any changes in our estimated land spending, and any capitalization transactions that we pursue.

Since we cannot speculate about every potential scenario, I will simply say that we believe we have plenty of liquidity to operate the business in the range of scenarios that we can foresee.

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

Thanks Allan.

During the past 12 months we have taken steps to transform the capital and operational structure of the company and believe we are now well positioned to benefit from improving conditions in the years ahead.

We recognize the continued risks to a broad-based housing recovery, but we do expect to see a gradual improvement over time.

Well, that's the end of the prepared remarks. I would like to turn it over to the operator for your questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions)

David Goldberg, UBS.

First question, I want to dig a little bit deeper into the sequential margin decline. And I understand it's mix shift and then some of the benefits that you guys had in the second quarter from the warranties.

But what I'm trying to get an idea about is, as you look out, and given what you have in backlog now, and given the communities as you kind of see them rolling out and what you have open now, do you think this is kind of an anomaly, or do you think you could see a significant snapback in margins in the next couple of quarters, just because the mix shift starts to normalize a little bit -- or not normalize but maybe go back to where was?

Well, David, we don't give -- as you know -- a quarterly or point estimates on individual line items. But I would say that you picked up on I think the two key issues. If you look at the backlog, certainly the ASPs being higher bode well for margins, and that's the normalization, if you will, of the mix.

And as I commented, we've bought 47 new committees, and we do expect -- and limited data to date, but we do expect that the margins in those communities are also higher than our -- on average than the existing communities. So I think we lean into and remain confident that full-year margins will be higher this year, and prospects are good for next year.

Got it.

The follow-up question -- I mean, there's been a lot of talk this earnings season, and some differentiation among the builders, about how aggressively they are pursuing sales at this point and how much they are willing to cut prices as they look forward. And I'm wondering if you could put you guys on a spectrum here. Are you really pushing sales? I mean, obviously the orders were down maybe a little bit more than what the consensus had expected, but is there a big push out there, given the environment now, to try to sell units? Or do you think you are holding back a little bit at this point and more focused on the margins?

Yes. So David, I would say that since May 1 when we came off really strong orders in the March quarter -- that continued through April -- since May 1 we haven't pushed too hard. We recognize there was a lot less urgency among the buyers there. They didn't have the same deadline to work to. A lot of people out there looking, not as many people committing.

Our view has been, hold back somewhat, preserve the margins within our communities. And I think if you look at even the most bearish outlook for 2011, it is increasing. And the housing market should increase. We don't want to undercut our communities now and not take full advantage of what looks like an uptick as we go into 2011 and 2012.

So I will tell you, we've held back somewhat. Just in the last month or so we, addressing some of the inventory that we have that was slightly higher than we expected at the end of June, because the market was a little softer than we thought, so we are addressing some of that inventory to bring that back in balance by the time we get to the end of September, but generally we are trying to hold margins at this time, and I think that's going to be the right strategy going forward.

Great. Appreciate it.

Jonathan Ellis, Bank of America Merrill Lynch.

The first question I wanted to ask about is on your community count. You mentioned that the community count should start to increase from here. Recognizing you don't actually give numbers, but can you give us some sense, when do you actually expect your community count to start to be up on a year-over-year basis? Would it be sometime in the first half of fiscal 2011? Second half? Just can you give us some sense about timing there?

Yes, I would guess that probably won't be until next calendar year. I don't know which quarter next calendar year, but it won't be in the second half of this calendar year. We are still going to have negative year-over-year community count comps, certainly through December, maybe into March. And that really has a lot to do with additional communities that we have yet to add that we would expect to over the next six months.

I think that that comp, though, flips within 12 months, but it may be 12 months.

Okay. That's helpful, thank you.

And then the second question, on your land purchases, within the lots that you put under control this quarter, can you give us a sense of the mix of owned versus optioned lots? And then also sort of a related question is, what have you seen in the land market since May? Are you seeing some deals fall apart? Are you seeing any change in land pricing? Contract terms? Any sense there?

So I would say that in terms of option purchases versus bulk, it is pretty evenly balanced. Some of those bulk deals are not coming on. We are taking positions now for later in 2011 and the like. We are tying things up right now. Some of the option lots of more immediate, but I would say fairly evenly balanced.

With the softening in the market generally in the last quarter, I would say that overall there is some softening in the land market, but in certain markets it is still fairly difficult to -- and it's still quite competitive to get finished lots. So there are certain markets where -- Phoenix and Orlando, some of those markets that are difficult to actually find finished-lot positions at this time. There's quite a bit of drive to pick those up.

Great. Thanks, guys.

Michael Rehaut, JPMorgan.

The first question I had was on -- also on the gross margins and pricing. I mean, given that you are trying to hold price by and large, although there might be some reduction in spec in I suppose the -- your fiscal fourth quarter, but as you look at your backlogs -- and there has been some volatility in the trend line year-to-date -- you know, is it safe to look at perhaps the first quarter and the third quarter as kind of a go-forward from here, as looking at what you have in the backlog and also current pricing trends?

Well, you know, Michael, I don't want to tell you that there is one quarter that is representative. We've said kind of consistently for the last two years that there will be quarter to quarter volatility; it's why we put the graph up. And I would challenge anyone to try and find the exact trend. We try and report it as it is.

I would tell you that the backlog that we've got, as I said to David, reflects the higher average selling prices. That bodes well for gross margins. The new communities bode well for gross margins. And I think that it is not -- it should not go unnoticed that reduction in ASP absolutely had an effect. The pull-forward was a selling pull-forward into March quarter, but the closing pull-forward was clearly into June. And I think that had a big effect on gross margin in this quarter.

So I would be reluctant to pick any one quarter, but I might be particularly reluctant to pick on the third quarter.

And it's why we tried to sit back and take some context and say, for the full year we expect gross margin will be up nicely over last year, and we feel confident as we move into '11 that we can continue to show improvement. So I think that is really the message, as opposed to the point estimates quarter to quarter.

I appreciate that, Allan.

The next question I just had was also on the -- gross margin related, but from the new community perspective. You had mentioned that you are seeing gross margins or expect gross margins to be 200 to 300 basis points ahead of your other communities.

You know, some other builders in kind of talking to the differential have pointed to a 400 to 500 -- as much as 400 to 500 differential. So I was wondering, you guys have -- you know, just if there's any differences there? If -- you know, what does that improved differential mean? If you just looked at the actual on an absolute basis, what -- is that a gross margin that is in the high teens or low 20s? Or maybe you could talk about why there's that difference there?

Well, I think there are a lot of factors in there. I'm clearly aware -- I've heard some of those comments. I'm also aware -- at least one builder talked about their new communities having gross margins in the new communities that were below their existing communities. So I know that there's a bit of a mix out there. And anytime you've got that many data points, it's hard to pick up the exact cause and effect.

I think a few things that go into it -- as Ian said, we've had a balance of owned land or acquired positions and option positions, and I don't know if our mix is a little bit different than other builders in terms of our new community distribution.

And I think inevitably it some -- in some way reflects back on impairments, because you've got to say the new communities are being compared for something. And you have been at this for a long time. Trying to figure out exactly how to compare builders' margins post-impairments is really, really challenging. So I think that is another component.

The other thing is, we've only got 12 closings -- or less than 12 closings. We may be being a bit conservative, I don't know, but we've got a limited data set, and we thought we would share what we were seeing at this point. We are confident that they are higher. We think that bodes well for gross margins. I think trying to refine it much beyond that at this early stage is pretty tough.

I appreciate it. I mean, I guess what I'm asking is -- that is why I asked that, what is it on an absolute basis, if you could perhaps share that? Is it sort of a high teens to low 20s type of range? Or how are you thinking about that?

And also, if I could sneak one more in, what do you expect closings from new communities to be as a percentage in 2011?

I don't have the answer to your second question. We're not going to make any comments about fiscal 2011 today.

On your prior question in terms of gross margins, one of the most important factors in comparing gross margins is the interest included in cost of sales. We do have a higher debt level and a higher interest burden in our cost of sales numbers than many of the other buildings. So if you strip that out -- first of all I caution, that's probably a cleaner way to make those comparisons, and we're clearly looking at gross margins in the low 20s before taking account of the interest.

Great, thanks.

Ivy Zelman, Zelman & Associates.

It's actually [Alan] on Ivy.

Allan, I appreciate your comments on the impairments, and it's certainly nice to see that number trending lower. And in terms of your commentary about you guys expecting it to remain low, we certainly agree. But I was hoping you might be able to paint some perspective around that maybe with some additional disclosure.

I know one of your competitors kind of provided a watch list of assets that maybe have indicators of potential impairments, so I'm not sure if you guys have a similar disclosure like that.

Then maybe just also providing some sensitivity around what prices might need to do in order for the impairments to start to accelerate or -- either price or volume. What might we need to see before that number starts to creep higher?

Okay. Two good questions.

I think on the watch list, we don't have a comparable disclosure. I think all builders have a process where you've got all of your communities to start with, there are some that you apply extra scrutiny to and then test, and then you've got the results that sort of flow out. So there is sort of that funnel process.

And again, I don't -- I want to be a little careful using the word "watch list" because I can't comment on any other builder's process. We clearly have that same kind of funnel, and I would tell you the number of communities we are looking at on a quarterly aces has absolutely reduced sequentially and year-over-year. We have definitely seen that. But I don't have a number -- it's X units or Y communities.

I would just tell you, directionally that has definitely gotten smaller, and that's why we are confident making the statement that they made, that we would expect that the significant impairments in the current -- the more current market condition suggests the significant impairment should be largely behind us.

In terms of the second question, what it would take, it's clearly the case that sales price changes are the biggest driver of impairments, and I would tell you that the sales price changes really come in two categories. There are those that are immediate and those that are permanent, and they are sometimes the same thing, and there's sometimes they are not.

But it would say, if you start to see high single-digit reductions, permanent reductions in sales prices in impairment calculations, that's going to have a very big effect on those models. Short-term effects will have a lesser effect.

So I think it's not a point estimate, again. It's not at a moment prices are different. It's over the life of the community, what do you expect. And I would say, if you started to see double-digit declines over the lives of communities and sales prices, those would be the kind of triggers that I think would put all of us on notice that the impairment calculations were going to get more interesting.

Great, that's really helpful. And then kind of just following on to your -- the temporary changes in pricing, I know you guys are in the process of holding a national summer blitz sale. I was hoping you might be able to just give us some detail about what type of incentives you're offering, how that might compare as a percentage of ASP, and then any preliminary feedback you guys might have from your sales managers on how it's going so far.

As I say, what we're really trying to do here is hold the line wherever we can. We've done through the last quarter, which is the reason why the numbers are down is we're holding the margins there.

What we're trying to do now in this summer blitz is just address the inventory that we have out there in terms of clearing that through in the September quarter.

I can't give you any specific numbers. It is really a promotional tactic. We've had this tactic for a long time. We typically annually do a sale in February, and we do a sale in June. This year we decided, because there is a little more inventory than we expected, we are doing a modest sale now. But it really is to -- it's really to spark activity.

And to be honest I'm actually encouraged, so I'm not giving you any specific discounts there, because they are very site-specific. But I am encouraged that we are seeing more activity, particularly through our website, through our leads, our traffic now has picked up. So I'm a little encouraged, even though the market is still soft at this time. By generating that kind of activity, we can see some more prospects to make sales to.

Great, thanks a lot.

Dan Oppenheim, Credit Suisse.

It's actually Mike Dahl on for Dan.

My first question, it was interesting to see the $28 million moved from land held for development to active. I was wondering, where was that land? What led to that move there? And as we think about the portfolio and especially with most of that being held in California, what can we expect going forward in terms of what it takes to bring more of that back online?

Okay, so your question is a great question. I think first of all the asset in question was in Southern California -- just as a matter of fact.

In terms of the process and what drives those and will drive those communities back, there are a few factors.

In California we have seen a few things happen. We have seen some improvement in pricing, topline ASP's have turned up in the last six or so months.

We've seen reduction in build costs.

And we've also seen reductions in development fees and those types of things.

We've also seen reductions in land-development costs.

So as we are watching the equations on a particular project, you start getting revenues up and costs down, those things start to move into an interesting category pretty quickly.

The second thing though that is a factor is -- and this site is an example of that -- this is a site that needs some land development completed on it. Whatever the pro forma may show for this asset, or any other asset, we've got to be really smart about where we want to lay out capital to do land development. Clearly there are finished lots in many places, and so first opportunities to deploy cash to these finished-lot deals makes sense.

This happens to be in a submarket where there aren't a lot of finished lots, and in fact we think that the incremental return that we get on the cash that we will be putting into the land development on this site will be very well rewarded, and the overall project will work nicely.

So that's sort of the equation that we are looking at in bringing things back.

In terms of expectations, I would say we are hopeful that during fiscal 2011 we will be able to bring more back. I would caution you that there is no way it is all coming back in a year, and in fact a significant amount, over $100 million of our land held is in Northern California, in particular in Sacramento, and it is constrained by being in a flood district which is at present not developable while the Army Corps of Engineers repairs the levees in Sacramento.

And I -- we are anxious for that work to be completed so that those assets could be -- can be reviewed, but that component of the land held is a little further out and is somewhat independent of the equation that I mentioned a moment ago in how we are evaluating the asset.

Great, thanks for the color there.

Second question, I guess is just following up on the capital deployment, and I think you've talked in the past about potentially leaning into the market if we saw some strength, or pulling back if we saw softness, as we think about managing the cash balance.

Given your comments that you now expect land spending to increase a bit here as given the softness we have seen, what is giving you that confidence to continue spending on land here?

So, Mike, would say it is, as I just mentioned just now, I think nearly all of the analysts are forecasting that as we go through 2011 and we go through 2012, we're going to have a pickup.

I think we've hit the turning point in the market after -- some markets started turning down in '05, they were peaking in '06, and then '07, '08, '09 we've seen just continual down, down, down.

I think -- we had a Board meeting here this week to review the business, and we gave numbers to our Board of our expectations, not of our business but of the overall market, up 25% in 2011, up 35% in 2012. That's the kind of confidence that we say we do expect this to happen

We are concerned about unemployment. Unemployment is the constraint that we have today, and until unemployment is really addressed and starts to turn in the right correction, it's going to be difficult to see those increases, but I think everyone would agree it's going to come. It may be six, nine, 12 months before we fully realize that.

But there's lead times like that in land development that we have to be aware of. We have to get communities up and running. We've got to put models up, get them set up. So now is the time that we've got to cautiously be looking at investing. And you've seen we've done that. Over the last year to date we've brought 47 new deals onboard.

So we have the confidence that this market will recover. We can't, as we said in the prepared remarks, predict when it will exactly occur. But I think almost everyone now is concurring that we've hit the bottom, we are bumping along the bottom, and that subject to some improvements in the economy and certainly improvement in unemployment, we are going to see an upside.

So that's what gives us confidence in saying that we need to get out there.

And the other point I would make is -- and the other point we made is, we recognize the constraint in the capital markets -- or the financing markets -- for the private builders. So when we see that level of increase overall in the market, we think there's an opportunity for ours and other public builders who are able to finance our own deals, to be able to take market share as we go forward.

So those are two factors I think that give us some confidence that we need to cautiously move forward optimistically.

Okay, that's very helpful; thank you.

Nishu Sood, Deutsche Bank.

I wanted to follow up on the earlier land question, just from a -- maybe a slightly different perspective.

It was very interesting to hear you folks say that going forward you may see -- we may see a greater willingness from you folks to put money into land development.

Now, when some of the -- a lot of the -- a lot of your peers are basically just saying, we are not going to develop anything that can't be turned around into cash relatively soon. And the implications normally I think that investors draw from that is, obviously folks are being conservative and maybe some of those raw deals that would require development don't really pencil, they're kind of options that are out of the money.

So when you folks say there's an alternate consideration -- and obviously your liquidity position has improved a lot, and maybe there's some pretty good quality stuff in your kind of lesser-developed parcels.

So how should we interpret that statement considering that it stands out from what some of your peers are saying?

I guess I can answer the question in our own context. I'm not really sure how to relate it to other people, because every land bank is a bit different.

A couple of comments though. The first is -- and it sort of ties back to the issue on the land held -- we've made a conscious decision in moving that Southern California asset over that in bringing it over we're going to have to spend some land-development dollars.

We've penciled that deal on an aggregate basis, it's basis plus the incremental dollars, and it works nicely. It works particularly well on the incremental dollars being spent in comparison to other deals that were available. And it's a market we like and know well.

So that was a site-specific, as opposed to some kind of a macro thesis or some extrapolate-able data point that we've now gotten into the land development business. There is a particular site. It's in a unique location that we believe recommended itself to being put into development.

So I think there are going to be those kinds of individual sites. And it's a meaningful site. It's a large site.

I think the second comment is -- and Ian made this point in his comments -- you know, our community count is down 20% year-over-year. We think it's going to start growing here, and I think as we rebuild that community count, there -- not every community that we add is going to be able to be finished lots. And the margin consequences if we tried to do that I think wouldn't be as interesting as on a limited basis being willing to put a few development dollars to work.

You know, one of our beliefs is that there are finished lots in every market that are in C locations, and those are probably still going to be finished lots available in those C locations in five years, because consumers don't really want to live in those locations. And it will turn out to be the case that doing some land development in A locations will result in a better lot and value proposition for the consumer than just running to all of the finished lots, irregardless of where they are located.

So I think our view is that everybody wants finished lots in A locations and finished lots in B locations. Where the fork in the road comes is, do you want finished lots in C locations, or are you willing to put a little money to work to have finished lots in A locations? And I think our view is that the latter will prove to be the case in some markets.

Got it, okay. No, that helps.

The second question I wanted to ask was on the deferred tax asset. You mentioned gross -- I think I'm going to get these numbers wrong a little bit -- about [380], and then [170] after your extensive review isn't going to be available because of 382.

Can you just give us what -- how has that changed from your earlier assessments or kind of estimates of those numbers?

Well, I think the ownership change that occurred in January -- we were asked a lot of questions, what impact that had on the DTA, and we told folks that by the time we got to this earnings call, we would have some answers. And as I mentioned, it is a very complicated analysis.

I mean, we knew -- and this is too much information, but -- we knew that when we had had the initial ownership change, that there were some limitations. But the annual limit at that point was around $17 million, and it was much harder to have certainty as to whether or not -- or what the quantity of the limitation was going to be.

With the limit now at 11.4 because of the second ownership change, it made it a bit easier to do some modeling to give us that estimate of the $174 million that's not likely to be available.

So I don't have a point estimate again to compare the $174 million to a prior period. If we had known it, we would've said it. But I think that $174 million is up to -- that's kind of what we think the maximum amount is that won't be available to us.

I don't want to call it conservative or aggressive. I would just say, that's our estimate that that's the maximum amount we won't have. But it does mean that there is over $200 million that we will have, plus the losses that we will have generated since that second ownership change, which would be unlimited.

Got it. Thank you very much.

Susan Berliner, JPMorgan.

Allan, I guess I wanted to ask a question to you specifically regarding I guess your stance on the balance sheet. I know you guys are putting a little bit more into land, and I know you had talked about opportunistic activity. But I guess as the balance sheet stands now, how do you feel about it? Are you pleased with it? Or is there more work to do there?

Well, I've got to tell you, compared to any prior period in the last three years, we are pretty pleased with it. Is it optimized? No. But we need to also invest in the business. So I think we've gotten the liquidity where we wanted it, we've got the maturities out far enough, we don't have covenant constraints. So we feel like it is in a manageable situation.

And we did tell investors at the time of the May equity offering that we didn't expect to do significant material equity raises for the purposes of de-leveraging because we felt like we had gotten the capital structure to a sustainable and manageable level.

You know, whether or not we -- there are opportunities that present themselves with respect to our 2013's, 2015's or 2016's, or some other transaction, I mean we are interested, we are paying close attention to those markets, but right now nothing really looks to be imminent or looks to be required.

But we will watch that very closely, and if there is an opportunity that makes sense, we will probably take advantage of it.

But I think there is a change in tone here, Susan, which is that we have talked repeatedly for a year and a half about reducing debt and increasing net worth, and I think what we're saying is we've got a balance sheet now that we can live with, that we can grow with and that we can invest to get back to profitability.

Got it, thank you. And I guess my second question was regarding the markets. I know you talked about Southern California. I was wondering if you could go through kind of some other markets in terms of the top and the bottom. Any commentary on specific markets would be helpful.

Well, Susan, I think the one point to make for the June quarter was the impact we had in our Houston market, one of our strongest markets, and we are one of the stronger players in that market, but was really impacted in the June quarter by the issues in the Gulf. So that was a real knock-back there.

I am pleased to say that as we've gone through July and into August, we have seen some good pickup there again in Houston, so that's very encouraging for us.

You know, on the whole, as we weren't forcing sales during that period, a number of our markets were down, although I will tell you, just as examples, a number were actually up in the June quarter. We had Las Vegas up; we had Nashville, Indianapolis up; we had Tampa up in that period. Myrtle Beach, as more of a seasonal market, was up in that period.

So even though it looks a down market for orders, we've had some highlights there through those -- through that period.

So I would say that, as I said before, I think we are bumping along the bottom here. I don't think we see much more deterioration. There has to have been some pull-forward from the June period into -- back into March of the sales there with the tax credit. So I think if I look at all the markets that we are in, there's nothing alarming in any of our markets.

We are trundling along. We're getting the sales that we think are the right sales to make. We will be specifically doing promotions where we need to. But we're really preparing now for this uptick, which has to come. There's got to be an uptick year, and I would say that with Houston as the one exception that saw a real shock, the rest of our markets are fairly stable.

The other factor we have to take into account is community count. Where that community count is down, that obviously impacts our sales. That really impacted us in Southern California. We're really -- have sold out. Obviously we had terrifically strong March and December quarters of sales, and we sold through a number of our communities there.

So I think that what we're trying to do now is look at all the markets, see how are we positioned in those, where we need to add. And you've seen, if you look at the distribution of the acquisitions we've made, pretty much across the country, it's almost in every one of our markets, apart from two or three that have a longer land bank anyway. So I think that we are saying we are getting ready here to pick up, see improved sales as we go into 2011.

Great. Thank you very much.

Alex Barron, [Housing Mart Research Center].

I wanted to ask you -- I'm not sure I heard if you mentioned this -- give us any sales trends by month for the quarter, and any comments on July?

So Alex, I just kind of made that -- those points to Susan. I already talked about what was happening there, that Houston was our biggest impact, really impacted by the Gulf, but now we are seeing it picking up again.

You know, I would say July is comparable to June -- no real change across the board. I would say Houston has picked up compared to the others, but across-the-board, fairly static. And again, that's partly, we are not forcing sales. We are taking the sales that we want, and so I wouldn't say there's any appreciable difference between July and June at this time.

Okay, and thanks.

And in terms of -- obviously the market has been a little bit unpredictable given the tax credit and everything. So I'm just kind of wondering if for some reason the unemployment picture doesn't change a lot in the next couple of years, and let's say revenues stay similar to the run rate where we are at right now, is there anything else that you guys can do, I don't know, say, on the SG&A front, to try to reduce the losses? That would be my one question.

And then I also wanted to clarify what happened on the share count. I thought it would go up due to the equity raise.

Just addressing the markets, I mean, I don't think anyone predicts that unemployment is not going to improve in the next couple of years. I think there has to be an improvement, there will be an improvement.

You are seeing business now typically driving pretty well forward. You are seeing local government -- and government in a difficult situation, but the federal government is trying to subsidize some of that. The measures they were passing last night, I think there's going to be some subsidy for that -- not for housing, but just in terms of the financing of local and state governments.

So I think we have to believe that unemployment will improve as we get through the next six, 12, 18 months; I really do believe that. And that will release the pent-up demand for housing. There's no question there is pent-up demand for housing now. We've used a considerable amount of the overbuilding that was in the previous cycle, so I think that it's ready to really pick up.

And I would say on the supply side, it is very constrained. Certainly there are foreclosures there, and we have to take that into account. And certainly we would like to see the resale market open up a bit more. But in terms of good, new homes in the right location with the right energy features, the cost of ownership that we talked about, really and a terrific advantage now compared to those lagging foreclosures -- the best foreclosures I am sure have been snapped up by now. So I think we feel new home sales, will no -- there's no question they will definitely pick up.

On the SG&A side, certainly there's always things you can do. What we feel is, we've got to a level that is the right level for today, and if we have to endure a period of low to modest sales through this year, we think we can absolutely endure that. We've got the right level.

Certainly if we needed to take further action, we can, but more than likely we are looking and anticipating 2011 and beyond as we go forward and seeing a pickup there. We feel pretty confident that will come. It's just a case we've got to get to that point.

And Alex, we are up against the time here, but I would just tell you on the share count, it does reflect the common offerings from January and May. It doesn't reflect the tangible equity units because they are not outstanding, and the mandatory was anti-dilutive because we had a loss in the period.

Okay, thanks.

So, Operator, I think we have reached the allotted time. What I'd like to do is just thank everyone for being on the call with us today and remind you that there is a recording of this conference call, and it will be available this afternoon in the investor relations section of our website at Beazer.com.

So with that, thanks, and we look forward to speaking to you for our full year-end results in November. Thanks.

This concludes today's conference. Thank you for your participation. You may disconnect at this time.