Beazer Homes USA Inc (BZH) 2010 Q4 法說會逐字稿

Good morning and welcome to the Beazer Homes Fiscal Year 2010 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 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 of the fiscal quarter, ended September 30, and our year-end, ended September 30, as well. During this call, we will webcast a synchronized slide presentation; to access the slide presentation please go to the investor page of Beazer.com and click on the webcast link.

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 of which such statement is made and except as required by law, we do not undertake any obligation to revise any forward-looking statements, 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. Following their prepared remarks we will take questions in the time remaining.

I will now turn the call over to Ian McCarthy.

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

On our call this morning, we will recap our fiscal year accomplishments, discuss our fourth quarter results, and share our current expectations for 2011. Starting with the full year, it is clear that fiscal 2010 was an exceptionally important and successful year for the Company. Both operationally and financially, we improved the business to better endure this housing crisis and position ourselves to participate in the eventual housing recovery. These accomplishments were achieved through the diligent work of our ambassadors, the cooperation of our operational partners, and the support of our financial stakeholders.

The highlights for the year included new home orders and closings were both up modestly for the first time in five years. Gross margins were up 200 basis points excluding impairments, and SG&A costs were down more than $36 million. We also managed to completely restructure the Company's balance sheet. Our year-end cash of $576 million was up $19.5 million from last year, debt was down by $297 million and shareholders' equity was up by more than $200 million.

The top line in margin improvements contributed to a smaller loss. The loss from continuing operations for the fiscal 2010 was $0.50 per diluted share, compared to a loss of $4.54 per diluted share in the prior year. The net loss of $29.9 million reflected a substantial cash tax benefit and a non-cash gain from debt restructuring, but also included non-cash impairments of our inventory and our joint venture investments. The net loss, including discontinued operations, was $34 million.

Turning to the quarterly results, I think it is fair to say that while we were pleased with our overall progress in fiscal 2010, we are disappointed with the quarter's results. Generally speaking, we suffered from both volume and sales concession pressures, resulting in a backward step in gross margins. The faint silver lining is that by clearing out much of the excess inventory, we accumulated last quarter we were able to further strengthen our cash and liquidity positions. The very soft selling conditions that began with the expiration of the new home tax credit on April 30, continued into the fourth quarter. However, for the total Company we reported 810 new home orders, slightly ahead of our September estimate of 700 to 800 new home orders. We generated 1,149 total home closings, representing a 30% decrease from the same quarter last year.

Our gross margin, before impairments, but after interest expense to cost of sales, was 11.3%, 300 basis points below last year. Excluding interest charges, gross margin was 16.5% in the fourth quarter, versus 19.3% in the prior year's fourth quarter. These margins reflected the difficult selling environment, our emphasis on reducing inventory homes, and some start-up costs associated with our new communities. Allan will walk you through the numbers in more detail in a few minutes, but I want to acknowledge that these margins are not where we want them to be.

Year-over-year operating SG&A was up slightly in percentage terms, but this was entirely due to the 30% reduction in home closings during the quarter. One topic that has garnered a lot of attention in recent weeks is mortgage put-backs. As most investors know, we exited the mortgage business in February of 2008. When we did participate in the mortgage business, principally as a broker, we relied on third party underwriters and third party closing agents. In terms of exposure, what we can tell you is that over the past three years we have received put-back requests from several institutions covering fewer than 100 loans. To date, we have not been required to fund any of those requests. We maintain a reserve of under $1 million related to potential put-back risk and while we cannot rule out the potential for put-backs in the future, at present we do not believe they are likely to result in material exposure for the Company.

Our loss from continuing operations for the quarter was $0.78 per diluted share, compared to a gain of $0.83 per diluted share in the prior year. The net loss of $57.4 million was impacted by non-cash inventory impairments of $26.5 million. In the prior year, the Company had a gain of $33.5 million, which reflected an $89 million gain on extinguishment of debt. The net loss including discontinued operations was $59.5 million.

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 a meaningful recovery in the near term. As we have noted previously, attractive interest rates, historically high housing affordability, and evidence of home price stabilization are very encouraging. On the other hand, 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. As a result of difficult market conditions in recent months, we remain cautious in our assumptions for fiscal 2011, and unlike 2010, when the bulk of the home selling activity was pulled forward by the tax credit, it is likely that normal seasonal patterns will exist in 2011, meaning that more activity will be back-ended until the spring and summer selling seasons when there is more clarity about the extent of the economic recovery, political priorities, and any change to tax policies.

With all of that said, we can provide you with a high-level view of our expectations for fiscal 2011. First, we expect national single-family housing starts to increase in 2011, but likely in low double-digit percentages. We're looking for total single-family starts in the 550,000 to 600,000 range. Second, we expect our growth in new-home orders will at least keep pace with the increase in national housing starts, with the majority of the year-over-year increase coming from our existing and recently purchased communities. Third, we expect new-home selling prices to be somewhere between flat and down 3% in 2011. Our reported ASP might exhibit slightly different characteristics, simply because it's heavily influenced by the mix of closings, both between divisions and within the divisions themselves. While there are clearly risks of further home price declines, we believe that new homes are well positioned relative to non-distressed existing homes and rental options, which should allow new homes to suffer less pricing pressure than existing homes. Fourth, based on the expectation of slightly lower sales prices, we are currently targeting gross margins for the full year, roughly comparable to 2010 levels, but trying hard to do better. Longer term, with more new communities and more sales per community, our pre-interest gross margins should exceed 20%. Fifth, we expect our land and land development spending will be somewhat higher than the level in 2010. Our owned-lot position, together with our recently strengthened balance sheet, gives us significant discretion over the amount and timing of land spending.

And, finally, for the first time since 2007, we expect to generate positive EBIT from operations before any impairment charges that may arise. In light of the ongoing housing crisis, we do not want to sound overly optimistic at this time, but we believe the environment will improve, perhaps slowly, and we have taken and will continue to take steps necessary to position ourself to participate in the eventual housing recovery.

We continue to focus on our core operational and strategic priorities to enhance our operational execution and deliver exceptional value to our customers; prudently reinvest to maintain geographic diversity and generate attractive investment returns; and, maintain strong liquidity and a balanced capital structure. These initiatives are targeted towards an overall goal of accelerating a return to profitability. As we anticipate improving conditions for selling new homes we are focussed 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 have committed that every home we build will be a high-performance home that saves energy, conserves water, and improves indoor air quality. These green or eco initiatives are essentially an arms race as we compete with other builders to offer a superior value proposition to home buyers. To that end, we have recently raised the bar again in our Houston division by including in every Houston home our eSMART Green package developed in cooperation with our national green award winning partner, Imagine Homes. We're excited about the additional differentiation this creates for Beazer and the incremental total ownership cost savings that this will deliver to our customers. Reducing total ownership costs is a key tenet of our differentiation strategy.

As part of our ongoing business planning process, we continually evaluate macroeconomic data, the competitive landscape, and our existing positions in each market. During the fourth quarter, we decided to withhold further investment in both Jacksonville, Florida, and Albuquerque, New Mexico. As a result we have reclassified the activities from these divisions into discontinued operations for all prior periods. This decision reflected our judgment on new home supply and demand factors as well as available growth opportunities in these markets and importantly the quality of growth opportunities in other markets. We expect to reinvest in each of our remaining markets during 2011.

We have the benefit of owning an ample supply of finished lots in most of our markets so our land acquisition efforts are really aimed at controlling positions that can generate home closings in 2012 and beyond. In fiscal 2010, we were successful in sourcing 61 new land positions, which met our return requirements, and this slide highlights the markets where we've acquired new positions this year. For the fourth quarter of 2010, these new communities generated about 10% of our new-home orders, and about 5% of our closings. Based on margins and backlog, these communities appear capable of delivering gross margins, 100 to 200 basis points higher than our older communities. And in 2011 we expect these communities to generate about a quarter of our total closings. 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.

Our recapitalization efforts this year have significantly strengthened our capital structure by generating liquidity, reducing debt, and increasing shareholder net worth. We have a much better balance in our capital structure and one that should provide us with the operational flexibility to endure the balance of the housing downturn and thoughtfully reinvest in our business in the future.

With that I'll turn it over to Allan to further discuss our financial results.

Thanks, Ian.

As I run through our financial results this morning, I'll use the same basic outline as Ian, operations, assets, and then capitalization. In the fourth quarter, we had 810 total net new home orders, 778 of which were from continuing operations. This represented a decrease of 20.6% year-over-year and was attributable to order declines in our East and West segments. For the year, we generated 4,122 new home orders from continuing operations, up 1.1% from last year. Our cancellation rate was 33% this quarter, compared to 35.2% in the prior year. For the entire year, the cancellation rate was 25.5%, versus 31.5% in fiscal 2009. For the fourth quarter, home closings decreased 30% year-over-year to 1,149 homes. While the fourth quarter is usually our strongest closings quarter, this year the normal seasonal pattern was disrupted by the timing of the tax credit. The fourth quarter has typically constituted one-third of our annual closings compared to only 25% this year. For the full year the Company generated 4645 total closings,up 5.9% from last year.

Resulting backlog as of September 30, was 780 units with a value of $186.2 million, which represented a decrease of 33.4% in units, and 32.4% in dollars, compared with the same period last year. We have attempted to provide more visibility on average selling prices, or ASP's, on this slide. The ASP in our backlog at 9/30 was 239,000, which compares to ASP in the fourth quarter's closings of 236,000, and a full-year ASP of 222,000. Last quarter, there was a lot of concern about the dramatic fall in our ASP. We set up a time that it related to the mix of closings within that particular quarter and we pointed out that the ASP and backlog was quite a bit higher. In fact, you can see there are many quarter-to-quarter variations in the backlog and reported ASP's. We suggest you look at the longer-term trailing ASP to see the trends more clearly. This is detected by the solid line on the graph on page 15. In 2009, our full-year ASP fell 9.2%. In 2010, the rate of decline moderated to 3.9% and, as Ian said, we currently expect something between flat and down 3% this year.

Despite substantially lower sales prices our gross margins have been on an upward trajectory for two years as a result of reductions in direct construction costs, lower required warranty reserves, impairments previously taken, and moderating home buyer concessions. In the fourth quarter, some of those longer term trends were not working in our favor. For the fourth quarter, total gross profit margin was 11.3% before impairment and abandonment charges, a 300 basis point decline from the fourth quarter of last year and a 170 basis point decline from the June quarter. As we have said all year, gross margin trends are difficult to evaluate over short periods of time due to differences in mix and volume.

Our gross margin in the fourth quarter was down for three principal reasons. First, we offered increased home buyer concessions during the quarter, particularly for the sale of spec homes. This cost us about 100 basis points of margin. Second, warranty recoveries during the fourth quarter of fiscal 2009 amounted to the equivalent of 100 basis points and were non-recurring in the fourth quarter of 2010. And, third, indirect construction costs and interest amortized to cost of sales were higher as a percentage of revenue by approximately 100 basis points. Essentially, we had higher costs as we added 61 new communities, but fewer assets eligible for capitalization and lower closings to spread the costs, compared to last year. Due to our reduced backlog, our margin visibility for fiscal 2011 is not very high. Based on what we can see, our desire to further reduce specs, and non-recurring warranty recoveries we received last year, it does appear challenging for us to have positive year-over-year gross margin comparisons in the first half of the fiscal year. However, as Ian said, for the full year we are targeting gross margins at or above fiscal 2010 levels.

We continue to be very focused on increasing efficiency in our business and diligently managing overhead expenses. In absolute dollars, total SG&A for the quarter decreased $12.7 million or 22.3% year-over-year. As a percentage of revenue, total SG&A increased slightly from 15.6% in the fourth quarter a year ago, to 16.1% of revenue in the fourth quarter this year. In keeping with our efforts to point out anomalies and non-recurring benefits, I do want to point our that we benefited from a $4.5 million litigation settlement in the quarter, which effectively reduced the period's SG&A below what it otherwise would have been.

As provided in previous quarters, slide 18 is a representation of our operating SG&A expense, since the reported SG&A is impacted by both variable costs and the various legal and settlement expenses we have incurred over the past several years. By removing commissions, which are purely variable, as well as G&A costs related to severance, legal and professional fees, stock compensation, certain JV charges, and the carrying costs related to land held for future developments, we arrive at operating G&A, totaling 10.6% of revenue in the fourth quarter compared to 7.5% of revenue a year ago. The increase in the ratio this quarter was entirely attributable to the revenue reduction, which was driven by the tax credit pull-forward of closings into the third quarter of the year. The important takeaway is that for the full-year, our operating G&A fell from 11.9% in 2009, to 10.6% in 2010. The breakdown of these figures is provided in the appendix. 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.

Inventory impairments totalled $27.9 million in the September quarter, substantially all of which related to properties held for development. Impairments of inventory involve ten communities totaling 989 lots. The impairments in the fourth quarter included one particularly large write-down in the East segment which warrants a brief explanation. The asset involved is a large master planned community with multiple lot sizes and product types that had not previously been impaired. During the quarter, we changed both the product strategy and the anticipated development timeline. These changes, which were made in response to changes in the competitive landscape, resulted in total anticipated cash flows falling below our carrying value, and because it is a longer-life community, the present value of those lower cash flows resulted in a very significant impairment.

On the positive side, our impairment watch list included fewer communities in the fourth quarter than in any quarter in recent years. Lot option abandonment charges were minimal at 304,000 and JV impairments were under $1 million. We cannot say that the impairment cycle is done, but we can say that the market conditions have improved and have reduced the probability of additional, significant or across the board impairments. The caveat, as ever, is that if prices or absorptions deteriorate materially, our impairment calculations will reflect those factors.

Our land position as of September 30, totaled 28,996 lots, 80% of which were owned and 20% of which were controlled under option. This reflects reduction on our lot position of approximately 5.4% from the level as of September 30, 2009, and is basically unchanged since June 30. Approximately one-third of our owned lots were either finished lots or lots upon which home construction had already commenced.

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 fourth quarter land and land development spending was $51.8 million, compared with $52.8 million in the prior year. For fiscal 2010 we spent $182.7 million, 8% below the comparable period in fiscal 2009, but substantially below our spending levels of 2008 and 2007. Approximately one-third or $72 million of our spending in 2010, was related to new communities. As Ian highlighted earlier on the call, we anticipate land spending to be somewhat higher in 2011. This spending will be related to both existing assets and potential new assets. Because of our extensive finish lot position, we have great discretion in controlling this spending.

At September 30, we had 382 unsold homes under construction representing a decrease of 35 homes from year ago levels. In addition, we had 423 unsold finished homes at the end of the quarter representing an increase of 153 homes from last year. Despite the year-over-year overall increase, we were pleased to have reduced unsold homes from the June quarter quite dramatically. Of the 1,116 inventory homes at June 30, we had over 1,000 homes either finished or capable of being finished by September 30. As the selling environment failed to improve during the quarter, we got more aggressive and moved through many of them. In fact, of the 810 net new orders in the quarter, approximately 70% were these inventory homes, representing a much higher ratio of inventory sales than we typically experience. We still have slightly more unsold inventory homes than seems optimal in the current environment and we will work to bring this down further during the quarter.

During fiscal 2010 we undertook several steps to recapitalize our balance sheet with the goals of preserving our liquidity, reducing debt, and increasing net worth. We have discussed the capital structure extensively, so let me just point out the results. Our cash and cash equivalence of $576.3 million including restricted cash of $39.2 million, was up $19.5 million. Our total debt of $1.2 billion was down $297.3 million, and it will be down by a further $57.5 million upon the automatic conversion of our mandatory convertible subordinated debt in 2013. During the year, we repaid $585 million of debt that was due or puttable in 2011 or 2012. Our shareholders' equity was up $200.5 million or prospectively $258 million when again factoring in the mandatory convertible subordinated debt. Our cash position at September 30, is over three 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. While we expect to take additional steps to refine our capitalization, our primary emphasis going forward will be to invest wisely, to accelerate a resumption of profitability, while maintaining a significant liquidity cushion.

As a result, of both a Section 382 ownership change, which occurred in connection with our January 2010 equity transaction, and significant deferred tax liabilities related to the taxable gains we deferred from discounted debt extinguishment, our deferred tax situation is much more complex than most builders. Now that we have completed our year-end analysis, we have added additional disclosure about the DTA's in the 10-K, which we intend to file later today. The simplest description of our DTA situation is that despite the limitations imposed by the tax ownership change, we have very large dollar value of deferred tax assets that will make its way back on to our balance sheet upon resumption of sustained profitability. Worst case, we believe that dollar amount is $228 million, but our actual estimate at the end of the year is $350 million and that figure will grow until we resume profitability. The table in the presentation depicts the amount of the DTA subject to the Section 382 limits, the amount of the DTA not subject to the limits, the amount of the DTA that may be subject to the limits, our deferred tax liability, both the minimum and estimated recovery of the DTA, and the valuation allowance that currently covers all but $8 million of the DTA. I encourage investors and analysts to review the disclosure in our tax footnotes in the 10-K for more details, and we will provide additional information as we are able to further refine our expectations.

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

Thanks, Allan.

Well, during fiscal 2010 we undertook and accomplished many difficult steps to transform the capital and operational structure of the Company and believe that we are now well-positioned to benefit from improving conditions in the years ahead. We recognize the continued risks, which may delay a broad-based housing recovery, but we do expect to see gradual improvement over time.

Operator, with that, I would like to open it up for questions and wait your instructions.

At this time we'll begin the question and answer session.

(Operator Instructions).

One moment for our first question. Our first question comes from David Goldberg, with UBS.

Thanks, morning everybody.

Hi, David.

Morning, David.

I'm wondering if we can start by talking about the margins on the spec homes that you delivered in the quarter relative to the presold homes, and how that looks for the spec that you still haven't delivered in the backlog now. Is it a similar spread between the two?

Yes, the margins, obviously, in the specs have tended to be several hundred basis points below what we call the pre-sale or the "dirt" sale and that definitely continues. We did lead into the spec sales a little bit to the tune of about 100 basis points in total margin, but that probably was on the order of 150 or so as it related to the specs, because it was 70% waiting that is what contributed the 100 basis points of pressure. As I look into the backlog, you can see that and I think we also telegraphed that we would like to bring that spec level down a bit further in the first quarter.

Got it. But presumably there is some specs that you've finished -- I'm sorry, that you have sold that were spec units when they were under construction, right? I mean, it wasn't all finished specs?

That is absolute right.

There's some that will be delivered that you already know of; it's no longer in the spec unit count, right?

That's true. All of those sales of specs in the quarter did not deliver in the quarter.

Ian, I wanted to ask one more question about the comment you made about it being an arms race on the green friendly initiative. I'm trying to get an idea why you think that is. I'm having some trouble understanding the competitive advantage that you get from being the leader on the green side, if peers can copy some of the technologies that you're putting into the home, unless you think that it really is a long ramp and other folks can't just go take the technology and take the innovations you guys are making.

Or maybe there a long-term branding benefit that I'm missing? I'm wondering if you can give us an idea of why you think it is an arms race, and why it is driving some competitive advantage over time?

That's a good question, David. As you know, we've been involved in looking at environmental issues, energy savings, since back in 2006. We helped establish Imagine Homes back in 2006, and we've used that as an R&D lab to develop ideas, test them, see which are the most cost effective, and which are most beneficial for the customers. We think even more today than back in 2006, with all of the foreclosures in the market, this is a really distinct advantage for new homes in general, but for us in particular, because we are really innovative in that technology.

And when we can then position to a home buyer, the total cost of ownership that they will have in our home for the next five or seven years -- that's the way we are portraying it to them, the advantage they have there -- compared to getting an initial discount in the foreclosed home, but then a much higher cost of ownership going forward. So that's -- really, we're competing with the general market. Others certainly have copied our ideas. There is no question there, and that's inevitable in this industry. It is going to happen and it is a very open -- people can walk through our model homes. They can see how we display and portray those features and they can adopt those ideas themselves. And certainly that will happen.

I think it is up to us, if we want to compete and continue to keep our advantage, then we have to up the bar time and time again. And what -- we've had our green package available now across the whole country. What we've decided to do now is choose one market, which is an energy-sensitive market in Houston, and we've decided to put all of our homes under the green umbrella there. And we'll see how that works, offering every home there with a green package. We'll see if that gives us, again, a competitive advantage and whether we should roll that out into other markets.

Really, I would say we're not really just competing against our new home peers, who, obviously, are going to be adopting some of these ideas over time. We're, really, in this particular market, really focused on the foreclosure market, where there is a distinct difference in pricing that we have to compete against. We don't want to do it just exactly as your question to Allan about margins. We don't want to have to just discount to be competitive. We want to add features, add value, add total cost of ownership savings to our consumers to really give us that differentiation and drive our sales going forward.

I hope that answers the question. David?

Operator, we seem to have lost David Goldberg there. Maybe we'll take the next question.

Our next question is from Dan Oppenheim with Credit Suisse. Your line is open.

Thanks very much. I was wondering if you can talk about the trends in the orders where they came in better for September relative to the pre-announcement. Was there a big effort with incentives there? How would you describe the trends that you saw in September?

Dan, what I would say is, as you know, we were in the market in September. We had to put out that pre-announcement because we were somewhat sensitive to our orders. What we saw is that the little pickup towards the end of the month -- and part of that was moving some of the inventory homes that Allan talked about in term of the margin impact. We had that inventory. We are we were successful at the end of the month moving those out. I wouldn't say it is a robust market right now but I would say we made a good effort in clearing those out. I'd say that's the biggest influence on just slightly exceeding our estimate that we put out there in the middle of the month.

Got it. Wondering, then -- related to that, if there was orders of specs in September presumably that probably wouldn't have impacted the margins for this quarter, but probably more of a 1Q issue, I presume. But then, also, along those lines, wondering about how you're thinking about SG&A and overhead given where the backlog is at this point thinking about that as we move into 2011?

Okay. So I'll take a stab at that, Dan. Couple of things. There is no question that we got aggressive with specs in the quarter and that affected both the quarterly results by about 100 basis points, and there is clearly, as David asked and you're asking, an effect of that in the backlog. That's why we said, together with some non-recurring warranty benefits we had last year, it is going to be difficult for us to positively comp gross margins in the first half of fiscal 2011. Those things all add up to our view that that's the case, although we do think with a mix towards the newer communities, our ability to get to fiscal 2010 levels and gross margin, and beyond, it is still there for the full year.

On the SG&A side, we continued to benefit from the steps we have taken in the past to realize savings. We're pretty comfortable with that operating G&A level for the full-year was down 10%. Our view is at the current level, we've right-sized the infrastructure of the business. I would have to say, if things take a leg down from here, we'd have to reflect that, but we have some belief that order patterns will be stronger in the spring and for the full year, and we want to be careful not to decimate the infrastructure, so that we can fully participate in that.

Okay. Thank you.

Our next question comes from Jonathan Ellis with Banc of America Merrill Lynch. Your line is open.

Thank you.

First question, I wanted to ask about -- as we look into next year, you talked a little bit about your assumptions for pricing, but I'm wondering if you could talk about concessions? I know you spoke about what happened this quarter, but as you think into next year about whether you think additional concessions may be needed and also the relationship between pricing and concessions in the context of the stringency of the appraisal process.

Well, I think as we see an improvement in the market, concessions are the first things to come away. We'll be bringing concessions down during that period as we see an improvement there. That is the way we can, again, address the margins. We can bolster the margins through that.

I think that some of the headline pricing may have to be still competitive because, again, I think we do see an impact of foreclosures throughout next year, fully through next year, and so I think what we need to be doing is to be competitive on a price list basis, but then as we see benefits and sales in communities, we'll be trying to take concessions down. So that is certainly one of the areas we will be working on to help our margins.

As it relates to appraisals and valuations, that's obviously a very tough topic at this time. I think it's a lot of education needed for the appraisers there in terms of the value in the home. We're trying to be very transparent in how we put features in the home, how they're valued and get those appraised. I think that's something that is a very sensitive subject right now. The appraisal market is very attune to that, has to look at what the comps are, but I would certainly say that we will try to take concessions down as one of the first things we do, more so than raising prices. There will be some raising of prices hopefully, market by market, as we see an improvement over next year and beyond, but it's the concession area which we'll lead with.

Thanks, that's helpful. Second question, and I think if I caught this correctly, you talked about gross margins on new communities being 100 to 200 basis points above legacy communities, and I think if I noted this correctly last quarter, you said the spread is more along the lines of 200 to 300 basis points. I'm not trying to split hairs here, but why is there a less of a gross margin spread between the two than you may have indicated last quarter?

The only distinction there -- and there really is -- there was not an intentional change, it is just the snapshot of the backlog that we have. We don't have backlog from all 61 of the new communities at this point. In fact, very few of them are open for sale, yet. But of those that are and of the sales that have been made, they appear to be about 100 to 200.

We're still comfortable were we get the benefit from all of the 60 communities and others that we will add that we'll probably be more in the 200 or 300. That is a little bit more speculative. The backlog right now is solidly showing that 100 to 200 in those communities that are open.

Great. That's helpful. Thanks, guys.

Thanks, a lot.

Our next question comes from Alan Ratner with Zelman and Associates. Your line is open.

Good morning, guys. Thanks again for all your thoughts on 2011. That was really helpful. I was hoping to drill a little bit deeper into the gross margin guidance and make sure I'm understanding it correctly because it sounds like you guys expect some of the pressure you saw this quarter to at least continue into next quarter and probably a little bit into 2Q 2011 as well.

If I'm doing my math correctly here as well, in order to get back to the full-year number that you hit in 2010, you would have to see something at least 200 to 300 basis points improvement on a sequential bases in the back half of 2011. I was just curious, is the shift to the new communities and also a reduction in the spec sales, is that enough alone to get you that lift, or do you need to start to see other things come into place, whether it is price stabilization, cost cuts -- excuse me, cost reductions, anything like that?

I think you framed it right, Alan. I think the mix shift plus the reduction in the number of or ratio of homes that are specs, and probably less concession in the homes that are specs, that's enough to get us to the fiscal 2010 level. Then we're in the position if prices are better than we expect, and our efforts to continue to take direct costs out of the home are realized, we'll be able to do better than fiscal 2010.

This was intended to be a baseline. That is what we see right now. As Ian said, we are working to and think have some leverage that we can pull that would help us do a little better, but it would certainly be helpful if prices weren't down 3%.

Okay. So you think even if prices come in toward the bottom end of that range, the 3%, the 2010 level is still achievable?

Yes, that's baked in. We've tried to say, this is what we're thinking is going to happen in terms of pricing and volumes and the result is that we think we can get to, and we'll get to 2010 levels, but we certainly are not satisfied with that and want to do better and are working to do better.

Okay. That's helpful. Thank you. Ian, just to following along one of your comments earlier, I know you've always been kind of up front about viewing foreclosures as a very large competitor in the market.

So I'm kind of curious, just from the feedback you've been getting from your sales people whether you've noticed any changes in October in terms of buyers' sentiment related to some of the issues in the foreclosure process, whether that's helped you guys at all on the traffic front and even the order front, as people might be a little bit more nervous about buying a foreclosure?

Well, Alan, one of the key points there is that the difficulty in buying a foreclosure, whether it is a short sale or REO, is just a very difficult process, and I think that people who are attracted by that up front by the discount that they can get up front, they find it is very difficult. So we really work hard to talk to the consumers who come in through our model homes, just about the competitive nature of the market, and the total ease that they're going to have with us, the way that we'll look after then, the way that we'll put them through the process, work with our partners of Bank of America in term of the mortgage process, and the difficulty it is compared to that with a foreclosure, and from what I'm hearing, and it is just anecdotal, it is more difficult now than it has ever been.

I think for any individual going out there trying to buy a home, they have limited time available to do that. The process, the time consumption that it is taking for the foreclosure, in addition to the cost of ownership, total cost long-term, I think it is a difficult process. We try to make that clear to them, and I'm hearing it is probably getting harder and not easier.

So the fact that it is getting harder which we certainly hear as well have you guys noticed any positive impact from that to your business at all or is it too early?

It is a little early. As I said earlier, this is not a very robust market at this time. We're trying to make the very best of the environment. I'm somewhat hopeful that, very encouraged with the jobs number today. Maybe we're heading in the right direct without any political spin, having the election behind us, is I think a good thing.

So I think the market has got a couple of very, very slight positives as we go through the end of this year and as we come into next year; and that is why we were strong on the numbers that we're projecting that we think will be there for 2011. And then the point I wanted to make clearly, is that even though we've come out of some of the markets that we were in previously, we really think we can take our market share, if not more, as we go forward, and that's what we're positioning for in the business plan we have today.

Okay. Great. Thanks a lot.

Thanks, Alan.

Our next question comes from Michael Rehaut with JPMorgan. Your line is open.

Thanks. Good morning, everyone.

Hi, Michael.

First question, I'm sorry if you hit on this before, I had to jump off for a moment, but, as part of the 2011 view, can you just go over community count growth expectations? I think previously you have referred to percent of closings from new communities, 2011 versus 2010?

Yes, Ian mentioned that we thought closings in 2011 would be about a quarter from the new communities. In terms of community count, that's not a metric we have published and is easily tracked, but what we said is that we now think that the community count number, as of today, is going to be moving slightly positive.

But on a comparative basis, year-over-year comparative basis, it won't be until, optimistically, the March quarter may be more likely, the June quarter, where our actual year-over-year community count is up. Even though it is moving up today, it is still comping negative against a year ago on the community count level, but I do think that will flip over. I'm hoping we can get some of these new communities open in the March quarter. If we miss a couple of openings, and there will be weather related risk in that, then it would be in the June quarter where we comp up on community count.

Okay. I appreciate that, Allan. Following up on that with backlog, obviously, down right now and potentially community count on a year-over-year is still down, I would assume at least for two, three quarters of next year, you're going to have a lower revenue base, so how are you thinking about SG&A at lease levels? Can we expect a similar type of dollar per quarter run rate which would assume a little bit negative leverage into next year?

Well, we've focussed on this thing we've called operating G&A just to try and get a cleaner comparative, and it is appendix A in our slides this morning. It is very similar to, if not identical to the format that we used in the last, I don't know, four or five or six quarters.

What we've said was that in that high 20%s area, we think that is a sustainable run rate until we have substantial growth in unit activity. So I think if we were to see a leg down, if we were to see the inability for improvement in the back half of the year, we would take some steps. At this point, though, we definitely believe this first quarter is going to be challenging on a bunch of fronts. We're not intending to react to that directly with the overheads.

Okay. So, but on a reported basis --

Yes.

There would be incremental leverage then?

There could be. There's a lot of leverage in that number, though. That's why I break out all of the things included in it. We have the opportunity for legal and professional fees and some of those things to comp positive because they're erratic, non-predictable by us.

The top line is a pretty tricky number, and your guess is as good as mine, in terms of whether it will be positive or negative leverage. I always try to point out when we have things that are anomalies in that number, but there is a lot more going on in that top line number to get comfortable with trying to guess what it is going to do.

Okay. One last one if I could.

On the new communities, and we appreciate the color there in terms of the gap of gross margins relative to your pre-existing portfolio, but, as you're doing land deals now, I was wondering if you could just give us an update in terms of what you're targeting or seeing in term of deals out there from a gross margin standpoint , what you're able to find today?

Obviously, it has kind of been more difficult to find things as the market slowed, I think, as other builders have mentioned, that sellers have become a little bit less -- initially more -- less flexible in adjusting. Do you see a high teens gross margin, which is implied by your new community, still achievable, or still achievable, but at a much less lower hit

That is an excellent question, Michael.

I think there is one more element to it, just to complicate things, which is, what is the deal structure in the new community? I think if we're in an option context, a new community in high teens is achievable. We can find those deals and occasionally they will cross into the 20%s.

In order to do a new community deal, though, where you're in the 20%s, you've probably got to buy a bunch of lots. Now, a bunch may be 50 as opposed to 500, but the real distinction in the margins, and again there are local differences which make all of this somewhat different, but at an aggregate level, if you are looking at deal structure, an all-cash deal, we can find deals, and have found deals, that ared in the 20%s.

Again, that is, and for everybody else's benefit, you and I are talking about this is in the context of excluding the interest and included in cost of sales, so preinterest charges, you can get into the 20%s but they're more typically in the high teens if they're option deals.

The other point, Michael, is it depends who the seller is. We're seeing a wide variability between end user sellers and the banks; and the banks it's going to be a wide variety there, depending -- a lot to do with the bank circumstances themselves and how they want to release the properties they own today and the rate they want to release them and the urgency that they have to release them.

So I think you have a case right now where there is a very wide range of margin availability depending on who owns the deal and the timing of taking it out.

Okay.

The availability of those finished lots option deals in the high teens, you would say is relatively similar today versus three or six months ago?

It is, and I think maybe part of the reason is that we drew a fairly narrow bead on the communities we were interested in. They had to be in sub-markets, price points, and capable of supporting our core product strategy, and if they were outside of that, we weren't terribly interested in it. So in the solution set that we're focussed on, the communities that meet those parameters, there hasn't been a significant change in availability.

Thank you.

Thanks, Michael.

Our next question comes from Nishu Sood with Deutsche Bank. Your line is open.

Thanks.

I wanted to ask first about your pricing strategy in the quarter. I think it's probably safe to say that most builders -- the extent of the downdraft in demand, post the tax credit was more than they expected, so probably most builders, it's safe to say, ended up with a little more spec coming out of the June quarter than they would have wanted. But your strategy, based on your results, seems to have been a little bit different, a little more aggression on the incentive side, to clear those out, as reflected in your better than peer order numbers, but some softness, as you mentioned, in margins from those discounts on those specs.

I wanted to dig into that a little bit. What was the main driver of that? Why -- what were you seeing out there that led you to be a little bit more aggressive on the specs? Was it year-end, a cash focus? What are you seeing going forward, perhaps, strategy-wise that led you to deviate from your peer strategic a little bit?

Well, Nishu, you have to recognize that this was our year-end, and there is always an incentive both for the Company and for every division to post results for the year. So that there is always a bit of a push towards the year-end to finish with a number that they're proud of for the year, and we were certainly looking for year-over-year improvement. That was a real goal for us after seeing declines for the previous few years, to see -- to post some numbers that were positive was a real psychological goal for us. So I think you've got to take that into account for other people who may have December year-ends or whatever.

And second point is, those specs don't look any prettier the next day out. I think we're quite happy to see those move on, and we don't want to be sitting on them. We're now in the slowest quarter of the year, in the December quarter, and we just felt if we had the opportunity to sell them in September, we should take that advantage, as Allan pointed out just now, we'll try to move some of those on in the December quarter as well. So we come out fresh in the spring and that's what we're looking to do. I would say it is two-fold in that way.

Got it. Great. That's very helpful.

The second question I wanted to ask, thank you for the mortgage disclosure, the 100-loan request or information request, but no expenses so far.

And that will be in the 10-K as well, today.

Got it. Got it.

What I wanted to get a little more clarity -- from one of your peers where there has been a transaction it seems to affect the nature of the liability as it relates to the subsidiary which in most cases don't have recourse. You're exiting of the mortgage business in 2008, what effect, if any, does that have on your liability? I imagine you had it structured similarly that there is an independent sub with no recourse backup to the parent. Is that the case, and, obviously, with the issues with the mortgage business a few years back, does that have any effect, the decision to exit it have any effect? Is there any kind of differences that we should be aware of when we consider Beazer's situation?

A couple of things. Our circumstance, when we were in the business, was similar to others in terms of the structure with the mortgage subs, and secondly, we don't think our decision to exit the business changed our risk profile in any negative way, or increased risk. It means there was a period of time after February of 2008 we weren't originating loans, so arguably we were in a less risky position because as we understand it and read about, many of the put-back requests also related to the 2008 vintage loans.

Thank you. That concludes the Q&A portion of today's conference.

I'll be turning the call back over to Ian McCarthy for closing remarks.

All right. I'm sorry, Nishu, if we lost you; give us a call afterwards and we'll catch up with you.

Looks like the call -- we have come to the end of our prepared remarks. A recording of the conference call with the slide presentation will be available this afternoon in the Investor Relations section of our website at Beazer.com. Thank you for joining us today. We look forward to speaking to you after the December quarter. Thank you.

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