Beazer Homes USA Inc (BZH) 2011 Q1 法說會逐字稿

Good morning and welcome to the Beazer Homes' first quarter of fiscal year 2011 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 Solomon, 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, Pat. Good morning and welcome to Beazer Homes' conference call on the results for the fiscal quarter ended December 31, 2010. During this call we will webcast a synchronized slide presentation. A link to the presentation can be found on the Investor page of Beazer.com.

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 10K. Any forward-looking statements speaks only as of the date on which such statement is made, and except as required by law we do not undertake any obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. New factors emerge from time to time, and it is not possible for management to predict all such factors.

Ian McCarthy, our President and Chief Executive Officer , and Allan Merrill, our Executive Vice President and Chief Financial Officer, will give a brief presentation. Following their prepared remarks we will take questions in the time remaining. I will now turn the call over to Ian

Thank you, Jeff, and thanks to all of you for joining us this morning. On our call this morning we will discuss our first quarter results and share our updated expectations for fiscal 2011.

During the first quarter we saw a continuation of the broad market conditions that have been evident since the expiration of the first-time home buyers tax credit last spring. Namely, poor consumer confidence that has led to modest traffic in our communities and slow new home sales. Consumers remain concerned about their employment conditions. As a result, despite the resent uptick in mortgage rates, which historically has pulled indecisive home buyers off the fence, prospective home buyers seem content to wait until later this year to consider a new home purchase.

On the other hand, despite many forecasts predicting lower home prices, new home prices and builder concessions have remained relatively constant in recent months. While we are guardedly optimistic about the upcoming spring selling season, we remain cautious about its achieving significant year-over-year order growth in fiscal 2011. I'll comment more on our recent activity and our expectations for the balance of the year towards the end of our presentation.

During the quarter and our results from continuing operations, we recorded 540 new home orders, down 24%, compared to the first quarter of last year. We started the year with a much lower backlog, which together with lower new home orders during the quarter, resulted in new home closings down 44%, compared to last year, at 527 homes. Our ASP was down year-over-year, about 6.5%, to $209,000. But as we will discuss in the next few minutes, this was primarily related to mix. Home building gross margin before interest and impairments was 17%, declining year-over-year as expected, but improving sequentially.

SG&A was down in dollar terms year-over-year, but was up in percentage terms as a result of the lower home closings. And finally, impairments and abandonments totaled less than $1 million.

During the quarter we also strengthened the Company's balance sheet. We issued $250 million in secured, unsecured and senior unsecured notes due 2019, and repaid $185 million in debt, including $165 million of debt that would have matured in 2013. We incurred a small loss to complete this transaction. But we are very pleased to have eliminated our senior debt maturities until mid-2015.

Our cash position at December 31 totaled $522.4 million, up from $480.5 million a year ago. Our loss from continuing operations for the quarter was $0.66 per diluted share, compared to a gain of $1.09 per diluted share in the prior year. The net loss of $48.5 million was impacted by pre-tax, non-cash debt extinguishment charges of $2.9 million.

In the prior year the Company had net income from continuing operations of $44.5 million, which included a tax benefit of $93.8 million, primarily related to our tax loss carryback claim. The net loss this year including discontinued operations was $48.8 million.

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 diversification and generate attractive investment returns, and maintain strong liquidity and a balanced capital structure in a market that continues to exhibit volatility. These initiatives are targeted towards an overall goal of accelerating a return to profitability.

We are focused on delivering homes that differentiate Beazer in the eye of consumer. Back in 2006, before every builder was attempting to market so-called green features, we invested in Imagine Homes, a start-up home builder in San Antonio focused on delivering environmentally advanced homes. Since that time Imagine has been recognized nationally as NAHB's Green Builder of the Year for production homes in 2008, and again in 2009, for affordable homes.

At the same time we've been able to integrate many of their building innovations into our eSMART program. This constantly evolving program, which originally launched in 2008, introduced the promise that every home we build will be a high performance home that saves energy, conservatives water, improves indoor air quality and, most importantly to potential buyers, delivers a lower cost of ownership. In fact, our most recent consumer research indicates that 88% of our prospective home buyers consider energy saving features to be a key part of their buying decision.

In order to meet these consumers' rising expectations, this month we are rolling out the third phase of our eSMART initiative called Energy Star and More. Going forward, every home we build will incorporate the power of the nationally recognized Energy Star brand with the additions of more features to save energy, more features to conserve water, and more features to improve indoor air quality. We're excited about this new phase and believe it will enhance our leadership role in offering high performance homes.

We have the benefit of owning an ample supply of finished lots in most of our markets. Though our land acquisition efforts are in controlling positions that can generate home closings in 2012 and beyond. Since the beginning of fiscal 2010 we've been successful in sourcing 69 new land positions, including ten new communities approved in the first quarter of fiscal 2011.

This site highlights the markets where we've acquired these new positions in the past 15 months, and here are some key facts about these new communities. At December 31, 44 of the 69 new communities were open for sales. During the first quarter, these new communities generated about 21% of our new home orders, and approximately 11% of our closings. For the full year, we expect these communities to generate about a quarter of our total closings. Based on margins and backlog, these communities appear capable of delivering gross margins 200 basis points higher than our older communities. And, finally, the ASP of these new communities is approximately 5% lower than our older communities, which is one of the factors that will impact our ASP this year.

We think the number of our active selling communities has likely stopped shrinking and will grow modestly from this point forward, with positive year-over-year community comparisons starting in our third quarter. Our recapitalization efforts have significantly strengthened our balance sheet 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 remainder of the housing downturn and thoughtfully reinvest in our business for the future.

I will now turn it over to Allan to further discuss our financial results.

Thanks, Ian. As I run through our financial results I'll use the same basic outline as Ian -- operations, assets, then capitalization.

In the first quarter we had 553 total net new home orders, 540 of which were from continuing operations. The 23.9% year-over-year decline was attributable to 12.7% order growth in our east segment, offset by order declines of 50.7% in the west segment and 15.5% in the southeast segment. Overall, we had approximately 10% fewer communities open for sale during the period than in the prior year period.

Our cancellation rate was 31.2% this quarter, compared to 27% in the prior year's first quarter. Our sense is that the increase in the cancellation rate was related to more stringent mortgage underwriting criteria. One indication is that the average FICO score for our buyers who used B of A, which represents the majority of our closings, jumped up to 721 in the first quarter from 707 in last year's quarter.

For the first quarter, home closings decreased 43.6% year-over-year, to 527 units. Which is, as Ian noted, was largely driven by lower starting backlog. As a reference point, our backlog at September 30, 2010, was down 33% from the same period a year earlier. We also experience a lower backlog conversion rate this quarter, at just under 70%, compared to 80% last year. This too is likely evidence of stricter underwriting criteria.

Backlog in our continuing operations as of December 31 was 793 units with a value of $199.5 million, which represented a decrease of 16.2% in units and 12.7% in dollars, compared with the same period last year. Our ASP from closings during the quarter was $209,000, down 6.5% from the same quarter a year ago, and 11.4% sequentially.

Again this quarter, we experienced volatility between the ASP metrics, as our backlog ASP increased to $252,000, or 20.6% higher than the closing ASP. The ASP volatility relates primarily to the mix of closings within a particular quarter, and we have pointed out that the ASP and backlog often moves in a different direction. In fact, on this slide you can see that there are many quarter-to-quarter variations in the backlog and reported ASP's, so we suggest that you look at the longer term trailing four quarter ASP which is depicted by the solid line to see the trends more clearly. The trailing ASP reflects a modest decline of 3% from the same period a year ago.

Despite lower sales prices, our home building 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 first quarter, some of those longer term trends were not working in our favour. For the first quarter, home building gross profit margin before interest and impairments was 17%, representing a 100 basis point decline from the same quarter of last year. But, an 80 basis point improvement from the September quarter. As we have said previously, gross margin trends are difficult to evaluate over short periods of time due to differences in mix and volume.

On slide 14, we have illustrated the impact of impairments and interest in our home building gross margin. The decline in year-over-year margin performance was influenced by a number of factors, including the reduction in ASP, change in product mix, flow-through of previous cost reductions and the timing of non-recurring warranty recoveries. Most notably during the quarter, our lower closing activity resulted in a 170 basis point rise in indirect construction costs as a percentage of home-building revenue. But we also benefited from some non-recurring warranty recoveries.

Due to our reduced backlog, our margin visibility for fiscal 2011 is not very high. At this point it appears challenging for us to have a positive year-over-year gross margin comparison next quarter. 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 $7.1 million, or 15.8%, year-over-year. But as a percentage of revenue, total SG&A increased from 21.1% in the first quarter a year ago, to 34.3% of revenue in the first quarter of this year due to the substantially lower revenue base.

As provided in previous quarters, slide 15 illustrates our operating G&A expense which adjusts for both commissions and other items, such as the legal and settlement expenses that we have incurred over the past several years. Operating G&A totaled $23.8 million, compared to $24.1 million in the same period a year ago. The breakdown of these figures is provided in the appendix.

In dollar terms, operating G&A is in a range that is sustainable until we see material increases in home closings. Total inventory and JV impairments and lot option abandonments were $1.2 million in the quarter, representing the lowest level of impairments in any quarter since 2005. The stabilization of new home prices and the resulting reduction in impairments depicted on slide 16 are encouraging, but are not a reliable indicator that we won't have impairments in the future. Market conditions have reduced the probability of additional significant impairments, but if prices or absorptions deteriorate materially our future impairment calculations will reflect those factors.

Our land position as of December 31 totaled just under 30,000 lots, 81% of which were owned, and 19% of which were controlled under option. This reflects a reduction in our lot position of less than 1% from the level as of December 31, 2009, but an increase of approximately 2.5% since September 30. Approximately 30% of our owned lots were either finished lots, or lots upon which home construction had commenced.

Over the past four years, we have dramatically reduced land and land development spending. That trend is now likely to gradually reverse. In the first quarter, land and land development spending was $62.6 million, compared with $30.4 million in the December quarter last year. Approximately 60%, or $37.9 million, of our spending in the quarter was related to the 69 new communities. We anticipate land spending to be somewhat higher in 2011 than in 2010. This spending will be related to both additional takedowns in our existing assets and potential new assets. However, because of our extensive finished lot position, we have great discretion in controlling this spending.

We had 882 total unsold homes in inventory at December 31, representing an increase of 77 homes from the previous quarter. Finished unsold homes totaled 453, an increase of 30 homes from the previous quarter. Our desired level of unsold home inventory is driven by seasonal trends, recent sales activity, expectations of future demand and home buyer profiles, all determined at a community level. Although we may tweak the level of unsold inventory quarter-to-quarter based on new information, we're comfortable with the overall level at this time.

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. As Ian mentioned, during the quarter we made an additional improvement to our capital structure by redeeming the debt that was due in 2013 and replacing it with a maturity in 2019. We are convinced that clearing runway will serve us well in the eventual housing recovery.

Also, during the quarter we closed two cash-secured term loan facilities with a combined commitment of $275 million. At closing in November we borrowed $32.6 million and, under the terms of the loan have the ability to make a second borrowing within six months. We currently intend to draw on this facility in an amount equal to our debt repayments. Given their cash-secured nature, these facilities are not intended to provide near-term liquidity. Instead, the loans provide a vehicle to extend our ability to borrow under the refinancing basket provided for in our indentures until we have an appropriate use for the proceeds. Absent this facility, we would be required to reborrow any repaid debt within 180 days or lose the ability to do so for the remaining term of the senior notes.

Our cash position at December 31 was $522.4 million, including $32.6 million in proceeds from the cash-secured term loans. We have no maturities, except for the modest amortization of the notes embedded in our tangible equity units, until mid-2015. Beyond that our maturities are nicely laddered through 2019, leaving us with a manageable maturity schedule. While we may take additional steps to refine our capitalization, our primary emphasis going forward will be to invest prudently to accelerate our resumption of profitability while maintaining a significant liquidity cushion.

As a result of both the Section 382 ownership change and a significant deferred and significant deferred tax liabilities, our deferred tax situation is more complex than most builders. The simplest description of our DTA situation is that, despite the limitations imposed by the tax ownership change, we have a very large dollar value of deferred tax assets that will make its way back onto our balance sheet upon resumption of sustained profitability. Worst case, we believe that dollar amount is $284.8 million. But our actual estimate at year-end, plus losses during the quarter totals, $406.8 million. And that figure will continue to grow until we resume profitability.

The table in the presentation depicts the amount of the DTA's subject to the Section 382 limits, the amount of the DTA which is generally not subject to the limits, the amount that may be subject to the limits, our deferred tax liability, 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 our 10K and 10Q for more details. 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.

We continue to anticipate that 2011 will be a modestly improving transition year for us, and the entire home building industry. However, unlike last year, which was front end loaded due to the tax credit, 2011 is shaping up to be more back end loaded in terms of new home activity. As we said in November, the first two quarters of the year pose very difficult new home order comps. On the other hand, beating last year's results in the second half of the year appears to be achievable. In fact, as we've looked at the past two years, we think that the pattern of demand will more closely resemble 2009 than last year. But hopefully resulting in a full-year increase over either year.

In that respect January's results were somewhat encouraging. Traffic in our communities was up substantially in every division, and our new home orders were up by more than 50% over December, and up a comparable amount over January of 2009. These orders are still below last year, and we aren't expecting to match last year's second quarter order level this year, but we are hopeful that we will do substantially better in the second half of the year.

There are three reasons for our guarded optimism. First, the economy is clearly on a more solid footing this year, with positive job growth in each of the last four months. Second, we do not expect sales to essentially fall off a cliff in May, like they did last year, after the tax credit expired. In our third and fourth quarters last year, we only generated 1,783 new home sales. We fully expect to beat that performance this year. And, third, for the first time in many years, we will have a larger number of communities open for sale in the third and fourth quarters than we did last year. Driven by our new communities which we expect will deliver higher absorptions.

All of the above should enable us to sell more homes, but we realize its important for us to balance unit growth and margin improvement. We will carefully monitor pricing and profitability measures as we consider strategies to accelerate our home sales this year. At a more macro level, we continue to believe that home buyers are caught between the factors that favor resumption of growth in the new home market and those that weigh against a meaningful recovery in the near term.

As we've 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 foreclosure makes it very difficult to predict when and to what extent the housing market will recover.

While we have slightly reduced our expectations for national single family housing starts in 2011, to a level of approximately 525,000, or up about 10%, we're still comfortable with our other objectives for fiscal 2011. Our new home orders will at least keep pace with the growth in national single family starts. Prices for new homes nationally will be flat to down 3%. Despite the continuing pressures posed by distress sales, rising residential rental rates increasingly favour new homeownership. Our gross margins for the full year will be roughly comparable to last year. Longer term, with more new communities and more sales per community, our pre-interest gross margins should exceed 20%.

Our land spending will be up somewhat over 2010. And for the first time since 2007, we continue to expect to generate positive EBIT from operations before any impairment charges that may arise, although our expectations for slightly lower unit activity have reduced our margin for error.

During fiscal 2010 we undertook and accomplished many difficult 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 in the economy which may delay a consistent, broad based housing recovery. As we continue to experience volatility in the market we want to avoid becoming overly focused on short-term trends. Instead, we want to take long-term decisions that lead to stronger, sustainable performance during the expected recovery. The lessons learned during this downturn have been painful, and we are committed to producing demonstrably better performance in the years to come.

That is the end of our prepared remarks and the recording. I would now actually turn this over to the Operator for your questions.

Thank you.

(Operator instructions).

Our first question comes from David Goldberg with UBS. Your line is open.

Thanks, good morning, guys.

Good morning, David.

The first question, Ian and Allan, in terms of trying to get to positive EBIT from an operating perspective for the year, I'm just trying to get an idea of what kind of pickup you would have to see in the selling season, what you guys have in your models, and is it in line seasonally with the improvements you saw in January? If things continue to improve seasonally would you be able to hit that goal, or do we need to see a better improvement from what we've seen thus far?

Well, David, it's hard to predict. We really see a lot of volatility in the market. I think if you refer back to slide 23, this is a slide that we've looked at closely to see what we think our expectations are going to be going forward. If you look back at 2009, what we're saying is that we expect it to be more like that.

We've had a modestly slower first quarter, still higher than what we had in 2009, but less than what we had last year. But we accelerated, so even though 2009 was a tough year we accelerated through that, and we think the position that we have now for the third and fourth quarter are much stronger with these new communities coming on-stream, they should all be on stream by that time.

So, we're really looking at something similar to the numbers, overall numbers, for '09 and '10. We hope to be slightly modestly better than those numbers, but we don't need to be considerably more -- further ahead of those now to get to that positive EBIT at an operating level.

So what we're saying is we think we're -- we're bouncing along the bottom of this housing market right now. I think we're poised, ready and we're positioned for the upturn. But if we have to go along about this level, then we still think that we can get to an EBIT operating positive position this year.

Yes, David, what -- what Ian said is exactly right. The backdrop is we're expecting housing starts to be up 10%, and we're expecting for the full year to be up more than that. And that's part of our expectations for being at positive EBIT for the year.

Fair enough. The follow-up question was on the cancellations you guys had in the quarter, kind of a two-part question. Not to break my limit of two questions, but the first one is -- presumably and Ian you commented on a lot of cancellations were driven by tighter underwriting standards through the process, through the building process, and so the first question is, where are you finding that people are canceling?

Is it later in the process and creating spec units? Or are you finding out earlier that underwriting guidelines have changed and you can't qualify people, maybe that pre-qualified for a loan? And the second question that goes with that, are you -- have you kind of scrubbed the backlog at this point, that you feel pretty comfortable that given what you guys are hearing from Bank of America, that everyone who is in backlog now is able to qualify under the current standards and you don't have people who are going to get kicked out -- who are going to get kicked out in a couple of months when they come to close?

David, let me take a stab at that. I think, to answer both of your questions, the first part in terms of when does the cancellation related to tightening occur? What we saw in the quarter was it affected both sales and the backlog. And I referred to both the backlog conversion rate was down, and that big step-up in the FICO scores affected the can rate a little bit. And so we saw it on both sides.

I think that what that really relates to, as much as anything, is we all remember in that October, November, December time period what a pressing issue mortgage putbacks and concerns about underwriting and robo signing and a lot of other macro issues were -- that environment was really a different environment, and it affected anyone in the home buying process, regardless of the stage that they were in. And the right answer is that it affected both sides. It affected not just later in the process, it was more of a timing related thing than a process related thing.

And that leads to the second part of the question. I do think that that process resulted in -- or that environment resulted in a review and a thorough review by us, and by B of A and I feel very comfortable about where the backlog is now in relation to where underwriting criteria are.

Great. Thank you.

Thanks.

Thank you. Michael Rehaut with JP Morgan.

Hi, this is actually Will Wong on for Mike. How are you guys?

Good, Will.

Hi, Will.

I just had a quick question about gross margins in terms of -- you said it was going to be roughly comparable to 2010. Can you talk about where gross margins are the last two quarters, both 3Q and 4Q, the most recently completed quarter, and where you expect those gross margins to be going forward in the next quarter or two?

Well, yes. I'll refer you to our slide 13 which has the gross margin trends on it. You'll see 3Q we were 17.9%, 4Q we were 16.2%. And 1Q, this most recent quarter, we were 17%. So, the trend has been in and around 17% the last two or three quarters.

We had a 22.5% -- a little over 22.5% gross margin in the second quarter last year. And we acknowledged at the time that there were a couple of hundred basis points of warranty recoveries making that really a non-comparable kind of a number. And we've said further today that we do not expect to positively comp for the second quarter. So our average for all of last year was a little above 18%, and we've said we expect to be roughly comparable with that for the full year this year. And those numbers, all of those numbers that I've quoted, are pre-interest and pre-impairment.

Okay. And then you mentioned that warranty expense for this quarter, I do not think that I got that number. Could you --?

Yes, what I said was what really hurt us this quarter, and it is not shocking, is that we were down in closings so substantially that the indirect costs had to spread across a much smaller number of closings. So that cost us about 170 basis points compared to last year. We were only down 100 basis points, and the reason is we had some modest pickups in warranty recoveries that really accounted for the difference.

Okay. Great, thanks.

Dan Oppenheim with Credit Suisse.

Thanks very much. Was wondering about the comments in terms of the new communities that you have, when you talked about the margins being term basis points higher and such. Didn't talk so much about absorption, but it would seem that the absorption wasn't so much different than the overall absorption. Can you clarify that? You've got the new -- the new design project there which one would think would help the absorption. How are you seeing absorption in those communities versus the existing communities?

I would say it is early in the life cycle of those communities, but we fully expect the absorptions rates to be slightly higher. I think that's our full expectation. We've re-tooled our product lines over the last couple of years, and all new product is going into those new communities.

Some of our existing communities have residual models and residual product lines there. So I'd say we will definitely expect to see higher absorptions, but at this point we're not giving an absolute run rate for that. And I think that we'll see that as we go through the spring and the summer.

Okay, thanks. And the second question also relates to the absorption in the sense that if you look at the orders for the first fiscal quarter here, it looks as though it would be probably just about -- less than one order per community, per month. And when you think about that, obviously, it is seasonally slower there. But, where do you think about what you need in terms of leveraging the overhead on an annual basis in terms of -- what are you targeting? And as you go through the spring, what are you looking for? What would trigger a change in terms of pricing strategy if you are not getting that level of absorption?

Well, just to reiterate, again, what we're looking for over the whole year is about 10%. That's what we're saying we think the market is going to pick up by that. If it is slightly more than that, then I think we will be very pleased with that. It will help margins as well.

This is a volume game now, really. We are trying to hold to our margin levels in communities. You saw that in the first quarter. We didn't discount in a slow market there to try to drive volume. But I think driving, going into the spring, now, we'll be looking at it community by community. And we'll be taking communities that have some pricing power. We've seen that in certain areas now, and we'll have other communities where we will have to make some discounts to be competitive.

So I think -- I go back to the point that I think we've got volatility right now. It is choppy out there. We cannot just give general comments. When we get back onto sustained growth again, I think it's going to be much easier to measure these trends at this point now, that we have to be very specific and select in each community.

Okay. Thanks very much.

Dan, I just would tag on, I think your estimate is not far off in terms of Q1. As you know, we don't give a denominator or a metric on community count, but I would say that generally in fiscal '10 we were around 1.5 per community per month, and our expectations for the full year this year would be to do a bit better than that.

Okay. Thanks.

Thank you. Alan Ratner with Zelman and Associates.

Good morning, guys. Thank you for taking my question.

Allan.

On the orders, if I look at your fiscal first quarter versus 4Q, they fell about 30%, a little bit more than that. And the other builders, your peers who have reported so far, have been more in the 15% range, which is more in line with your traditional change. So I was curious, when you look back on the quarter, obviously the B of A issues might have contributed to that, but some other builders also cited those same concerns. I'm wondering if you were able to identify any reasons for the underperfomance, whether it was maybe holding the line a bit more on price to preserve that margin, or any other factors that you think might have contributed to the underperformance on the orders.

Alan, one of the things to look at is our fiscal year end is September. And we were clearly moving, and we said this at this time, we were moving through specs in that fourth quarter. So we worked pretty hard, we took some margin pain to do it, but we made some sales and closings in that fourth quarter which, at fiscal year end, those behaviors relative to your follow-on quarter are a little different than for folks who are on their third quarter headed into their fourth.

Okay. So, on top of that then, did you notice any aggressive discounting from some other builders that might have been on their calendar year-end quarter that you were able to identify? And are you concerned at all that might have triggered another round of price pressures, or is that something that you think was one off?

So, again, other builders will have pricing concessions in certain areas, and we saw that. Every builder towards their year end does that. But we really -- as you mentioned earlier, we really held the line there.

Our first quarter, our December quarter, is not the quarter to be selling our inventory in a slow market. We wanted to hold onto that inventory. Unless we could sell it at the right price, we wanted to hold it for the spring selling season. So you weighed it up exactly right, we weren't going to force the issue in that quarter. But we are coming out of the blocks much stronger in January, and we're looking to continue that as we go through the March quarter.

So it's definitely the position we took. We haven't seen a lot of price pressure, though. I think that there is a real separation now between the new home pricing and the existing home pricings, particularly as it is impacted by the foreclosures. Those are very, very different markets right now. And I think what we're looking at is competing head-to-head with our new home peers. Those are far more comparable for us.

All the energy efficiency we have in our homes, those efforts there. The difficulty of buying foreclosures -- if people want bargains, a good article today in the Journal about how many of those foreclosures are now being bought by cash. If you look at our buyers, very, very few cash buyers. These are far more traditional home buyers, as opposed to investors buying those foreclosures at very low prices.

Great, I appreciate that color. And if I could just add one second question on the G&A, and we really appreciate all the color that you give on the SG&A breakout. Just curious on the -- specifically with the operating G&A line, you're running looks like this quarter just under $24 million, which is down about 10% from the average of 2010. But, obviously given the current run rate, it's still an inflated expense number as a percentage of revenues. So just curious whether that's a number that you think can move lower, or if you are looking to move it lower, or whether $23 million to $24 million is a good run rate going forward.

The latter. We think that that is a good run rate. We don't expect to have any other quarters with 500 closings. And so we'll deal with the denominator in future quarters rather than the numerator.

Okay. Thanks a lot, guys.

Thanks, Alan.

Joel Locker with FBN Securities.

Hi, guys. Just a question on your interest incurred. Is that a good run rate going forward after the debt financing, the $32.4 million a quarter?

That's a little heavy. It really relates to when the interest payments are and to the accrual moves up and down. We've got interest expense in the $115 million to $120 million run rate.

Right. So $30 million, or a little less?

Yes.

$29 million or $30 million, or so.

Yes.

And then -- I know that you guys do not give community count, but can you let us know, at least year-over-year, what it ended the first quarter, down or up?

Well, it was down about 10%. The overall community count was down 10%. And this is kind of the quarter where we're going to make a bottom, and then Q3 will be the first quarter where we're up.

Right. And what percent was it down in the west? Just looking at orders -- ?

Yes. That definitely played a role. And we broke out -- obviously there were the results. By recollection, I think the community count was down a little less than 10%. But it was down -- community count was down in the west, for sure.

Right. And then just last question on customer deposits. Where do those stand at the end of the quarter?

The dollar value?

Yes, dollar value.

Deposits, I'll pull out the balance sheet and I'll circle back to that answer. We'll move on. But I do not have that right in front of me, but I'll read that answer out in a second.

All right. Thanks a lot.

Jonathan Ellis with Bank of America.

Hi, this is Jay Chatmar on for Jonathan.

Hi, Jay.

Hi. My first question is, do you expect to put additional specs on the ground given the increase in traffic you've seen so far in January?

We control the spec inventory very carefully and, again, it has to come down to community by community. So we're very comfortable with the level we have today. Sales have picked up in January, and where sales are increasing, we'll be putting more specs back out there to replace those we've sold. It is a controlled number. If anything, as we go into this selling season, we will be looking to put slightly more out there. But it is just a case-by-case.

Okay. And my second question is, are your new community openings concentrated in one region versus the others? And what is the average growth you expect for the full year?

Don't have that number. The new communities are halfway spread over all three segments, it is not overweighted. There probably are some slight timing differences in terms of when they open. I'd guess that our eastern communities are more prone to open in the third quarter and the second quarter, than the first and the fourth, just because of weather related issues.

In terms of the full-year, I think we'll be up at September 30. We should be up in community count about 10%. Right now we're down about 10%. As I said, Q2 will be kind of the leveling out quarter. Q3 will be up a little bit, and I think Q4 will end up, up about 10%.

Okay, thank you.

And just to Joel's question from before, the customer deposit number is about $4.5 million, Joel.

Thank you. Alex Barron with Housing Research Center.

Yes, thanks, guys.

Hi.

I think I heard you right, saying that orders were up 50% from December to January. Can you either give us a sense of how the quarter broke down, or what it was year-over-year for January?

No. What we're saying is 50% over December 2010, and it was also 50% up over January 2009. We were trying to put it in that perspective there. It was fairly consistent through the quarter, I think, if that is what you are asking. It was not a strong quarter for us. There were no real highlights.

It was a tough market out there but a -- I'm far more encouraged about what we've seen in January. We've seen markets that -- the east is particularly strong, our Mid-Atlantic region is particularly strong. Indianapolis. We've seen some positive results in Texas. We've seen some good strength there. And after a slow quarter in California, we've really picked up in California as well. And so these markets, to go back to it, it is volatile at the moment, but we can try to give you color there. But I'm very encouraged with what we've seen in January so far, and we're looking for a strong February and March. It is going to be very critical to us.

And it comes down to the confidence in buyers. And the buyers need to know that employment is getting better. They need to know that pricing is stabilizing. And both of those factors are playing in right now. I'm quite encouraged that, from what we've seen in January, and what we're seeing in the quality of the traffic we're seeing, I think it is quite encouraging at this time.

Good to hear. The other question I had was related to the interest. I noticed the capitalized interest went up a little bit sequentially. Is that a trend that we should expect? In other words, is your interest expense below the line going to decrease due to your rising inventory? How should we think about that?

Yes. What you really saw this quarter was the effect of a very low number of closings. You know, the capitalized asset base, or the asset base eligible for capitalization, is growing slightly but not dramatically. So when we get back to a more normalized level of quarterly closings, you will not see that trend continue.

Thanks.

Thank you. Carl Reichardt with Wells Fargo Securities.

Hi, guys, how are you?

Hi, Carl.

Hi, Carl.

You had mentioned, Allan, in your comments about land spending being up in fiscal '11 and a difference between takedowns and existing assets in new deals. As it sits right now, do you have a rough idea of how you would split those two out? And what kind of activity level do we need to see increase-wise for new deals to begin to accelerate for you? And can you also give me a refresher on your underwriting criteria now?

Sure. So, that is like a three for one.

I know. I won't ask another one, how about that?

Now you are testing me. You're going to see if I can remember all three.

The first thing I would say is that for us to be up this year there is a combination of takedowns and existing deals. Now, existing now includes the 69 deals we've approved. If we don't do any new deals, if there was nothing beyond the 69, I think it is likely that our land spending would be down year-over-year. So -- we're very close to flat. So that the increase year-over-year is largely us telegraphing that we do expect to add to that count of 69.

I think the -- the second part of your question, what would we have to see? I think if we started to see order growth looking like it was trending to up 20% year-over-year, not up 10% for the company as a whole, for the year, those kinds of -- the things that would be necessary for that kind of order growth to be evident, we definitely -- it would cause us to be leaning a little heavier into our land spending this year for 2012 and 2013.

And then in terms of underwriting criteria, it is a -- it is a complex process because sometimes you look at replacement cost. But our financial analysis is really around a 20% modified IRR. And we use a modified IRR because the reinvestment rate, assumption or -- the reinvestment rate math in an IRR calculation we think leads to kind of faulty numbers. So we use the modified IRR with a reinvestment rate set at 15%, and we target rates of return above 20%. So MIRR is above 20%.

We're also looking at one year out cash-on-cash return. We're also looking at different payback ratios and gross margins and net contribution margins. And so we kind of triangulate in. But I would say that if you asked any of our folks in the field, the first number they'd come to is we're looking for a 20% MIRR.

That's very helpful. Thank you.

Susan Berliner with JP Morgan.

Hi, good morning.

Hi, Susan.

I was wondering -- I guess referring to your chart on page 17 with your land, I was wondering if could you give any additional details regarding breaking out more of your land under development. If you could give bigger buckets, in terms of what is 70% finished, et cetera? And then if you could give us any more details on -- I call it the mothball land communities, how we should be thinking about that or any more details on that?

Well, I'm not able to sort of break new ground in real time with you in terms of that 9,000 lots in land under development, Sue. I think it is in various stages. It is not a trick by us that it is basically all raw; that is, typically the land in communities where we're active. But the lots aren't yet finished. It could be as, as you know, as light as maybe a top coat of pavement. It may be that there needs to be some additional grading. Or it may be more raw.

And so I'm sorry that I do not have an real breakdown, but I think we feel very comfortable that it is in the right places to feed into our operation and to allow us to continue and grow the business in the places where we are.

The second part of your question, the good news for us around our land held for future development is we have over the last year brought 30 or more back into active development. And I will expect that during this coming year, during fiscal '11, we'll pull a comparable amount, or maybe more, back into active development. Largely those parcels are undeveloped and the issue that we've had is we want to bring them back at the point that the incremental capital that we need to spend is earning a very high rate of return. Because that incremental capital on those existing deals has to compete with new deals that we're looking at in the market.

So, where we're seeing price appreciation in some markets, and we're seeing shortages of finished lots in markets, including California as an example, we've been able to bring -- justify bringing back those into active status. And I do believe that we will bring a number. I do not have an exact number, but I will bet it is more than we brought back last year by the end of this year.

All right. That's really helpful. And just one follow-up, Allan. As you look at the balance sheet now, you obviously accomplished a lot last year. Are you satisfied where you are? What should we be expecting for 2011?

Well, we tried to telegraph very directly today that we will likely do a second tranche of that cash secured loan prior to the six month anniversary from the closing. So prior to May. Where we will draw down an amount equal to the debt that we've repaid. And we also said that we've repaid $180 million in the quarter. We want to protect that refinancing capability, so you should expect to see us add more cash to the balance sheet, but also add debt in the cash secured term loan.

The rate on that is 40 basis points over LIBOR and so we're comfortable that that is a very inexpensive price to pay to preserve that refinancing flexibility. But I would say that that is the only thing that we're really directly trying to signal. Otherwise, we feel pretty comfortable with the senior debt maturities cleared out until 2015.

Okay, terrific. Thanks so much.

Dan McCandless with Guggenheim.

Hey, good morning. First question, just wanted to get a sense of timing. Assuming that you can get orders up 10% or more from the year, do you expect that 1Q is probably the low point on gross margins? Or do you think that will you have to give some more incentives to get to that plus 10% number by the end of the year?

It is a great question. The challenge that we've had, Jay, with gross margins, is the mix within divisions and between divisions is such a huge factor that volume by itself is not a great indicator. We've had some heavier closing quarters where margins were up, some lighter closing quarters were margins were up. What that tells you is that it is real will a complex combination of volumes where we're leveraging indirect costs and then mix.

We had a situation this quarter where Houston is for example in the order of 10% of our total closings, their ASP was down about 15%. Well, that wasn't because we lowered prices or anything like that. It is simply because the communities that sold best this year as opposed in the prior-year quarter were lower average sales prices. Ad there wasn't a meaningful margin difference.

So I can't directly link the gross margin forecast to the volumes. What I can tell you is, and what we've said, we do expect by the end of the year to get to a point where our gross margin pre-interest, pre-impairments is comparable to what it was last year. But it will likely be, as it has been in prior years, choppy between here and there.

Okay. And actually that leads into my second question, is with the increase in traffic that you've seen in January versus December, is there a trend you can see in terms of what people are going for? Is it more moveup, is it more entry level? Are they demanding higher incentives? Can you just give some more color around the traffic.

Yeah. So what I would say it is still very much an entry level market. I mean, two-thirds of our buyers are entry level at this time. But we are hopeful that the resale market is starting to open up, that we are getting more traffic from the resale market, people coming in thinking about selling their homes. So that is a market that has been under served for the last few years. People have stayed in the resale market, they haven't been will to resell their home. But we are seeing some of that moving out.

And as far as incentives are concerned, I would say that we are -- we are really -- people are walking in and comparing foreclosures, that is not happening as much these days. So I think that we are not getting as much pressure on incentives right now as that period when the foreclosure down the road was the comp is not happening as much now, certainly for buyers.

Still some appraisals take that into account, but the buyers really understand that we've got two different markets there. So we're actually hopeful that we can hold the line on pricing as we go through this year, and we're also hopeful that we see some movement in the resale market. In fact, you saw existing homes at the end of last year really spiking up. Now a lot of that might be foreclosures, but that is good, they are being taken out of the market. And secondly you are seeing the existing home market start to open. So we are hopeful that we'll see more moveup buyers moving forward.

Great, thank you.

Thanks a lot Jay.

Thank you. Our last question comes from Michael Kim with CRT.

Hi, thanks for taking my question. Just curious if you could talk about the legal and professional fees spent during the quarter, is this a run rate to assume for the remainder of the year, or should we expect this to come down sequentially through the rest of the year?

One of the reasons that we break that out, Michael, is it is just unpredictable. As you know from our prior conversations, relates to legacy costs where we may have cooperation or legal expenses that arise during a quarter that then are done and we do not hear for the next quarter or they could be more.

I will tell that you there was an accrual this quarter -- of over a million dollars that related to the payment that we would expect to make under the agreement that we had with the government when we signed the deferred prosecution agreement because it is predicated on a formula. It is kind of a complicated formula of adjusted EBITDA that we need to pay into a fund over five to seven years. And so there is an accrual in this quarter for what we estimate that will be for the full-year.

If we perform on plan from here until the end of year, that is a compound that would not be recurring. But other than that I would tell you that the vagaries of the composition of that, the very things that give rise to it, are just too hard for us to predict. And that is why we break it out, show it for us what it is. Directionally it is coming down year-over-year, and we think that it will continue to. But quarter-to-quarter it is impossible to estimate.

I understand. And just a question as a follow-up to mortgage putbacks. I know that you guys are not as exposed as some of your peers, and especially thinking about exiting the business back in 2008, and relying on third party underwriters and closing agents, just wondered if you had any color on the state of putback requests since the October/November time frame? Have you heard about any uptick in initial requests through December and January, since the foreclosure moratoriums?

You know, have I not been paying attention at a macro level. I will tell you that we didn't receive any requests during the quarter.

Okay, great. And your reserve is still below a million?

It is. And there was no change on our side.

Great. Thank you.

And at this time I'm showing nothing further.

Okay. Thanks, Operator.

And so just to remind you that a recording of this call with the slide presentation will be available in the Investor Relations section of our website at Beazer.com. And we would like to thank you all for joining us today and we look forward to speaking to you at the end of the next quarter. Thank you very much.

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