Beazer Homes USA Inc (BZH) 2011 Q2 法說會逐字稿

Good morning and welcome to the Beazer Homes Earnings conference call for the second quarter of fiscal year 2011. Today's call is being recorded and will be record hosted by Ian McCarthy, the Company's Chief Executive Officer. Joining him on the call today will be Allan Merrill, the Company's Chief Financial Officer; and Bob Salomon, the Company's Chief Accounting Officer. Before he begins, the Carey Phelps, Director of Investor Relations, will give instructions on accessing the Company's slide presentation over the internet, and will make comments regarding forward looking information. Ms Phelps?

Thank you Evan. Good morning and welcome to Beazer Homes second-quarter earnings call. This morning we will be discussing our results for the fiscal quarter ended March 31, 2011. During this call we will webcast a synchronized power presentation. A link to the presentation can be found on the investor page on www.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 10-K. Any forward-looking statement speaks only as of the date on which such statement is made. And except as required by law, we do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. New factors emerge from time to time and it is not possible for management to predict all such factors.

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

Thank you Carey. Good morning and thank you all for joining us today On our call to this morning we will discuss our second quarter results, and share our updated expectations for the remainder of fiscal 2011. Last fall we were relatively optimistic about new home sales for our fiscal 2011. While the second half of 2010 had been very disappointing after the home buyers tax credit expired, conditions seemed right for an improvement in the housing market. Inventories of new homes were very low, affordability was at record levels and job growth had finally begun.

Unfortunately at the midpoint in our fiscal year, we have to confirm that the improvement has not materialized as expected. While we share investor's frustration at the slow pace of recovery in the new home market, we are not sitting still waiting for an elusive recovery. In our comments today, we will address three primary actions we are taking in response to the, so far, tepid housing recovery. Improving efficiency, creating new opportunities and investing for growth.

First though, I will summarize our results for this quarter, which reflected expected seasonal improvement t, but not much more. While consumers are still wary about employment conditions and the overall economy, we are encouraged by the sequential improvement in traffic we saw in our communities each month of the quarter. In some of our key regions more prospects came through our sales offices this quarter, than during the same period last year, despite the availability of the tax credit last spring.

While new home orders lagged behind the results we saw during the second quarter of fiscal 2010, orders were up 9% over the second quarter of fiscal 2009. The most recent comparable period without a tax credit. And were more than double the number we recorded in our first quarter this year. During the quarter in our results from continuing operations, we recorded 1194 new home orders, down 26.7%, compared to the second quarter of last year. New home closings were 573, compared with 832 for the same period last year.

Our ASP was down year-over-year by 6.5% to $215,700, in part reflecting the growing impact of our new lower priced communities. Home building gross margin, before interest and impairments, was 19%. And SG&A was down in dollar terms year-over-year, but was up in percentage terms as a result of the lower revenue base. During the quarter we took inventory impairment charges of $17.9 million, primarily related to assets in Las Vegas. Allan will discuss this further in a few minutes.

Our loss from continuing operations for the quarter was $0.74 per diluted share, compared to earnings of $0.10 per diluted share in the prior year. The net loss of $54.9 million was impacted by the inventory impairment charges of $17.9 million. In the prior year, the Company had net income from continuing operations of $6.2 million, largely due to a $52.9 million gain on the modification of our subordinated debt. The net loss this year, including discontinued operations, was $54.6 million.

As I mentioned a moment ago, we are not sitting still waiting for a better market in order to make progress on our profitability. After restructuring the balance sheet last year, our efforts to accelerate and return to profitability this year have fallen into three categories. Improving efficiencies by examining every functional activity in the Company. Creating new opportunities by finding ways to leverage our expertise and infrastructure to generate profitability. And investing for growth by identifying the market segments we can most profitably serve in the years ahead, and positioning ourselves in those locations.

These initiatives are targeted towards overall goal of accelerating a return to profitability Despite modest improvement in some of the leading economic indicators, including job growth in most of our markets, there is still no definitive sign that a significant market turnaround is imminent. Although we remain convinced that a recovery in housing will occur, our operational strategy has been to align the business with current market realities.

Between fiscal 2006 and last fall, we have reduced our headcount by approximately 80%, and lowered the annual run rate for SG&A by more than $300 million. In November, in the midst of an unusually weak December quarter, we made a public commitment to review our overhead expenses, if new home orders during the March quarter did not provide clear evidence of a strong recovery in the housing market.

While we are encouraged by the month-to-month improvement in new home orders we experienced from December to January, and then again from January to February, March results were mixed, with traffic up that orders down. Similarly, orders in the June quarter got off to a relatively weak. Sales patterns continue to be erratic and do not indicate real evidence of a sustained improvement.

Other results. In April, we took another hard look at our cost structure and identified ways to further reduce our expenses, given the current market environment. These efforts resulted in a restructuring of many corporate and regional functions, including Accounting, Purchasing, Planning and Design, Marketing and IT. In addition, we identified and implemented strategies to reduce costs in every division. Taken together, the cost realignment efforts, including the elimination of approximately 130 positions, are expected to reduce overhead costs by more than $20 million per year. Although we do not have specific plans for further restructuring, we will continue to take the appropriate steps to accelerate our return to profitability.

In addition to ensuring our cost match today's market realities, we are also actively pursuing new opportunities to leverage our skill sets and resources to provide an attractive return. While many prospective home buyers recognize that it's an excellent time to purchase a new eSMART, high-performance Beazer home, some consumers want or need different alternatives. To this end, we have recognized a unique opportunity to take opportunity very attractive rental market, leveraging our combined strengths as a home builder with our specific sub market knowledge.

During the March quarter we launched d our Pre-owned Homes Division, beginning with the Phoenix market. This division is charged with acquiring, improving, and renting recently built, previously owned homes within select communities, in markets in which we can't currently operates. By augmenting the sale of new homes with rental options of previously owned homes, we expect to appeal to a broader range of consumers, including those who have elected not to become homeowners at this time, as well as those who simply may not qualify for mortgage financing right now.

We believe that this business offers an attractive investment business proposition for a portion of our liquidity. As a primary source of pre-owned homes will be distress sales, typically foreclosures or short sales, we anticipate acquiring homes at a discount to their replacement costs. Through the end of April, we had either purchased or placed under contract, approximately 40 homes in the Phoenix area. Once we complete the purchase, we use our home building expertise to perform the repairs necessary to prepare the home for rent.

We've retained a third party to provide day-to-day property management, and we work with a management company to identify prospective tenants. The unleveraged cash-on-cash returns after allowances for vacancy maintenance, real estate taxes and insurance, have been in the high single digits. Excluding any future appreciation potential. I expect that by the end of this fiscal year, our Pre-Owned Homes Division will have purchased at lease 100 homes in the Phoenix area . In addition, we are considering expanding this division to other hard hit markets, such as Las Vegas, and parts of California where we see similar opportunities.

In fact, our early experience has given us added encouragement to find ways to more quickly scale the pre owned homes opportunity. This may involve the acquisition of one or more portfolios of distressed homes and the use of external capital . In all events, our desire to scale this business will be aligned with our ability to further invest in our core home building operations. Upon our recovery in the housing market, characterized in part by higher home prices and lower cash yields for rental income, we expect to offer these previously owned homes for resale, either to their respective tenants or to other buyers.

Our land acquisition efforts have been organized to support our home building strategy within each of our markets. And rather than reacting to whatever happens to be for sale in the market, we have identified sub-markets and buyer profiles we are targeting. Within these target nodes, we want to own or control through option, several years worth of lots. In some of our nodes we are well set for the next couple years. In others, we would like to add to our positions. But because positions within our target nodes may or may not be available in a particular quarter, a quarterly land spending will be somewhat volatile.

Last quarter we told you we have sourced 69 new land positions since the beginning of fiscal 2010. During the quarter ending March 31, we added another 18 positions, giving us a total of 87 new positions in the last year and a half. This highlights the markets where we have acquired these new positions. One other note, since the land positions we acquire may be designed for more than one product line or price point, the 87 new positions will represent slightly more communities as they commonly refer to in the industry.

By the end of the second quarter we were open for sale in 52 of the 87 locations. During the second quarter, these locations generated approximately 23% of our new home orders. We are still on target for new locations to contribute approximately 0.25% of our closings for the full year. The ASP for our new communities is approximately 6% lower than our older communities, which, as we said last quarter, is one of the factors that will impact our ASP this year.

To date, our gross margins in the new communities have been approximately 180 basis points higher than our existing locations. In looking at our most recent new home orders however, we are seeing a smaller differential in margins between our new and existing locations. Within the third quarter we expect to show our first positive year-over-year community count comparison in four years. With that I'll now turn it over to Allan to further discuss our

Thanks Ian. In the second quarter, we had 1199 total net new home orders, 1194 of which were from continuing operations. While this represented a 26.7% decrease in orders from continuing operations year-over-year, orders were up 9% compared to the same period in 2009. Year-to-date, we are down 25.9% impaired to 2010, but are up 7.8% compared to 2009. As we have mentioned previously, we had similar full-year order numbers in fiscal 2009 and fiscal 2010, but very different seasonal order patterns due to the tax credit pull forward last year.

The decline in new home orders compared to last year was attributable to the declines in all three of our geographic segments, with particular weakness in the west segment. Our cancellation rate ticked up a little this quarter to 19.9%, compared to 17.8% last year. It is hard to discern reasons for such small changes in the cancellation rate, but somewhat more stringent underwriting criteria by mortgage underwriters probably played a role.

In fact, the FICA scores for our customers who used Bank of America, were up to 722 this quarter, compared to 712 a year ago. Those are pretty healthy numbers for first-time home buyers, suggesting customers with less pristine credit either can't get credit or are choosing not to buy right now.

We had 573 closings in the quarter, down 31.1%, or 259 closings from last year. This related to both the lower starting backlog and a lower backlog conversion rate. We started the quarter with 153 fewer homes in backlog, and our backlog conversion rate slipped to 72% from 88% last year. The lower conversion rate was primarily caused by the mix of units and their respective construction status at December 31, but was also impacted by severe weather conditions in most of our markets.

Backlog in our continuing operations as of the end of March, was 1414 units, with a value of $339.3 million. Which represented a decrease of 18.9% in units, and 12.1% in dollars compared with same period last year. Our ASP from closings during the quarter was (technical difficulty) % from the same quarter a year ago, but up 3.3% sequentially. Again this quarter, we experienced volatility between the ASP metrics as our backlog ASP and the end of March was $240,000, or 11.3% 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 there are many quarter-to-quarter variations in the backlog and reported ASP's. So we suggest 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 decline of 4.4% from the same period a year ago.

This morning, we provided our home building gross margin on three different bases. On slide 14, we have illustrated each of these by showing the impact of both impairments and interest to our reported gross margin for the second quarter this year, and for the prior-year period. Excluding interest and impairments, our home building gross profit margin was 19% in the quarter, representing an increase from 17% in the prior quarter, but a decrease from gross margins of 22.6% in the prior year.

This roughly 360 basis point reduction in gross margins from fiscal 2010, was primarily attributable to the impact of reduced revenue on our fixed indirect construction costs, approximately 70 basis points. As well as by a non-recurring warranty recovery last year of $4.4 million or 220 basis points. We believe the 19% figure is most comparable to the way the investors and analysts compare gross margins across home builders.

Looked at from a longer-term perspective, during the second quarter our (technical difficulty) years. These improvements are the result of many factors, including reductions in direct construction costs, flow back from impairments previously taken, lower home buyer concessions, and lower required warranty reserves.

As we have said previously, gross margin trends are difficult to evaluate over short periods of time due to differences in mix and volume. In fact, other than trying to predict new home orders, I'm not sure there's anything more difficult to accurately estimate than future gross margins. In light of the somewhat uneven selling conditions Ian described, we're hopeful that gross margins in the second half of this year will be comparable to the margins in the second half of last year.

While that doesn't sound particularly heroic, remember that we had a that extraordinary spike in closings in the June quarter last year which allowed us to leverage our indirect construction costs, benefiting gross margins. Therefore, matching last year's second half gross margins, absent that kind of closing leverage in either of our remaining quarters, (technical difficulty). While we have made great progress reducing our direct costs, at the halfway point in our fiscal year, we are about 200 basis points behind our gross margin from last year.

This is due to a combination of lower closing volumes this year, and nonrecurring warranty benefits last year. So, even if we were able to improve upon last year's second half margins in the balance of this year, we are likely to end up with gross margins for the full year slightly below last year. All of this discussion of future gross margins has to come with the significant health warning. Our actual results could be better or worse than we are expecting based on the specific quantity and mix of homes closed.

We continue to be very focused on increasing efficiency in our business and diligently managing overhead expenses. Total SG&A for the quarter decreased $1.3 million, or 2.9% year-over-year, despite (technical difficulty). Total SG&A also reflects a charge of approximately $1 million, related to the return of an invested stock grant in the quarter. Absent these two charges, SG&A would have been down $6.3 million year-over-year.

In relation to the return of compensation, the accounting is a little bit complicated. We recognized $6.6 million in other expense this quarter from the cash invested stock portions of the settlement agreement. That (technical difficulty) portion of the stock returned poses a more complicated question. We've gone ahead and treated that portion as a cancellation for accounting purposes, which means we have to pull forward the recognition and future stock compensation charges. That is the $1 million I mentioned.

But we are not convinced that the un-vested portion is actually a cancellation. If accounted for as a forfeiture, the accounting would flip. We would recognize a benefit and an amount (technical difficulty) expense related to those shares. We have formally asked the SEC for guidance on this matter and they are currently considering our request. In the event it is determined that the un-vested stock should not be treated as cancellation, we would change our accounting at that time. We expect to file a timely 10-Q, which gives us until May 10 (technical difficulty).

As provided in previous quarters (technical difficulty) adjusts for both commissions and other items such as the legal and settlement expenses that we have incurred over the last several years. (technical difficulty) $5 million this quarter, down from $26.4 million a year ago. The breakdown of these figures (technical difficulty) prior periods we have referred to this operating SG&A as essentially fixed, absent a significant change in the business.

In April, in response to market conditions, we created that change through a significant cost realignment effort. We reduced our annualized overhead and administrative costs by more than $20 million, most of which will flow through operating G&A. These changes will result in a charge of approximately $3 million in the third quarter, but the savings should be nearly fully realized by the fourth quarter.

Total non-cash pre tax inventory impairments and lot option abandonment's were $17.9 million for the quarter, compared to $10 million during the same period of fiscal 2010. Changes in market conditions, including sales price movement and changes in absorption estimates, can significantly impact the fair value of our inventory. During the second quarter we saw further deterioration in Las Vegas, which was characterized by additional reductions in new home prices and higher levels of them foreclosure inventory.

As a result, we took impairments of $16 million related to our active communities in Nevada. Unless new home prices fall significantly however, we do not expect to return a significant broad-based impairments. Our land position at the end of the second quarter totaled just under 31,000 lots, up 4.1% over the end of last quarter, and an increase of 6.6% from the end of fiscal 2010. 80% of these lots were owned, and 20% were controlled under option. Approximately 32% of our owned lots were either finished lots or lots upon which home construction had commence.

When the housing market saw it's most dramatic declines, we significantly reduced our land and land development spending. However, as we position the Company to take advantage of an eventual housing market recovery, we are carefully and selectively reversing this trend and investing for future growth. For the quarter ended March 31, we spent $61.1 million on land and land development, which compares to a $43.3 million in the same quarter last year. So far this year we have spent $123.7 million, compared to $73.7 million for the same period of fiscal 2010.

We have not changed our return criteria or underwriting standards for new deals. Nonetheless ,we've been encouraged by the availability of attractive land positions in our target sub markets, and as a result, we expect our full-year land and land development spending to exceed last year's spending by about 25% after factoring in anticipated land dispositions.

Excuse me Mr. Merrill. Sorry for the interruption. I just wanted to let all callers know that we are aware of the technical issues and we were are working on it from our end, and the call will now continue. Thank you.

In March 31, we had 789 total unsold homes in inventory, representing a decrease of 93 homes from the previous quarter. Finished unsold homes totaled 332, a decrease of 121 homes from the previous quarter. Compared to last year when we had 968 total unsold homes in inventory, our inventory position is down about 19%, or 179 homes.

Last year we underestimated the post tax credit fall off in demand, and got caught with more inventory than we wanted at June 30. That led to some margin erosion in our fourth and first quarters. This year, with the demand levels erratic, we are being particularly careful about releasing unsold starts. Our desired level of unsold home inventory is driven by seasonal trends, recent sales activity, expectations for future demand, and home buyer profiles, all determined at a community level.

Since the beginning of fiscal 2010 we have taken several steps to recapitalized our balance sheet, with the goals of preserving our liquidity, reducing debt, and increasing net worth. These steps have better positioned the Company to take advantage of the recovery in the housing market. In November 2010, we closed two cash-secured term loan facilities with a combined commitment of $275 million. At closing, we borrowed and immediately re-pledged an initial traunch totaling $32.6 million, with the ability to make a second borrowing within six months.

We currently intend to make a second draw under the facilities later this month. This draw, which is expected to be in excess of $200 million, represents the amount of our previously executed debt repurchases and repayments, including the retention of our 2013 senior notes. As we have previously indicated, the cash secured term loans are intended to preserve the refinancing basket provided for in our indentures, and are not intended to provide additional liquidity. As such, cash in an amount equal to the draw amount will be held by the lenders as collateral.

We are very comfortable with our current liquidity position. We ended the quarter with $453.2 million in cash. And as a result of the steps we took last year to improve our balance sheet, we have no debt maturities until mid-2015, except for the modest amortization of the notes embedded in our tangible equity units. Beyond that we have a manageable maturity schedule, with maturities of all but our junior subordinated notes, which are due in 2036, spread from 2015 through 2019. Our improved capital structure allows us to focus our attention on making investments that we believe should (technical difficulty) maintaining a sufficient liquidity cushion.

As we have discussed in our last few calls, as a result of both the section 382 ownership change that occurred in January 2010, and a significant deferred tax liability, our deferred tax situation is more complex than most homebuilders. 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 it is way back onto our balance sheet, upon resumption of sustained profitability.

Worst case we believe that dollar amount is $308 million. But our actual estimate at March 31 totals $430 million, and that figure will continue to grow until we resume profitability. I encourage investors and analysts to review the disclosures in our tax footnotes in the 10-K and 10-Q for more details. We will provide additional information as we are able to further refine our expectations. And with that I'll turn the call back over to Ian

Thanks Alan. As we said previously, we believe that fiscal 2011 will be more back-end loaded than last year's front-end loaded selling season caused by the tax credit. However, our visibility is limited given the erratic nature of order trends today. While we're still confident in an eventual market recovery, there is no indication of an eminent sustained level of improvement. In this context, we believe that our new home orders for the second half of the year will be comparable in the aggregate to the second half of fiscal 2009. Although quarterly year-over-year results will likely differ.

While 2011 has not brought with it the swift turn-around that we'd all like to see, it is delivering modest improvements in economic indicators such as jobs in some of our key markets. Which we hope will eventually lead to an uptick in consumer confidence. While favorable trends such as low interest rates, high level of affordability, home price stability, and non-distress sales and an increase in rental rates, exists in the market (technical difficulty). And those that want to purchase, in some cases, are finding credit more difficult to obtain.

For the second time this year, we have reduced our expectations for national single family housing starts in 2011, to a level of approximately 475,000, or comparable to last year. And as I mentioned, we expect our new home orders should also be similar to last year. We still expect prices for new homes nationally to be flat to down 3%. Our gross margins for the full-year are likely to be slightly lower than 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 as we invest for growth. And finally, with reduced volumes impacting our ability to leverage fixed costs, (technical difficulty) likely will not break even on EBIT basis for the full year as previously anticipated. 2011 represents the fifth consecutive year of the housing downturn. During that period of time, I believe we have demonstrated a high degree of resiliency and creativity in dealing with our balance sheet and improving our operations.

Despite the continued challenges in the market this year, we are working decidedly to accelerate our after profitability by improving efficiency through further cost reductions, creating new opportunities, particularly through our innovative Pre-Owned Homes Division, and investing for growth in our core markets. All of these initiatives are directed at returning the Company to profitability.

That's the end of our prepared remarks. Operator, we are available to answer questions at this time

(Operator Instructions)

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

Thanks good morning everyone.

Morning Michael

First question, just going back to the gross margins, and Allan, I appreciate the challenges you mentioned in terms of trying to gauge that going forward but, with the back -- I believe you said you are hopeful that the gross margins in the back half of the year will be comparable to a year ago.

And you mentioned further that you did have the benefit in the third quarter on the higher volume a year ago, but you still have margins that kind of trailed off in each of the two last quarter's and you're looking at 19% right now. So I guess the question is, as you look at your backlog and you look at the current pricing and incentive environment that you've seen over the last few months, are there things either in either of those the backlog or the current incentive or pricing environment that drives your cautiousness that you couldn't keep a 19% level or -- because other builders have looked at over the next two quarters gross margins expanding a little bit

Yes, I think we've got a limited number of homes in backlog, probably four or five months worth of supply, and so you've got the portion beyond that there were really trying to estimate. And given how erratic the sales patterns have been, I think we're trying to be a bit careful about projecting something that is hard to see right now.

And I do want to comment on what you said about the back half of last year tailing off. I think in the third quarter of last year, margins were something like 18% and then they were down to 16% in the fourth quarter. And I'm not suggesting that we're going to necessarily have that pattern, but sort of speaking broadly if you look at the sum of the third and fourth quarter, that is sort of a number that we're targeting to do at least that well.

But then I went on to make the comment that even doing that well or doing a bit better than that, we are starting a bit from behind. So the real key was we now think that on a combined basis, first half and second half, we're likely to come in with a full-year gross margin a bit below last year.

I think that was really the key thing. Three months ago and six months ago, we were hopeful that the gross margins for the full year would be up. I think at this point we think they're going to be down a little bit. But the precision of those estimates on a quarter-to-quarter basis, you know that's why I put the health warning on it. It's based on a lot of uncertainty

Okay thank you. The second question I guess goes to your pre owned homes effort. And I think it's more of a bigger picture question. To be honest, I'm just a little perplexed or confused by this effort overall just given, I think the huge challenges that you face in your core business, in terms of just not only navigating the challenging market itself but improving some of your metrics relative to your peers.

And so I was wondering if you could just explain the rationale a little bit better in terms of why you're necessarily kind of creating an additional area to -- that would take up resources and focus that kind of appears to be non-core.

Michael, that's a good question. The fact is that if we could do everything directly through our core business today we would absolutely do that. The market is just not strong enough to give us the results that we want, the number of homes sold that gets us back to profitability. So we've looked at a number of different strategies with our board and we recognized some time ago the strength in the rental market.

It's difficult for company like us to get into something completely multi-family housing, whatever, it's quite different from what we're looking at. But we found an opportunity through the foreclosure process in a number of our existing communities in Phoenix, and then another communities where we can take back homes that are ready foreclosed or through the short sale process, that are there at less than replacement cost.

We can then use our cash to buy those homes back, repair them very efficiently, and get them back into the rental pool and take advantage of the strength in the rental market there. And it really isn't taking a lot of resources. It's taking some cash, but we see a real opportunity here in select markets.

As we said, Phoenix is where we started, we think Las Vegas, we think certain parts of California, but we also think that we've got an opportunity here to possibly really leverage this up through some of the portfolios that are out there now with the banks.

And once we really refine that skill, and at this time we're using outside management company to manage it for us, so really very limited resources within the company, but really taking advantage of the market, particularly in rental there, that we see as an opportunity.

We also think that some point in the future as the market recovers, there will be appreciation there. And that's another opportunity for us to gain some profitability through this operation. So we think it's within -- very closely associated to our core business, single-family homes, and then just tapping into the real strength in the rental market, which, as you know, rental rates are increasing appreciably at this time

And the high single that cash returns I believe you said would be inclusive of, or net of any additional SG&A or personnel costs.

Right That's a fully loaded cash-on-cash yield. The only thing it doesn't take in account is what the ultimate resale may add to the total return. That's just cash-on-cash return that after all costs.

Okay, great. Thank you.

Thanks Michael

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

Thanks very much. I was wondering if you could talk a bit more in terms of what seems to be a shift in your thoughts on just the business here. Previously if we go back just a couple of months you would've talked about how getting back to profitability you have to do more that just cost cutting, you need the volume to come back. Now it's much more talk of the cost cutting and talk of rental strength. There is very little that can be done to stimulate demand for new homes in terms of selling those homes. How are you thinking about the core business there, and how you think that's, or how do you see that evolving over the next couple quarters here.

As I said to Michael just now, certainly we'd like to get the business back to our existing communities. That's the fastest way to profitability. Getting more sales per community is the fastest way back to profitability. We've looked at our product, we've retooled our product lines there, we've set our pricing to be competitive, but with new home sales at such a low rate at this time, it's really hard to force that pressure and force more sales through there.

Because we also think that we ought to maintain a reasonable margin level, and again it's a margin versus volume question. We want to try and maintain a margin level there that we think is sustainable for long term in the communities. We don't want to undermine the communities in total. So were balancing that margin versus volume at this time. We do think the market will come back. Inevitably, it will come back. But at this time, there's just not enough confidence of the buyers .

The encouraging thing to us is that as we said, during the March quarter we saw traffic up in every month. In fact in some markets, higher than it was last year. When as you know, our orders over the prior year in '10 were up by 48%. So we've got more traffic now than we had last year, but were not able to get those buyers to commit at this time. It just isn't the urgency in the market.

So we do think there's a lot more interest. We think the pent up demand is coming out to look, but as I think you've seen across the board, orders are still very, very erratic. There's no consistency there. So what we've done, as I said, we've looked out for other opportunities that we think in the short term can give us some real benefit. Because it's just hard to really stimulate demand.

We can certainly have good product, we can have good pricing, we can have great communities, and we're showing some real success in some of these new communities where we've been able to lower the product pricing there. But it's difficult to try drive demand at this time.

We're well positioned. We're investing in new communities. That's our core business there. And, to reflect the lower point in the market, we've taken the [price down]. We had to do that. We made a commitment to do that last year ,we've done it. We didn't want to do that before we saw if there was real strength in the spring selling season, which we anticipated but which didn't

Okay, and relatedly I guess you talked about the traffic being at higher levels there, but just a lower conversion. If we look at the existing home market and such, where there is more activity, is that something that you think it's an issue where the buyer is using the financing environments so difficult, or you're unwilling to lower prices to a level where you might be able to capture some of the traffic in terms of sales

I think the key point there, if you look at the resale market and the number of foreclosures and short sales through that, it's a very large part of that. A substantial part of those purchases are being made by investors, including us, as opposed to end users. So I think you have to take that piece out of the equation.

We've looked at pricing for new homes, and non-distressed sales, and distressed sales and there is a very big differences between each one of those. Unfortunately that's hard for the media to capture in a sound bite.

So it looks as though the resale market is going down in price, where in fact it's substantially driven by -- the lowering of price are substantially driven by the distress sales. The resale market is somewhat coming down. The new home pricing is typically above the resale market at this time.

So again, we don't want to -- it's that balance, we don't want to drive margins down to a level that we don't think is the right level for these communities when the up-tick does occur. But at the same time, obviously we need to capture some volume.

Okay. Thanks very much

Thanks Dan.

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

Good morning, it's actually Sue on for David.

Good morning Sue.

Just going back to the pre-owned homes operation. I understand that, or I believe that at this point you've self-financed all of these homes. Going forward, to what point do you think you can continue to do that? I know you said you expect to have about 100 homes by the end of this year

Well it really is a question of how quickly we scale it, Sue. I think 100 homes is something on the order of $10 million . I think we would consider that to be not significant or impactful in our overall liquidity situation. But as Ian said, as we look at opportunities to scale more dramatically, if we find those, there is likely going to be utilization of what I'll call external financing. And that could take a lot of different forms.

It's probably not prudent for us to speculate on that, but I think we would be very mindful in the scale scenario that we don't want eat into our cash reserves, or our ability to invest in the core business. So there's an amount of money we've sort of earmarked for this, but I think of we find the opportunities to work through and beyond that, I'm very confident in the external sources being available to us to facilitate

Okay. And then of the homes that you have, what percent of them are currently rented and are you finding that it's really easy to get renters

The ones that we own today, I think with one exception are all rented. They rented within a matter of days. I mean almost instantly. The vacancy rate in Phoenix right now in the neighborhoods that we're in for single-family houses is under 5%. You know that translates on the calendar to of about two weeks is the average vacancy rate. I think we've had a vacancy experience less than that

Okay.

Thanks Sue.

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

Good morning guys. Thanks for taking my question. Ian, I was hoping to I guess triangulate your comments on the spring, which obviously sounded like it was disappointing from your guys' view point, versus the actual results.

Where if I look at your orders, they were of up about 120% sequentially which is certainly much stronger than your peers, admittedly against a pretty tough basin in the prior quarter. But it was also much higher than your typical increase that you see this time of year on the Q2 versus 1Q.

I guess what I'm really curious on is what were your expectations heading into the quarter for these results to fall so far below, and ultimately have the spring, I guess in your opinion, be a disappointment

I think that's a good question Alan. As we said in the prepared remarks, we agree with you that in fact during that March quarter we more than doubled as you said under 120% over our December quarter. Now, December was weak, we have to acknowledge that, but this is a good game for us.

January started out white strong. February was very strong for us, we had an excellent month in February. But it really started to fall off in March and has done in April as well. I'll tell you that. We haven't seen consistency. And the other point we haven't seen is, we haven't seen any one market be consistently strong. It's been a erratic across the board.

I think that's the real disappointment. That's why it's hard I think to predict exactly what's going to happen. Because we can't say -- even though we can look at the mid-Atlantic up into New Jersey, across to Indianapolis, and say those markets are fairly reasonable and fairly robust, a little bit in the southeast maybe Atlanta, South Carolina for us nowhere else I would say has really shown sustained strength. It's difficult then, they've had some good weeks, some bad weeks.

That's the real the disappointment for us. That we haven't got momentum in the market and seen it consistently driving through week after week. And I think that's our real disappointment. Again we do appreciate it. We had a pretty good start to the quarter and we were feeling quite good to start ,with but it's really trailed off at the end

You know Alan, I had one other comment relative to the peer group and I'm sure you processed this. But, the fiscal year ends make a difference. And for us coming off a Q1 into Q2 is probably different from others coming of a Q4 into a Q1. So I don't know to what effect that affects the sequentials. We don't want to take away from being enthused about being up 120%. But, it's really in the context of what we see at the end of the quarter and for the balance of the year

Sure that make sense. And I guess just in terms of the fall-off you saw in March in April. There were a couple of other builders that actually gave monthly order data which showed that kind of continued improvement through the quarter continued into March and April.

So I was just curious if when you talked your guys in the field of they were able to identify what contributed to that, whether it was other builders getting more aggressive on the discounting side or maybe you pull some sales forward in January and February. Any type of color that you were able to get from your operators on that might have caused that.

I will say we have a February promotion. Since 2006, we have two annual promotions a year and one is in February. So that certainly helped our sales in February to the extent of pulling some through for March, I would say. But overall, there isn't robust demand in the market. So I think you're going to find someone is going to pull sales in one week, and someone else is going to pull it in after. It's just we haven't got that robust demand that would drive continuous sales. That's the problem at the moment.

I understand, thanks. And, if I can just sneak in one last one on the SG&A cuts. I know previously you had indicated that your current overhead you are pretty confident that the business could be scaled quite significantly on the volume side. Just curious now with these cuts what you think the potential growth could be once demand does snap back at the new overhead levels

You saw last June, as we said again, 70% increase in closings in June last year without any additional overhead. Certainly we've taken out overhead cost here, substantial amount of overhead cost. But a lot of it is in support services that we've kept, as far as we could, the people in the field who sell and deliver the homes. We tried to do that as much as possible. So I feel very confident that if we get to a point of robust growth going forward , we will be able to deliver with this level of

Thanks a lot

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

Thank you and good morning guys.

Morning Jon.

First question, just give some data points and the newer communities, which sounds like there is a slight deterioration of just pricing and the margin spread relative to older communities. And I guess I'm just trying to understand is that a function of geography where these new communities are located, if it more a function of those communities being geared toward the entry level buyer, which seems to have been somewhat weaker that the move-up buyers? Any commentary on those new communities, and then sort of entry level versus move-up trends

Jonathan it's Allan. I think the first part on sales, I'm not sure we saw any deterioration in sales prices. We had estimated, before we really had any closings, that the new communities would be in the range of 5% below. I think 6% below our existing communities. That didn't feel different to us in any expectation.

We've talked about 100 to 200 basis points and margin differential in the closings that we've had through March have been 180 basis points. And Ian's comment was simply that differential had narrowed a little bit.

I can tell you in some instances it's been because existing communities have ticked up a bit ,and in others it's been because the new communities have been a bit lower. Which at this early stage, I really believe is mostly a function of plan mix.

When you're pro-forming a new community, you may have three floor plans, four floor plans that have slight differences in mix and margins. And you estimate about how many you're going to sell on the exact timing you're going to sell those. And if your initial sales meet your targets but are of a different floor plan mix, you can see a little tweak to the margin.

So at this point I don't see anything in the new communities that really changes the thesis of 100 to 200 basis points. The 180 may not be the number next quarter, but that is what we have experienced so far. And again, I think when we've only got 60% of the new communities even open, and their accounting for only .25% of selling activity, it's a little early to try to extrapolate from that, that they have in some way been disappointing or been less than what we expected.

I think your other point about new, or first-time versus move-up, probably is right. In fact Ian mentioned this, that the strength that we have seen has been really heavily weighted toward that eastern seaboard. From Maryland to Virginia, up into New Jersey. And for us, those are primarily first move up, second move-up type buyers. And some active adult type buyers with less emphasis in the single family. So we tend to interpolate that in more a geographic context than a buyer profile, but I think it gets at your question as well.

That's very helpful. Second question just on land development spend. And I don't believe you gave an exact number last quarter in terms of expected growth this year, although I know you did say it was expected to be up.

But it doesn't sound like you've changed your view on land and development spend this year. And I guess given your revised outlook for starts, maybe you can talk about why you're going ahead with the same land development spend target. And then a sort of a related point is general availability of lots at this point throughout the country.

I think one of the keywords in the commentary was about the volatility of quarterly land spending. And the thing that came before that was, we try not to let land brokers create our corporate strategy by running around like chickens with our heads cut off every time something becomes available for sale.

We try to be somewhat disciplined about which sub markets do we want to be in, and which communities do we want invested into our growth plan. And when we have an opportunity to get one of those at an attractive, on an attractive basis we take a really hard look at it. You know the so called shiny objects that go floating by from time to time, there's an opportunity to react to those and we try not to.

That kind of comes back to, well if your order expectations are down for the next couple quarters, why would you buy land? Well, it really has to do with the discipline of wanting those positions in those particular sub markets. So we're also at a level in the low 200s, where were kind of treading water.

That's in the range of the amount of land we're using. But that doesn't really represent a significant reinvestment cycle, and I think that does reflect the fact that sales are fairly tough.

Just in terms of market, we're also actually seeing some of the banks releasing some of those properties now. So there's some good opportunities that we're taking advantage of. We know that we have to reinvest in the business to get back to profitability, and we are seeing those attractive deals now. So, this is a good time to buy.

Thanks. I have one last really quick question if I may. You gave the average FICO score this quarter and last year. Do you happen have that average FICO score for last quarter, your fiscal first quarter and any commentary on sequential changes in underwriting. I know you said on a year-over-year basis it was tougher, but any insight on the sequential change?

Didn't really see anything sequentially. And I'll, during maybe an answer to another question, I'll look up that number and shout it out. No real change in sequential underwriting

Thanks guys

Thanks a lot.

Our next question comes from Jay McCanless with Guggenheim. Your line is open

Good morning everyone.

Good morning Jay.

I wanted to stick on the sequential questions. Sequentially it looks like your gross margin ex impairments was up about 160 bps, I believe. When you look at the order book down, when you look at the back-log book, do you believe that we could see that type of sequential improvement through the rest of the year or maybe something above that?

Well we've talked an awful lot about gross margins this year, and obviously the mix of things in the backlog are always going to be different than the mix of things we've just delivered. What we're seeing right now, is that if our second half of this year matched the second half of last year, that's sort of in the range of expectations.

It could be a little better than that, it could be a little bit worse. But I think that's where we've been super careful and could not have said more times that sequential gross margin comparisons are dangerous. We've stayed away from them. We've tried to talk about them over periods of time. It's so significantly influenced by the mix of deliveries, which in turn, is affected by geographies.

We just have a different pattern of closings in the Northeast, Mid-atlantic, than we do in the Southwest. So as you go through a year, and you try and jump from one quarter to the next, you really do have to be careful. So I think the comments that we've made about gross margin, we're saying we think gross margin for the full year will be a little below last year. But we did have the benefit of some significant warranty recoveries last year that or nonrecurring. And that's part of the difficulty in making up last year's number.

Okay great. Thank you.

Thanks Jay.

Our next question comes from Adam Rudiger with Wells Fargo. Your line is open

Good morning thank you. I wanted to ask you about the SG&A cuts. I think you said they were focused on support services. I was wondering if you can elaborate a little bit and say a little bit more of what the people who got cut did. And then on that same front, where do you think potentially if you had to guess, that could bite you later if you're not staffed as well as some of your competitors.

Good question. What I'd say is that a lot of the functions that support the divisions we've scaled-back. Some of the new initiatives that we may have wanted to put through, in IT for example, we use technology a lot within our company. We recognize the strength of the Internet, and we constantly upgrade our presentation there. What was said is, at this point we're going to stand still at some of those initiatives. So we've had to scale back expectations for future upgrades in that area.

The same with our planning and design team. We've had a very big initiative over the last couple of years to really work on our product. We've substantially completed that whole scaling back of SKU's there. We've got that product in pretty good shape now.

So what we're saying to everyone is we're not going to change our plans, we're not going to upgrade, we're going to stand still for the moment unless we have a new community that needs additional product. We're going to use the existing core product that we have designed, we have it purchased, and we're going to use that going forward.

So again, we can bring those items back of the future, but at this point we're going to stand still and take those costs out today. But as I said, where we could, we've left the builders, the sales team in the field so that as we see more activity, they can deliver those homes.

And as we see the market improve, we can bring some of these newer initiatives back into production. But for now, we are going stand still on this

One detail on that. We did make part of the adjustments in our IT area, but I will tell you over the last couple of years we've adopted and implemented a significant CRM solution and deployed it across the company. And done a refresh of the hardware and software for all of our employees.

And those are fairly significant, but I would call them lumpy exercises. And I think with those behind us we had the opportunity to change the run rate in that functional area without really affecting the business in the near-term

Okay thank you, and then just for modeling purposes. I think said you see a $3 million charge this quarter, but when should we should we see the reduction in SG&A? Should that come in the next quarter as well, or is that going to be a little more gradual?

You'll see some of it in the third quarter, but it will be mostly fully realized in the fourth quarter. Almost all of it will flow through the operating G&A. A little bit of it, just a small amount, will be up in indirects which will affect cost of sales. But, the substantial majority of it will flow through this operating G&A and it will be almost fully in place in the fourth quarter

Thank you

Thanks Adam

Our next question comes from Alex Barron with the Housing Research Center. Your line is open.

Thanks, good morning guys

Good morning Alex.

I wanted to focus a little bit on your initiative in Phoenix. I wanted to ask you, are you guys, did I hear you correctly, you're only limited to buying homes in existing or previous Beazer communities, or you open to other markets. And as part of your rationale for getting into this business to I guess avoid irrational pricing from other people.

Alex we started in our own communities in the markets that we are in, but we expanded out since that point. So we have bought other homes, pre-owned homes, but in the cities that we build in. So we've expanded to that point. We do expect as we move into new markets, they will certainly be in the markets that we're in today. We'll probably start in our communities and then expand out again. That's the strategy we're looking at this time

Okay. Well, in general I think it's a really good idea, and I wish, well I don't want I don't want to get you competition, but I think other builders would probably, if everybody sort of did this, I think the market would recover a lot sooner.

As Allan intimated, we have talked to some external sources of capital who are very interested in this. And I do think that there is going to be somebody who wants to take this opportunity and we want to be the delivery mechanism for them. We're going to have a skill set here, which we're perfecting at this time, that we will then hope to expand substantially with other sources who want to take advantage of this opportunity. So I appreciate your support on that . It's something that we think -- it's a short term solution, it's not going to be long-term, but we do think in the short term we've got some cash-on-cash return and we'll have some appreciation at some point in

Right. I agree with you.

Thanks Alex

My other question has to do with the orders. I know you guys talked a little bit about your promotion. I don't know if that was in late February or early March, but I was just trying to get a sense of what did the promotion consist of, and what roughly percentage of the orders in the quarter came from that, and what would be the impact of the margins from that promotion

Really there is very minimal impact on margins. It's activity and as much as anything, is creating real activity and urgency within each of our communities. It's not something we can do every week, but it creates a lot of activity. Certainly helped our orders in February .

I haven't gotten the exact numbers there. We used to do it for a weekend, we actually now have a two-week run for it. So we catch a couple of weekends. It just creates a lot of activity. It's what needs to happen in the market. And what happened last year is that the tax credit got into people's imagination. It change their behavior, they came out.

At that point last year, many, many builders were offering far more than $8000, $8500 in terms of incentives. But the tax credit caught everyone's imagination and we sold to a lot of people in spring last year who got the benefit of the tax credit. A lot people also bought at that point thinking the market was back, and they didn't actually get the benefit. They closed after the tax credit expired.

So I think that's what we need now again. We that, we need to people to think that buying at the right point in the market and the promotion helps them to think that's the right time to buy.

It's really try to create that. And at the end of the day, it really doesn't impact margins. Very slightly may we clear some existing standing inventory, but only at the edge there We will have another promotion later in the

Thank you, Ian.

Alex, thanks very much.

Our final question today comes from Joel Locker with FBN Securities. Your line is open.

Hi guys. Just wanted to see what your community count was down our up year-over-year in the second quarter

I think Joel, it was down a little bit, single digit percentage, but we do expect that the third quarter will be the first time that we have a positive, and maybe just slightly, but we'll have a positive community count for the first time in the third quarter probably since 2006.

And if you look at your back log conversion, it dropped about 1600 basis points year-over-year. Is that going to be the new norm? Just because you're growing backlog less [factors], or was there something that -- one time event that happened in the second quarter for it to drop from 89% or 88% to 72%.

That's great question and I can tell you I spent a lot of time analyzing that because it was -- as it's happening you don't notice it. You get to the end of quarter you start looking at metrics. And I think as we pulled it apart, we ended up with an unusual number of our homes at the end of December that weren't under construction.

Sometimes it was for weather related reasons. Sometimes it was anticipated delivery dates, and then we were further affected by bad weather in the first quarter. So, I don't know that 88% is normal, or that 72% is normal. I would say I think we were unusually affected. And as I've looked at the backlog conversion over the last four or five years, I think the 72% will prove to have been kind of an outlier

One thing to add onto that. We are really very focused right now on cycle times. Sales to delivery cycle is something that we're very focused on. So I would hope that conversion ratio would come back up again

Right. Do you have a monthly order breakdown for the second quarter

We don't deliver monthly orders, but I think in our commentary you've heard pretty good in January, pretty good in February, less enthusiastic in March is kind of the headline

Right. Thanks a lot guys.

Thanks Joel. I think we finished the questions there I think. Let me just thank everyone for joining us today and remind you that there is a recording of this conference with the slide presentation available this afternoon in the Investor Relations section of our website at www.Beazer.com. We look forward to speaking with you again in the quarterly update in August. Thanks very much.

This concludes today's conference, you may disconnect at this time