Beazer Homes USA Inc (BZH) 2011 Q4 法說會逐字稿

Good morning and welcome to the Beazer Homes earnings conference call for fourth quarter of fiscal year 2011. Today's call is being recorded and will be hosted by Allan Merrill, the Company's Chief Executive Officer. Joining him on the call today will be Bob Salomon, the Company's Chief Financial Officer.

Before he begins, 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, good morning and welcome to the Beazer Homes conference call discussing our results for the fiscal year and quarter ended September 30, 2011. During this call, we will webcast a synchronized presentation which 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 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.

Joining me today are Allan Merrill, our President and Chief Executive Officer; and Bob Salomon, our Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will take questions in the time remaining. I will now turn the call over to Allan.

Thank you, Carey, and thank you for joining us. On our call this morning, we will recap our results for fiscal 2011 and for the fourth quarter, discuss our current operational objectives and share our financial goals for fiscal 2012.

While 2010 was focused in large part on improving our capital structure, in fiscal 2011 we turned our attention to accelerating a return to profitability. That starts with selling more homes. I am very pleased that our team delivered solid sales results to close out our fiscal year with new home orders up over 30% from last year. These sales were generated in spite of a near total lack of consumer confidence caused by a litany of factors, including capital market volatility, stubbornly high unemployment, depressed home prices and an extremely difficult mortgage origination environment.

One really has to ask -- why does anyone buy a new home in the face of all that? Our belief is that answer is a combination of demographics and extreme affordability, plus the fact that some consumers have a strong preference for newly built, energy-efficient homes. In this environment, the key to selling more homes is tapping into all three of those drivers rather than simply dropping prices or, worse yet, sitting back and waiting for the economy to improve.

With that short backdrop, here are the highlights of our year-end results. We recorded 3927 new home orders, nearly overcoming a terrible first half of the fiscal year with new home order growth of 28% during the second half of the year. We closed 3249 new homes, down 27% for the full year, but up 23% in our fourth quarter. We generated gross margins, excluding interest and impairments, of 16.3% for the fourth quarter and 17.2% for the full year. This compared to a similar 16.3% in the fourth quarter last year and 18.5% for all of last year, when we had the benefit of an unusual warranty recovery.

We ended fiscal 2011 with a backlog that is 88% higher than at the end of fiscal 2010. We reduced annual overhead expenses by approximately $20 million. And finally, we maintained substantial liquidity, ending the year with $370 million in unrestricted cash.

On the issue of our liquidity and as we noted as a press release in mid-October, we had just over 100 home closings push out of our year end into the first two weeks of October. This was due to several new underwriting processes unexpectedly implemented in September by our largest mortgage provider. These changes were made across their entire underwriting platform and, unfortunately, caused us to experience the pain associated with the new processes during our heaviest month of closings. It led to terrible customer service for our buyers and made forecasting home closings nearly impossible.

Primarily because of these late closings, our unrestricted cash balance at the end of the year was the $370 million I noted, rather than the approximately $400 million expected. I am happy to confirm that we collected an additional $23 million from these delayed closings during the first couple of weeks of fiscal 2012.

Given how poorly we started the year, it is gratifying that the full-year results, especially the strong sales in the last two quarters, have positioned us to make progress in fiscal 2012 against our goal of returning to profitability as soon as possible. After assuming my new role in June, I made it a point to personally visit every division to meet with nearly every employee and to visit a very large percentage of our new home communities. In this travel blitz, I identified a lot of things that we were doing very well, but I also came away with three critical and overarching observations.

First, we had allowed a small fraction of our communities to generate a wildly disproportionate share of our new home orders. Through June 30 the best-selling half of our communities were responsible for over 80% of our orders.

Second, in our zeal to pursue standardization to successfully drive overhead savings, we lost much of our ability to react locally and quickly to changes in the marketplace.

And third, we were generally lacking a sense of urgency and accountability throughout the organization. We had become far too accustomed to assuming we simply had to wait it out until the market recovered and that there was little, if anything, we could do to change outcomes in the near-term.

Well, these observations have led to some fairly big changes in my first four months. To change our perspective on the essential fact that we need to make all of our communities perform better, we adopted, with apologies to the politicians for borrowing their phrase, a no community left behind mindset and management accountability program. Instead of letting our best-performing communities drive our sales, we want every community to contribute every month.

I mentioned on the last call that this has led us to use the 4 Ps as a way of creating community improvement plans, focused on product, people, promotion and, of course, pricing. While time on a call like this doesn't really allow us to describe these plans and details, I would be happy to give some examples during the Q&A session, if it's of interest. Of course, the easiest and laziest way to try and drive incremental sales, especially in underperforming communities, is to compete on price. Please don't misunderstand what I'm saying; we absolutely have to be priced to the market. But if we are offering tangible and differentiated value, as we do in every market with our highly energy-efficient homes, we really should not have to be the lowest priced just to make a sale.

At the risk of stating the obvious, there is no doubt that my abrupt adoption of no community left behind led to some panicked reactions in the field. And while I can't quantify it exactly, I am certain these reactions contributed to some of the emerging pressure in the fourth quarter spec sales as I continually harassed our division presidents and our sales vice presidents to get their communities off the no sales [knotty] list. I guess you can put the emphasis on no community left behind in the no good deed goes unpunished category, but it is and will remain a central piece of our operational improvement plan.

As I've already said, lowering prices to compete is self-defeating and lazy. So, in order to assure that our efforts evolve to include all the other Ps -- product, people and promotion -- we adopted an entirely new approach to incentive compensation for our divisions. We have created a scoring system for every community that incorporates both monthly sales velocity and contribution margins. While we will reward our managers for creating EBIT, incremental EBIT and EBIT in excess of the cost of capital, they will only get to participate in the program if they get the majority of their communities above a pretty high score on this new performance scale. We also adopted a long-term plan that uses the same scoring system but measures our communities in three years.

To help us compete better locally, we pushed a number of key functions back into our biggest and best managed divisions. In particular, we decentralized most of the management of our purchasing activities as well as the supervision and drafting of our floor plans and elevations. While the original centralization of these functions allowed us to substantially cut costs, we were able to create more autonomy without any impact on the overall cost structure.

And, finally, as just one indication that we intend to become a truly performance-driven culture, I have changed out 20% of our division presidents. The underlying reasons were all somewhat different, but the bottom line is this. If you weren't demonstrating improving operational performance while sustaining excellent results in customer satisfaction, jobsite safety and compliance, you're not going to be with us very long. I'm excited about the new leaders we have in place and I'm confident that all of our division presidents are committed to accelerating our return to profitability.

So let's now turn our attention to this profitability objective. After all, it is the most frequently asked question I get when I meet with investors, employees or other stakeholders. We have a number of challenges in returning to profitability, but the largest one is that our overheads and interest expense represent a formidable threshold of relatively fixed costs that we have to cover. I don't believe that slashing overheads further holds any real promise. And, unfortunately, there is no magic elixir that causes interest expense to simply disappear. This means we have to figure out how to squeeze a lot more EBITDA out of our existing communities.

On this slide, you can see that we have outlined a four-point plan to reach this objective. First, we need to increase ourselves per community without simply lowering prices. Second, we need to gradually increase our community count. Third, over time, we need to generate somewhat higher contribution margins as our sales per community improves and as we benefit from additional communities. Finally, we have to keep our overheads locked down so that increased unit activity flows through to the bottom line.

Executing this plan will consume most of our efforts in the coming quarters. Fortunately, our recapitalization transactions gave us liquidity, the maturity profile and the flexibility in our cap structure to work through the plan for a number of years, if necessary. While opportunities may arise in the future to reduce interest expense, hope doesn't make a comfortable strategy, so we have built our plan with the assumption that we will have to deal with interest expense as it is.

Before turning the call over to Bob, I should also briefly mention our preowned homes business. As of September 30, we owned 120 homes in Phoenix and Las Vegas with the majority already improved and rented to families. The opportunity in the rental home space is immense; and, as we mentioned last quarter, we are actively pursuing strategies to scale this business beyond the $15 million to $20 million we have allocated to the opportunity. I can't say more than that right now, but we remain optimistic about our prospects for creating shareholder value from this initiative.

Now I will turn the call over to Bob to take you through our financial results.

Thanks, Allan. I will try to quickly go through some of our numbers. Please note that some slides you should typically see in our presentation, such as those highlighting our impairment trend and supplemental gross margin information have been moved to the appendix for you to review at your convenience.

The loss from continuing operations for fiscal 2011 was $200.2 million, or $2.71 per diluted share compared to a loss of $29.6 million or $0.49 per share in the prior year. The year-over-year variance was primarily due to fewer homes closed in 2011 as well as a $118.4 million benefit from income taxes in 2010 and a $43.9 million gain on the extinguishment of debt, also recorded in fiscal 2010. The net loss including discontinued operations for fiscal 2011 was $204.9 million.

For the fourth quarter, our loss from continuing operations was $42.4 million or $0.57 per diluted share compared to a loss of $57.1 million or $0.77 per diluted share in the prior year. The net losses were impacted by non-cash inventory impairments of $7.1 million during the fourth quarter of fiscal 2011 and $26.3 million in the same period of the prior year. The net loss this year was also negatively impacted by a $1.5 million charge related to South Edge and a $3.4 million tax provision which is described in the 10-K that will be filed later today. The net loss, including discontinued operations for the fourth quarter of fiscal 2011, was $43.2 million.

Now let me turn to our other operational results for the quarter. As Allan indicated earlier, while our full-year order total fell just shy of our fiscal 2010 results, given today's volatile market conditions, our fourth-quarter sales were quite strong. Orders were up 33% for the quarter and closings were up a solid 23%. Although these closings all fell somewhat short of the number we had expected for the quarter, in part due to changes implemented by our largest mortgage provider, these results should help position us as we move forward.

Our annualized orders and closings have fallen sharply since the peak of the housing market. However, I'm encouraged by the recent reversal in this trend. You can see a pickup in the last 12-month totals of both orders and closings beginning in fiscal 2011. We hope that this trend will continue.

During the quarter, our backlog conversion improved to 75.6% compared with 56.7% in the third quarter. Backlog at the end of a quarter is a snapshot of potential closings activity that could be generated in coming quarters. As we have shown in this slide, there are a number of moving parts that impact that conversion ratio in any quarter. Closings that were pushed into October are contained in the push to future quarters line on the slide. I should note that our backlog cancellation rate ticked up sequentially in the fourth quarter, in part due to these more stringent mortgage processing requirements. As we stand today, it is too early to tell whether or not this will continue.

Given our solid sales results in the back half of our fiscal year, we entered October with a backlog of 1450 homes, which was 88% higher in units since the same time last year. The sales value of our backlog at September 30 was $334.5 million, up 81% with sales value of $184.7 million at the same time last year. ASP in our backlog at 9/30 was $230,700, which compares to an ASP in the fourth quarter's closings of $228,100 and a full-year ASP of $219,400.

Volatility and ASP relates primarily to the mix of closings within a particular quarter, and as we've pointed out in previous quarters, 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 ASPs. But we suggest you look at the longer-term trailing for quarter ASPs shown on the right side of the page to see the trends more clearly. The trailing ASP reflects a slight 1.2% decrease from the same period a year ago.

In the fourth quarter, our homebuilding gross margins excluding impairments and interest was 16.3%, which equals the margin that we recorded for the same period last year. For the full year, however, our homebuilding gross margin was 17.2% compared with 18% last year, excluding the 50-basis-point benefit from an unusual warranty recovery in 2010. Quite frankly, we did not achieve the gross margins we anticipated earlier in the year, and in hindsight it is clear that I was a little bit too optimistic about our margins in the quarter. While our fourth-quarter margins were consistent with last year, they were impacted by several factors.

First, we had fewer total closings than we had anticipated. Between a mortgage-related delay and the uptick in our backlog cancellation rate, we missed more than 200 closings relative to our expectations. Not only did we lose some decent margins in these closings, but we also lost a bit of the leverage related to the fixed cost portion that flow through our cost of sales.

Second and as a result of missing these closings, we ended up with a much higher proportion of our closings in spec sales than I had anticipated. Specs that were sold in closing the quarter amounted to nearly 30% of total closings versus our expectation of under 20%. Spec sales almost always have slightly lower margins than pre-sales.

And third, the margins we actually realized on our spec sales during the quarter were somewhat lower than I had projected.

Having a chance to dig into these spec margins, I can point out two main culprits for the slippage. For one thing, the mix of our sales and closings during the quarter was more heavily weighted towards some of our more lower-margin divisions, like Phoenix and Vegas, and less weighted towards some of the better-margin divisions, like the mid-Atlantic markets and Houston. While we are happy to get a broader base of divisions generating sales increases, it impacted the mix of margins.

The other main driver may get me in trouble with the boss, but he already pointed out. The drive to beat our no community left behind objectives clearly motivated some of our folks to figure out how to drive sales during the quarter. While I'm sure they will exercise all four Ps in the coming quarters, it is clear they leaned into price a bit to jumpstart stalled communities. Over time, I expect our margins will improve as our sales per community venture dries and as the environment for homebuyer concessions wanes. However, as we implement our 4P plans, including changing out products, these improvements are likely to remain uneven, making it difficult to predict margins in the near term.

In response to requests made by investors, you will notice that we have pulled commissions out as its own line item in our financial statements, as shown in this morning's press release. Commissions as a percentage of homebuilding revenue averaged between 4.3% and 4.7% during the fiscal year. By separating commissions from G&A we can better reflect our fixed costs.

Total general and administrative expenses for the quarter decreased $1.2 million to $30.2 million from the fourth quarter of fiscal 2010. This included $4.4 million of legal fees, which ticked up for the fourth quarter due to court proceedings against a former employee, $2.2 million in severance and related costs and $1.5 million in accrual adjustments related to our right to purchase land in our South Edge joint venture.

Operating G&A, which adjusts for these items among others, totaled $21 million this quarter, down from $28.7 million a year ago and the lowest quarterly total in years. Importantly, benefiting from our previously announced cost reductions, our operating G&A totaled only 6.3% of revenues during the quarter compared with 10.7% in the same period last year. I'm very pleased with the current trajectory of these operating G&A expenses, which position us for significant fixed cost leverage as we drive toward increased sales per community.

Finally, I should note that our legal fees may continue to be higher than our normal operations would require for the next couple of quarters as further legal proceedings may take place against that same former employee.

Now me turn to our inventory. We have the benefit of owning an ample supply of finished lots in most of our markets. At the end of the fourth quarter, we had close to 7000 finished lots with houses under construction or ready to begin construction. Another nearly 8000 lots are under development and could be ready for use in the near future. During the fourth quarter we reduced our lots held for sale to just over 650 lots. In addition, we maintained approximately 6500 lots of land held for future development, about half of which are in California.

Within California, about half of those lots sit behind levies in Sacramento, where we await the completion of repairs by the Corps of Engineers. As we have said in previous quarters, because we have an ample supply of lots in inventory, our level of additional land spending is largely discretionary in nature. Throughout fiscal 2011, we made adjustments to our land spend as we reacted to market conditions. For the fourth quarter we spent $43.6 million compared to $51.8 million during the same period last year. Also during the fourth quarter we have received cash proceeds of $42.8 million from land sales and recorded a negligible gain relating to these sales. All in, our net land spending was equal to approximately 23% of homebuilding revenue or within a range of 20% to 25% of homebuilding revenue that is typically characterized by our use of land during the year.

As we look forward to fiscal 2012, we anticipate increased land and land development spending, but we expect the overall level to remain consistent with our underlying use of land or within a range of 20%-25% of homebuilding revenue. As always, we will adjust this expectation as necessary to reflect market conditions.

At September 30 we had 712 unsold homes under construction or completed, representing a decrease of 93 homes from year-ago levels and 282 homes from the end of our third quarter. We were pleased to have reduced unsold homes during the June quarter quite dramatically. As a result, we will be controlling the level of spec homes very, very carefully.

In combination, our plentiful supply and the recapitalization efforts we took place in 2009 and 2010 provided us with a flexible capital structure and a comfortable level of liquidity. We ended fiscal 2011 with $370 million in unrestricted cash and added another $23 million from our delayed closings during the first couple of weeks of October. We have no significant debt maturities until mid-2015. And as I pointed out last quarter, if conditions in the future warrant, we could arrange a first lien revolver of up to $150 million, issue securities under our $750 million shelf registration, advance a portion of our land spend with nonrecourse financing and/or further reduce our land spending. So I feel very comfortable with the options provided for our capital structure and the liquidity that we have today.

With respect to our deferred tax assets, as we have previously discussed, the dollar value of deferred tax assets is significant and totaled $482.1 million at the end of fiscal 2011. While we are unlikely to be able to use the entire DTA due to some change of ownership limitations, our current expectation is that, upon the resumption of sustained profitability, we will be able to utilize approximately $412 million to offset future taxes. As I mentioned a few minutes go, at year end we increased the valuation allowance related to a portion of our DTA that had previously not been reserved. This contributed to a nonrecurring $3.4 million tax charge during the quarter.

There is one other item I would like to note. In the first quarter of fiscal 2012, we will expect to recognize a non-cash tax benefit of approximately $27 million related to changes in certain tax methodologies resulting in a release of prior-year uncertain tax position under FIN 48. Rather than delving into the complexities of tax on the call, let me direct you to our tax footnotes in the 10-K which will be filed later today. With that I will turn the call back over to Allan.

Thanks, Bob. I would like to end our comments this morning by addressing two final points.

The first is to acknowledge what the market is saying right now about our prospects for recovery. On this fair value slide, we have put the book value of our capitalization side by side with the market value of our debt and equity securities as of September 30. As a matter of interest, all these figures will be in the 10-K we file later today.

While the market value of our securities obviously fluctuates every day, it is clear that investors are heavily discounting the probability and the timing of our return to profitability. The fair value of our securities is about one-third lower than our book capitalization, and it ignores any value our deferred tax asset will eventually generate. These values reflected a pretty pessimistic view, but I accept that until we show real progress in our path to profitability we are vulnerable to being valued on something like a liquidation basis.

I have confidence in our operational improvement plans and I'm comforted by the knowledge that the market has unsuccessfully predicted our demise a couple of times in recent years. So, while we acknowledge the market sentiment, we are resolved to demonstrating a path to profitability that allows us to earn a valuation more in keeping with our peer group.

That brings me to the final point I would like to address today, which is our overall operational and financial goals for the year. I wouldn't characterize this as guidance, because our visibility into future market conditions remains sufficiently challenging to undermine any real effort for us to make detailed full-year projections. But with 90 days of sales momentum, a bigger backlog and maybe a bit of unwarranted optimism, here is what we're shooting for in fiscal 2012 -- to sell and close more homes than we did in fiscal 2011, to generate positive EBITDA and to preserve and protect our liquidity.

Our predictions about improving national housing starts for fiscal year 2011 proved to be substantially too optimistic, so I'm reluctant to go on the record with any more macro predictions. Even though I do believe that national housing starts are likely to be higher in 2012, we have not assumed any improvement in national housing activity as a part of our financial planning for the year.

While we will undoubtedly encounter some bumps in the road, I'm optimistic about our prospects for the future as we work to implement our path to profitability strategies. Homeownership fundamentals are very compelling with population growth, household formation and affordability all poised to provide a more constructive environment in the years ahead.

With that, I will turn the call over to the operator to lead us into Q&A.

(Operator instructions) Josh Levin, Citigroup.

Allan, you talked about how you are trying to drive your managers at the local level to really sell more homes in the communities and increase your absorption rate. But you talked about how it backslided a little bit in the sense that you had some more spec sales being pushed through and that led to margin compression. So going forward, how do you balance that? How do you make sure that the managers drive sales but don't give away margin? What is the control on that?

It's a great question. Josh, I wish I had a perfect answer, but I will tell you that compensation plans turn out to be a pretty good lever in this business. This is, probably like a lot of businesses, one where our senior folks are motivated by their compensation plans, and I think their behaviors will reflect that.

So what we did for fiscal '12 is we changed all the comp plans for our folks in the field to really create a scoring system where every community is measured based on sales per month in the community and the contribution margins that they're getting in the community so that they can evaluate whether or not a little uptick in velocity makes sense against what the give-up is in terms of margin, if there is any give-up in margin. And maybe there isn't, but it gives them kind of the tool to know that on the one hand, but on the other, so that they have to deal with both pieces of it, because I've been nettled by the exact same question. It's easy to talk about sales per community, but at what cost? So making them accountable for making those decisions at every single community and then paying them on the basis of the percentage of their communities that they get above a threshold on that metric not just in fiscal 2012 but over the long-term, because it has also become the trigger to their long-term compensation plan, I think creates the right level of incentives to get right at this issue.

So with this algorithm or this compensation plan, was it in effect during the fourth quarter?

No.

Okay, so the fourth quarter, the results do not show -- we really don't know how the compensation plan works out yet?

No, we don't. And I'll be honest, Josh, I really want to caution folks. Let's look at fiscal '12 as opposed to Q1. We announced the plan for our guys in October. They are getting used to it. I think it will take time. Forgetting the comp plan just for a moment, as Bob said, we really want them focused on product, we want them focused on changing out people, if we don't have the right sales people. We want them focused on how we are promoting a particular community locally, not just price. And I've challenged them across all four of those levers to drive the business. So I do think that there's going to be some choppiness over the first couple of quarters. But I know that when we get to the end of the year, they are crystal clear, they only get paid if they manage both margins and velocity.

Thank you very much.

David Goldberg, UBS.

It's actually [Susan] for David. Allan, you mentioned that you've made some relatively significant changes in terms of your division presidents and the management out in the field. Do you feel like most of that is behind you now? Do you feel like you're in a pretty good position going forward for 2012?

I do. I don't have any major pending changes planned in our operating platform or in our division leadership, and for our division presidents who are listening, I've told them the same thing personally. I do think that the level of accountability is high, and if we get into a market where we are underperforming our expectations, we are underperforming market and we are not taking corrective actions, I'll make other changes. But right now I don't see any -- there are no pending looming changes. The first group that we made, we did very quickly.

Okay. And then, just in terms of the specs, you noted that you are going to manage that a bit more carefully going forward. Do you have any kind of targets that you have out there? How do you balance that against the kind of momentum that you want to get in terms of improving your sales per community?

I don't have a target, per se, although we definitely look at the level of investment that are -- is in those specs, and we look at for each community, the margins that you are receiving on spec versus presale and really trying to rationalize the need for specs in certain communities where it becomes obvious that it's a losing sum game.

So we are really trying to put crystal-clear focus on presales, the margin that those presales generate, along with specs. Now, some markets and some communities will generate very high spec margins, but there are certainly others where your spec should only be caused due to cancellations that occurs throughout time.

Okay, thanks.

Ivy Zelman, Zelman & Associates. We will move on -- Dan Oppenheim, Credit Suisse.

I was wondering if you could talk a bit more in terms of the incentive program that you're introducing. How is it weighted in terms of the volume versus margin? And the market to some extent will determine the margins that you have at some of the communities. Have you looked at how it will work for your sales personnel so that -- is it a risk that they end up doing worse than they could at another builder? And, obviously, you want to keep some consistency in terms of your sales force now. How are you balancing the two?

Good question. So first of all, this plan really applies to our division presidents. We have not used this entirely for the sales counselors. The sales counselors continue to work on a margin or on a commission basis relative to the sales that they make, and we haven't radically changed that. There constantly are tweaks to that. Setting aside our new incentive program at the sales counselor level, we are definitely focused on paying them for the outcomes that we want. And so you will see within the individual divisions, during the year you may see changes to what the commission rate is on spec versus what the commission rate is on presales, for example. We haven't overly restrictive that or imposed some kind of top-down control on that. Really, I trust my division presidents to make those decisions that are right for their market so that we attract the very best sales counselors.

But the division presidents are running businesses. Many of them are running multi-, multimillion dollar businesses, and they've got to be able to do more than one thing at a time. They have got to be able to make those decisions. And it forces them to really think about what product there building and what features are in the home and how they are promoting the home. Those are things, candidly, the sales consultant isn't directly responsible for.

Sure, okay. And then the second question -- wondering about land development next year. As you think about just the cash position and to bring communities online and just to leverage overhead, how much do you anticipate putting into land in terms of -- over the next year? Where do you see that going?

Bob made a great point on this; I think it was a great point. I think we changed the way we talked about this a little bit to help investors understand it better. For fiscal '11, I think the number he gave was 23%. Our land and land development spending was 23% of our revenue.

Now, you and I both know, that's not a direct connection, but it's a context, because, obviously, revenue is how we generate the cash that we use the land, that we are able to replenish our cash position. And we've talked consistently about the fact that lots reflect somewhere between 20% to 25% of the sales prices of our homes.

So if you hear us talking about land and land development spending in the 20% to 25% range in fiscal '12, then you are looking at an environment where we are spending on land and land development about what we are using. And so, while we are definitely anticipating more closings, we are also anticipating more land spending, but we are expecting that to be more or less neutral.

Okay, thanks.

Michael Rehaut, JPMorgan.

Thanks. I wanted to delve into the statement of the goal for positive EBITDA in 2012, and looking at 2011, on the homebuilding EBIT line, you ran about negative $90 million. You had about $10 million of D&A, so you are talking about negative $80 million. Of that, there was about a little over $30 million of land impairment charges. And I was just wondering, how do you think about the land -- you know, the map to get there? Is a lot of it going to come from less land impairments, but obviously it's only part of it?

And I was wondering -- I assume a lot of it is going to focus on the gross margin, given limited incremental overhead cuts as you had discussed. And maybe you could break down what you would consider the big factors. I know you had also mentioned a little bit reversal from the centralization to decentralization.

Let me delve into that. So on a simple basis -- and again, I've got the advantage of looking at the K that we are about to file -- I think that you will see an adjusted EBITDA about negative $28 million, backing out the impairments and the depreciation and amortization that you mentioned. And so the target is, we've got to get from negative, call it $28 million, to better than breakeven. And I am not assuming any impairments when we talked about getting to positive EBITDA. So let's just deal with operations in the business.

We lost money on EBITDA basis in Q1, Q2 and Q3, and we made about $9 million in Q4. So clearly, there is leverage from having more closings, as we did in Q4. So the path forward kind of comes back to the path to profitability. The first thing we've got to do is get back to zero in terms of EBITDA, and then we've got to drive up to the level where our fixed costs are.

And, Mike, it's really those three things. Sales per community -- in the fourth quarter, we had about 1000 sales, 200 communities, about 1.7 sales per community. We need to push that up close to two this year. Next year, we've got to get it beyond that, but clearly we've got to push that sales per community to a higher number. I think we will see some modest store count growth during the year. I mean, low-single digits is my best guess, but it's a definite part of the strategy that will see a little bit of community count growth.

That's much less likely to affect profitability this year, obviously, than next year, just because of the latency in getting those communities on. And then, as we are seeing additional sales per community, we do anticipate being able to drive towards better margins. To keep overhead fixed, you're increasing sales per community; I think you've got a shot.

Now, I talked a little bit on the call about these 4P plans, and I'm sort of begging for the opportunity to explain it, so I'll give you an example just as a part of this. I went into one of our markets and realized that, because of a central purchasing philosophy, there were certain features that we didn't have in the base house. Because we didn't have them in the base house, they were expensive add-ons to the home buyer.

I went and did the competitive shop with our sales counselors in that community and found the items in question were base in our competitors' houses. So we were, in every instance, having to add that feature and then essentially give it away to get to an apples to apples. It's just stupid. It was not a feature set that made sense in every one of our markets, but in that market we were not competitive because we were beholden to this sort of idea that we had a base inclusion of features in the house across the country.

So we went back and we reengineered that house a little bit. We changed not just dimensions, but we changed some of the other features in the home. Things that we had not included as standard became standard. We did not change prices. And the sales that we've had since there repositioning of the product in that community have been at substantially better margins, and we've had more velocity.

So it is not a case that every instance to drive sales per community is just drop price. You have to figure out what's got to be in the house. And what I've said to our division presidents is, you can't blame me. Don't blame centralized purchasing, don't blame centralized floor plans, don't blame centralized elevations. You guys are running businesses. Get the plans right, get the elevations right and get the right features in the house. And I will pay you for making money, but you've got to get your communities to perform.

So on that last point, and I appreciate that detail, you mentioned that you have turned over about 20% of your division presidents. I was just trying to get a sense, because obviously it's a critical part of as you are implementing new plans and policies, etc., to get everyone on the same page. What is that on an actual absolute number basis? And can you give us a sense of when that occurred over the last three months or six months?

Sure. I'll be very transparent about it. It's not a state secret. We've got 15 division presidents, and I changed out 3 of them. I changed out Phoenix, Raleigh and Florida. I changed out Phoenix in June and I changed out Raleigh and Florida at the very end of the fiscal year. So we're still on the very first weeks of the Raleigh and the Florida changes.

I'm excited about the fact, candidly, that we made a change in June and September -- or in Phoenix, and we had excellent fourth-quarter sales in Phoenix. I'd like to give him all the credit; I'm sure he would be the first to say he doesn't deserve it. But I don't think it's completely a coincidence that that change in management is associated with better sales performance.

Great, thanks.

Ivy Zelman, Zelman & Associates.

While we appreciate the detailed information, Allan, what I was wondering, with lot count down year-over-year about 8%, and you said you're going to grow community count roughly in the low-single digits, curious if there's going to be a stress to getting there with the amount of available lots you have. I know you said you had an ample supply. But even more curious where do you stand for 2013 in your business plan right now, because assumingly I know you have one. What percent of the 2013 business plan is already 100% secured, but what percent of it is secured in terms of lots, finished lots available?

Sure. So if I looked at the owned position, Ivy, we have got around 13,000 homes under construction, finished lots and land available for development. And that gives me confidence that an exceptionally high, nearly 100% 2012 coverage of owned land positions and a very high coverage of '13, then when we add to that the option land positions, we are not that dependent on new communities for fiscal '13. We do have to put some additional communities in place during this year to get to where would like to be in '13. But you also know that it's possible that we can get the demand. We have enough lots that if we got the demand in exactly the right places, we could clearly hit '12 and '13 on the owned land.

I don't think it will happen that way. I think what will happen is, we will hit '12 and then into '13 with the existing assets owned, the existing assets optioned, and then some new communities, it will take all three. But the largest component of fiscal '13 closings are going to come from land already owned.

Can you talk to, though, recognizing what you owned in finished lots and what you incrementally have in future developed lots, we all will realize that a lot of those lots are still legacy lots. So would you characterize those lots as all desirable? We talked about A, B and C locations; I would imagine that -- I'm talking about good location that you have for your '13 business plan. Aren't a lot of the lots that you owned that are finished maybe not as desirable as you would like them to be?

You know, I wouldn't say that as much as I would say we are longer in the tooth in some communities. You know, if we own 300 lots and we are doing 30 a year, that's not a super-exciting place to be, because even if we go to 60 a year, we still own a 5-year supply. And one of the things that we are looking at in those instances, and there are a handful of those, is how do we swap out, bring in somebody else potentially on a different program, different feature set or maybe a different lot size and then swap that into -- and I don't really mean swap; consider that a sale and then a repurchase, because the idea of swaps is kind of mythical and hard to actually achieve. But the idea of converting some hold positions without using incremental cash into some new stores -- and we have actually had some success doing that in a handful of our markets.

So I would say it's more about the longer in some places than really characterizing them as undesirable.

If you look at your comments from last quarter, you indicated that you had the ability to secured debt. Have you moved any closer towards doing so, or are you comfortable with your cash position and going through 2012?

I think right now we are no closer or further. We've made no change in our view. We've restated all of the options that are available to us, and we don't eminently have any capital markets transactions planned.

Right, okay, guys, thank you.

Lee Brading, Wells Fargo.

One of the questions, I guess, was just touched on, but I just wanted to see if you could expand a little bit more on it, was the opportunity in that land held for future development. If you could just talk little bit more -- I think, Bob, you mentioned -- am I right on this, half of those lots are in Sacramento?

Half is in California, and then half of California is in Sacramento, substantially stuck behind a levy that is in the repair process. And it's quite complicated, and we're happily -- well, not happily. We are not the only builder stuck. The fact is, though, that with the Corps of Engineers and then a -- I've forgotten the name of the agency that's up in the delta there, in the American River Delta, is working on the levees. We are probably two years out from those levees being fully repaired and us been able to get to what is essentially a quarter of that land held for future development. And another quarter is elsewhere, primarily in Southern California, and then the other half is broken up between the West and the East.

Great. And then you had, as you noted, some land sales this past quarter. Should we expect to continue to see some of that? I know you didn't have much at the end of last quarter from an inventory standpoint.

So, Lee, we only have about 650 lots left in land held for sale, and so while we don't have anything imminent, I think that you will see over time we will peel that off.

The other thing, Lee, just sort of tying the other comment I made for Ivy to your question, there are some communities where we are active, we've got more lots than we would ultimately deem to be desirable, we may sell down some positions. But the quid pro quo is, what can we buy back to get another store open?

So I don't think that that's going to be particularly material, but I wouldn't say that the lots held for sale is the extent of the likely trading that we will do in the land positions.

Okay, great, thanks.

Adam Rudiger, Wells Fargo.

Allan, I'll give you another chance to talk about your 4 Ps (laughter) since you sounded like you wanted to. You mentioned that half the communities accounted for about 80% of the orders. And I was wondering, first, what was, if you could draw a theme as to a location that was doing those -- is it people, is it product and -- that was driving those strong orders in those particular communities? And then in order for you talk about your 4 Ps, how much of the other half of the communities that weren't delivering the kind of orders that you wanted -- how much of that do you think is fixable? I'm wondering if some of those communities are simply in a bad market, a bad location; no matter what you do, you are not going to be able to get that distribution more equal.

It's a good point. I think we have to assume, and I don't know this at a statistical level, but there is some normal type distribution of our communities from the very best to the very worst. And I think it would be unrealistic to assume that the second half is going to naturally, just through our great management, be able to perform as well as the first half. But there are clearly significant opportunities for improvement.

In terms of themes, it really is all four of the Ps. I would say that -- one of my division presidents -- we had a division presidents meeting here in our office in October, and one of the guys said something which really struck me. He said, you know, it all comes down to who you have negotiating for you. And I think we have underappreciated how important great salespeople are. We like to crow on these calls about having great order growth, but the fact is it takes a salesperson to create that order growth. And I think that's probably the biggest single component to the community performance, is creating heightened accountability. If you are not selling a couple of homes a month in a community, why are you here? And if you don't have that sense of urgency that that's what's required, we are doing something wrong.

Now, we are not paying extensive draws to people, so what you end up seeing here is some turnover. Well, we've simply got to get people in those communities that are committed to the success of those communities. Now, oftentimes, and any builder will tell you this, the salespeople are the first ones to tell you everything that's wrong with your house. You know, you've got to have this, you've got to add that, marble this, stainless steel that. And there's some truth to that. There is some truth to that, but I think I wouldn't be alone as well in telling you, we really can't let the new home counselors do all of our floor plan and design work because there are a lot of things that look great that they would like that turn out, on deep analysis, to not really be things that buyers pay for.

So you want that feedback, but you've got to really be tougher about shopping the competition. And that's the product piece of the P that I've been very disappointed in, and I would put that right up there with the people side.

I walked into our houses, I walked into our competitors' houses, and ours didn't look as good. And it wasn't just the fact that we didn't have them furnished appropriately. Our layouts weren't right. The rooms were too chopped up. We didn't have some of the features in the base houses. We put 30-inch cabinets in instead of 42-inch cabinets, trying to save $100 -- false economy.

So we've got to attack all four of those. And when I went through the underperforming communities and I reviewed these 4P plans every single week, these are the things that I'm saying. And I've said, okay, I'm taking the restrictions away, guys. You want to put 42-inch cabinets in the homes, knock yourselves out. Go do that. I still want to see sales per community at a margin. And if that's the thing that's holding you back, more power to you. Go fix it.

That's interesting, thank you. The other question I just wanted to ask you is, you mentioned, when you were talking about the 4 Ps earlier about the energy efficiency and the value proposition for a Beazer Home that that could offer a buyer, is that what you think is the biggest differentiator? Or is that what you want the Beazer Home to be thought of from the buyer? Or if not, how do you want the buyer to think about Beazer?

Well, that's a phenomenally good question, and it's something that we have wrestled with a lot. We made I would call it a nearly all-in bet on energy efficiency, our eSMART program, things to drive our HERS scores to very low levels. And we are directionally absolutely right.

But I think in executing against that plan, if you went into our models, you would've seen some interesting things. You would've seen four message boards in the walls of our models, and three of them, if not four of them, were about energy efficiency. There was no map that showed where the community was in relation to amenities, there was no display of the floor plans that we offered or the options that were available with respect to those for plans.

So I think it's a point of emphasis that was maybe taken to the extreme. We're not backing off being in (technical difficulty) our certified rated qualified builder, and we're not backing off having every one of our homes third-party tested because we're committed to driving lower and lower energy consumption and lower utility bills.

But I will tell you that, as a market matter, I think you will see less emphasis by us on that, not that the product is changing as much as there are other things we need to talk to consumers about than energy efficiency. It resonates really well with a group of buyers. It doesn't resonate with everybody. It's not that people don't appreciate having a $50 monthly utility bill instead of $100. But if that's the prime point that we are making from a marketing standpoint and somebody else that is competing with us has other future benefits that they're marketing against us, we've got to be a little bit more capable and not working with one hand tied behind our back from a competitive standpoint.

So I do want them. I do want buyers to think about a Beazer-built home as better built and with substantially greater energy efficiency. But we've got to talk about locations, we've got to talk about amenities, we've got to talk about floor plans, and our elevations have got to look right.

Thank you.

Joel Locker.

Just curious on your SG&A, basically on -- your stock compensation fell pretty significantly. I was wondering if that was a one-time event. I know it depends on other things, but what do you expect in the first quarter with the new stock comp plan?

We haven't had the grants fully approved, and therefore they are not complete. So it's a little bit hard to estimate. I think the fourth quarter was a little bit lower than what the run rate will be in future quarters, but I don't see it going back anywhere near where it was.

And then, also, the severance was still $2.2 million. Do you expect anything in the first quarter of fiscal 2012, or is that pretty much all over?

There may be some slight amount due to these division president change-outs that happened towards the added -- based on payouts already. But I wouldn't expect to see (technical difficulty).

That would be pretty modest.

Be very, very modest.

So less than $1 million, like it had been before?

Oh, yes.

Certainly well less than $1 million.

Right. And then also, your I guess -- your ASP on closings -- what do you expect in 2012? I know it can vary a lot, but higher or lower than 2011?

Flattish.

Flattish with that?

Yes. There's so much mix stuff that goes into it, it's really hard. I don't see anything that says structurally or market weighting wise it ought to take a leg down. Similarly, I don't see anything that causes me to think that the business has changed weighting by geography or by product that it's going to be dramatically higher.

So you are looking at 220 or so, I guess that's kind of where it was in 2011?

Well, it -- flattish. I'm just not going to get drawn into a dollar amount, but I definitely don't see big ups.

I got you. And one last question -- with your debt trading at a significant discount, I know you guys can't run out and buy a huge amount. But what are your covenants currently? And would you be open to buying $50 million or $100 million worth of debt in the open market at a discount?

Well you know, Joel, we've had a lot of these conversations with investors about utilizing our liquidity to purchase bonds back. And it's something that we have erred on protecting our liquidity while we balance those returns; they get to some interesting levels. But when we look at what we believe that we can earn in our business, to date we haven't found any of those types of transactions that attractive when balancing against our desire to preserve liquidity.

I think it's the case that there are no restrictions in our covenants in terms of the debt that we buy back. We are not limited in that way.

Right, all right, thanks a lot, guys.

Alex Barron, Housing Research.

I guess I wanted to focus a little bit on the gross margins. I understand some of these strategies you guys are talking about. But from an absolute standpoint, I'm just wondering, do you feel that your land maybe needs to get impaired a little bit more to get your margins closer to what the rest of the builders are reporting? Or do you think there's something else on the mantle, like maybe, like you said, you were including some features that didn't need to be there?

Well, you don't get to solve for gross margin in your impairment calculations. If the aggregate values on an undiscounted basis are above book, there's no impairment. If they're below book, then you do the impairment test. So it's not like we get some capacity to go to manage gross margins.

I will tell you, we are very detailed in all of the disclosures that we provide about all of our impairment testing. So I think that's kind of a dead-end. I think the issue for us is, we've got to get the right product in the market and we've got to have the right features in it. We've got to have the right sales people promoting it and selling it. That's where we've got to drive our margins. And it's clearly the case that we have been under our peer group in terms of sales per community for a period of time. That's the first, second and third priority we've got. Let's get that sales per community up, and I think we will like the effect it has on margins.

Okay. And the one thing that I didn't catch maybe last quarter was, what was the purpose of drawing on the term loan? Because you guys already have enough cash to -- for liquidity purposes, so I wasn't sure why you would draw on that and pay some interest on that.

Alex, what we did in the third quarter was just was the second draw, take the cash-secured term loan up towards a $250 million number, which we felt would be more liquid at the time that we decided to refinance it.

And we are also -- remember, the reason for this cash-secured term loan is to extend the time which we can refinance debt under our current indentures. We have to refinance any debt that we repurchase within 180 days of that purchase. This cash-secured term loan effectively extends that from the term of the term loan.

And look, Alex, it cost us 40 BPS a year on the principal amount. It's a super-cheap insurance policy to allow us to have the flexibility to extend the refi out into the future to a point where we may be interested in drawing additional long-term debt and taking the incremental interest expense associated with it. It seemed to us to be kind of silly to let the basket expire and not draw on it.

On the other hand, the last thing we needed right now is a lot more interest expense. So this cash-secured term loan let us preserve flexibility without really creating material change in cash interest cost.

Got it, okay, thanks.

Okay, I want to thank everybody for your participation in our fourth-quarter call, and we will look forward to talking to you in several months. Thank you.