Beazer Homes USA Inc (BZH) 2014 Q4 法說會逐字稿

Good morning and welcome to the Beazer Homes' earnings conference call for the quarter and fiscal year ended September 30, 2014. Today's call is being recorded and a replay will be available on the Company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the investor relations section of the Company's website at www.beazer.com.

At this point I will turn the call over to Carey Phelps, Director of Investor Relations.

Thank you. Good morning and welcome to the Beazer Homes' conference call discussing our results for the fourth quarter and full year FY14.

Before we begin, you should be aware that during this call we will be making forward-looking statements. Such statements involve known and unknown risk, uncertainties and other factors which are described in our SEC filings including our Form 10-K which may cause actual results to differ materially. Any forward-looking statements speak 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 statements whether as a result of new information, future events or otherwise. New factors emerge from time to time and it is not possible for Management to predict all such factors.

Joining me today are Allan Merrill, our President and Chief Executive Officer; and Bob Salomon, our Executive Vice President and Chief Financial Officer. Allan will start things off by discussing progress made in our 2B-10 plan and summarize our full-year results. Then Bob will provide a more detailed look before turning the call back over to Allan for our updated 2B-10 targets and our current outlook for FY15. 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. We were extremely happy to report positive net income for FY14. This is the first time we've reported a profitable year since 2006 and is obviously a very important milestone for the Company, our employees and our shareholders. Speaking of milestones, earlier this week, we announced the transition of our Board's Chairmanship. I would like to acknowledge and thank Brian Beazer for his leadership and council, and congratulate Steve Zelnak on his new role. I look forward to working with both gentlemen for many years to come.

Before we jump into a detailed discussion of 2B-10 progress and the results for the year, I'd like to set the context for our performance this year. Despite favorable demographics and excellent affordability, demand for new homes has been uneven, and over the course of the year somewhat disappointing. Every notable third-party estimate for 2014 single-family starts has been adjusted downward since this time last year, many of them more than once. On the other hand, home prices, at least the way they are most visibly measured, moved up more than we expected. Both of those themes are reflected in our results for the quarter and the year.

Returning to profitability has been our number one priority for several years. When we introduced our path to profitability plan three years ago, we acknowledged that we needed to improve several key operating metrics. Since that time, we improved absorptions from 1.8 sales per community per month to 2.8 this year. Increased gross margins by 470 basis points and reduced SG&A by 960 basis points. That represents an awful lot of progress over three years. The Board and I are proud of our team's focus and determination to turn this Company into a stronger operator. To be a great Company, we know we have a lot of work left to do. But we think generating a profit in 2014 on lower home closings demonstrates the changes we have made to the business are working and that we have built a foundation to deliver greater profitability in the years ahead.

A year ago we introduced our 2B-10 plan to reach $2 billion in revenue with a 10% EBITDA margin within the next several years. At that time we identified the key metrics that we would use to track our progress towards reaching those objectives. Including sales per community per month, ASP and community count, which would drive our revenue growth, and gross margin in the SG&A ratio which would drive our EBITDA growth.

So it's fair to ask, how much progress did we make during year one of this multi year plan? Actually quite a bit. We introduced our 2B-10 plan last November as we were reporting our FY13 results. The map showed that we had a gap of $712 million in revenue to reach $2 billion and 3.3 points in EBITDA margin to reach 10%. In dollar terms, we had a gap of about $114 million of EBITDA.

Just one year later, we closed 25% of the revenue gap despite having a lower active community count virtually all year and a more challenging selling environment than we had expected. We benefited from a big jump in our ASP, which reflected some strategic changes in our business mix and the stronger home pricing conditions I mentioned a moment ago. We did even better on profitability. Our EBITDA margin for the last 12 months improved 2 points to 8.8% closing nearly two-thirds of the gap. Combined, the revenue growth and margin expansion allowed us to report an improvement in adjusted EBITDA of more than $42 million, or almost 40% of the gap in just the first year of the plan.

As you will hear in the balance of this call, we do not achieve every operational metric we hoped to. That's what makes this business pretty humbling. But we accomplished a lot and importantly have positioned ourselves to take another big step in EBITDA in FY15 despite expectations for only modest improvement in the demand environment. More active communities and higher average sales prices will be the primary drivers this year and should set us up to reach our 2B-10 objectives by the end of 2016.

Now I'd like to give you a quick summary of our FY14 performance before turning the call over to Bob for his more detailed review. For the full year, we reported $35 million in net income from continuing operations, or $1.10 a share. We achieved $128 million in adjusted EBITDA, $42 million above last year. Excluding an unexpected warranty charge, our adjusted EBITDA exceeded our guidance even though our home sales fell below our expectations. Orders were down 5.5% and closings were down 2%, but a big increase in ASP and planned land sales allowed us to grow revenue by $176 million or about 14%. EBITDA margins also improved with homebuilding gross margins up 190 basis points and SG&A 20 basis points better. We invested $551 million in land and land development and we ended the year with plenty of liquidity, $324 million in unrestricted cash and an undrawn revolver.

So with that summary, let me turn the call over to Bob for a closer look at the results.

Thanks, Allan. For FY14, results were impacted by a lot of unusual items both positive and negatively, we talked about three of them on our last call. A $19.9 million non-cash loss in the extinguishment of debt in the third quarter as part of a refinancing transaction, a $28.5 million cash tax benefit resulting from our successful appeal of certain carry back items which were received in the fourth quarter as expected, and a $6.3 million non-cash gain related to the sale of a pre owned homes business.

Since our last call, we had three more large and unusual items we recognized in the fourth quarter. Including a $13.9 million non-cash tax benefit from the release of FIN 48 liabilities which was mostly offset by $5.4 million impairment on our only land parcel in Bakersfield, California where we repriced our homes to match significant price reductions adopted by our competitors. And a $4.9 million warranty charge related to water intrusion issues in a number of homes in Florida and New Jersey. The homes averaged more than seven years old, so we don't think they represent a systemic or recurring issue. Nonetheless, they're included in our homebuilding cost of sales, and therefore reduced all measurements of income including gross margin, adjusted EBITDA and net income.

Including all these noisy items, we reported $34.9 million of GAAP net income. Excluding these items, we made $16.4 million in net income which was several million dollars short of what we had guided to. The profit shortfall was the function of lower sales and closings in the quarter particularly in the E segment as well as slightly higher advertising costs. With spec sales we anticipated to close in the quarter fell short of our internal forecast and a handful of additional higher priced home closings slipped out of the quarter due to mortgage issues and minor construction delays. Together, we missed about 50 closings and about $20 million of revenue. Had things gone exactly as planned, our ASP would have been slightly higher and our SG&A ratio would have been slightly lower.

Despite those challenges we have a strong quarter. We showed year-over-year improvement in many of our key metrics during the fourth quarter and strong performance relative to our peer group and most others. Specifically, we reported $60.3 million of net income and $56.5 million in adjusted EBITDA. The EBITDA was up 36% from last year on 25% total revenue growth. We ended FY14 with a community count that was 16% higher than a year ago and average 10% more communities during the quarter.

Orders were down 1.6% due to a slight slow down in absorptions in the current uneven sales environment. However, home closings were up 2.3% reflecting the 77% backlog conversion ratio. Our ASP was 12% higher than a year ago and we improved SG&A as percentage of total revenue by 130 basis points. We reported $546 million in revenue for the fourth quarter which brought our full year FY14 total to almost $1.5 billion, up 14% over the last year and bringing us $176 million closer to our 2B-10 revenue objective.

Sales were uneven during in the quarter, and in fact throughout all of FY14. While we had hoped to reach 3 sales per community per month for the quarter and for the year, our absorption rate of 2.6 in the fourth quarter resulted in a full-year absorption rate of 2.8 sales per community per month, down fractionally from last year. As you can see, that was still a very good number compared to our peer group. From a sales perspective, the quarter was bipolar. We told you last call that July was not stellar. On the other hand, we had an exceptional August with orders up materially over last year. And in September, even with really strong traffic, sales were soft again.

To some extent, we were the victims of our success in opening new communities as we got quite a few active with just their first two sales. These communities hadn't had their official grand opening events, so they weren't yet reflecting their full potential. Our ASPs continued their upward trajectory increasing 12% to $295,000 for the fourth quarter and 13% to $285,000 for the full year. We saw increases in ASP across all three of our operating segments led by an 18% increase in the southeast. And our highest ASP segment, the east, grew as a percentage of our total closings while increasing its own ASP.

To a greater or lesser degree in each market, these increases reflected improving market conditions or skillful product positioning in the land acquisition strategies we adopted several years ago. We have a lot of confidence that our ASP will continue to increase in FY15. Start with the fact that our ASP and backlog at 9/30 was $305,000. Then considering the change in our business mix, which will include a higher mix of mid-Atlantic and California closings, that leads us to believe that our full-year ASP will be up more than 10% this year even if the broad home price indexes don't go up. We ended FY14 on a high note when it comes to community count. At September 30, we had 155 active communities, up 16% versus last year. This was the first quarter of year-over-year growth in community count since the middle of FY12.

During the fourth quarter, we opened 24 communities and closed out 11 and averaged a total of 149 active communities, up 10% from last year. For the full year, we opened 73 communities and closed out of 52. Our average community count for the year was 142, down 2% compared with last year. At September 30, we also had 64 communities that were under development, of which close to 40 are expected to open in the next six months while another 30 existing communities are expected to close out. We also had 35 land deals that had been approved but not yet closed. Based on what we know today and building in a little extra time for permitting and utility delays, we now believe that our average active community count for FY15 will be up on a percentage basis in the mid teens versus last year.

Turning now to our EBITDA results. We reported $56.5 million in adjusted EBITDA for the fourth quarter and $128.3 million for the full year, covering our cash interest expense for the first time since 2006. As you can see the chart on the right, this represents $150 million improvement since we introduced path to profitability plan back in 2011 when our EBITDA was negative. Absent the unexpected warranty charge this quarter, our full-year adjusted EBITDA would have been $133 million, up $47 million from last year in line with the guidance we provided on previous calls.

Our improvement in gross margin is contributed heavily to our improved adjusted EBITDA. Our full-year gross margin of 21.9% was up 190 basis points over last year while our fourth-quarter gross margin of 21.3% was 10 basis points below last year. Included in these calculations was the $4.9 million of unexpected warranty charges during the fourth quarter. Excluding these charges, the full-year home building gross margin would have been 22.2% and the quarters would have been 22.3%.

The fact is that these margins are better than we expected at the beginning of the year despite our home sales being lower than planned. But we also know that many of our peers have discussed increasing incentives heading into their fiscal year end, that makes us somewhat cautious when considering further improvements in gross margin for FY15. How we will continue to push and pull levers trying to eek out every basis point we can find, we will be satisfied if we are able to keep gross margins around 22% for the year.

SG&A was 11% of total revenue for the fourth quarter and 13.3% for the full year. That's slightly higher than we expected, both because of the revenue shortfall I mentioned, and because we stepped up our advertising in the quarter. It's always hard to measure -- fully measure the effectiveness of ad spending, but we feel like our targeted messaging to create a sense of urgency among buyers helped a little bit. The biggest portion of our ad spending is online these days, and we can turn it up or down as market conditions dictate. For now we'll likely stick with the increased ad budget.

Looking forward, our G&A dollars for the full year will increase but by a lesser percentage than our revenue. In our first quarter we expect a bit of a spike in G&A as a percentage of revenue, but by the end of the year our ratio should improve. We expect our full-year SG&A expenses to be around 12.5% total revenue. Since we have one of the lowest ASPs among our peers, we perform a reality check by also looking at overheads per homes closed. On that basis, we're still one of the best-in-class operators.

Moving now to our land investments. We spent $170 million on land and land development during the fourth quarter and just over $550 million for the year. In FY15 we expect to spend around the same level as we continue to grow inventory and invest for further community count growth in 2016 and behind. On the other -- one other land note, we recorded over $50 million in land sales during the year which netted a 5% gross margin for us, contributed $2.7 million toward pretax income. As we mentioned on prior calls, in some cases, we had found it advantageous to purchase larger land parcels with the intention of selling off a portion to another builder. This activity will be reflected in our results again in 2015 when we anticipate land sales and related margin similar to 2014.

With our increased land spending, our inventory levels have continued to rise. At the end of September, we had over 28,000 owned and controlled lots and nearly $1.6 billion in total inventory, up $247 million or 19% from last year. Land held for future development continues to shrink in both dollar and percentage terms. At September 30, we had $301 million of land held for future development, down $40 million from the end of FY13 as we activated several parcels during the year. Our land held for future development represented 19% of total inventory at September 30, down from 26% last year. As we bring more assets into active status over the next couple of years, the dollars that were returned to the business will be a nice addition to our results since further activations are not currently included in our 2B-10 targets.

Looking at our capital structure, we ended the fourth quarter with no significant debt maturities until 2016, $324 million of unrestricted cash and an undrawn $150 million revolver. As we said before, we plan to refinance our 2019, 9 1/8% senior notes during the coming year if we can save a substantial amount of interest. Despite some volatility in the high-yield market, this seems reasonably likely. In addition, during the summer of FY15, our TEUs will mandatorily convert to common shares and our 2018 secured notes will be callable. While there is unlikely to be much interest savings and refinancing these notes, we do hope to eliminate secured debt from our capital structure when the opportunity arises.

Finally we were pleased to receive more than $40 million in tax benefits this quarter. After adjusting for the impacts of these benefits, we currently estimate that we will be able to use approximately $440 billion, or nearly $14 per share in deferred tax assets to offset our future tax liabilities. As a result, we should not have to be a federal cash taxpayer for some years to come. As we've discussed in the past, the exact timing for bringing our deferred tax asset back onto our balance sheet is not known. Having said that, we expect to start the process during the second half of FY15 because we currently anticipate a loss for the first half of the year. Once we're able to bring this asset back onto our balance sheet, our book value and our debt to equity ratio will be substantially improved.

With that, let me turn the call back over to Allan for his conclusion.

Thanks, Bob. We're in the midst of a housing recovery but it doesn't always feel that way. The fact is this recovery hasn't yet created the level of new home activity anyone anticipated and we're prepared for that environment. But I think it would be shortsighted to give up on expectations for greater volumes in the new home market in the coming years.

The fundamentals, particularly for first-time home buyers, are just too stronger. First, the long-term demographic trends provide a constructive backdrop led by the rapid expansion of millennial households into prime home buying ages. Second, new home affordability remains robust as low interest rates and reasonable home prices combined to make owning a new home very compelling especially in light of the sustained growth and rental rates. And finally, improvements in employment bode well for increased first-time home buyer demand.

The housing recovery has been held back by both stringent mortgage underwriting and low levels of consumer confidence though both show signs of improvement as we enter FY15. As I mentioned at the beginning of the call, we made significant progress toward the achievement of our 2B-10 objectives this year. Operationally we outperformed our expectations from margin and ASP, but under performed on sales pace and active community counts. These results and current market conditions, have led us to modify our targets for the combination of operating metrics that can lead us to our 2B-10 goals in the next two years.

Here are the new targets we are aiming for now realizing they continue to be subject to ongoing refinement and they don't reflect reductions in potential performance. Three sales per community per month; $325,000 in ASP; 170 active communities; a 22% homebuilding gross margin; and SG&A no higher than 12% of revenue. This is just one of many paths to 2B-10 and you can rest assured that we'll be pressing for improvement in all of these metrics. Now let me relate the 2B-10 targets to our FY15 expectations. We ended September with a 10% lower unit backlog which arose in large part from a lower community count during most of the year. As a result, we expect fewer closings in the quarter than last year's first quarter. But with an expected ASP of $300,000, first-quarter revenue should be comparable to last year.

On the profitability side, homebuilding gross margins should be up a bit from last year's first quarter, but they will be more than offset by higher G&A as we absorb the cost of a larger community counts before benefiting from their associated revenue. G&A is likely to be between $32 million and $34 million for the quarter. This means Q1 EBITDA is almost certainly going to be a little lower than last year. Given the result -- given the recent unevenness in sales, we're anticipating two sales per community per month but trying to match last year's pace.

For the full year, our expectations are substantially better as we finally benefit from the larger base of communities. On the revenue side, we expect the year-over-year growth in our average active community count to be in the mid teens for the full year. Chastened by our recent sales experience and in light of having more communities with higher price points, we're forecasting flat absorptions for FY15. That means orders should roughly follow the community count growth and be up somewhere in the mid teens. For closings, we expect something more modest like mid single-digit growth since we won't have a full year of closings from the larger community count.

Revenue growth, will better than closings growth. That's because we expect ASPs to take another big move higher for the year, up more than 10% and likely approaching $320,000. That would still leave us with one of the three lowest ASPs in the industry, so we aren't abandoning our core buyer profiles we're just benefiting from a better mix within and between our markets. On the margin side, while we will work to increase gross margins, we are targeting 22% for the full year. The anticipated revenue growth will help us leverage our fixed cost which should let us reach an SG&A ratio of about 12.5% of total revenue for the year. We also expect to make $2 million to $3 million in gross profit on our planned land sales. Taken together, these results would allow us to increase EBITDA by at least $20 million to approximately $150 million for the year.

Our eyes are firmly fixed on achieving 2B-10 in 2016 and we're going to make up another big chunk of the gap this year. Our first year of 2B-10 implementation was a hard fought success with the Company's first annual profit in a most a decade. I'm very pleased with the progress we've made and I'm confident that the focus and intensity that we're putting on our 2B-10 metrics will further improve our growth and profitability in the years ahead.

Thank you for joining us. At this point I'll turn the call over to the Operator to lead us into Q&A.

(Operator Instructions)

Ivy Zelman, Zelman & Associates.

It's actually Alan on for Ivy. And thanks for all the great guidance and congrats on the progress on the 2B-10.

Allan, I was hoping to dig in a little bit on the gross margin because we've heard from several other builders that have maybe put up a little bit of a red flag on the margin outlook for next year, suggesting there could be some downward pressure. And I think for the most part you guys are forecasting pretty flat gross margins for the full year.

So I was curious if you could talk a little bit about the leverage that go into that -- where do you see incentives playing out through the year? What do you see costs doing on the construction side? And finally, on the land side, what are the land inflation that's going to be flowing through the P&L next year -- how is that going to compare to what you faced this year?

Well, we had one of the longest scripts on record for us, and I'm at risk of matching that with my answer to that comprehensive question. So let me try and break it down.

First of all, I think you said -- restated it correctly -- we are expecting flattish gross margins for the full year. We did say Q1 will be up a little bit over Q1 last year, but I think that 22% range for the full year for us strikes the right balance. I think the second point of context is -- and I've probably botched the expression -- but I think there's a saying something like, the stand you take depends on the seat you had. So the stand we're taking about margins relates to where we are today. I think if we were trying to defend the indefensible, some very high gross margin that wasn't sustainable, we'd be in a different position.

So I don't worry too much about what others say, because where they are relates to things that they did that we didn't do, and positions that we have that they don't have. So I understand the context, but I think it's important to realize that, that relative move between builders really has a lot to do, as I say, on the seat that we each had.

Now, pulling it further apart into the components as you suggested, we didn't see a real movement through the year in incentives. And in the fourth quarter, they were very comparable to where they were in the prior year. So I just don't see a lot of activity there. But -- and I've said this on this call before -- the thing about measuring incentives that is complicated, is that you've got base prices; you've got options and option pricing; you've got lot premiums; you have incentives that can be offered; and, of course, closing cost. And so if you mix all of that together, it's very hard to pull it apart and say, okay well the base price went up by X because you're always comparing a slightly different mix of units anytime you're doing that comparison.

But if we just isolate incentives -- price reductions offered to help make sales -- there was essentially no change. And I'm not really anticipating that there will be a change in the coming year. I think that we will constantly be shuffling, remixing, repackaging our incentives. We've talked about that maybe more than others and I think we have to do it if not weekly, then monthly, in every community. And sometimes those cost you a few bucks; sometimes you save a few bucks; but being fresh and being respective or reflecting what market demands are, is absolutely crucial.

If I think about the cost side, there are some cost pressures. But one of the things that we should all keep in mind is, the input costs -- and I'm going to ignore land for a minute -- are theories or hypotheticals that are based on an assumption about what total aggregate demand is going to be and what capacity constraints those relate to. And I think if we think about 2015, a lot of the published estimates for 2015 single family in particular, are up 20%, 25%, 30%. I think if that plays out, we would absolutely expect to see $2,000 or $3,000 of additional direct cost per home.

But I have to tell you that's not our base case. I just don't think that aggregate demand is going to be that strong. And I'm not sure which I hope for. I think in general we'd like to have a lot more demand, and so I'd like to be having to contend with those kinds of cost increases. But the fact is, in a better, but less better, demand environment than I think what is baked into a lot of the forecasts that are out there, I don't think that the cost pressures are going to be at that level of, call it $2,000 to $3,000; and that's in our context against our $300,000 ASP.

On the land side, the mix of our lot costs will shift up as our ASP shifts up. But if you think about it in terms of a percentage of revenue, we don't see it particularly or a meaningful change in that percentage; it's tracking up. Which is why if you add all of that together, we got comfortable that a forecast for flat margins in our circumstance made some sense.

That's really helpful, thanks very much.

And if I can squeak a follow up on there, I know that was a comprehensive answer. But in the past few quarters, you've given some helpful commentary on what you're seeing in the mortgage market. Was curious if you can give an update there? And any significant changes you've seen over the last few months? And also commenting on the proposed changes as FHFA?

So for those who weren't as familiar, with our mortgage choice program, we have the benefit of having a lot of different lenders competing to earn our customers' business. And it gives us a chance to hear and see what different people are doing. A couple of interesting tidbits: our full year FHA and VA business was only a third of our total. Given that we're predominantly a first-time home-buyer builder, that's a surprising outcome. And what it reflects I think is, you are seeing a lot of lenders, particularly smaller and medium-sized lenders, getting a bit more aggressive in underwriting in the conventional product category.

It's also, though -- and this is important -- it's also a function of the reduction in FHA loan limits that have totally hammered some important markets. It had a huge effect in Vegas, a huge effect in Phoenix, a big effect in California in certain sub-markets. So I think that's also part of the reason that FHA number is down a little bit.

But what I read through there, Alan, is that we are definitely seeing, I've called it the animal spirits, we definitely see a little bit more intention on the part of the lenders to write primary purchase money mortgage financing. Which is good. Now I think it's incremental; I think it's modest; it's every little bit helps. And because of what I'm about to say, we're assuming that, that just only incrementally gets better.

Now there are two big things that have happened in the last, call it, 60 days. Clearly FHFA and the Administration have said some things that would be very favorable as it relates to down payments and potentially loan limits to open the credit box, and absolutely I'm in favor. I think that should happen. I think, in fact, the arbitrary setting of price caps, essentially, with the FHA loan limit has been particularly disadvantageous to first-time buyers. I think it's done exactly the opposite of what both the Administration and the regulatory authorities really should have been doing.

But the flip side, the second thing that happened, is we've had regime change in the Senate. And as a result of that, I am less optimistic about legislative changes that are going to do things that open the credit box. There's a great struggle right now between this idea the private market will fill in the gaps, but what happens in the meantime? And I expect that there will be a struggle between different camps there, and I think stalemate is the best bet. And as a result, notwithstanding the positive sound bites, or potentially some of the more challenging sound bites coming out of some of the newly elected members of Congress, I think that the stalemate and not better, not worse, is an appropriate operating assumption. And that's where we are.

Great, thanks so much.

Michael Rehaut, JPMC.

First question I had was on the ASP. Wanted to understand that in terms of the full year expectations. You said nearing $320,000, and you put out a roughly $300,000 for the first quarter. Does that nearing $320,000 mean what you expect to get to by 4Q? Because otherwise I think an average for the full year would seem a little aggressive, at least relative to what you have in backlog right now.

Yes. So the new communities are exhibiting and will exhibit a pretty strong influence in 2015 on our ASPs. So nearing $320,000 I intend to be where the full year is going to get to. Now it may not get all the way to $320,000, but I'm not talking about the high water mark at the end of the fourth quarter being $320,000 and drawing a line between $300,000 and $320,000 and taking the average. I'm talking about a movement in ASPs that allows us to get the full-year average pushing pretty close to $320,000.

Okay, that's helpful.

And moving from that question to the next, about adjusted EBITDA growth -- with around $320,000 ASP, that's about a 12% increase year over year. Mid single digits you're saying on closings, and margins a bit better at least from the SG&A standpoint. So that would positively impact your EBIT margin as well as I'd expect better interest amortization. At least $20 million higher of adjusted EBITDA growth does look slightly conservative. I would think the numbers would come closer to a $25 million, $30 million number -- does that make sense? Is my math right there? And what could drive that higher or lower?

So last year we gave an estimate from what we thought we could increase EBITDA in November, and we raised it a couple of times during year; the market allowed us to do that. And I have no idea whether the market will allow us to do that again this year. If you string together -- and I promise I've done the math not once, but about 10 times -- and take quite literally what we've said in terms of expectations, it comfortably supports at least $20 million.

And I don't really want to -- you can twist dials on any one of those metrics, Michael, and make it a little more or little less, and that's, I think, at this point the safest thing for us to forecast. We obviously don't have huge visibility into Q3 and Q4 right now, and those of the money makers for us. So I think I may be turning over a new leaf and being more conservative, we'll see. I hope that proves to be the case. But I think if you just follow the math on what we've said, it'll get you to at least $20 million. How you interpret that, obviously, is why you get the big bucks.

Well, hopefully we'll see it, year end. But one last question, if I could.

The absorption pace talk -- similar to 2014. Does that -- I understand that might be more of a market assumption perhaps that you don't want to necessarily bet on the industry backdrop being materially better, and I think you referred to that already. But from a community mix standpoint, as you just eluded to, some better, higher ASPs driving that guidance there -- but from a community mix standpoint in terms of positioning, locations, et cetera, would that in and of itself affect the absorption pace? In other words, some builders, if they open up new ones, better location, they expect a little bit better absorption. Or are you just being conservative there?

Well, I think there are a few things going on. You're right about the fact that I have a moderate view of what the macro environment is going to be. I don't see it being dramatically better. I hope I'm wrong. But I think the other thing -- and I think this was maybe in Bob's comments -- we definitely are mindful of the fact that with a lot of the new communities having higher price points, we have planned for, as a part of our underwriting of those deals and the normal competitive dynamics, those higher price points tend to have slightly lower paces, and that's okay.

You want to create value at $325,000 or $350,000 in a community and in some of our markets we'll have new communities that are above $500,000 -- those are clearly going to have paces that are different from a lot of the things that we were selling last year, when we had an ASP in the $250,000s. So we're seeing a shift in the business a little bit, and as that happens and the ASP moves up, I think it's fair to say that, that puts just a little bit of stickiness and upward movement in the sales pace.

So again, I hope I'm being conservative; I'm trying to tell you what we are expecting. And I think it's reasonable in light of the mix to say that flat is not overly conservative.

Fair enough. Appreciate it, thanks.

Mr. David Goldberg, UBS.

Congratulations on a great quarter and thank you for the detail on the slides -- very helpful.

My first question, Allan, was on your comment on increasing -- or maybe it was Bob's comment -- on increasing marketing spend in the quarter to help drive some urgency for your buyers. And that's not something we're hearing from a lot of builders. Proactive suggests to drive some urgency. And is there a way you can give us some ideas of what kind of things you do without revealing the secret sauce to your competitors? It's interesting you're taking a little bit of a different tack, it feels like, in a somewhat stagnant market.

Yes, look -- I have a little bit of a background, and it makes me armed and dangerous with online marketing. Some of our vendors and partners that we do business with hate the fact that I think I know something about this, because they're pretty capable of proving that I don't know very much. But I personally spent a fair bit of time on it, and as a Company we spend a fair bit of time on it.

And I think one of the big things -- and setting home building aside, no one could reasonably disagree with the fact that mobile has become a very big factor as we think about online experiences, consuming content, and being exposed to advertising. And there's certain things you can do in mobile platforms that you can't do in desktop platforms. So some of the initiatives that we're taking to do better targeting, which was one of the keywords Bob used, and also to create a sense of urgency, relates to mobile platforms.

That's helpful.

My follow-up question is on the land sales this quarter. And I'm wondering -- I completely understand the concept of buying some parcels you're very interested in selling off some of the pieces. The margins on the land sales were -- obviously the gross margins were pretty low on the land sales.

Can you talk a little bit about the timing? Did you sell these pieces right after acquisitions, so you sold them as raw -- maybe, I don't know if they were entitled pieces or whatever? And if we should continue to expect the margins on land sales to remain depressed on a go forward basis? Or does it make more sense to hold the land a little bit further, get it closer to the finished lot and sell it when you've increased some value on the land, from a cash flow perspective?

All right, well, all of the accountants listening closely will be super excited to hear this answer, because there's a little complexity to it and it's not quite, I think, how your thinking about it. There really are, broadly, two scenarios that we ought to talk about to create context. One scenario is when we buy a large parcel, and at the time we buy it, we identified a portion of it that is going to be sold. And that really reflects mostly what happened for us this year. And will happen again, by the way, in 2015.

But we have to allocate our purchase price across the part we're going to keep and the part we're going to sell. And if we know that we are selling it, and in a particular if we have a contract to sell it at the time we're buying it, we tend to write that portion of the basis right to where we're going to sell it, because it's like property held for sale. When you carry something that property held for sale, the accounting convention is, you carry it at what you expect your net realizable value is going to be. So you got a contract, I know where to market, so there shouldn't be a big profit there.

Now if we've held something for a long period of time and we decide, you know what, we'll sell the 60-foot lots, we've got another deal elsewhere and we've had it for a period time; those could definitely have very different margin characteristics. And you're right -- if you take things through either a final entitlement or you do land development, you're darn right, we want to get paid a full developer profit, that risk premium that we would be entitled to.

But mostly what you're seeing for us is not that we're in the land development business and trying to arbitrage raw versus finished prices, but the very best parcels were a little chunkier than we wanted to do, and so we found someone to whom to sell -- typically at a higher price, by the way, than our price -- a section. But from an accounting standpoint, the way the basis gets allocated, that doesn't necessarily show up in current results as a big margin bump.

I understand, like purchase accounting, essentially.

You've got it.

So to make sure, the resulting margin on the leftover pieces, whatever the remainder is for you, theoretically should be higher because you've underwritten to a flat margin and some of it's going to get less and some of it's going to get more?

That is definitely our -- in that scenario, that's what should happen.

Okay, perfect. Thanks for so much for the clarity.

Mr. Adam Rudiger, Wells Fargo Securities.

I wanted to readdress one of the previous questions about the absorption pace. I recognize, on slide 11, where you guys are over more on the right side of the slide. But if you look at the decline this quarter year over year, that was more significant than peers. And your first-quarter guidance or expectation seems to imply a decline as well. So you talked about community mix and stuff like that, but can you talk about how much of that might be mix related? You talked about this quarter in your prepared remarks, maybe a little bit of an impact from communities that just opened, and so that was a little bit maybe miss --.

I think it weighed on it a little bit. So, look, I think the fact is, Bob said this: July, so-so; August, awesome; September, not so good. So trying to figure out, okay, what should we expect over the next three months? What are we seeing? Traffic levels are up year over year. The enthusiasm with buyers seems pretty good. But that conversion is so difficult, and there's no question that, that has been on our minds as we think a little bit about Q1.

And I think I walked into a trap that I set for myself last quarter, because I told you all, I said I really want to do $3 million in the fourth quarter. And I got a bunch of looks and phone calls and emails: what the heck are you thinking, the market's not there. Well, damn it, we were trying to get to $3 million and we didn't.

So I think I've tried to moderate just a little and say, I have very high expectations for our business, and I communicate those consistently internally. I think externally sometimes I haven't done a very good job of differentiating those two things. So part of what you're hearing is, I think it's reasonable to assume if we have the continued unevenness that we've had the last three or four months, $2 million would be pretty good number in the first quarter.

I want to point out one other thing about slide 11, and it's a little bit defensive sounding, but it is not irrelevant. The two builders that had absorption rates that were over $3 million, their period ends were August. Ours would have been a lot higher if we had looked at three months ending August instead of three months ending September. There was a significant difference in the environment between August and September.

So I understand that we aren't the furthest right and that's okay. This isn't about winning sales derbies, but the context for that comparison, I think it's fair to point out, was a slightly different time period.

All right, that's helpful, thank you.

And then one other question on your mix -- you talked about the higher ASPs before; how much of that is a function of regional geographic differences versus within a market location difference versus targeting different buyers, like move up or luxury buyers more than the entry level?

It's very little of the third point, of targeting different buyers. It is substantially, the larger portion is the geography mix between the Mid-Atlantic and California weighing more heavily in our overall results in 2015. And then within our markets, as I've said before, we're placing product in the $220,000, $230,000, $240,000 range is very difficult without making significant compromises either to location or included features.

And our position, and with the first-time buyer, is we want to be awesome value, not necessarily the lowest sticker price. And so you got to be in a little better location and you have to have some stuff in the house. And as we have identified the preferences, particularly this coming wave of millennial buyers, location is going to be at a huge premium and the feature set has got to be dialed-in right. Is it a round toilet or an oblong toilet? Is it a round sink or a square sink? You got get that stuff right.

So from my perspective, the mix within markets is not a deviation from who we're trying to serve, but it's about serving them where they want to be served. So those are one, geography between markets; and two, geography within markets or communities within markets. And almost only an accidental shift that we might have a slight increase in buyer profiles at higher price points in a couple of markets -- that's not a big part of our corporate strategy.

Got it. Thanks for the help.

Mr. Will Randow, Citigroup.

In terms of circling back on the absorption pace, when you're looking at your competitors in your markets in terms of increasing community count, how do you think they're increasing relative to you? And what are the opportunities and challenges related to if you have store growth or community count growth in excess of demand?

Yes, and that's a great question. And look, we all have seen that played out in Phoenix, just as one example. We saw 25% increase in community count in the last year and a half, and all of us have suffered on absorption rates. So it's totally a fair question.

I think the one thing within that, though, and in its -- that's a great fact and its -- we're conscious of it, but let's pick again on Phoenix for a minute and there are other companies that are even more expert in it than we are. But if you looked at the growth of 100 communities in Phoenix, be interesting to note that over 80% of them were in a very small number of primarily east- and northeastern-biased geographic markets. So for our guys out on the southwest side or on the northwest side, where the community count growth in those sub markets was much more modest, it's not much of an excuse to me to say, there's a lot more community count growth in Phoenix. Well, that's true, but not in Peoria or not in Goodyear.

So it is at the market level, but it's more importantly at the sub market level, which you've got to analyze that. And I know you know that, Will, but I want to point that out, that communities are not all synonymous or capable of one being replaced or competed with another. Obviously, the location aspects matter a lot.

So as we've looked at our land position over the last couple of years and where we wanted to be, we've tried not to put ourselves in the middle of the killing fields where the proliferation of community counts is going to really take away either price or margin, or in the worst-case scenario, both. I'm sure we didn't get it exactly right, but that is a very big part of the land acquisition strategy is, not who's selling today, but what's every piece of land and its entitlement status around something that we want to buy, so that we can start to anticipate what the competitive dynamics are going to be in two years when we're in the meat of that.

And like I said, I know we didn't get it exactly right, but I feel like we have been intentional in trying to be a bit defensive and not get completely exposed to the growth in community counts. I know that's not a perfect answer, but it's clearly the case that you're pointing out something that we're very aware of, and our best antidote to that is to get the feature level right, and that's what we're doing.

Thanks for that. And if I could just slip in one follow up: in terms of the current order pace, the most recent trends, could you talk about where the overall Company is tracking in the differing paces throughout the country for you?

Well, we don't typically give paces by division. I think I would tell you that there were some places that were softer than they were last year but were still really good for us. There's been a lot talked about Vegas; our Vegas pace fell by an order of magnitude, I think it had been over five, and it ended up at three. It was down a lot, but, boy, three is not a bad pace in Vegas right now. So that's for us a bit better news maybe then the headline.

I talked about Phoenix; I think our pace in Phoenix fell from three last year to two in the fourth quarter. We clearly saw a reduction in pace there.

What I would tell you overall, though, Will, is that -- and Bob and Carey are about to give me the look, I can just tell you -- the volatility or the standard deviation of paces between our markets is dramatically reduced this year versus last year. Last year there was some really high highs and then some low lows. There's been a compression amongst our divisions this year. The highest aren't as high as they used to be; the lowest aren't as low as they used to be. And I don't know -- I think that's a good sign, that's a healthy sign, because we're not try to then play off of some hot and potentially unsustainable levels in certain markets.

Thank you for the color and good luck on 2015.

Mr. Eli Hackel, Goldman Sachs.

Wanted to focus on the balance sheet for a second, and maybe in returns. [While still] to know where in the cycle we are; I think we're probably not in the first inning or whatever the right word or inning is. How are you thinking about cash flow generation and your balance sheet? And maybe tied to a land investment, where we are on the cycle right now, Allan?

I would have told you that two years ago risk on was what we talked about with our Board; it was time to heavy up. We had put the balance sheet in a better place with the equity offering that we did, and we were prepared to invest pretty aggressively and that's what we've been doing.

I would tell you that my euphemism for 2015 is focused growth; it's not an all systems go in every market, put risk on; it's pick spots, it's fill in areas where we've got gaps and have capabilities and there is market demand. I'd say the light is still green, but it's definitely more selective. There are certain markets where I feel like we've gotten our total capital employed to a very comfortable sustainable level, where we can generate a terrific return. And in those markets we've said, look if we want to growth the scope of the business, don't really want to change the risk profile. So those better be places where we're seeing option opportunities as opposed to bulk purchase opportunities.

We do expect to spend, I think Bob said, about the same amount on land and land development. It will be mixed differently this year. I think last year we spent 60% on land and 40% on development. And this year it's much likelier to be 50%-50%. As we emphasize investing in the things that we purchased.

And we may see a few markets where there are opportunities. Phoenix is interesting; we bought a deal recently in Phoenix that was well below where it had been offered to us two years ago. I was excited about that, because we had sat out two years of the land market in Phoenix; we just couldn't make stuff work. Turns out that was probably the right thing to have missed. And there aren't very many markets that may have those characteristics.

So that's why I say, on balance, I think the dollar amount that we're spending this year, if we spend exactly what we spent last year, there's obviously a smaller portion of the total than it was last year. So that shows the diminution and the level of incremental investment, which I think speaks to, I don't know is we're in the third inning or whatever, but we're not in the first inning but I don't think it's time to call the closer yet.

Great, and then one quick one.

Could you -- maybe I just missed it -- but the write down I think you said it was in Bakersfield -- can you repeat what you said there?

Yes, Eli, the asset was in Bakersfield, California, It's the only really assets we have in Bakersfield. It was in response to some competitive dynamics.

Okay, thanks very much.

Mr. Alex Barron, Housing Research Center.

I was wondering if, in terms of capital allocation, the number of builders have talked to different strategies. You guys are still working on getting back to profitability and it seems to me that the debt is still part of the problem. Have you guys considered maybe doing an equity raise to pay down some of that debt?

Not right now, no. I think we've said pretty consistently, we've got good opportunities to deploy the capital at very good returns. And given that the low trajectory of the recovery, I think the good news is, it's likely extended the duration. And I got a tell you, I have no enthusiasm or interest, and I'm sure our shareholders would share the sentiment, that raising equity to pay off 7% debt would be a pretty lousy ROI. So you shouldn't look for that.

Got it. In terms of your comment about August and September being significantly different, what do you guys think changed? Have you been able to pinpoint what changed between those two months?

No, because it reverses the pattern that we normally see, where people go away in August and then in September there's a little enthusiasm. And I would tell you up through and including today, I don't really know. It wasn't a traffic issue; it was a sales issue. And I don't see that there were any big winners in September. We looked pretty closely at all of our competitors at each location, and it's not like we looked at it at the end of the month and we got left behind in September and everybody else knocked the cover off the ball. So I don't know exactly what happened. We could talk about macro stuff or stuff in Europe or stuff in Asia -- I have no idea. It just -- it was different.

Do you have any comment on October?

Yes, I would say that October has not been a blowout. It hasn't been tragic, it's been okay. And that's -- we are on plan for the month; it wasn't a hugely ambitious plan for the month; but we were on plan. But I'm not leaning into it, telling you how enthused I am, but I'm not crying the blues either.

Got it. Okay, thanks again.

Mr. Michael Rehaut, JPMC.

More of a technical question, perhaps for Bob.

The interest amortization expense for FY14 improved as a percent of revenue by about 50 bps, moderated in this most recent quarter, with more of only a 30 bp year-over-year improvement as a percent of revenue. Can you give any thoughts towards 2015, and if the improvement should continue but be a little bit more moderate like that? Or could we see some type of an equal amount of, more like another 50 bp improvement?

Okay, Michael.

Quickly, our cash interest expense will be a little bit lower in 2015 than it was in 2014 due to refinancings we had. So I think we'll save about $5 million in incurred next year. If you notice, also the direct expense was down to about a $9 million or so run rate. So I think you'll definitely see some reduction in direct interest expense in 2015 versus 2014. And certainly as we continue to grow the balance sheet, that will play out.

As it relates to the cost of sales, I think overall we're going to close more units in 2015, so we're going to run more dollars through cost of sales as it relates to interest. And I think as a dollar -- certainly in total dollars on a per unit term, you'll see likely higher numbers in cost of sales than we had in 2014.

Thanks for that Bob, and let me clarify on that. So a higher dollar amount could still mean some leverage from a revenue perspective, is that possible? And on the direct interest, direct expense, that $9 million that you referred to this quarter, with the refinancing or the actions there, can that continue to trend down? Or should we model that $9 million as a run rate on a quarterly basis; annualize that for the year?

I think we'll certainly see some leverage in interest expense in 2015 with the increased revenue. If you think somewhere in the $35 million range for direct interest expense for the year, that probably gets you into a reasonable range.

Perfect. Thanks so much.

All right. Well thank you for participating in our call. We look forward to talking to you at the end of our first quarter in February. Thanks very much.

Thank you for joining today's conference call.