Beazer Homes USA Inc (BZH) 2015 Q4 法說會逐字稿

Good morning and welcome to the Beazer Homes earnings conference call for the quarter ended September 30, 2015. 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'll turn the call over David Goldberg, Vice President and Treasurer. You may begin, sir.

Thank you. Good morning and welcome to the Beazer Homes conference call discussing results for the fourth quarter of FY15.

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, which are described in our SEC filings, including our Form 10-K, which may cause actual results to differ materially from our projections. 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 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. Following our prepared remarks, we will take questions in the time remaining. I'll now turn the call over to Allan.

Good morning and thank you for joining us. We're happy to report our fourth-quarter results, which demonstrate the progress we continue to make toward our 2B-10 goals. I'll review our key accomplishments in the quarter and then move on to the full year.

On the profitability front, we reported $71 million of adjusted EBITDA, up 16% versus the prior year. Gross margins, excluding amortized interest, impairments, and abandonments, came in at 21.3%, a bit ahead of our August guidance, as we benefited from strength in our southeast region. Robust top-line growth led to improved operating leverage, as SG&A as a percentage of revenue declined about 60 basis points versus last year, to 10.4%.

We ended the quarter with nearly $670 million of future closings in backlog, which was up nearly 30% versus the prior year, and provides significant visibility into revenue and profit growth in FY16. And we were able to release approximately $335 million of the valuation allowance against our deferred tax assets.

Moving on now to our performance for the full year, we achieved $144 million in adjusted EBITDA, up about $11 million versus last year. Adjusting for the benefit we realized in 2014 from the sale of our interest in Beazer Pre-Owned Rental Homes, our EBITDA was up $17 million, or 13%. Orders rose 13% versus 2014, driven by a comparable increase in our average community count.

Total revenue grew 11%, led by a 10% increase in average sales price, which rose to $314,000. This top-line growth was generated while holding operating margins flat versus the prior year, as improved G&A leverage offset the pressure on homebuilding gross margins. We invested about $450 million in land and land development and we ended the year with plenty of liquidity, $252 million in unrestricted cash and an undrawn revolver, which we recently increased and extended.

Before I turn the call over to Bob and David to review our results in greater depth, I want to highlight an important objective we've established alongside our 2B-10 plan as we move into FY16. After discussions with our Board and many of our shareholders, we've decided to complement our growth ambitions with steps to reduce our leverage over the next couple of years. This will accelerate our efforts to reduce both our cash interest paid and our ratio of debt-to-EBITDA.

There are several points I want to emphasize about this decision. First, reducing leverage is not meant as a substitute for or a shift away from 2B-10. Given the land spend we've completed over the past two years, we still expect to achieve our 2B-10 goals in FY17. Our deleveraging efforts will be carried out in conjunction with our push toward $200 million in EBITDA.

Second, our strategy, while more balanced, still includes plans for top-line and EBITDA growth beyond 2B-10. Third, this decision should not be interpreted as pessimism about the shape of the housing recovery. In fact, it's the opposite. We expect the housing recovery to continue on a slow but steady pace for a number of years, but we're convinced that deleveraging while the housing market is still improving will create value for our shareholders, as the risk premium associated with owning our stock diminishes.

Finally, while paying down debt won't improve EBITDA, it will be very accretive to earnings per share. Upon achievement of our 2B-10 goals in 2017, we expect to express our targets for improved profitability in terms of EPS. With that, let me turn the call over to Bob to go through our results for the fourth quarter and our expectations moving forward.

Thanks, Allan. We're updating our 2B-10 metrics to provide ranges instead of point estimates. Since rolling out our 2B-10 in November of 2013, we have consistently said that there are a number of paths to achieve our underlying goal, generating $200 million of EBITDA, and that the direction we followed would be a function of both our internal efforts and broader market conditions.

On slide 7, we summarize our updated 2B-10 ranges. In the balance of my remarks, I'll be reviewing our fourth-quarter and full-year results. I'll also provide you with some visibility into our operational expectations for the first quarter, and how those relate to our 2B-10 goals. While we won't be forecasting quarterly metrics beyond the first quarter, you'll be able to see the path we are on to reach 2B-10.

Our revenue in FY15 totaled $1.6 billion, which is up almost $165 million, or 11%, compared to last year. Our LTM adjusted EBITDA of $144 million is up more than 13% versus last year, excluding the gain associated with the sale of Beazer Pre-Owned Rental Homes.

Sales were a bit disappointing in the quarter, although they showed some strength in September. Nonetheless, we achieved a sales pace of 2.4 sales per community per month, one of the highest levels among national builders for this time period. For the full year, our sales pace was 2.8, in the range of our 2B-10 targets and easily among the best in our peer group.

Just a quick note, excluding New Jersey, our fourth-quarter sales were actually up about 2% year-over-year. Traffic levels remained consistent and strong throughout the quarter, giving us confidence that the broader housing market can continue to grow at a slow and steady space as we move through next year. For the first quarter of FY16, we expect our sales pace to be essentially flat year-over-year, allowing us to achieve modest order growth versus the first quarter of last year due to a larger community count.

As it relates to our 2B-10 plan, we've adjusted our target for absorptions to a range of 2.8 to 3.2 sales per community per month as we continue to balance driving sales pace and margins on a community-by-community basis. The actual sales pace in any quarter will be driven by a combination of seasonality, market trends, and our geographic mix.

Turning now to average sales price. Our ASP rose 9% this quarter to $323,000, the highest level we've achieved in the Company's history. Each of our regions experienced price improvement relative to last year, led by the west, where our prices were up 16%. On a trailing 12-month basis, ASPs rose 10% over the year to about $314,000, compared with $285,000 a year ago.

While our average sales price came in slightly under our expectations, this reflected the impact of geographic mix, as a percentage of closings from some of our more expensive markets was slightly lower than anticipated. Importantly, our ASP in backlog as of September 30 was $328,000, above our prior 2B-10 target, which should lead to higher ASPs in future periods.

As such, we're increasing our targeted 2B-10 level to a range of $330,000 to $340,000. This expectation for further ASP growth is purely a function of continuing geographic and product mix shift and does not reflect any home price appreciation. We expect our average sales price in the first quarter to be around $320,000, and to continue to increase through the year.

Our backlog conversion ratio was 69% in the fourth quarter, right in the middle of our estimated range of 67% to 72%. We'd remind investors that the inclement weather experienced in Texas in the spring pushed a significant number of closings into the first and second quarters of this FY16. In the first quarter, we're expecting a backlog conversion ratio slightly under 50%, as a larger percentage of our year-end backlog is scheduled to close in the second quarter than was the case last year.

This reflects the heavier weighting of September sales during the fourth quarter and the labor tightness most builders have discussed. Rather than continuing to pay our trades extra to save a couple of weeks, we've managed customer expectations [to] anticipate slightly longer cycle times in the near-term. However, we think these trends will improve over the course of the year, as our initiatives to reduce cycle times take hold.

Extensive development efforts continue as we prepare to open new communities in the quarters ahead. Our average active community count during the quarter was 164, or 10% higher than last year. For the full year, our average community count was up 13%. This year, we will emphasize tightening the relationship between sales per community and closings per community, as the communities we added last year moved beyond the start-up phase.

Having said that, we do expect to have a modest year-over-year growth in our full-year community count, though there will likely be some variability quarter-to-quarter, based on the timing of new community activations. For the first quarter, we forecast average community count to be up [7% to 8%] versus the first quarter of 2015. Looking forward, we've raised our 2B-10 target for community count to a range of 170 to 175, which we expect to obtain an early 2017.

Turning now to our gross margins, we recorded a 21.3% gross margin for the quarter and 21.5% for the full year. At a segment level, gross margins were up nicely in the southeast, relatively flat in the east and down in the west due to both weather and labor issues. As expected, our exit from New Jersey cost us about 40 basis points in gross margin in the fourth quarter.

As shown on the chart on the right side of slide 13, we continue to make progress toward our goal of generating more gross profit dollars per closing, with fourth-quarter gross profit dollars of $68,900, up over $3,000 from last year. In the last few quarters, we've talked about our efforts to increase efficiency of our capital allocation. We know it is the right thing to do, but being more efficient has an impact on our gross margins.

Specifically, most listeners will recall our discussions about the benefits of activating our land held for future development. Putting these assets to work generates additional EBITDA and cash flow, but comes with margins below the Company average. Activating the Sacramento division last year, which consists entirely of former land held parcels, allowed us to start monetizing more than $50 million in assets that were previously stranded, but, as expected, these deliveries will carry lower gross margins.

The other capital efficiency factor affecting our margins is our increased use of land bank financing. The margins on these deliveries are also less than the Company average, but allow us to generate a substantially higher return on our invested capital and to incrementally expand our business. As shown on slide 14, we estimate how the increased number of these closings will impact gross margins by something like 50 basis points compared to 2015.

However, the EBITDA and cash flow benefits from these strategies far outweigh this modest impact. As it relates to our 2B-10 goals, we are targeting a gross margin between 21% and 22%, with the first quarter around 21%. In spite of the increasing cost pressures the industry is facing, we don't expect much, if any, margin change beyond our capital efficiency strategies. This reflects the continued success we're having in improving our operational performance.

Our G&A for the quarter came in better than expected at $40.7 million, as we continued to manage our overhead spending to align with our targeted profitability. SG&A was 10.4% of total revenue for the quarter, down almost 60 basis points compared to the prior year, as rising ASPs helped drive operating leverage.

The results are similar for the full year, as SG&A as a percentage of revenue was 12.8%, representing an improvement of about 50 basis points versus the comparable period last year. We always like to remind investors that revenue related to land sales is included in our SG&A ratio calculation. We expect our SG&A ratio to improve throughout the year, with the first quarter down approximately 50 basis points compared to last year.

As it relates to our 2B-10 targets, we are now forecasting SG&A as a percentage of total revenue to be in the range of 11% to 12%. Remember, the underlying goal of our 2B-10 plan is achieving a 10% EBITDA margin, and we're continuing to manage our overhead spend to a level that allows us to achieve this profitability goal.

Moving now to our land investments, shown on slide 16. In total, we spent about $100 million on land and land development during the quarter, bringing our spend for the year to about $450 million. This was a little less than expected, mostly as a function of the timing of some of our upcoming projects.

We remain optimistic about the path of the housing recovery and continue to find opportunities to invest in new projects that meet or exceed our required rates of return. Revenue for land sales during the quarter was $21 million, bringing the total for the year to $57 million, just ahead of our expectations.

Looking forward, we expect total land spend in the first quarter to be around $150 million. For the full year, land spend is expected to be approximately $600 million, about 80% of which we expect to do ourselves, with the balance spread among several land bankers. In addition to this spending, we anticipate the activation of one or more additional land held assets, which will further support our community count growth.

We currently forecast around $5 million in land sales in the first quarter, with minimal impact on profits. At the end of September, we had nearly 26,000 owned and controlled lots, and about $1.7 billion of total inventory, up $137 million, or 9%, from last year, and up almost $600 million since the end of 2012.

Turning now to our deferred tax assets, as we anticipated last quarter, the cumulative improvements in our results over the past several years allowed us to release a substantial majority of the valuation allowance against our deferred tax assets at year-end. In total, we reversed $335 million, or $10 per share, of the allowance. This has been a long time in coming and it is nice to finally have a balance sheet that reflects the huge improvements we've made in our profitability. With that, let me turn the call over to David to review our capital structure.

Thanks, Bob. As Allan and Bob discussed, we have established as an objective, the improvement of our balance sheet. In that regard, we have repurchased $8 million of our 2016 senior notes in the open market since June 30. We ended the quarter with approximately $252 million of unrestricted cash and nothing drawn on our revolver.

Given the reversal of the valuation allowance, the profitability achieved in 2015, and the early benefits from improving the efficiency of our balance sheet, our net debt-to-net capitalization declined to 67%, down from 81% the year before. At the same time, our book value per share rose to about $20, up from approximately $9 at the end of last year.

We are pleased to announce that our lenders have agreed to increase and extend our existing credit revolver through January 2018. We have increased the line to $145 million, up from $130 million previously, which together with our cash, arms us with nearly $400 million in liquidity.

Looking forward, in addition to our focus on reducing leverage, our balance sheet priorities remain consistent: extend maturities, reduce interest expense, and eventually move to an unsecured capital structure. Finally, as we have previously stated, we have no appetite to issue equity to pay down debt at our current valuation. With that, let me turn the call back over to Allan for his conclusion.

Thanks, David. On slide 20, we have summarized the three main themes for 2016. First we're going to generate significant EBITDA growth as we continue to march down the path toward achieving 2B-10. Second, we're going to improve the efficiency of our assets, both at the community level, and with our capital allocation.

Finally, we'll be focused on reducing our debt and interest expense, as we continue to improve the health of our balance sheet. I want to thank our team for their continued diligence and resiliency against a challenging backdrop. With their efforts, we remain on track to reach our profitability and balance sheet objectives.

With that, I'll turn the call over the operator to take us into Q&A.

(Operator Instructions)

Susan Maklari, UBS.

Good morning.

Good morning, Susan.

First question is, you guys very clearly walked through a lot of the updated 2B-10 goals and initiatives for the next few years. Why not give earnings guidance along with that?

Thank you for asking the question. We've given you two things. We've told you in a lot of detail what we think is going to happen in the next quarter and we've also told you where we expect to be with 2B-10, which is really a FY17 goal. Trying to pick arbitrary way-stations or stop-points along the way to predict the level of individual metrics didn't seem very prudeful to us.

We want to manage business to get to our profitability targets, not to hit particular metrics at random or arbitrary point in time. So our view was we've given you a lot of visibility into the next 90 days, we've told you where we're going over the next 18 months or so, and we've told you objectives around profitability, asset efficiency, and delivering. That is what we're accountable for. That's what we're going to do.

Okay. And with that, Allan, should we expect any targets in terms of the leverage, and maybe near-term, or just looking further out, where you'd like to get that to?

Sue, we're not going to be giving specific targets in terms of the leverage, but just thinking about it generally, our deleveraging is going to follow our cash conversion cycle, which as you know, is more back-end weighted. We've set $100 million of unrestricted cash, and as we look out, we don't see a lot of benefit to carrying more cash than we had at end of year, so if you think about that in some perspective, deleveraging will follow the cash conversion cycle, and excess cash, we've given you somewhat of guidance and how we're thinking about it, as we move to the end of the year.

Okay, thank you.

Ivy Zelman, Zelman & Associates.

Thank you. Good morning, guys. Unless I missed it, I don't think anyone, nor did you guys, address Houston? I know you have pretty significant exposure to that market, so maybe you could just give a framework for how you're doing there, especially because you're in a higher end-price point, which we're hearing is much more competitive?

How does that feed into your expectations in 2016 and hitting your goals in 2B 2017 -- I mean, your 2B-10 in 2017? But with your portfolio, and obviously, in New Jersey, as you've made the decision to exit, people like to -- the overall performance, even if Houston remains below average and weak, can you still hit your goals and where does that come into your forecast?

All right, Ivy, good morning. First of all, we do like our position relatively in Houston, and I want to make a few points about that, and I'll talk about 2016 and 2017. Our price point is at and below $300,000 predominately, so I feel like we are in the lower one-half, and in many of the submarkets, in the lower quartile of price points. We have very few communities about $350,000, in fact in two, so it's not a big weighting of our business.

Also, if we look at the map within Houston, we are somewhat less exposed to the energy corridor. That's not to argue that Houston won't in general move as a market, but there are certainly areas that are more levered to chemicals and to healthcare, and we have big investments in places that have those as the principal job drivers.

Thirdly, this is sometimes overlooked when people analyze Houston from afar, there's a big difference in operating flexibility between developing your own land and having total flexibility for product offering and feature levels and elevations compared to building in big master-planned communities, where many of those parameters are more or less dictated to you. The substantial, vast majority of our business is on self-developed parcels.

As a result of that, we have a lot more degree of freedom in making the adjustments to remain competitive in what we absolutely expect will become an increasingly competitive market. So being in the right places at the right price points with an awful lot of operating flexibility gives us comfort. I'll also say, and it's not entirely gratuitous, the fact is we have a very experienced Management team in Houston.

They have got a good track record over a long period of time, and that obviously helps. All of that said, we are expecting Houston to be challenging in 2016 compared to 2015, and we will see slower paces and we may see some price competition in the marketplace, so some element of that is baked in to our forecast for the year.

I'll get to the last part of your question last. In the environment that we see in Houston, given the position that we've got, we think it will contribute to our profitability nicely in 2016, and is a part of us getting to 2B-10 in2017.

That's very helpful. My thought is, Allan, it's a long road ahead and recognizing consistency and credibility is very important part of investors willing to put new money to work. Recognizing this quarter, your sales were weaker than expected, and it feels like in each quarter, we look back over the last few years, it feels there's been something wrong with the quarter.

There's always a reason, whether it was New Jersey, or there's some margin that came under pressure, whatever the timing -- and a lot of times, it feels like the stock overreacts. But it's really today about consistency and credibility, and looking at your goals and delevering and appreciating that doing it during the upward trajectory of the cycle makes sense, and there is a negative overhang about the leverage ratios.

I just think that people are like, why should we trust them? How do I know every quarter they are just not going to keep missing? So how low do you lower the bar, Allan, that we can actually tell people to buy the stock? And I've gotten basically my butt handed me for recommending your stock, and people are pissed off?

Ivy, I've been among the biggest buyers of the stock with my own after-tax dollars, and I don't know any other CEOs who can say that. So I share the pain. I'm personally experiencing it. We're committed to, of course, a profitability improvement over multiple years. I take your comment seriously about something wrong with each quarter, but I've got to give you a slightly different context, and it's something that we live with every day and that you live with.

Over the four years that this Management team has been in place, we've improved EBITDA on a run rate basis by $170 million. We're 500 closings up in the four-year time period and we have $170 million improvement in EBITDA run rate. We're about $55 million short of our 2B-10 target right now, and we've got the better part of two years to get there. Our track record over the last four years, taken in the aggregate, ought to give investors a lot of confidence that between the metrics that we have managed to, we have the ability to get to 2B-10.

The intra-quarter hits and misses has absolutely been a challenge and I take a lot of responsibility for trying to be overly prescriptive for individual metrics, 180, and 270, and 360 days out in the future. And I've tried to learn from that this year and deal with what we have a lot of visibility into, which is Q1, and the path we're on to get to 2B-10.

That was a great answer. I was just -- finally to say, those -- the believer in you and the believers in the turnaround, being public is different than being private, and having the improvement in EBITDA, and getting to the four years of achievement, that just hitting a quarter and what you say you're going to be able to do is going to be critical in getting people to be believers, because the investors in housing don't have any patience for bumps along the roads.

So my final question was how far have you lower the bar that you feel that you've given yourself enough of a conservative platform? Do you feel like you've really taken down, with the pushing out to 2017 being achieving 2B-10, do you feel like there's really no down-side growth for (laughter)? I know you can't say, so I'm glad to hear you are the biggest buyer of your after-tax dollars. That should boost people's confidence, but are you being really, really conservative?

Ivy, I don't have any better crystal ball than anybody else for 2017, Q2, Q3, Q4 of next year. What I can tell you is we've given very manageable expectations for Q1 and a path, if we go metric by metric, that we clearly can achieve between now and 2017. We've tried to be careful about which quarter in 2017. I'm not that smart, but our goal is to get to 2B-10 in 2017.

If you look at the five components -- if we look at gross margins, and SG&A, pace, community count, and ASP, it's right there for us to go execute against. So I don't know about lowering the bar. We don't give earnings guidance two years out, but we have established a very credible platform.

Just on this point, we had initially thought we could get to 2B-10 in 2016, and mid-year 2015, we reset that, partly because of New Jersey, partly because of what was happening in Texas, into 2017. Since May of last year, we haven't changed that expectation, so I understand that there was a bit of a reset, and we pushed it out into the following fiscal year, but we've been executing against that for the last six months.

Good luck, Allan. Thank you very much. That's a frank. I appreciate it.

Thanks, Ivy.

Michael Rehaut, JPMorgan.

Thanks. Good morning, everyone. First, just a clarification question on the guidance for next year about SG&A, for 1Q, and apologize if you didn't give this, I believe you gave a FY16, as well. Just your expectations of land and lot sales? You said it for 1Q was $5 million, what about the full year, because most people think of SG&A more as a percent of core homebuilding revenue of just closings times ASPs?

Hey, Michael, it's Bob. What we said was we would -- for the full-year, we expect to have continued leverage in our SG&A costs as we continue to grow revenue. We did lower our 2B-10 range from 11% to 12% through 2B-10, but we expected in the first quarter about a 50-basis point improvement year-over-year for the first quarter. We didn't give any specific 2016 leverage guidance, but it will be lower than 2015.

Okay, I appreciate that. And just also around, more granularly, you highlighted your focus on reducing the leverage, and as a benefit of that, reducing the interest expense and interest expense amortization. Any thoughts around 2016, in terms of -- I believe this year, you finished up around 3.5% of revenue in terms of interest expense amortization, and you also had some that was running through the -- not through COGS. Any thoughts around what that should look like for 2016? Obviously tough with the inventory balances, but directionally, at least, how to think about that?

Sure. We've talked about this a lot and it is a complex calculation. I know it's hard for analysts to wrap their heads around the moving parts, but let's set the table. Incurreds in 2015 were about $120 million. They will be roughly the same amount 2016 prior to any capital markets activities or any deleveraging activities. We had about $85 million hit the interest expense in 2015, about $55 million was in COGS, and $30 million was in the direct expense.

If you think about 2016, we think the increase will be somewhere to $100 million in the income statement, which is a substantial increase, but what you see is we expect COGS to grow faster than eligible assets, so we'll continue to amortize a little bit more of the capitalized balance. But I also think that eligible assets will continue to grow, so the direct expense below the line will also decline, as well, so you'll have a continued shifting of the interest up into COGS.

Okay, that's helpful. And just lastly, as you think about the increased investment or dollars spend, however you think about shifting among regions in terms of your mix, you actually ended 4Q relatively -- the east still lagging, obviously because of some of the issues in New Jersey, but both the west and the southeast remaining fairly solid. You've lowered marginally your gross margin outlook.

It appears that, from a mix, from an investment standpoint, relative markets, the gross margins, if perhaps you strip out New Jersey, is relatively stable across most regions. Is that just the outlook for 2016, that continued stability, or you talked about Houston becoming a little tougher, are there any other regions that you'd expect that could offset that, because certainly you're looking for roughly stable gross margins overall?

Hey, Michael. It's Allan. I'll take a swing at that. A couple of things go into thinking about capital allocations and margins are clearly one of them. But Bob laid out for you and for everyone, that as we think about margins, we want to make sure investors understand that land banking has an effective margins and so does activating land held. That's relevant, because when you look at segment margins, the land banking tariff, if you will, or the cost of that capital, is embedded in those margins.

We have historically, and just to this date, a slightly disproportionate share of our land banking has been in the east, so when you look at our east margins, bear in mind that they are bearing a larger share of land banking. As we think about the west going forward, that's been where more of the land held is, and so as the land held comes through in larger percentages, that will put some pressure on segment margin.

So I just want to be careful about projecting off of the segment side because you do have these mixes within segments that relate to the very items that Bob talked about. That's maybe in the category of health warning and when you think about sequential progressions in margins at the segment level, because those two factors will affect that.

We've absorbed, in our expectations for flattish gross margins in 2016, this extra load from a higher percentage of land bank and a higher percentage of land held at an aggregate level. But what we haven't done is tried to give you segment-specific weighted averages in 2016. So just word to the wise.

In terms of capital allocation, which is really where your question started, there's no question that there are markets that we are emphasizing in any given period of time, and deemphasizing. It comes back to an affordability metric around income and home prices at the market level, and then the supply-and-demand characteristics. I would tell you that a number of our markets screen pretty well for that right now.

I hate to give our competitors our play-book, but the fact is, the southeast, in general, scores pretty highly right now and those are markets that are gathering and have really, through 2015, more capital, as we think about our investment because the investments we're making now are for 2017, 2018, and 2019, they are not really for 2016. So I hope that gives you a little bit of color on how we're thinking about it and just a little bit of background on the margin side.

I appreciate that, Allan. Just to clarify, with the expectation in 2016 of an incrementally, modestly at least, negative impact from the activation of older land and land banking, what is the rough offset to that from either a mix standpoint or there are certain markets that you're expecting to do better because you also said, Houston, you're expecting to do a little worse?

There are a few things and the real difficulty -- and it gets back to the question that Ivy asked, which is, gosh, why don't you guys do what you say you're going to do three quarters in advance, at the metric level. I'm trying to avoid making that mistake, but there are a couple of obvious factors that work the other direction that are in our favor.

The New Jersey headwind, and Bob quantified that at about 40 bps in the fourth quarter -- we will have a few more New Jersey closings in Q1 and then we'll be done with that. That will not be a drag on gross margins in 2016. The other thing, and we talked about this last quarter, was we had -- I used the word concessions -- it was maybe not the most artful word.

But we ate some costs for both trade partners and customers to achieve some closing commitments that we had made to buyers in the third and the fourth quarter. We don't intend to build those into our cost structure on a go-forward basis. And so those things burning off are some of the things that give us confidence that we can absorb some of the extra load as we think about the capital efficiency strategies.

All right. Thank you.

Susan Berliner, JPMorgan.

Hi, still good morning. I wanted to start -- I know you guys talked about deleveraging, and I was hoping you could give us various options you're contemplating with regards to that? And then if you could also talk about -- I know you have callable bonds and you talked about refinancing your secures, as well as your higher coupon bonds?

We're all looking at each other. Everybody wants to say something. First of all, good morning, Sue, it is still morning. In terms of options, let's talk about sources and then maybe I'll let David and Bob talk about uses, because we have lots of choices on the uses side.

One of the things that we've talked about is a land spend in the aggregate that's a number that allows us to maintain a growth trajectory, but a portion of that being ours and a portion of that being with land bankers. The level that we're talking about spending in 2016 is going to allow us to generate some cash from the business, and so that plus our expectations for enhance EBITDA will give us some direct liquidity.

Then as we look to land held assets or any particularly long-lived assets and we think about how can we be more efficient with the capital that we've got, those are all the areas where we have access to capital that can be used for deleveraging without putting a real crimp in our ability to also grow the business. That's the where can it come from side. In terms of where it might be applied, Dave, why don't you respond to that?

Sue, and we've can highlight 2016s and just given the maturity being less than a year as being the priority, between other issuances, I would tell you we're not really signaling anything between the 2018s and the 2019s at this point. We're going to be opportunistic with what we do and see what's available to us in the market, so not a lot of specifics outside of the 2016s being the priority from my perspective.

Great, thank you.

Jay McCanless, Sterne Agee.

Hi, good morning, everyone. Three questions for you. First, on the slide about the deferred tax assets, it shows about $57.6 million still outstanding. How much of that do you think is recoverable over the next couple of years?

Jay, this is Bob. Obviously, it's a hard thing to estimate. But with continued profitability and improvements in profitability, we think we'll be able to remove the rest of that VA over time. I don't think it's completely lost to us.

Okay. All right. I didn't know. I saw the total number came down. I didn't know if you all just pared it down to what you thought was realizable in that September 30, 2015 column?

What was realizable was what we took in, was the $335 million and then we used about $10 million with our earnings in the quarter, so that's how you get to your net $325 million. The remaining -- there's some federal pieces, there's some state pieces, so it gets a little tricky when you talk about the states as to which state you're going to earn the money in order to get to a point where you can reassess your estimates, but over the next couple of years, we feel confident that we'll have the improvement in profitability to release the VA.

Got it. Okay. Thank you for that. And then in terms of the tax provision for next year? I believe you guys are going to be paying probably little to nothing in cash taxes, but in terms of your income statement provision, what rate should we use for 2016?

The mix rate will be about 40% for next year, and you're right we won't be paying very much in cash taxes.

Okay. 40%. And then -- and I apologize, I got on late -- but on slide 14, where you are talking about the gross margin impact from some of the mothballed land, and then also the land banking transactions, what exactly is the gross margin guidance for 2016 and can you relate it back to this chart on 2014 for me?

What we've said, Jay, is that we expect Q1 to be in the range of 21%, but we've talked about the 2B-10 guidance, which is really the guidance that gets us from here to 2017, between 21% and 22%. You can see that the mix shift that we're expecting because of these assets puts a little pressure on what 2015 margins were, but as I said just a minute ago, we will not have New Jersey and we will not have some of the extraordinary costs that arose from dealing with the weather issues.

And we have other initiatives underway, as well, so we're not trying to give you a point estimate. In fact, we're doing the opposite as it relates to the full year of 2016. We've given you some of the parts and pieces, and we've absolutely given you the right way to think about the first quarter.

Okay, okay. Any color on order trends or traffic for October?

Yes, it was okay. Nothing that happened in October though caused us to think that our pace or sales per month per community would be better in Q1 of this year than Q1 of last year, which is why we gave a guidance to flat pace against a slightly larger community count.

Okay, sounds good. Thanks, guys.

James Finnerty, Citi.

Hi, good morning. Just going back to the debt reduction, just want to be sure I'm clear on it, is the idea by the end of 2016 to actually have less total debt outstanding?

Yes.

If so, can you quantify, give us an idea how much debt reduction?

No. We've got a lot of homes to sell and close between now and then, James, so it would be difficult for us to try and put a point in the dollar amount, but I would absolutely tell you, we expect to have less debt on the balance sheet at the end of the year.

And then, Allan, in terms of the sources, you mentioned long-lived land assets, and you also mentioned land banking. Could that imply that there's potential for some of your assets to be used in land banking or you would go to -- give those assets to a land banker and potentially generate liquidity that way?

No, we're not using it that way, and in fact, we're largely using it for growth purposes. Land banking for us is an offset to cash that we would otherwise spend that helps us grow community count. We have no intentions at all to use existing assets in land banking transaction.

Okay, thank you very much.

Alex Barron, Research Center (sic).

Thank you, guys. I wanted to ask -- I don't know if I heard anything on some type of guidance for deliveries. Should we assume a similar backlog conversion to last year or lower given all these labor issues going on in the industry or how are you guys thinking about that?

The only guidance we gave was for Q1 and we said we expected it to be slightly below 50%, partly because of the labor issues and partly because, as I described, our Q4 sales pattern was a little unusual. There was a lot more activity in September and it's still a very high mix of to-be-builts in our sales, and as a result, the percentage of our backlog at 9/30 that was actually scheduled to close in Q1 was at a historically low level and that is what is leading that just below 50% conversion rate in the first quarter.

At a higher level, Alex, we talked a bit about closing the gap between sales per month per community and closings per month per community. That's possible because, remember, in 2015, there was very significant growth in community count for us, and it's inherent that you're going to sell the units before you close the units, so as you're growing community count materially, you're going to see a gap open up between that sales and closing per community.

Most of those communities are now beyond the start-up phase, so we ought to be able to narrow that gap. That's different from giving you backlog guidance in terms of conversion into Q2s, 3, and 4, but clearly, we expect to closely match what our sales per community will be over the balance of the year.

Okay, great. Then any guidance on your tax rate now that you've reversed the DTA?

Yes, Alex, our tax rate -- we talked with Jay McCanless about this -- about 40% will be the income statement rate, but remember we won't be paying very much in the way of cash taxes.

Got it. Okay, thanks so much, guys.

All right. That concludes today's call. We want to thank our investors and analysts for listening and we'll talk to you in about 90 days. Thank you.

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