Beazer Homes USA Inc (BZH) 2016 Q2 法說會逐字稿

Good morning, and welcome to the Beazer Homes earnings conference call for the quarter ended March 31, 2016. 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 David Goldberg, Vice President and Treasurer. David, you may begin.

Thank you. Good morning, and welcome to the Beazer Homes conference call discussing our results for the second quarter of FY16.

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 statement, whether as a result of new information, future events, or otherwise. New factors emerge from time to time, and it is not possible for Management to predict all such factors.

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

Good morning, and thank you for joining us. We're pleased to report our second-quarter results, which reflected our continued progress toward both our 2B-10 targets and our de-leveraging goals. We significantly increased our revenue and EBITDA, and paid down debt. Here are the highlights.

We reported $26.2 million of adjusted EBITDA, up more than 30% versus the prior year. On a trailing 12-month basis, our adjusted EBITDA is now over $160 million, up 24%. We closed 1,150 homes in the quarter, which was up almost 23%. This equated to a 60% backlog conversion ratio, as our focus on spec sales and improving construction cycle times both proved successful.

We entered into a $140 million, two-year term loan, and used the proceeds to retire our 2016 notes. Reflecting our focus on generating liquidity, we ended the quarter with $135 million of unrestricted cash, even after paying off more than $18 million in debt. This brings our year-to-date repurchases to over $41 million, and leaves us on track to retire at least $100 million of debt during this fiscal year.

Conditions in the housing market improved as we moved through the quarter. While it is very difficult for us to directly link our sales activity to macro issues, elevated concerns about the direction of the economy and the potential risk of a near-term recession appeared to weigh on home buyers early in the quarter. As those concerns waned and we entered the selling season in February, home buyers seemed a bit more enthusiastic and optimistic. This led us to better sales later in the quarter, with good geographic breadth across all our markets.

In terms of our balance sheet, last quarter we expanded the de-leveraging objective we outlined in the fall. This reflected our view that poor conditions in the high-yield market would make it unattractive for us to re-finance our 2016 debt maturity. Instead, we raised our target for debt reduction for this fiscal year from $50 million, and we noted some of the strategies we had already implemented to retire the 2016s on our own. These included selling a higher proportion of specs, which convert to cash more quickly, and using land banking for a higher portion of our future land spending.

During the second quarter we accomplished both with, specs sold and closed during the quarter higher than in the previous year, and a larger portion of our land spending committed by land bankers. These actions pay dividends immediately. In part due to this ability to demonstrate a path to re-paying the 2016s, we were able to successfully access the term loan market. By doing so, we eliminated our only near-term debt maturity, reduced interest expense, and gained operational flexibility to manage our de-leveraging to more naturally follow the cash-generation cycle of our business.

At the mid-year mark we remain committed to a balanced approach, with unchanged expectations for EBITDA growth, and at least $100 million in debt reduction this year, and an additional $70 million in debt reduction next year. Beyond 2017, it is absolutely the case that our decision to increase the speed and magnitude of our de-leveraging will sacrifice some growth. However, based on our discussions with our shareholders and our Board, we believe reducing the risk in our capital structure while market conditions remain constructive is the right course of action for our Company.

With that, let me turn the call over to Bob to go through our results for the second quarter, and our expectations moving forward.

Thanks, Allan. We continue to focus on the metrics that drive the achievement of our 2B-10 plan objectives. Although the path we take will evolve over time, the expectation that we will reach $2 billion in revenue with a 10% EBITDA margin remains unchanged. I will be reviewing second-quarter results, and providing some visibility into our operational expectations for the third quarter, and how those relate to our 2B-10 goals.

Looking at our progress to date, our last 12-month revenue totaled $1.8 billion, up more than $325 million, or 22% compared to last year. In addition, our LTM adjusted EBITDA of $160 million is up more than $30 million versus the prior year. In line with our guidance, our second-quarter absorption rate was 3.1 sales per community per month. The slow-down versus the prior year was expected, and reflects a more sustainable level than last year, which benefited from the unusually robust demand in a handful of markets. With more geographic balance in our absorption rates, we are less reliant on the small number of markets.

On a trailing 12-month basis, our sales pace was 2.6 sales per community per month, slightly below our 2B-10 range, and mostly reflecting our poor sales pace in Q1. We anticipate moving back toward the low end of our target range as we progress through the remainder of 2016 and into the next fiscal year. In the third quarter, we are expecting a sales pace at or above 3, in line with our recent results.

Turning now to the average sales price. Our ASP in the second quarter rose 7% over last year to $328,000. Each of our regions experienced price improvement on a year-over-year basis, led by the West, where our prices were up 13%. On a trailing 12-month basis, ASPs rose 9.4% year over year to $322,000, up from $295,000. Importantly, our ASP in backlog as of March 31 was $336,000, within our targeted 2B-10 range. We expect our average sales price in the third quarter to be around $330,000.

Our backlog conversion ratio was 60% in the second quarter, which was 7 points versus the prior year, and in line with our expectations. Our higher conversion ratio was driven by a number of factors, including our focus on increasing spec sales and improving cycle times. In the third quarter, we're expecting closings to be slightly above last year, which translates into a conversion ratio in the mid-50s, in line with our historical performance.

Our average community count during the quarter was 166, or about 4% higher than last year. The sequential decline we experienced was exactly in line with our expectations, as we had more close-outs than grand openings during the quarter. We expect third-quarter average community count to be relatively flat sequentially, although openings may slightly exceed our close-outs. On the trailing 12-month basis, our average community count was up 10%. We continue to expect modest year-over-year growth in our full-year community count.

Turning now to our gross margins, we generated a 20.2% gross margin for the quarter, which is in line with our expectation for relatively flat margins sequentially. As we discussed last quarter, in connection with our plan to retire the 2016s, we deliberately emphasized selling more spec homes, which generally carry lower margins than to-be-built homes. These efforts were successful in the first and second quarters, which will contribute to margins remaining around the same level again in third quarter. With the term loan now in place, we have become less aggressive with pricing specs, which will be helpful for margins in the fourth quarter and into early 2017.

SG&A was 13.9% of total revenue for the quarter, down more than 100 basis points compared to prior year, but up about 70 basis points sequentially. This unexpected sequential increase was attributable to a few unusual expenses, including the short-term spike in our health care costs, and lower-than-forecast land sales revenue.

The back story on the land sale revenue is worth a short explanation. It related to a $10 million in-town site in Atlanta. The asset had been under contract to a local builder, who was unable to secure financing during the time period required, despite a substantial improvement in the sales pace and pricing of in-town housing. While the buyer was anxious for us to extend the financing window, with the term loan in place we elected to retain the asset and build it ourselves. We have a growing collection of in-town sites, and we expect to start generating home sales from this location late in the calendar year.

Our SG&A ratio will be much lower in the third quarter, likely falling below last year's level. On a trailing 12-month basis, SG&A as a percentage of total revenue was 12.2%, representing an improvement of about 130 basis points versus the comparable period last year. As a reminder, 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 will allow us to achieve this profitability goal.

Moving now to our land investments shown on slide 13, we spent about $84 million on land and land development, including deposits associated with three new land banking deals we closed this quarter. Including our land banking arrangements, total commitments were about $100 million, about even with our expectations. During the second quarter, we also activated a $13 million asset out of land held for future development. This community consists of about 140 lots in southern California, and is expected to open for sale next spring.

Looking forward, total land spending, including both on-balance-sheet spending and land banking commitments are expected to be approximately flat sequentially into the third quarter. Revenue from land sales during the quarter was $8 million. As of the end of March, we had approximately $50 million of land held for sale, the majority of which we expect to close in this fiscal year.

As shown on slide 14, we have more than 25,000 owned and controlled lots, representing about $1.8 billion of total inventory, essentially flat with last year. Based on our trailing 12-month closings, our active lot position represents about a four-year supply, and is more than sufficient to achieve our 2B-10 plan and allow ongoing de-leveraging. We continue to make strides in improving the efficiency of our assets, as we reduce our land held for future development and increase the percentage of our optioned lots.

As reflected on slide 15, our trailing 12-month EBITDA-to-inventory ratio has more than doubled since FY13, reflecting our success in improving profitability and increasing the productivity of our land position. Driving greater capital efficiency remains a top priority, and we expect further improvements in the future. At this point, I will turn the call over to David to discuss our balance sheet and liquidity.

Thanks, Bob. We ended the quarter with approximately $250 million of liquidity, consisting of $135 million of unrestricted cash and $115 million of availability on our credit revolver, after adjusting for letters of credit. As you've heard a couple of times already, during the quarter we entered into a $140 million two-year term loan. The proceeds from the term loan, in combination with cash on the balance sheet, were used to redeem all of our 2016 senior notes.

The term loan provides us increased financial flexibility to reduce our pace -- our debt at a pace more in line with our normal seasonal cash generation. During the quarter, we re-purchased $18.4 million of debt, bringing our total purchases year to date to $41.3 million. These re-purchases, combined with the savings generated from refinancing the 2016s, has reduced the run rate of our annual cash interest expense by more than $6 million.

We remain committed to retiring at least $100 million of debt in this fiscal year. Beyond the $35 million of principal re-payments on the term loan, we plan on spending at least $25 million more on debt re-purchases. With no current maturities, we have lots of flexibility around which debt instruments to target. Next year, we expect another $70 million in de-leveraging, as we make amortization payments on the term loan. With that, let me turn the call back over to Allan for his conclusion.

Thank you, David. On slide 17, we have reiterated our main themes for 2016, and our accomplishments so far this year. We generated significant year-over-year EBITDA growth for the second quarter and year to date. We have grown our EBITDA while holding our inventory relatively flat, allowing us to improve our return on capital. Finally, we retired our 2016 notes, and have now eliminated over $43 million of debt since September, reducing the run rate on a cash interest expense by more than $6 million.

Before turning the call over to the operator for Q&A, I want to highlight that Beazer Homes was recently named an Energy Star Partner of the Year for 2016. We were one of only three national builders to be recognized. Although achieving these energy savings increases our construction costs, it's one of the three key ways we differentiate our homes. We think it's the right thing to do, and based on our customer surveys, our home buyers seem to agree. I'd like to thank our employees and our trade partners for helping us earn this recognition.

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

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Mike Rehaut, JPMorgan Chase.

Thanks very much. Good morning, everyone.

Good morning, Mike.

I appreciate all the detail, and the data points and outlook around the third quarter. A bigger-picture question her around gross margins. Obviously you have laid out what you want to do with specs and land banking.

Just taking a step back, and as you think about if possible to give some thoughts around, let's say 2017 and 2018 as the liquidity and de-leveraging plays out, how should we think about specs and land banking and impacting the future direction of the gross margin on a pre-and post-interest type of dynamic? I realize the interest is -- we're playing into the leveraging there, but any thoughts around the direction there would be very helpful?

Great. I'm going to give you a health warning. I'm punting on the interest piece. Let's talk about un-levered gross margins, because that's really quite operational, and I think we can give you a lot of things to work with there. Maybe we'll have a separate interest discussion, but let's deal with the un-levered gross margins.

I appreciate your question. I think we acknowledge where we are year over year as down quite a bit in gross margins, for reasons that were both structural, related to our land banking arrangements and activating a number of land held assets, and some more temporary issues that really were directing firepower, if you will, at our desire to create liquidity, in the event we had to take out the 2016s on our own. I would say that both of those have contributed, I don't know, to the last basis point. But those are both meaningful contributors to what the year-over-year margin profile looks like.

As Bob said, as we think about the third quarter, what we did in Q1 and Q2 to emphasize the sale of specs, which included being more aggressive on pricing, we're going to continue to have some of that in the numbers. That's why we've guided to Q3 gross margins to be pretty similar to Q2.

But when we look out to Q4, I can tell you that we have been successful in raising our margins on our to-be-built homes, and they are in backlog, so there is a nice upward trajectory into the fourth quarter. I see an absolute pathway, notwithstanding land-held assets and land banking assets, for us to get back towards 21%. I don't know that we'll get there in the fourth quarter, but as I look into early next year, that's the ramp that we're on back to 21%. I think for the reasons that we've talked about previously, it's going to be tough for us to get back to 22%, but I think we can get back to 21%.

That's great. That's very helpful. Secondly, as you look at -- again, managing through this de-leveraging period, any initial thoughts around growth objectives for FY17, from either a community count or how the community mix might impact the sales pace? I know that in the third quarter and I think in general, you have been hitting that three -- plus or minus the three per month. If that were to continue -- any thoughts around, again, the community count direction?

There are a lot of things going on there. I think -- it's hard to isolate an answer to that question. Let's do this. We continue to believe we'll have a nice up-tick in EBITDA this year. I think we'll have a nice up-tick in EBITDA next year. We're not going to give 2017 guidance.

I think, and I was quite intentional about this, as we think about taking $100 million and de-levering this year, and $70 million next year, where that's really going to influence us is in 2018 and beyond. If we bought a piece of raw ground today, it is very unlikely in any of our markets that it would progress from being raw ground to closings in FY17.

The effect of de-levering is going to reduce the rate of growth that we're able to achieve in 2018 and beyond, for sure. I'm intentional in saying the rate of growth, because I think that there is still a lot of inefficiency in our balance sheet that we are working through. We have been successful in activating land held assets. There are more land held assets to activate.

We've got our option percentage of our lots up from the teens to low 20s, and I think this most recent quarter it was about 30%. There's a little bit more for us to do there, as well. We can be on an upward growth trajectory into the next several years, but clearly the pace of our buying big land deals for 2018 and beyond, we are emphasizing de-risking the balance sheet instead.

I appreciate it, and thanks for talking a little bit past this year. I know it's a little more than you wanted to do, but I appreciate the directional guidance.

Okay, thanks, Mike.

Ivy Zelman, Zelman Associates.

Good morning. Thanks, guys.

Maybe Allan you can speak a little bit about strategy as it relates to entry level. I know that you've talked about staying in-fill and better locations and not sprawling out, but you actually have one of the highest percentages of homes that are built under 2,200 square feet. Are you doing more smaller units that might be a little more expensive, but they are considered first-time but closer in? What's the strategy going forward on that? Then I have a follow-up, thank you.

Sure. Thanks, Ivy. I appreciate the framing of that, because I think the nomenclature of entry-level and first-time buyer are oftentimes juxtaposed or used synonymously, and we don't think of them as being the same thing. We do have a large share of first-time buyers, and have historically, and that's been a core business for us, it remains a core business.

What we haven't made the decision to do is to reduce features and move to more outlying locations to get to that price-driven, entry-level demand. We don't deny that it exists, but there are characteristics associated with that, that just are not in our wheelhouse.

Our strategy is to be incredible value. We want to have a good location, we want to have the right amount of square footage, not excess square footage. Between mortgage choice and Energy Star programs and our choice plans, we want to stand out as that first-time buyer proposition that is very distinguished.

It's not you can have any color as long as it's brown, it's not we've made all the selections for you. You've got things to do with the floor plans, things you can do with how you finance the home. Oh, by the way, it has industry-leading energy features. That's who we want to be. It is not right down on the lowest rung of price, but we are not trying to become something that we historically haven't.

What you have really seen in our Company of the last few years is we have bigger businesses in coastal markets, and naturally while we're going after a similar buyer profile, those have helped pull up our ASPs, which is one of the intentional strategies to lever our overheads.

It's certainly the case that whatever the corporate overhead number is, having a $200,000 ASP as opposed to a $300,000 ASP, we clearly are getting better leverage. That has been part of the strategy, as well. I think I've dealt a little bit with the geography and a little bit with the buyer profile. I don't know if that's exactly what you were going for, but that's what we are trying to do, and frankly, what we have been doing pretty well.

No, it's helpful, because I think by providing us more framework, if you're going to not just give a box, but you're going to give a box that there's some optionality to it is different than a pure entry level, even if it's in-fill. A townhome, it sounds like you're not necessarily going after the basic box, and you're given features and allowing people to make decisions, so that's helpful. I don't know if you have a percent of how much is attached product? That might be something, if you don't have it, maybe Bob or David can follow up.

My second question relates more to, as you do not have a captive mortgage company any more, and you're relying upon the lenders of choice that you use to help you facilitate getting homes closes, right now there are definitely concerns about the confusion still related to selling loans to investors, besides Fannie and Freddie. What percent of your loans that go through your lenders are sold directly to Fannie/Freddie, where there doesn't seem to be any issues, as opposed to being sold through to correspondents and to wholesale?

Well, I'm trying to frame an intelligent response, and not sound like a smart Alec, Ivy. I don't know the answer, because we aren't -- we don't have visibility to who the lenders are selling their loans to. I'm not diminishing the importance of your question, but the fact is we have this tension. It's an intentional tension at every community, which is we need two, three, or four lenders competing for each buyer's loan opportunity. We manage very carefully the capture rates between the lenders. If one lender's winning all the time, we need to get other lenders in there so one lender doesn't win all the time.

What that allowed us to do last year, as we think about TRID just for a second, is it allowed us to kick out those lenders where the risk factors around their TRID compliance was pretty high. What it has allowed us to do is kick out lenders who have overlays that are above and beyond regulatory requirements for certain buyer profiles. We're not held hostage by back office or underwriting criteria of individual lenders. That dynamic, that flexibility is an absolutely core part of our strategy. We're completely committed to it. It has driven sales pace. It has driven customer satisfaction, and it has massively reduced risk in our Business.

Thank you.

Thanks.

Susan Maklari, UBS.

Good morning.

Good morning, Susan.

You talked a little bit about how you expect the absorption rates to improve as we move through the back half of the year. Yet you also noted that you're not going to be as aggressive, perhaps on pricing with those specs that are out there. Can you talk a little bit about how you're balancing those two, and how we should think about that in a bit more detail as we move through this process?

Sure. It was interesting in the second quarter. We knew, and we talked about this 90 days ago, that the comp, if you will, for us was pretty tough in Q2, coming off something in the mid-3%s. It was a great number. It was heavily influenced by a handful of markets that were white hot, and we were not expecting to do that again. In fact, in the case of Dallas, we tried not to do that again.

That certainly can create backlog issues that you worry about, both the quality of your backlog, the margins in your backlog, the customer experience. I'm pleased with the fact that we have not got an oddly shaped demand pattern. It feels pretty good across the business. That gives us some confidence as we look into Q3.

Your question really gets at this mix between specs and to-be-builts. I'm going to say something, and maybe it's because I'm getting old, I can't remember if I said this exactly this way in February, but it certainly has been an issue inside the Company.

There is a certain unintentional, or maybe not an obvious relationship, as you are emphasizing spec sales in part by pushing up to-be-built pricing. That's how you make the specs on a relative basis more attractive. In some of the communities, that hurt sales pace. Not a lot of specs in that community, not wanting to get the backlog too big, too far out. It's interesting, I think there might be a knee-jerk reaction that hey, if you're going to emphasize spec sales, that's only going to be positive for pace. It's more nuanced than that.

That's why, as I look into Q3, and say we're going to be a little aggressive, little less aggressive on pricing of the specs, I don't see that having this instant corollary that okay, well that means pace has got to decelerate. I think we can let the horses run a little bit in some communities from a to-be-built perspective, that we didn't in the second quarter.

The other thing that happens every quarter is there's always a mix of close-outs and startups or grand openings that you've got. As we look at the roster of start-ups, I know that we've got pretty good pent-up demand in some places -- interest lists, waiting lists, checks in hand in some places. That also gives us some visibility into feeling all right about the third quarter.

All right, that's very helpful. In terms of Houston, there's obviously been a lot of very severe weather there recently, a lot of flooding, those kinds of things going on. Can you talk a little bit about what's going on down there within your communities? Any impact that we should be thinking about as we move through the third and fourth quarter?

Well, it's a great question. I'm going to -- if I may, with your indulgence -- I'm going to answer two Houston questions. One you asked, but one you didn't ask that we want to talk about, because I think people are generally interested, what are we seeing in Houston. Is that all right if I deal with that, and then talk about the weather piece?

Absolutely.

On the Houston thing, I would say I have seen some of the narrative from our peers about the market. We certainly concur, things are slower on a year-over-year basis. It has been particularly acute at move-up price points, certainly above $400,000, down into the mid-to-low $300,000's In certain locations there have been sales-pace reductions for the industry for the market.

Now let me talk about Beazer. Our absorptions are absolutely down on a year-over-year basis in Houston. However, they remain right around the Company average, which is to say at very healthy levels. I'm pretty pleased.

The question is, how are you defying gravity, and how could things be that good for you? The fact is, again this is a bit redundant, we're in the right locations, we're targeting the right buyer profiles at the right price points, we have a terrific Management team. I feel pretty good about where we are in Houston.

We have been cautious on land in the last 12 months. We were land sellers last year in that market. Glad that we did. But it's a core market for us, and it's one we're absolutely committed to for the long term. I think -- I don't know that the worst is or isn't behind us, but I like our position, I like our buyer profile.

There is a level of stability and an absence of some exceptional anxiety that we've got about the market. I think that's starting to come through in some others' comments, but again, we have been in the right places with the right buyers, and I think that's served us very well.

As it relates to the specific question about weather, I think a couple of things about that. We absolutely have gotten phone calls on some warranty issues. The level of those have been very modest. We have been highly responsive to it. I have no reason to believe that that is going to represent an extraordinary event. We have weather all the time. I think our team is doing a nice job of dealing with it.

We did not have, on the land development side, we did not have communities that were particularly vulnerable stages of development, so that we didn't lose a significant number of days in the land development side for new communities, like we did a year ago in both Dallas and Houston, so that's better. I'm happy to say that our land development expertise in that market was really proven out.

Many of you may have seen kayaks and canoes in roads in Houston. We didn't have any instances where we had water get into homes, ground water get into homes. The drainage that we have designed into our communities worked well. There is always going to be a little bit of noise when you have a big weather event like that, but I think -- I tried to give you a little color on the land side and on the house side. I think we've got it pretty well managed.

No, that's very helpful. Thank you.

Susan Berliner, JPMC.

Hi, good morning.

Good morning, Sue.

I want to talk, start with the debt repayment. I know last quarter you talked about what you had repaid subsequent to quarter end. I notice you didn't this time. Does this mean you didn't do any debt repurchases since the quarter ended?

Yes, that's right, Sue.

Okay. Then I assume that $18.4 million, couple of the bonds you bought, I would assume that would be at a decent discount, at least?

Generally, that's right. Some of it also came from retiring the 2016's, which obviously we had to make whole. Generally, we have been buying them at a pretty big discount in the market, in the open-market transactions.

Got you. Allan, can you talk about some of the other markets? Houston was helpful, but obviously the orders were down. I was looking for any other color, and if you can give anything on April, as well?

We don't really do the month thing. I find it's a little bit of fool's gold. You can have two good weeks and start pounding your chest, or you can feel sad after two weeks. There's just not enough stability. That's a dangerous game. It's not something we do. Patterns are pretty good. I think what we've said about third quarter should give you some indication that nothing is substantially different from the second quarter.

Let's go to the regional discussion, though. I'm happy to do that. I think -- let's think about it as we report, which is in three segments. If we think about the East, our absorptions were actually up in the East. We had pretty good showing in Indy and Maryland. We have struggled a little bit in Maryland to find our footing. It is a market in which we compete at a much higher price point. I'm pleased with the progress we've made there. We've got a big business there, and it's firing on more and more cylinders. I think that was nice.

The Indy market is one that we allowed to get smaller. I admitted freely that I wish we hadn't allowed it to get smaller at the rate we did, but it's still a strong business for us, and it's one we are growing, and is performing very well.

If I think about the West and the Southeast, the thing they both have in common is they both had year-over-year declines in absorption rates, but they both ended up at levels right around the Company average, I mean for the segment as a whole. What that really tells you is there were outliers in both segments last year that didn't recur, and I'll be happy to talk about that.

Last year in the west, both Houston and Dallas were pretty far above Company average levels. Houston has declined for reasons we've talked about but remains in very good shape. Dallas, it was so strong last year, and the demand is there. That market is very healthy. We are in great locations. We could sell faster than we are selling, I am confident of that.

But, we created a bit of a problem for ourselves last year, because we sold so well so quickly. Our backlog elongated. That ends up introducing margin risk into you backlog. Then we got hammered by weather, so that elongation to the backlog got exacerbated. This year we looked at it and said there's a great pace, but let's be really careful with pricing, as well. Dallas continues to be a strong performer on any metric for us, including pace. It just isn't as strong as it was last year, largely because of decisions that we've taken.

In the Southeast, really the outlier last year for us was Charleston; spectacular, crazy-high number. It's still a number at or above the Company average, but it isn't what it was a year ago. Part of it is we had both a grand opening and a closeout last year that happened to occur in the second quarter. Both of those communities posted giant numbers.

I'm really pleased with that business. We've invested in it, we're growing it. It's performing well. It's got all the characteristics we like in terms of job growth, and some barriers so that our value proposition really is compelling. The reality is it's hard to comp a six in sales per month per community. We didn't intend to, and we didn't.

I don't know, we could probably spend hours talking about individual markets, but I would tell you the West and the Southeast did what we needed them to do, and the East got a little better. I am pleased. I will say, you didn't ask the question but I'll tell you this, I think our pace is going to stand up really well under scrutiny against our peer group. I think this was a pretty good quarter for us. People can talk about the change in pace, and I accept that as fair. But at 3.1, I think that's a pretty darn good pace.

Thanks very much.

Thanks, Sue.

Jay McCanless, Sterne Agee.

Good morning, guys. Good order growth in the West segment, or the West region. Can you talk about is that a function of more community count out there, or are you seeing a pick-up in the same-store sales growth?

It's a great question. I will tell you one of the biggest contributors to the order growth there was our Sacramento division. It's a real point of pride for us, because a year ago we had zero sales in Sacramento. We activated the division about this time. We pulled some land out of land held for future development. We're active in two locations now, total of seven price points.

All of a sudden, we've got a rapidly growing business that's got a lot of sticks in the air and a lot of momentum, and we are monetizing these previously land held assets. That's a meaningful part of what we saw in terms of order growth in that community count growth, was really supported by Sacramento.

Got it. On the slide with the specs, it looks like basically your spec count, total spec count slide 23, is flat to slightly higher on an average basis versus last year. How much more on a community basis do you want to have in spec? What should we anticipate for spec versus dirt closings going forward?

Jay, this is Bob. That's a good question. I think when we talk about specs, we're pretty comfortable with where we are. We're set up well for Q3 and Q4. Really on a community basis, every community is a little bit different. Some communities sell specs very well, and some don't. We continue to monitor that community by community. I think with less emphasis on pulling spec sales forward, I think we'll see the margins related to those improve on a go-forward basis. I don't think you'll see anything drastically different than maybe what we've been more from a historical sense.

Okay, then one other quick question. What's the spread now on a gross-margin basis for spec versus dirt sales?

I think this quarter and probably the third quarter a little bit wider than normal than we've always had. Historically, it was somewhere in the 200 to 300 basis points. It's a little bit higher now, because we were bringing those spec sales forward.

Got it.

We expect that to normalize as we get into Q4 and into 2017.

Great, thank you.

Peter Gluschenko. Sir, your line is now open.

Hello, it's Peter Gluschenko with Imperial. Thanks for taking my questions.

I wanted to understand a little more in terms of your strategies in addressing 2018 maturities. What are the current thoughts on using alternative financing methods, perhaps such as JVs, land banking, maybe non-recourse mortgages, or model sell-backs versus traditional refinancing?

Peter, it's David. I will tell you, and not specific to the 2018s, but in general, we consider all different sources of financing. We are pretty active users of land banks. We've talked about that and the land banking relationships. Haven't done as much clearly on the JV size, but we've looked at a lot of different ways to think about generating liquidity.

The answer is we're going to be opportunistic. We're going to look at our cost of capital. We're going to look at how the capital markets look, and how they evolve over time. Things have clearly gotten better in the last few months, and that's a great sign. We're going to be opportunistic in how we approach the market and how we deal with our debt maturities.

Peter, I want to add one other thing. We are not planning on selling land that we own today to a land banker to generate that liquidity. I just want to be clear on that.

Got it, thank you, very helpful. Given your de-leveraging targets, how should we think about total inventory numbers going forward from the cash-flow standpoint? Do you intend this to be source of cash this or next year?

It's an excellent question, and there's some timing issues which make that tricky, because if we mix land banking into the overall equation, I think we are going to be buying land at a level that is equal to or in excess of what we are running through cost of sales for the next couple of years, if you think about them in the aggregate.

But in any given period, what the mix is and how that affects the carrying value, it's a little bit tricky. I think we're going to be more exposed to the markets with a larger combination of land banking take-down opportunities plus land on balance sheet. But there's going to be much less growth -- and in certain periods, no growth in the on-balance-sheet piece over the next year, year and a half.

Got it, great. The last question, if I may. You mentioned the spread within specs versus non-spec homes was 200 bps. Can you provide similar metric for gross margins and the land banking?

A couple of things there. I think just to be clear, Bob talked about a normal range of 200 to 300 on a run rate basis. We widened that on both sides, specs and to-be-builts in the first, second quarter as a part of this liquidity strategy. It's wider than that now, and we think that narrowing that, which we have already taken the steps to do, will start to flow through in the fourth quarter and beyond.

When we think about land banking, we've got a slide -- what number is it Dave? Slide 20. I think I'd direct you and others to slide 20, because I think this is really the context for the impact of land banking, and frankly, the land held assets on our 2015 and 2016 results. It's illustrative. We can kill ourselves getting overly precise, but in general you are thinking about 400 points or 400 basis points or about 4 percentage points in margin associated with a land bank deal, to essentially move 85% of the capital on to somebody else's balance sheet.

Got it. Very helpful. Thank you, and best of luck.

All right. Thanks, Peter. Richard, are there any additional questions?

That's the last question we have, speakers.

All right. Well, thank you all for joining us on our earnings call. We look forward to talking to you in 90 days and reporting further progress. Thanks again.

That concludes today's conference call. Thank you everyone for joining. You may now disconnect.