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Beazer Homes USA Inc. (NYSE:BZH)

F4Q2012 Results Earnings Call

November 12, 2012 11:00 AM ET

Executives

Carey Phelps - Director, Investor Relations

Allan Merrill - President and CEO

Bob Salomon - Executive Vice President and CFO

Analysts

David Goldberg - UBS

Alan Ratner - Zelman & Associates

Michael Rehaut - JPMC

Dan Oppenheim - Credit Suisse

Joel Locker - FBN Securities

Alex Barron - Housing Research Center

Operator

Good morning. And welcome to the Beazer Homes Earnings Conference Call for the Fourth Quarter and Fiscal Year Ended September 30, 2012. This conference is being recorded and will be hosted by Allan Merrill, the company’s Chief Executive Officer. Joining him on the call today will be Bob Salomon, the company’s Chief Financial Officer.

Before he begins, Carey Phelps, Director of Investor Relations, will give instructions on accessing the company’s slide presentation over the Internet and will make comments regarding forward-looking information. Ms. Phelps?

Carey Phelps

Thank you. Good morning. And welcome to the Beazer Homes conference call discussing our results for the fiscal year and quarter ended September 30, 2012. During this call, we will webcast a synchronized presentation which can be found on the Investor page of beazer.com.

Before we begin, you should be aware that during this call, we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Such risks, uncertainties and other factors are described in our SEC filings, including our annual report on Form 10-K.

Any forward-looking statement speaks only as of the date on which such statement is made and as except as required by law, we do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. New factors emerge from time to time and it is not possible for management to predict all such factors.

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

I will now turn the call over to Allan.

Allan Merrill

Thank you, Carey, and thank you for joining us. On our call this morning, we will provide highlights of our results for fiscal 2012, including our recently concluded fourth quarter, update you on our progress on our four path to profitability strategies and share our primary financial goals for fiscal 2013.

During fiscal ‘12, we made impressive progress in our path to profitability strategies, while dramatically strengthening our balance sheet. We generated solid growth in orders, closings and backlog across every geographic segment, and achieved companywide gross margin expansion.

Although, we clearly benefited from improvements in the housing market, our team’s efforts to implement our strategies played a central role in our accomplishments. For the full year, we generated $22 million in positive adjusted EBITDA, up $47 million. We recorded 4,901 new home orders, an increase of 25% over last year. We closed 4,428 new homes up 36%.

We ended fiscal ‘12 with a backlog that was 33% higher in units and 43% higher in value than at the end of fiscal ‘11 and we increase gross margins, excluding interest and impairments by 50 basis points, even though our primary focus was improving absorption rates.

In terms of our balance sheet, we raised $170 million in growth capital, which we’ve started to invest in new communities. We reduced our annual cash interest expense by approximately $15 million and we increased our liquidity ending the year with $488 million in unrestricted cash, as well as a new undrawn $150 million revolver.

Results in the fourth quarter contributed to the full year’s encouraging operational trends. Most importantly, we generated positive adjusted EBIDA of $15 million, even after absorbing nearly $6 million in charges related to discontinued operations.

Orders were up 10% year-over-year, despite an 11% decline in community count in the quarter. While this order growth was lower than in prior quarters, the underlying improvement in sales per community continued to be very strong, especially in light of our intentional pivot to a primary operational focus on improvement in gross margins.

ASP and backlog was up nearly $20,000, which as we will discuss this morning is an important development in our path to profitability. Closings were up 17% as we benefited from a much higher backlog and finally, our homebuilding gross margins were up 90 basis points year-over-year. Operationally and financially we are long way from where we want to be, but we are also a lot closer then we use to be.

Now, let’s dig into the four components or strategies of our path to profitability plan. These have not changed, although, today we are going share some numerical targets for each metric.

Please understand that these targets are not specifically for fiscal 2013. We will make a bigger effort to reach all of them as soon and as responsibly as we can, but collectively reaching these levels will clearly take us in the fiscal 2014.

Improving sales per community and the portion of our communities that are performing has been the foundation of our operational improvement efforts, it is simply impossible for us to reach profitability whether one generate adequate returns on capital without improving sales absorptions and eliminating non-performing communities.

The results for the year very encouraging, on a trailing 12-month basis, we reached 2.3 sales per month per community, up nearly 30% from 1.8 sales per month a year ago. Equally improvement, looking at the average the last four quarters, the ratio of our communities we calculate to be performing is up to 81% from 69% a year ago.

As I mentioned a moment ago, today we are introducing some longer term targets for all four of our core path to profitability strategies. These targets are all expressed as ranges since they are interrelated in a variety of ways, and it is important to note that we reserve the right to change these targets especially to the upside.

As pleased as I am with our improvement in sales per community per month we have plenty of work to do to reach our path to profitability target range of 2.5 to 2.75 and on the performing community metric we want the average of our last four quarters to exceed 90%.

The second area where we have made great progress on our path to profitability is leveraging and in effect reducing our fixed costs. This includes both our G&A and our interest expense.

Our annualized total G&A as a percentage of revenue fell over 700 basis points in the last year, as we held the line on expenses and generated higher revenue.

With respect to interest expense as a result of our capital transactions we reduced our GAAP interest expense by about $17 million, $15 million of which is an annual cash savings.

Since we aren’t currently contemplating any transactions that would further reduce our interest costs, the target for future improvement in leveraging our fixed costs is expressed in terms of G&A as a percentage of revenue.

Remembering that we exclude commissions from this figure, our path to profitability target range is between 9% and 10% of revenue. This will only happen if we continue to grow revenue faster than expenses and I believe we can do that.

In order to return to profitability we need to improve our gross margins and perhaps even more importantly our gross margin dollars per closing. This is a new way for us to discuss margins and it is very important.

We can’t really make money of a higher gross margin percentage. We need the gross margin dollars and the dollars are a function of both the gross margin percentage and the average sales price.

Over the past year, we have been highly successful in working through some of our oldest and lowest priced communities. As a result, if you look at our ASP and backlog, you’ll notice that it was a lot higher year end than it was last year.

Bob will show you some interesting data on how ASP and backlog at year end has related to ASP on future home closings. But let me be clear, regardless of whether there is improvement in new home prices in fiscal 2013, our ASP is going to trend up significantly as our mix within and between market changes.

Separately, our gross margin percentage is showing some early signs of improvement, we were pleased to pick up 50 basis points this year, but we know a lot more is needed. In fact, we’ve gone on record a same we are targeting a gross margin percentage that starts with the 2 and not 1.

Now combining these two metrics, ASP and gross margin percentage, you can see the modestly improving trend this year in gross margin dollars per closing. More importantly, you can also see that our path to profitability target range of $45,000 to $50,000 represent significant improvement, compared to the $37,000 we generated in fiscal 2012.

Yeah, it is a tall order, but improving ASP can provide us a big boost to gross margin dollars this year even as we continue to scrap for every basis point in the gross margin percentage.

The last of our four path to profitability strategies, is to gradually expand our community count, and frankly, we’ve been going in the opposite direction for the last year. As I told prospective investors in July, I just didn’t feel comfortable gambling our liquidity on incremental land deals until we prove we were better operators.

When we reach the end of June, I felt like we had made enough progress in community performance to ask investors to underwrite an expansion of our community count. Although, the short-term reaction of the share price was painful, investors fully subscribed to our offering allowing us to raise about $170 million in growth capital.

Since completing the offering we’ve gone to work carefully investing the funds. So far we’ve contracted for more than 20 communities or about the number we have purchased in the entire year preceding the offering.

Here is what I have to offer a surgeon general’s type warning. We are targeting new communities that can provide robust margins, not a quick boost to this year’s home sales. This means we are typically acquiring raw or semi-developed sites, which likely won’t generate sales or closings until fiscal 2014.

As a result, our average community count isn’t going to gradually increase this year, it is going to fall. This reduction will present a real challenge to sustaining growth in new home orders in fiscal ‘13 even as we deliver substantially improved profitability.

The good news on the land side is that we have plenty of capital and numerous opportunities to enable us to rebuild and then expand our community count in the coming quarters. And despite the current challenges our part to profitability target for average community count is between 190 and 200, but we won’t do done deals just to hit this numbers.

Now, taken as a group this path to profitability targets represent the most important, quantifiable metrics we are pursuing to accelerate our return to profitability. While none of them will happen without effort on our part, none of them are dependent on improvement in market conditions that are completely outside our control. We are committed to creating our own recovery not waiting for market conditions to do it for us.

Now, I’ll turn the call over to Bob to review more detailed financial results and after that, I will finish with our financial objectives for fiscal 2013.

Bob Salomon

Thanks, Allan. The progress we made in our path to profitability strategies resulted in significant improvement in our financial results for -- from continuing operation this year.

For the quarter, our net loss excluding inventory impairments and the loss on debt extinguishment incurred when we refinanced our 2017 notes, improved to $0.69 per share this year, compared with a loss of $2.38 per share in the fourth quarter of fiscal 2011.

Similarly, for the full year, when we exclude the first quarter FIN 48 tax benefit impairments and losses on debt extinguishment our loss per share was $6.17 for fiscal 2012, compared with $11.14 last year.

We converted 66% of our beginning backlog this quarter, slightly better than I had predicted on our last call. This slide shows the factors which impact our backlog conversion ratio.

Home schedule to close in future quarters, rose to 913 units at the end of September, this increase illustrates the growing percentage of to-be-built homes in our backlog, which at September 30th was 82%.

Fortunately, these homes also tend to deliver higher margins than spec sales. 7.6% of our homes in beginning backlog canceled during the quarter, compared to 14% last year. We pushed 6% of our June 30th backlog in the future quarters and finally, we sold and closed 429 homes during the quarter.

Assuming that the vast majority of our buyers continue to prefer to-be-built homes, I expect our quarterly conversion rates during fiscal ‘13 to be similar to fiscal 2012.

As our experience indicates average sales prices can be especially volatile quarter-to-quarter due to changes in geographic, product and community mix. We have enjoyed an upward trend in ASP during the past several quarters. Our fourth quarter ASP grew to 228,600 and we finished fiscal ‘12 with an ASP of 224,900 or at 2.5% annual increase.

Our ASP and backlog at September 30th increased significantly compared to last, up 18,400 per home to 249,100. Additionally, these slide show that ASP and beginning backlog has been a reasonable indicator of future closing ASP’s falling in the range of 92% to 97%. As a result, I expect the significant increase in closing ASP’s for fiscal 2013 trending towards a high end of this range.

The improvement in operational execution by our division management teams along with return of pricing power in certain of our communities produced fourth quarter homebuilding gross margin, excluding impairments and interest of 17.2%, compared with 16.3% last year. For the full year, our homebuilding gross margin was 17.7%, compared with 17.2% last year.

Importantly, the 2.5% growth in ASP combined with 50 basis point increased in gross margin produced $2000 or 5.3% increase in gross margin dollars per closing, which was critical to the increased EBITDA we generated this year.

I’m confident that our full year fiscal 2013 margins will be higher in both percentage and dollars for closing, improving our gross margins while maintaining sales momentum is a key object for us this year.

On this slide we’ve broken down fourth quarter margins by segment, operationally, margins improved 100 basis points in both the West and Southeast, and we benefited from increased prices and/or lower incentives in many of our communities. In addition, the Southeast segment picked up an additional 200 basis points from warranty recoveries and related items.

Partially offsetting this margin expansion was a 50 basis point decline in the East due to our decision to use pricing incentives to stimulate underperforming communities. Although, our margins in the East were drag on the fourth quarter results, I’m encouraged by the fact that they were 200 basis points higher than in the third quarter.

We’ve made substantial progress leveraging our overheads during fiscal 2012, while delivering 70% and 36% more home closings in the fourth quarter and the full year respectively as compared with the prior year.

For the full year, our total G&A expenses, which exclude commissions improved 10.9% of revenue from 18.5% last year. Our operating G&A leverage for the full year also improved to 9.1% of revenue from fiscal 2012, compared with 12.4% last year.

For the quarter, total G&A expenses were $27.7 million, representing only 7.5% of revenue, the lowest of any quarter since fiscal 2006. Details of the components of our G&A and operating G&A can be found in the appendix to this presentation.

Now let’s move to our lot position and land spending. We completed fiscal 2012 with over 24,000 lots owned and under control, of which about 17,300 lots were ready for use today or in the near future.

This immediate and near-term lot inventory equates to approximately four years of supply, based on fiscal ‘12 closing volume. While we face some pressure in community count this year, we have many potential home sites available to us.

Our land held for future development representing about 6200 lots is a resource that we have just begin to tap. During the fourth quarter, we approved the activation of $20 million community in mid-Atlantic from which we expect our first closings in fiscal 2014.

There are two hurdles for us to move a parcel that is currently helped future development into active status. First, it must meet strategic objectives within its division and second, the return characteristics must be favorable when we weigh the time and capital necessary to develop the land against other acquisition opportunities.

Based on improving land and home price trends, it is likely that we’ll pull several additional communities in the active status sometime in fiscal 2013 with more expected in fiscal 2014.

For the full year, we spent a $185 million on land and land development, of which $45 million was spent in the fourth quarter. This compares to $222 million last year.

Our use of land generally equates to approximately 20% to 25% of homebuilding revenue. In fiscal 2012, we spent slightly less than that or 18.6% as we focused on improving our existing communities.

After the completion of our capital transactions last summer, we increased our efforts on the acquisition of new communities. Since the end of fiscal third quarter, we have approved and committed to purchase over 20 new and replacement communities all of which met our underwriting criteria.

For fiscal 2013, I expect us to spend at least twice as much on land and land development as we did in fiscal 2012. That’s why we raise the capital in July. Every division is the solid pipeline of new land deal opportunities that they are actively pursuing.

As long as we are able to continue underwriting transactions that meet our strategic and rate of return criteria, we intend to be very active land buyers nearly all of our markets with special emphasis in California, Texas, Florida, Arizona and North Carolina.

I’m very pleased with the discipline our teams has demonstrated this year to control our level of spec homes. At September 30th we had 392 unsold homes, a 45% reduction from a year ago.

Our finished spec count declined from 334 homes last year to only 174 at the end of fiscal or roughly one per community, occurring some specs remain an important part of our business, I expect the restraint on starting spec homes to continue.

I’m very comfortable with our liquidity position. We ended fiscal 2012 with $488 million in unrestricted cash. We have a new undrawn $150 million revolver. We have no significant debt maturities until mid-2015.

Capital market transactions that we completed this year were especially beneficial to shareholders. By raising as much equity as we did approximately $170 million, we were able to refinance our most expensive debt at a much lower interest rate saving us $15 million in cash per year immediately.

But the best part and we also get to invest the full proceeds in our business to improve future profitability. In essence, we get to use the same money twice. As a result of these transactions, I expect our annual -- annualized cash interest expense to total approximately $105 million.

The dollar value of our deferred tax assets is significant and totaled $495 million at the end of fiscal 2012. While it is unlikely that we will be able to use our entire DTA to do some change of ownership limitations, our current expectation is that upon the resumption of sustain profitability, we will be able to utilize approximately $436 million or $13 per share to offset future taxes.

We are aware of discussions regarding the potential reduction in federal corporate tax rates. After reviewing our mix of federal and state NOLs, we have estimated that a reduction to 28% may potentially reduce our estimated usable DTA to approximately $360 million or $10.75 per share.

With that, I will turn the call back over to Allan.

Allan Merrill

Okay. Thanks, Bob. I’m very pleased with the progress we made during fiscal 2012 and I’m encouraged about our prospects. With that said, we are the first to acknowledge that loosing money every year is a not sustainable financial model. That’s why we’ve made returning to profitability our overriding goal.

For fiscal 2013, our financial goal is to deliver adjusted EBITDA of at least $50 million, or approximately $30 million more than our adjusted EBITDA in fiscal ‘12. This improvement will arise from four primary factors, higher closings driven by our higher backlog, increases in our ASP, further improvements in our gross margin percentage and dollars, and modest additional leverage of our overhead costs.

Taken together with the benefit of the four years worth of interest savings from our recent transactions, we plan to improve our pretax profitability by at least $40 million in fiscal ‘13. That won’t return us to profitability but it does represent another sizable bite at the elephant in the room, our losses.

Now, in terms of expectations for fiscal ‘13, I want to make sure we share all the news, not just the good news. Due to a decline in community account and our operational emphasis on improving gross margins, our plan to increase profitability by at least $40 million this year does not contemplate a meaningful increase in new home orders. We are committed to making improvements against all four of our path to profitability targets but order growth in the next few quarters isn’t a necessary part of their plan.

That leads me to my final comment. Every single employee at Beazer takes our responsibility to return to profitability incredibly seriously. We’re appreciative of the opportunity we have and we know we need to continue our relentless and disciplined focus on our path to profitability. So far, our plan has yield a dramatic improvements and I’m convinced the best is yet to come.

Thanks for your attention today. With that, I’ll turn the call over to the operator to take us into Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from David Goldberg.

David Goldberg - UBS

Thanks. Good morning, everybody.

Allan Merrill

Hi, David.

David Goldberg - UBS

My first question and Allan, I’m talking about the elephant since you mentioned him at the end.

Allan Merrill

Yeah.

David Goldberg - UBS

I wasn’t sure if you’re going away from it. But you talked about last quarter about the ability to kind of, maybe eat the elephant little bit at a time, nibble the elephant, whatever the analogy was. What -- we think as much maybe update on kind of the progress on gross margin improvements, $250 at a time, I think, we talked about last quarter.

Allan Merrill

Yeah.

David Goldberg - UBS

Where are we? Have we seen that start to kind of come true? Is there more opportunity than what you expected less opportunity?

Allan Merrill

I think we are well under way, David. I know that when we said that in August, I mean, our quarter, the September quarter was largely baked. So the things that we had started doing in July and August to improve margin, we just barely begun describing service in terms of results that we have delivered.

So I feel like the opportunity is comparable to, if not, greater than where it was 90 days ago, but actually I feel better about having identified more of those opportunities in individual divisions and really, they’re at the plan and at the elevation levels like I talked about a few months ago.

David Goldberg - UBS

Got it. And then just as a follow-up on slide eight, you talked about the sales per community, the improvement that we’ve seen?

Allan Merrill

Yeah.

David Goldberg - UBS

Trying to get an idea of, kind of, how you benchmark that against your peers. Do you think at 2.3 sales per community that’s about in line with market, a little light or little heavy and kind of how do you benchmark that and how do you improve it from here?

Allan Merrill

Well, as -- one of the things, I feel strongly is that we need to do -- what we need to do to improve our business. And so benchmarking is useful on things like sales per community and gross margin when you’re last, that’s not good. And that’s where we were a year ago.

On the sales per community, in particular, I think that we’re now, I would, say in the middle of the pack. And I’m confident that the efforts that we’ve had going on for the last year can continue to push that up a little bit. But I don’t frankly want to push it through to the highest possible number because I think we’d be leaving margin dollars on the table and doing that.

So I’ve had said, kind of, consistently 2.5 is a pretty good number to shoot at. I think with an improving market, maybe we’ll do a bit better than that. But of course, that’s where the attention where the gross margin improvement will come in. We clearly can eke out additional improvements in velocity but we want to take chunks on the margin side.

In terms of how do you do it, its part and parcel of a community improvement plan. Now, the improvement plan for community is, at this point, two parts margin and one part velocity and really looking at the mix of features and the pricing that we’ve got and the incentives that we’re offering, those levers have to be designed at that individual community level to move both of those forward.

David Goldberg - UBS

Got it. Thank you.

Operator

Our next question is from Ivy Zelman of Zelman & Associates.

Alan Ratner - Zelman & Associates

Good morning, guys. It’s actually Alan on for Ivy. Allan, I was hoping that I’ll ask a little bit more about community count. So and the target range is very helpful in understanding that, putting a specific timeframe on that. But if we assume that community count continues to decline through the next year, I’m not sure if you quantify that. I may have missed it, but that would kind of imply that off of a lower base, you probably need to see 20% plus growth from that point to hit your target range.

And going back historically, looking at your company’s history, we haven’t really seen organic growth in communities at that level. Certainly, we’ve seen you get there through acquisition. So I guess, the question is, are there any potential M&A baked into hitting that target number there or is it something that really we shouldn’t expect to hit in your firm, maybe, three or four years, which would be coming more in line with organic growth you’ve seen in prior cycles?

Allan Merrill

There are a lot of questions embedded in that one, very good questions. First of all, let me think. I don’t think I did, that I would expect that on a quarterly average basis, we’ll trough out in a 150 range on community count, which is down a little bit from the low 160s, where we were in the fourth quarter. But that implies a pretty big percentage down relative to the 178 that we average for the full year.

In terms of history, I’ll be honest, I don’t spend a lot of time and I’m not too worried about five years ago or 10 years ago in terms of what organic growth rates were in communities. We have the capital and we have the pipeline that we can get to our target range, not in three or four years but over the next couple of years in terms of community count.

Now, to the question of whether there is any M&A opportunity, we’ll keep our eyes peeled. I’m interested in that. If it makes sense, there is nothing currently active. And so I haven’t build a plan here, based on, kind of, the hope that something will drift into our field of view that we can -- that we can tackle. So I think you should look at our community count growth is primarily an organic exercise. But I think with focus, with the right balance sheet, I think we can execute it.

Alan Ratner - Zelman & Associates

Great. That’s helpful. And just a follow-on to that, can you give us an update on how many communities, you currently have mothballed and whether any of those communities coming online, this contemplated in your ‘13 guidance?

Allan Merrill

Well, we don’t county communities. In my thought, I don’t have that figure but what I can tell you is the total dollar amount is just under $400 million. We pulled as Bob said one community in but it’s, kind of, a big community, so $20 million asset. We’ll have multiple price points in there. That will end up counting in our parlance for probably three different communities, when it’s active at the end of our fiscal year in ‘13 or ‘14.

So that probably accounts for three. I think the size of that asset and the aggregate is in the range of 500 lots. So I would tell you that it’s hard because each of those assets is different. I would be real careful about trying to do an extrapolation of either community count or lot count from dollars. But absolutely harvesting that asset over the next eight quarters will be part of our growth in community count.

Alan Ratner - Zelman & Associates

Can you maybe give a little bit more detail on the $400 million whether -- what percentage of that are finished lots that you can bring on pretty quickly versus what might be raw and still few years out?

Allan Merrill

Most of it is going to require development.

Bob Salomon

Yeah.

Allan Merrill

Most of it is -- in fact, the substantial majority of it. And I think we’ve said in the past that half of its in California. So that’s -- as Bob said, the issue really is when those deals compete with raw deals that we’re looking at from third parties, that’s pretty good indicator when we start bringing those out.

Alan Ratner - Zelman & Associates

Great. Thanks a lot.

Allan Merrill

Yeah.

Operator

Our next question is from Michael Rehaut of JPMC.

Michael Rehaut - JPMC

Thanks. Good morning, everyone.

Allan Merrill

Good morning, Michael.

Bob Salomon

Good morning, Michael.

Michael Rehaut - JPMC

First question on the gross margin dollars that you have targeted. Again, I guess looking at the other targets, I’m not sure if that range is necessarily for fiscal ‘13, but certainly as you’ve also pointed out the ASP is starting to trend upward nicely, particularly this quarter and the average order price, average backlog. So working off of, I guess, where you were -- where you are in the fourth quarter in the low 17% pre-interest. I’m just trying to extrapolate if possible what that implies from a percentage basis?

Allan Merrill

I think we…

Michael Rehaut - JPMC

Top part.

Allan Merrill

I think we tried to lay out a lot of numbers to help people do that. If it was absolute tie-ups, I would have just given the answer. But I think with $18,000 improvement in backlog ASP and Bob showed some statistic, which showed that they -- I don’t want to say conversion, but the progression of that in the future ASP has been in the range of 92% to 98%.

We think it will -- this year tend toward the higher end of that. If you’re taking $16,000, $17,000 improvement in ASP, even if the margin in percentage terms didn’t change at all, you’re picking up $3,000 or $4,000 in gross margin dollars this year. So -- and we’ve also said we do expect to see progress on the gross margin percentage.

What we didn’t do and frankly, I think as you’re responsible to try and do is to give a quarter-by-quarter gross margin percentage. Our focus is very clearly pushing through 45,000 in gross margin dollars per closing. And I think that is probably the metric against which we’ll most easily be judged.

Michael Rehaut - JPMC

Okay. Also just talking about the land spend, which is very helpful as it provides that kind of bridge to ‘14 and beyond, where -- for potential growth. As a lot of this land in fiscal -- rent spend in fiscal ‘13 is -- is more development oriented. Does that development -- is it the length of which that you’re really not even going to see the full benefit in our ‘14 or how much of that -- those dollars would you start to see generating return in fiscal ‘14?

Allan Merrill

That’s a tremendously good question but a super hard one to answer because I can’t predict everything that we’ll buy this year. Let me tell you about the 20 communities that we bought since we did the financing.

They represented about 2,000 total lots, which would suggest that the average size was about 100 units. We did at eight markets. About half were raw off land deals, half were at various stages of development. They may have been cash or option deals but they were at different stages of development. So I would say with respect to half of them, there is a very good chance we’ll have of sales, that we’ll certainly have full years worth of sales in ‘14 and probably, full years worth of closing.

On a couple of the development deals, I don’t think we’ll have 12 full months of deliveries in ‘14 from those new communities. But -- and obviously, the longer we go into fiscal ‘13 is we’re making acquisitions, the more of that will be the case. So that’s why I try to articulate these targets including importantly the community count target, not as a fiscal ‘13 number, but something that we think that together with the other target to get us back to profitability.

Michael Rehaut - JPMC

Okay. One last one, if I could, the East and Southeast is certainly shortly showing below average -- below corporate average order growth then the West. Do you expect in fiscal ‘13 to those -- for those regions to stabilize or is that part of the movement in the community count that perhaps it’s more concentrated in those areas and that would kind of drive down the average, where the West would continue to lead?

Allan Merrill

It’s a good question. We definitely saw in ‘12 more reduction in community count percentage terms in the East than we did in the other segments. So that contributed to the order growth issues. But not only do I think they’ll stabilize, I’m sure that they will and I think we’ll see the East contribute nicely in ‘13.

We’ve gone through a lot of improvement strategies in each of the divisions in our East segment and I feel like that is a good opportunity for us. Interestingly, if I’m right about that, our highest ASPs are in the East as well. So that’s going to add further fuel to the migration upward in our ASP.

Michael Rehaut - JPMC

Okay. Thank you.

Operator

Our next question comes from Dan Oppenheim of Credit Suisse.

Dan Oppenheim - Credit Suisse

Thanks very much. Allan, you’ve done a great job in terms of focusing on the -- trying to boost the margins in what you’re doing different -- the operational performance to get there. When you think about the land deals, just as you went through that there, talking about half raw, half partially developed. There is a lot of other builders talking about doing more, majority of the land that we’re getting now just being developed lots. How are you thinking about the margin opportunities you are seeing for those for raw versus partial versus fully developed at this point and how is that guiding you versus thinking about just bringing committees on more rapidly?

Allan Merrill

Well, there is no question and this was actually one of the things that I talked about in July and August when we did the financing. I was saying then that there were some builders that were very short land for ‘13. And it felt to me like disconnect in valuation between ‘13 deliveries and ‘14 deliveries was huge.

It’s you’re really having to pay up to get ‘13 deliveries and by pay up, I mean, midteens margins unless you were bailed out by price appreciation. That didn’t strike me as being accretive to our strategy to improve gross margins. So by raising the money when we did, and sort of letting go the idea of ‘13 order growth, not ‘13 profit growth, we’re committed to that but ‘13 order growth and sort of skipping that year and being in the ‘14 context for our deliveries. I felt like we were going to be able to achieve both the IRR and the gross margin objectives that we stick to and that’s played out.

In fact, it’s probably even more true today, anything that you would tie up or try and control today that we deliver physical ‘13 closings, very unlikely that, that would have decent margins associated with it and really that’s trying to leverage overheads, kind of, a play or a speculation of home prices, which may be valid strategies for others but that’s not where we’re focused on.

Dan Oppenheim - Credit Suisse

Great. And then I guess, in terms of the development, in terms of taking on those, the raw land deals that’s term wise betting the -- having the confidence, in terms of the market continuing to improve and working through those locations. Where are those raw land deals, are they -- where are you looking in terms of locations? And if you think about it relative to some of the mothballed land that you have right now, are these we call premium locations relative to that or is it thought that this -- the recovery that we’re going through right now continues to be confident in taking on partials further out?

Allan Merrill

Certainly, starting at the center and working outward, I mean, I think Southern California is good. It’s a little bit different but what we’ve done from a cash purchase on a development side has been much closer in, in the last six or eight months. We’ve done two really significant deals, one in Cucamonga, one in Fullerton, which are surrounded on four sides by development.

I mean, they are not pioneering in any anyway. Some of our land held in California is out in that Temecula, Murrietta, French Valley corridor, which is hotter than a pistol right now from a land price perspective, but it’s not as attractive from a home selling perspective. So I think that’s going to come to us over the next year or two, in focus, closer in.

Dan Oppenheim - Credit Suisse

Great. Thanks very much.

Operator

Our next question is from Joel Locker of FBN Securities.

Joel Locker - FBN Securities

Hi guys. Just on your backlog conversion going forward, what you expected in fiscal -- by the end of fiscal 2013 and going into 2014? Would you expect it to normalize back to where it was, say 2003, before the boom/bust cycle?

Bob Salomon

Joel, this is Bob. In 2003, before the boom cycle, our conversion was in the low 50% range.

Joel Locker - FBN Securities

Right.

Bob Salomon

So, I think we’re kind of there, if you think of that as normalized. As long as our sales activity is, it’s heavily trended towards to-be-built. That cycle time is going to be a little bit longer and as you’re building backlog and the cycle time is a little bit longer, due to to-be-builts, it’s going to hold down that conversion a little bit.

Joel Locker - FBN Securities

Right. And then what about -- what did your community count, I might have missed it but what did it end the fiscal year with?

Allan Merrill

The quarter was 167, I think.

Bob Salomon

163.

Allan Merrill

163.

Joel Locker - FBN Securities

Because -- the average that I was saying, what did it end up?

Allan Merrill

Yeah. I think it ended about 158.

Joel Locker - FBN Securities

158. All right. Thanks a lot guys.

Operator

Our final question comes from Alex Barron of Housing Research Center.

Alex Barron - Housing Research Center

Yeah. Thanks guys. I know, I guess it’s always a challenge to balance pace versus margin but I’m wondering what the -- do you guys have some kind of metrics at which you decided is time to raise prices or lower incentives. And why -- I guess why focus more on the margin it seems than on the sale base?

Allan Merrill

I guess the answer is every community is a little bit different. We’re in locations where there is an opportunity to raise prices and capture margin based on the competitive position that we have. We want to get fully paid for the value that we’re providing. If we’re in a location, where it’s high per competitive from a price and feature standpoint, we want at least our fare share -- share in terms of absorption.

If I go back 15, 16 months frankly, I think we had an opportunity to do a lot of improvement in both. We got competitive, I believe, and have moved ourselves kind of into the center of the fairway from a sales per community perspective. But I am still convinced that we’re leaving dollars on the table every time we sell a home.

In many of our markets, we still got opportunities to capture margin dollars. And I think it’s a little bit of a teeter-totter, Alex. I mean, we’ve got a little of this and then a little of that as back and forth, back and forth but it really has made community by community. And I just think at this point you look externally, somebody ask the question about benchmarking. We can’t take a lot of pride in a 17.7% gross margin. We’ve got to do better than that. We can do better than and we will.

Alex Barron - Housing Research Center

Okay. And as far as your focus on -- on your target clients, what percentage do you think you guys will be doing like entry level type home in 2013?

Allan Merrill

I think, its going to stay very consistent. I mean, our pricing is changing a little bit but our buyer’s really aren’t. It’s very tough to deliver in the 140, 150, 160 price point in any of our markets today.

We cant replace product at that level, where mortgage rates are that first time buyer who buy the way for us, is got a FICO according to our lending partners over seven and a quarter or over 7.25. They can afford the monthly payment at 2,000. I’m sure they like to buy at 150 but we can’t get the lots or the build cost delivering 150s. So I think our buyer profile stays much the same, but the pricing is definitely moving.

Alex Barron - Housing Research Center

Thanks.

Operator

That concludes today’s conference call. Thank you for joining the Beazer Homes earnings conference call for the forth quarter and fiscal year ended September 30, 2012. You may now disconnect.

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