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Edited Transcript of BZH earnings conference call or presentation 1-Aug-19 9:00pm GMT

Q3 2019 Beazer Homes USA Inc Earnings Call

ATLANTA Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Beazer Homes USA Inc earnings conference call or presentation Thursday, August 1, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allan P. Merrill

Beazer Homes USA, Inc. - CEO, President & Director

* David I. Goldberg

Beazer Homes USA, Inc. - VP of IR & Treasurer

* Robert L. Salomon

Beazer Homes USA, Inc. - Executive VP, CFO & CAO

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Conference Call Participants

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* Alex Barrón

Housing Research Center, LLC - Founder and Senior Research Analyst

* James C McCanless

Wedbush Securities Inc., Research Division - SVP of Equity Research

* Thomas Patrick Maguire

Zelman & Associates LLC - Senior Research Associate

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the quarter ended June 30, 2019. 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.

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David I. Goldberg, Beazer Homes USA, Inc. - VP of IR & Treasurer [2]

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Thank you. Good afternoon, and welcome to the Beazer Homes conference call discussing our results for the third quarter of fiscal 2019.

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-Q for the quarter, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date this statement is made, and 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's simply not possible 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. On our call today, Allan will review highlights from the third quarter and then discuss our operational and capital allocation priorities for the remainder of this year and into the future. Bob will cover our third quarter results in greater depth as well as our expectations for the fourth quarter of fiscal 2019, and I will then come back to provide more detail about our efforts to improve balance sheet efficiency, land spend and our capital allocation priorities, followed by wrap up by Allan.

After our prepared remarks, we will take questions in the time remaining. I will now turn the call over to Allan.

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [3]

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Thanks, David, and thank you for joining us on our call this afternoon. We had a productive and profitable third quarter, generating results that were at or above our expectations on every front, leaving us well positioned for a strong end to the fiscal year. Orders were up over 6% as we benefited from an increasing community count and improving demand. This led to higher revenue and a better operating margin than we anticipated, allowing us to deliver EBITDA ahead of our expectations. The quarter was successful in terms of capital allocation as well.

We retired about $17 million of debt and repurchased $11 million of stock during the quarter, bringing our total capital returned to investors this year to nearly $60 million. We expect that number to reach approximately $100 million by year-end, with more debt than equity repurchased.

The long-term goal of our balanced growth strategy is to achieve a double-digit return on assets by delivering higher EBITDA from a more efficient and less-leveraged balance sheet. While setting long-term targets is obviously difficult, there is one goal we are particularly focused on, reducing our total debt below $1 billion. For investors, the combination of improving EBITDA with less debt will generate significant growth in both earnings and book value per share.

Based on the strength in the current environment, we expect improvement on each component of our balanced growth strategy next year. We anticipate growth in EBITDA from 3 primary sources. First, we're going to generate top line growth as we benefit from the higher community count we have reached this year. Second, we have a path to higher gross margin that includes delivering a higher percentage of to-be-built homes, reducing incentives, particularly on spec homes that spiked in the first half of the year, and simplifying our plans to allow direct cost reductions despite tight labor and material markets. And third, by delivering more closings within our existing footprint and product line, we can incrementally improve our overhead leverage, even though we already have one of the lowest overhead for home closed ratios in the industry.

While we are growing EBITDA, we expect further improvements in our balance sheet efficiency as we accelerate the monetization of formerly land held assets, increased our use of options and slightly shortened the size and duration of new communities. These steps will allow us to improve liquidity and reduce risk. And finally, in terms of debt reduction, we expect to reduce debt in fiscal '20 by more than the amount we retire this year.

In summary, our balanced growth strategy positions us for improvements next year and beyond.

With that, I'm going to turn the call over to Bob.

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Robert L. Salomon, Beazer Homes USA, Inc. - Executive VP, CFO & CAO [4]

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Thanks, Allan, and good afternoon, everyone. Looking at our third quarter results compared to the prior year. New home orders increased 6.5% to 1,544, as our average community count rose to 174, an increase of more than 10% from the previous year. We ended the quarter with 173 active communities. Due to the timing of some activations and closeouts, our third quarter number was a little ahead of our expectations, allowing us to achieve our targeted level for the full year sooner than anticipated.

Homebuilding revenue dropped 5% to $482 million, as a 4% increase in our ASP partially offset a 9% decline in closings. Our backlog conversion ratio was approximately 64%, up 360 basis points as we benefited from a higher percentage of spec closings in the quarter and improved cycle times.

Our third quarter gross margin, excluding amortized interest, impairments and abandonments was 19.4%, ahead of our expectation by about 0.25 of a point, aided by some warranty pickups. SG&A as a percentage of total revenue was 12.2%, down in absolute dollars and in line with our expectation. This led to adjusted EBITDA of $38.7 million.

Finally, we benefited from $4.4 million of energy tax credits, which brought our net income for the quarter to $11.6 million.

Turning now to our expectations for the fourth quarter. Our sales were up double digits in July, and we are working to take advantage of the improved environment to drive higher margins. Accordingly, orders should be up 5% to 10% year-over-year, with an average community count around 170. We expect closings to be relatively flat versus last year, with a modest improvement in the backlog conversion ratio as specs remain slightly elevated.

Our ASP should be above $385,000, up versus the prior year and the third quarter. Our gross margin should be roughly flat sequentially as demand for specs have been higher than anticipated. We expect margins to improve next fiscal year as our mix of specs and to-be-built homes normalizes.

SG&A should be around 10%, down as a percentage, and about flat on an absolute dollar basis relative to last year. And finally, the cash component of land spend should be around $100 million.

At this point, I'll turn it over to David.

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David I. Goldberg, Beazer Homes USA, Inc. - VP of IR & Treasurer [5]

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Thanks, Bob. The objective of our balanced growth strategy is to deliver -- is to drive higher returns on our assets by improving our EBITDA and by using our balance sheet more efficiently.

Slide 8 illustrates our active assets as a percentage of the total and the returns we're generating. You can see that we've been successful in activating nonearning assets, while increasing returns.

In the coming quarters, we expect that virtually all the former land held assets that are nonearning today will start producing revenue, contributing to better returns in the future.

In the third quarter, we spent $103 million on land and development, in line with our expectation. Going forward, we're focused on increasing use of options in targeting smaller purchases with shorter durations.

On Slide 10, we outline the components of our expected community count for the coming quarters. We expect to end fiscal 2019 with around 170 active communities, though forecasting exact quarterly trends is challenging. The majority of the new communities we are bringing online have lower ASPs relative to our existing communities as we remain focused on delivering an extraordinary value at an affordable price for millennials and baby boomers.

In terms of the rollout of gatherings across our footprint, as of the third quarter, we have gatherings buildings under construction in Orlando, Dallas and Nashville, with additional sites under development in Dallas and Houston. We have also approved projects in various stages of entitlement that will result in having gathering sites in nearly half of our markets by the end of this fiscal year.

We've made a great deal of progress returning capital to investors. During the third quarter, we continued our debt reduction, retiring approximately $17 million, bringing our year-to-date total to $22 million. We expect to retire more than $50 million of debt this fiscal year.

In May, we entered into a second ASR program and repurchased shares in the open market, bringing our total buybacks for the fiscal year to nearly $35 million or 3.3 million shares. This represents more than 10% of the company acquired at a blended price of approximately 60% of current book value.

Over the last 11 years, we've made significant strides in improving our leverage, having reduced total indebtedness by more than $500 million. Over the next several years, we plan to reduce debt by an additional $200 million to achieve our target of getting under $1 billion of total debt. This reduction will bring our net debt-to-EBITDA into the 4s before accounting for any growth in earnings.

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

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [6]

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Thanks, David. The demand environment has improved this year, which should allow a strong finish to the fiscal year. Looking forward to next year, we expect EBITDA growth as we benefit from higher revenue, improved gross margin and further overhead efficiency. Longer term, our balanced growth strategy should allow us to continue to grow book value and earnings per share, while bringing debt below $1 billion.

I want to thank our team for their ongoing efforts. I'm confident that we have the people, the strategy and the resources to execute our plan over the coming years.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jay McCanless with Wedbush.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [2]

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The first question I had on the order growth was definitely within the guidance you all gave, but a little lower than we were looking for. Did you all have any issues with getting communities open or as we've heard some other builders talk about weather delays forcing communities to the -- openings to the end of the quarter?

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [3]

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No, Jay. I think for us really it was as we had talked about in May and started to benefit from in June, we've really used the stronger environment to try and reduce incentives and drive margin. And that progression for the quarter for us showed the effects of that. I have no doubt that had we not been pursuing that, we would have had a different order number, but we felt like this was sort of the right balance of order growth and incentive reduction.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [4]

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Got it. And I apologize if you said that already, but could you quantify what has happened with incentives and on closings? And also what's happened with incentives on orders, maybe this year versus last year?

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [5]

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Yes. We don't have a consistent metric that we have publicly disclosed around that. So it's a little bit tricky. And what I can tell you is that every week, and in some -- most cases, it's more frequent than that, each of our divisions in each of their communities has got a pricing strategy that they're following, and directionally across the board, but particularly, as it related to specs, we were removing incentives. And those may have been modest initially, whether it's you're removing $1,000 or $500 or changing a set of included features, but it's more the direction than it is the precision and I think we want to leave you with, because it's not an exact science and it's not terribly reliable because the things that you do to change that mix in incentives over time makes the comparisons difficult.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [6]

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And then just looking to the fourth quarter guidance, closings at flat year-over-year certainly better than we were expecting. But I would have thought the additional volume would have produced a gross margin a little bit better than flat quarter-over-quarter. Can you talk about what's happened there?

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [7]

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Well, I think Bob made the point that in the third quarter, the gross margin was at the high end of the range that we had kind of anticipated that got up to 19.25%. And then beyond that, we benefited from some warranty pickups, and we won't have those in the fourth quarter, I don't think. So we still see a positive progression from Q3 into Q4 ex that. I will say that, I think, as we started to remove incentives in the third quarter towards specs, it actually stimulated more spec sales than we expected. And so, I think we'll still have a slightly higher share of homes closed in the fourth quarter that are specs. That's another factor, but looking out into Q1, I think, that mix starts to normalize.

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David I. Goldberg, Beazer Homes USA, Inc. - VP of IR & Treasurer [8]

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Yes, Jay. I think Allan was pretty clear in his comment about kind of the expectations for higher margin as you move into '20. And he kind of looked at the reasons behind it, but certainly, we feel like there's some margin improvement with reducing incentives. There's a little bit of a mix in Q4, though.

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [9]

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But it's still a positive progression we think.

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David I. Goldberg, Beazer Homes USA, Inc. - VP of IR & Treasurer [10]

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Yes.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [11]

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Yes. Absolutely. And then the last one I had. Just any kind of color or insight you can give us about community count growth in '20? And what we should be modeling?

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [12]

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Yes, Jay. So obviously, it's difficult to predict the quarterly trends, let alone try to go a couple of quarters out and tell you what we think is going to happen. We've clearly said, we're going to benefit from the community count growth we've already experienced -- we've already achieved, and that's going to drive higher sales and top line growth next year. I would tell you pretty early in the planning process, and we'll have more to talk about next quarter about kind of full year community count guidance. But at this point, just kind of the higher in the first half as we've kind of talked about from what we've already experienced.

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Robert L. Salomon, Beazer Homes USA, Inc. - Executive VP, CFO & CAO [13]

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And I would just add. Look at Slide 10, Jay, it's a slide we typically provide, have for years. I think it will give you kind of the components. The timing within that is tough, but I think you and others can see that there's a lot of activity. The pipeline is pretty good.

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Operator [14]

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The next question comes from Thomas Maguire with Zelman & Associates.

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Thomas Patrick Maguire, Zelman & Associates LLC - Senior Research Associate [15]

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Just to stay with the demand side. Can you talk about just (inaudible) price point maybe and understand the market has improved broadly. But any relative differences you would call out are pockets of weakness or strength?

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [16]

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For us, the strength was pretty well across the board, price point and markets. The -- there's no question that the focus that we have as a company in the first time, first move-up on the one side and then the active adult side, both benefited. We don't have a huge exposure to the second and third move upmarket. So I wouldn't take a lot of read-through from our experience in that category, but in the 2 segments that we really serve, we saw strength in both.

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Thomas Patrick Maguire, Zelman & Associates LLC - Senior Research Associate [17]

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Got it, that makes sense. And then just to shift gears to the capital allocation side. And I know you guys touched on it earlier, but maybe just some more thoughts about how you guys prioritize, and specifically with (inaudible) buyback further debt reduction, maybe beyond the target you talked about. And just from a high level, what's kind of the discussion that you guys have when you're weighing those moving pieces?

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [18]

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Well, I mean, in terms of the high level, we want to get total debt below $1 billion. It'll take a period of time to get there. We've said that we expect to reduce at least $50 million of debt this year, and we said today that we expect to reduce debt, in dollar terms, next year by even more. So that's kind of the breadcrumb trail, if you will, from where we are through this year into next year, with a goal in mind, and that's pretty well, I think, articulated. I mean, within the capital structure, in terms of individual components, we're, obviously, not going to speculate on that, but we've got a pretty favorable maturity structure. So I think we have a lot of flexibility in how we pursue debt reduction and indebtedness.

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Operator [19]

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(Operator Instructions) Our next question comes from Alex Barrón with Housing Research Center.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [20]

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Yes, I was hoping you guys could comment on what you've seen in the California market. I guess, last quarter, I think, you guys had a view given the impairments, but I'm wondering how the market has progressed since that time?

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [21]

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It's good question, Alex. The fact is this spring, California has participated in the improvement in demand that we've seen across our footprint. We are competitively better positioned with the price adjustments that we took, and we saw a pretty significant improvement in sales pace in California, owing both to our better positioning and the fact that, I believe, that each of the submarkets that we participate in showed greater strength.

So I'm glad we took the steps we took to become more competitive, and we are benefiting from a improvement in demand.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [22]

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Got it. And then also, I guess, we've been to Vegas recently, and it seems you guys are doing pretty well based on your price points there. Do you feel like there's more land that would enable you to keep going once you finish some of the current projects?

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [23]

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We do. We've got a terrific land pipeline in Las Vegas, and we've got a great position. I mean, it's good an example of what we do well, extraordinary value at an affordable price. Are there lower price points available in some of the submarkets? Absolutely. But I can tell you, in terms of bang for the buck and value to the customer, we have a phenomenal position. And it's an interesting market. As you know, there is kind of quite a concentration of land ownership. But we've got positions in a couple of the master plans, and we've got a capacity and have executed on self-development deals. So we've got multiple ways of participating in that market. I have to say, I'm really -- I kind of shout out to our team in Las Vegas, they've executed exceptionally well.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [24]

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And one last question, on the $1 billion debt target, by when do you expect to hit that?

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [25]

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That's a good question too. We said, over the next several years. Look, I think over time that will become more and more clear to us and, obviously, to the market. But if we reduce debt by at least 50 this year, more than that next year, and we sort of talked about $1 billion, that gives you kind of a 200 and change quantum that we're working toward. You can kind of see the breadcrumb trail as I said. But I'd be reluctant to go much further than that in precision of the timing.

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Operator [26]

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And our next question comes from Jay McCanless with Wedbush.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [27]

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Just a couple more. Bob, tax rate for the fourth quarter, will we see a repeat of this credit we saw in 3Q?

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Robert L. Salomon, Beazer Homes USA, Inc. - Executive VP, CFO & CAO [28]

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I don't think so it's possible. We were always looking to maximize our ability for tax credits. But at this point, I don't see any in the fourth quarter. So the tax rate should be in the 25% range.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [29]

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And then I was going to ask, now that July is completed, any color or commentary you guys could give us on July would be helpful.

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [30]

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Yes. So obviously, the paint is still dry with the month just ending yesterday, but I'm pretty pleased. Our 1 month, on a year-over-year basis, performed better than any month in the third quarter, and better than the third quarter as a whole, obviously. And as Dave said, it was up double digits -- or maybe Bob said that. So that was encouraging. I mean, a year ago, there were signs of weakness starting to emerge in the middle of the summer. And I would say, this year, July has felt very, very different from a year ago.

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David I. Goldberg, Beazer Homes USA, Inc. - VP of IR & Treasurer [31]

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Hey, Jay, give me 1 second. It's Dave. Just to your point though, and Allan talked about this before, we've guided 5% to 10% order growth for the quarter, and it kind of compares that double digit. And as to Allan's point about taking incentives back and rebuilding margin, it's very clear this quarter too kind of what the game plan is for us.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [32]

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Got it. And then just on pricing power. I mean, I don't ever remember you guys breaking it up by a percentage of communities or something like that. But if you could talk about what type of pricing power do you have? You feel like you can accelerate it in certain communities or certain markets?

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David I. Goldberg, Beazer Homes USA, Inc. - VP of IR & Treasurer [33]

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Yes. I mean, I'll tell you, each market has an individual or specified mix of community. So it's so hard to talk about. I think -- let me talk about one market, let's talk about -- actually, Alex asked about Las Vegas, and Las Vegas is kind of interesting.

There are 2 facts about Las Vegas that kind of get to your question. The first is, Las Vegas, for us in the quarter had the highest sales pace. And it was the sales pace per community per month, little above 5%. That was the highest in the company for us. What's interesting is, a year ago, it was actually quite a bit higher. And the difference, while it was still a great number and a company-leading number for us, the difference was that we've used the better environment to really be much more aggressive on finding the price in the market. And I think that's a combination of base price, included features and incentive structure. So that's an example of a market where there was an explicit and clear trade-off in pace versus margin, and yet, still resulting in a really healthy margin. Not every market, obviously, is in that characteristic. But a majority of our markets had increases in pace in the third quarter. In fact, a significant majority had year-over-year increases in pace. And when you see those kind of increases in pace, that's a good indicator that we're able to drive some margin and drive some price. So I would say, you're right. We don't break it out by percentage, but it's fairly broad-based, our ability to -- even if it's at the margins. And I'm much more interested in the direction than the specific number at a moment in time because once you sort of turn that corner and you started to move in a direction, it gets a certain momentum, and that's kind of what we've seen over the last 2 months.

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Operator [34]

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And at this time, there are no further questions.

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David I. Goldberg, Beazer Homes USA, Inc. - VP of IR & Treasurer [35]

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Okay. We want to thank everybody on our call -- for joining the call this quarter, and we will talk again in 3 months. Thank you very much. This concludes today's call.

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Operator [36]

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Thank you. That does conclude today's conference, and all participants may disconnect.