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Edited Transcript of BZH earnings conference call or presentation 13-Nov-18 3:00pm GMT

Q4 2018 Beazer Homes USA Inc Earnings Call

ATLANTA Nov 14, 2018 (Thomson StreetEvents) -- Edited Transcript of Beazer Homes USA Inc earnings conference call or presentation Tuesday, November 13, 2018 at 3:00:00pm 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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* Alan S. Ratner

Zelman & Associates LLC - Director

* Gabriel Fineberg

* James Peter Finnerty

Citigroup Inc, Research Division - Director

* Michael Jason Rehaut

JP Morgan Chase & Co, Research Division - Senior Analyst

* Samuel Thomas McGovern

Crédit Suisse AG, Research Division - Research Analyst

* Susan Marie Maklari

Crédit Suisse AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Beazer Homes Earning Conference Call for the quarter and fiscal year ended September 30, 2018. 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. Thank you. You may begin.

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

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Thank you. Good morning, and welcome to the Beazer Homes conference call discussing our results for the fourth quarter and full year of fiscal 2018. 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 the 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 our fiscal 2018, provide our perspective on the broader housing market, and discuss our expectations and major areas for focus for fiscal 2019. Bob will cover our fourth quarter and full year results in greater depth as well as our expectations for the first quarter of fiscal 2019. I will then come back to provide more details about our land spend this quarter and provide an update on our balance sheet, followed by a wrap-up by Allan. After our prepared remarks, we'll 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 morning. Fiscal 2018 was a highly productive year for the company, with numerous achievements resulting from our balanced growth strategy. We surpassed our 2B-10 goal, exceeding $2 billion in revenue and $200 million in adjusted EBITDA. We completed our $250 million debt reduction program. We welcomed donors to the first new Gatherings community outside the Mid-Atlantic, as we advanced the rollout of our well-located active adult communities. And we acquired 2 builders, including Venture Homes, increasing our opportunity to serve first-time buyers. In short, we did what we said we were going to do financially, and we made investments that will contribute to shareholder value in the future. Bob and Dave will discuss our fourth quarter and FY '18 results in detail. So I'm going to focus my remarks on our strategy, our expectations for 2019 and several of our key competitive advantages.

For the last several years, we have been executing our balanced growth strategy, which is designed to generate higher profitability and a double-digit return on assets, while reducing our operational risk and debt. Our accomplishments thus far have positioned us to make further progress on this strategy in the coming year, even as we encounter a more challenging market condition.

As we think about 2019, let's start with our outlook for the broader housing market. There are quite a few reasons to be optimistic about the environment for new home sales. Employment and wage growth have remained strong this year. Consumer confidence is at its highest point in more than 15 years. Consumer debt remains in check; and crucially, new- and used-home inventories remain modest, even after the increases we've seen recently.

Of course, we realize that affordability is a major concern, both for potential homebuyers and for our capital providers. In the last decade, home prices have moved up considerably faster than wages. This has been written about a lot recently. And because of the strength in the economy, mortgage rates are up and likely heading higher. This has contributed to a double-whammy increase in monthly payments for potential homeowners, which has also, and appropriately, captured a lot of attention. But it's been my experience that when everyone agrees about something, there's usually something else going on that escapes notice. That's why we've done a lot of work on the historical relationship between home prices and incomes, factoring in mortgage rates. While we aren't offering this as a rebuttal to the obvious fact that affordability has become more challenging, we do think a longer-term context for affordability is helpful in understanding what might happen from here.

Our analysis is that home prices and payments may have been regressing to the mean. Said more simply, it may be that now we're in an environment where affordability is back to normal. So if the economy is humming, but housing is no longer inexpensive, the question becomes, "What's going to happen to new home sales in 2019?" We think that after an adjustment period, consumers, builders and our supply chain will adapt to these conditions, allowing new home sales to remain around current levels. On the customer-facing side, we may have to work a bit harder in this environment, but we're positioned correctly, providing exceptional value at an affordable price. That doesn't mean the absolutely lowest price, it means real value at an affordable price.

Our construction quality, multiyear Energy Star awards and third-party HERS scores help us to demonstrate that value. On the supply chain side, we have deepened and expanded our relationships with our largest national partners, which is allowing us to simplify our offerings, resulting in efficiency gains for all parties. Expanding this type of the integrated partnering to more and more of our local providers represents an opportunity to combat labor and material pressures. None of this is easy, but we are committed to helping buyers achieve their home-ownership goals by providing exceptional value at affordable prices.

In light of the uncertainty in the broader housing market and incorporating some of the feedback we have received from shareholders recently, we're adopting a different framework for providing forward-looking information. Going forward, our full year expectations will consist of a discussion of our capital allocation priorities and directional estimates on core profitability measures. On a quarterly basis, we'll continue to provide a range of expectations for the key metrics that drive our business.

Regarding capital allocation for 2019, we have 3 priorities: first, share repurchases. We believe our stock is significantly undervalued and has become an attractive investment opportunity. Our board has approved a $50 million share repurchase program, which represents more than 15% of the company at current share prices. As we announced this morning, we've already allocated $16.5 million to an accelerated repurchase program. At these prices, it's an easy decision for us to invest in our existing assets at a significant discount. Second, and importantly, debt reduction. Our capital allocation plan includes matching the dollar value of our share repurchases with reductions in our senior notes, allowing us to further reduce our debt as well as our cash interest expense.

And third, land spend. For the coming year, we're prepared to spend $500 million to $600 million, but consumer demand and land prices will have to warrant it. We've updated our underwriting to reflect expectations for higher mortgage rates, and we're focused on smaller transactions. To further address risk, we intend to increase our share of lots under option. Ultimately, if we can't fully allocate capital within our underwriting parameters, we're likely to expand our debt-reduction efforts even further.

Now let's discuss our profitability expectations for 2019. Back in July, along with the announcement of the Venture Homes acquisition, we outlined our expectations for fiscal '18 and '19. While we knew it was very early to provide an estimate for 2019, we wanted to emphasize the immediately accretive nature of the acquisition, which continues to be the case. Since that time, demand patterns have softened, and there's significantly more uncertainty around the upcoming selling season. As a result, we're modifying our expectations for the coming year to reflect these conditions.

We still expect EBITDA to be up year-over-year, with the larger community count and higher ASPs providing us a measure of protection against risks to gross margin and sales pace. And with the ASR we put in place, we expect to deliver full-year EPS above $2. The completion of our authorized stock repurchase represents potential upside to our current outlook.

Before I turn the call over to Bob, I wanted to review 3 key advantages that differentiate Beazer from our peers. First, we're already targeting the right buyer segments. About 55% of our sales are to first-time buyers and 25% are to active adults, the 2 growing demographic segments we've been serving for a long time. This has resulted in us having one of the lowest ASPs among the public builders. In fact, if you back out our California, Maryland and Virginia operations, our average selling price was below $330,000, illustrating that our homes are among the most affordable available.

Next, we have the right approach to mortgages. Our innovative Mortgage Choice platform has become increasingly valuable to consumers as rates continue to rise. For those of you who aren't familiar with Mortgage Choice, it is our program, which requires lenders to compete for our buyers' business. Mortgage Choice helps buyers get qualified, and then ensures they get a highly competitive rate and great service from one of the lenders who have earned the right to compete for that business.

Putting ourselves on the same side as our buyers is a crucial differentiator that uniquely positions us in the current environment. Finally, we have the right expansion plan with Gatherings. Active adults are the fastest-growing demographic of buyers and the vast majority of them want to retire in place, not out of state. We're making great progress on the rollout of our Gatherings communities across our geographic footprint, with construction activity now in the Mid-Atlantic, Orlando, Dallas and Nashville, with other markets starting communities later this year.

Running the businesses isn't just about hoping for strong demand and estimating earnings, it's about providing value to customers by doing things differently and better than others so that we can create value for shareholders. We believe our advantages and our disciplined capital allocation will allow us to achieve this with less risk and less debt. At this point, I'll turn the call over to Bob to walk through the results in more detail.

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

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Thanks, Allan, and good morning, everyone. We had a strong finish to fiscal 2018. Compared to the prior year, homebuilding revenue rose more than 14% to $762 million, driven by 7% increases in both closings and ASP. Our backlog conversion ratio was over 86%, up more than 800 basis points. Our average community count rose to 162, an increase of 8 communities from the previous year, and we ended the quarter with 160 active communities. Our fourth quarter gross margin, excluding amortized interest, impairments and abandonments, was 21.6%, above our guidance, largely as a result of better warranty experience and a lower purchase accounting impact from Venture.

SG&A as a percentage of total revenue was 10.1%, down 40 basis points. These results led to adjusted EBITDA of $90 million, up more than $13 million. Total GAAP interest expense was down more than $2 million. We had income tax benefit of approximately $19 million related mainly to a change in the valuation allowance of our deferred tax assets. Finally, net income from continuing operations was $60 million.

For the full year, we're excited to have achieved our 2B-10 goals of generating more than $2 billion in revenue and $200 million of EBITDA. The specific metrics we generated to ultimately achieve 2B-10 are outlined on Slide 10.

Finally, let's review our operational and financial expectations for the first quarter of fiscal 2019 compared to the prior year. Orders are expected to be roughly flat as a higher community count offsets pressures to sales pace. Closings should be up slightly versus the prior year, with a higher backlog conversion ratio this year. Our ASP should be in the low $370,000 range, gross margin should be approximately 20%. SG&A as a percentage of total revenue should be down. We expect EBITDA to be off slightly. Our tax rate is expected to be about 24%. This does not include the potential benefit of additional energy tax credits. Finally, the cash component of land spend should be comparable to the previous year. 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. In the quarter, we spent about $195 million on land and development, with acquisition spending up more than 40% and development spending up 49% versus the prior year. The increase in our land spending was primarily driven by the Venture acquisition. For the full year, cash land spending was $635 million, up nearly $200 million versus the prior year, as we completed 2 acquisitions, invested in new communities and activated many formerly landheld assets. For some time, our mission has been to drive higher returns on our assets by dramatically improving our EBITDA without increasing our asset base. You can see the success we've achieved thus far on Slide 13. Looking forward, we expect additional improvement as we currently have more than $500 million of nonearning assets that will begin to produce revenue over time. This should allow us to surpass a 10% ROA on total assets and drive further improvements thereafter.

On Slide 14. We outline the components of our expected community count growth for the coming quarters. We continue to expect to end fiscal 2019 with more than 170 active communities, though forecasting exact quarterly trends as challenging, given the uncertainty around the timing for community activations and closeouts.

As announced at the end of September, we retired the remaining $96 million of our 2019 senior notes, marking the completion of our 3-year $250 million debt repurchase program. Following this transaction, we have no debt due before 2022. While we are not giving detailed full-year guidance, I do want to make a comment about interest expense. Based on our repayments, our interest incurred will be lower in fiscal 2019 than the prior year. And with our expectation for higher revenue in fiscal year '19, we expect to see a reduction in interest expense as a percentage of revenue. However, the actual amount of interest that flows through cost of sales will depend on the amount and timing of our land spend. With our current land-spending assumptions, interest amortized to cost of good sold will be just over $100 million next year, with minimal direct interest expense.

Over the last decade, we made significant strides in reducing both our absolute indebtedness and leverage. Since fiscal 2008, we've reduced total indebtedness by more than $500 million. Since fiscal 2013, our net debt to adjusted EBITDA has declined to 5.3x, down from nearly 12x. We are targeting a net debt to adjusted EBITDA in the 4s, as we improve our profitability, further reduce debt and redeploy formerly nonearning capital. 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. Our balanced growth strategy allowed us to deliver strong results in 2018, and we now have the opportunity to improve upon those results in 2019 and beyond.

Operationally, we're well positioned to address more challenging market conditions as we're focused on the right buyers with the right mortgage approach and the right expansion plan with Gatherings. Financially, our disciplined capital allocation strategy, combined with an increase in community count and higher ASPs should allow us to achieve higher profitability and a double-digit return on our assets this year. I want to thank our team for their ongoing efforts. I'm confident 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 Michael Rehaut, JPMorgan.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Couple of questions. First on the guidance update in -- for fiscal '19 and then a broader question kind of regarding your positioning, which I think is important as well. But just firstly on the guidance update, reducing to EPS above $2 versus $2.50 before, if you could just try and break down for me where that difference is coming from. From the income statement line, are you kind of expecting -- or how are you thinking about either closings growth for the year and/or gross margins? And the $2, just wanted also to clarify if that includes -- you say that includes the $16.5 million stock buyback but not the additional remainder to get to $50 million?

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

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Mike, it's Allan. So I'll take the second part first. Yes, it includes the $16.5 million but not the rest. In terms of what changed, I think there are kind of 3 main things that we've reflected in our updated guidance. The first is that we have assumed the sales pace will be more sluggish in fiscal '19. As you know, a lot hinges on the spring selling season. It's early, but we have adopted a more cautious approach to what may unfold next spring. Secondly, a little bit of adjustment to gross margin, not a lot, but we do see some pressures there potentially manifesting themself. And I think thirdly, and this was one that's maybe a little bit harder to explain in a conference call format is that we have reduced our expectation for land spending in fiscal '19. And right away, that doesn't immediately lend itself to understanding changes in the income statement, but as Dave said in his comments, the amount of land spend and the timing during the year has an effect on the change in the balance sheet. And if the balance sheet is growing, we tend to expense less interest. We're assuming now, differently from 5 months ago, that we're going to buy less land, the balance sheet is not going to grow at the same rate. And as a result, we're pulling more interest through cost of sales than we previously assumed. So it's really all 3 of those elements, and there are a lot of ways to get there, but those would be the 3 primary factors in the change to our guidance.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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That's very helpful. And I believe Dave said on that last point that you expect interest amortization expense of around $100 million. Is that correct?

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

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Yes, we said it would be a little over $100 million. And it's strange but true. In that circumstance, interest in the income statement will be higher in '19 than in '18, even though our incurreds are quite a bit lower. And I think that nuance, well, a little bit complicated to explain as one of the factors in our guidance.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [6]

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Right, right. Appreciate that. Secondly, the -- you kind of made some points around your positioning through multiple differentiators: your first time in your active adult approach, your mortgage choice program and Gatherings, which obviously on the active adult front. I was hoping to get a sense of what your product mix has been if you kind of break it down between first time or entry level/first time, move-up, and active adult, how that mix came out for you in 2018? And what you expect it to be in 2019, as a result of the shift and maybe the acquisitions as well? And particularly within the first-time bucket, obviously, a lot of builders within the industry are moving in that direction. What would you say are kind of the differentiating attributes of your first-time offering versus the rest of the competition that might, let's say, buffet any potential increased competition in that area of the market?

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

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Okay, so a lot in that. Our positioning relative to the mix of our buyers hasn't really changed appreciably in the last couple of years, and it's not going to change very much in 2019. Somewhere in the 55% to 60% range for our first-time buyers, about 1/4 of what we call active adult that are also empty nester buyers -- and I have to point out, a very small percentage of those buyers in '18 were actually in Gatherings communities -- but the portion of our active adult business is going to twist towards or grow into that Gatherings mix over the next few years. But you can serve that active adult buyer with single-story ranch plans that are modest in price and high in livability. So we've been roughly 80% in those 2 cohorts. And I don't see any real change to that in the near term. In terms of how we withstand the competition, I don't mean to be a smart aleck, but it's a home game for us. This is where we are. This is who we are as a company. It's what we know how to do. And what are some of the things that we do differently? Well, it's easy to talk about construction quality, but you get a HERS score or an ACH report or an ENERGY STAR award, these are bona fide, third-party, verifiable, factual things that we can demonstrate are different about our homes, that affect their livability, they affect the monthly cost of occupancy and their long-term cost of ownership. I mean, we do things in our homes at other entry-level, first-time-buyer builders don't do: from house wrap, to framing techniques, to roof underlayments, to the quality of shingles we're putting on the home. And honestly, those things are a little hard to explain on an earnings call, but you start talking to a first-time buyer who has waited to acquire their home, they have become more sophisticated, they are well educated online, it's very powerful for our sales team to be able to talk about those differences. And then we put them in a mortgage program where they understand that there is a real effort to serve their interest, not our interest. And I think those are 2 big things that differentiate us and are very palpable to any buyer in any one of our communities.

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Operator [8]

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Our next question comes from Alan Ratner with Zelman & Associates.

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Alan S. Ratner, Zelman & Associates LLC - Director [9]

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So first one, just looking at your Slide 29 on the spec numbers, just wanted to dig in here a little bit. So obviously, there is still a pretty low absolute levels, but if I look rate to change, total specs looks like it's up over 20% and completed specs is roughly 40%. And we've seen similar trends from other builders and from the broader market as a whole, so I'm curious how you're thinking about spec inventory today, both for the company as well as the industry. Is it at -- is it starting to get at levels that's leaving you a bit more uncomfortable? And how are you treating those specs? Are you starting to incentivize more heavily? And maybe just talk a little bit about how incentives are running as a percentage right now.

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Robert L. Salomon, Beazer Homes USA, Inc. - Executive VP, CFO & CAO [10]

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Alan, it's Bob Salomon. I think a couple of things around your question. First off, I still control the spec starts in the company, so we manage that program pretty dynamically with all of our specific communities and what's going on. I think the overall level, to answer your question, is really we're pretty comfortable with it as we've been selling more specs throughout the year. So since each community level set, we set our own spec level, we're pretty comfortable with where we're landing in a totality for the company. The other thing that happened here really in the fourth quarter little bit with the acquisition of Venture, we did pick up more specs as a first-time buyer program, where traditionally they sold mostly spec homes as opposed to-be-builts. So that did bump up our number a little bit, but we're certainly comfortable with that since they continually sell them. And I think your last point related to incentives is, yes, incentives are up a little bit year-over-year. I'd say 20 to 30 basis points in the margin. I think that's been kind of consistent where we've seen things go here in the fourth quarter.

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Alan S. Ratner, Zelman & Associates LLC - Director [11]

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Okay. I appreciate that Bob. And then second question, if I could, Allan, I appreciate your comments on the affordability side. I'm not sure if you guys have access to this data through the mortgage choice, but we're starting to hear more concern over some of the credit statistics in the mortgage market, high DTI loans are certainly rising as a percentage of the total, especially at FHA. Have you looked at that data at all in your business? Are you seeing any discernible trends as far as more either lower FICO borrowers or high DTI borrowers that give you some cause for concern that perhaps affordability is getting more stretched? Or alternatively if you start to see some credit tightening on the edges, could that impact your buyer at all?

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

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So we do look at the data both at a macro level. So I'm familiar with the GSC and the FHA statistics, and I see that in my role at LBA as well. So I'm aware of it. I would tell you in our business and our discussions with our preferred lenders, we have not really seen a discernible change in their underwriting priorities and credit quality. I think that is something to keep an eye on. We're very attuned to it. I mean, it's pretty easy to tell the story of the financial crisis that when the mortgage market lost underwriting discipline, we created a supply problem, and I am hyper-attuned to that. I don't see exaggerated signs of that at this point.

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David I. Goldberg, Beazer Homes USA, Inc. - VP of IR & Treasurer [13]

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Alan, I would echo -- I would have to jump on the back of what Allan said there. You also have to remember what's the mortgage choice. It's a very differentiated program that the lenders are competing for our buyers' business. I think that gives us more access certainly to lenders and gives our buyers more access to loans than what you have to get a captive. So it's a big differentiator. And we think it's even more important in a rising-rate environment.

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Operator [14]

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Our next question comes from James Finnerty with Citi.

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James Peter Finnerty, Citigroup Inc, Research Division - Director [15]

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On the debt reduction front, you mentioned up to $50 million alongside the share repurchases. And then you also stated that if land spend in '19 ended up coming in lower than your range or at the low end of your range, you might look towards more debt reduction. Could that mean debt reduction could be beyond the $50 million in '19? Just like to get your thoughts there.

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

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Jim, it could be. I think we've kind of committed to matching the share repurchases that we do. And based on what we see in terms of our markets and the general conditions in the markets and if land spend is warranted, certainly, we're set to spend up to $500 million, $600 million. But if it's not, there is the possibility certainly for more debt reduction.

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James Peter Finnerty, Citigroup Inc, Research Division - Director [17]

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And how would -- should we think about the debt reduction in terms of the debt that's outstanding? Would it be focused on near-term maturities or longer-term maturities that are trading below par? How do you feel...

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

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Yes, we're not going to telegraph now kind of what we're looking at. We've been opportunistic debt repurchasers in the market before and we'll continue to be. And as our strategy comes together, we'll talk about it more, but at this point, it's premature to give a specific game plan.

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Operator [19]

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Our next question comes from Sam McGovern, Crédit Suisse.

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Samuel Thomas McGovern, Crédit Suisse AG, Research Division - Research Analyst [20]

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Just to piggyback on James' question on the leverage. I mean, how do you think about absolute debt levels? I know you talked about how you're targeting 4x in terms of an EBITDA leverage figure, but how do you think about actual debt levels over the course of the cycle? Where you want to be? And obviously, you have a very long-tenured debt distribution, but in terms of the absolute levels, how are you thinking about them?

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

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We want to have less total debt and higher earnings. And the 2 things together help us get to the debt to EBITDA ratio that we talked about, but we absolutely want to have less debt.

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Samuel Thomas McGovern, Crédit Suisse AG, Research Division - Research Analyst [22]

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Okay. Got it. And then in terms of the timing of the buybacks. I mean, how do you think about the timing of that? Should we expect the full $50 million in fiscal '19 or could it be longer term over that?

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David I. Goldberg, Beazer Homes USA, Inc. - VP of IR & Treasurer [23]

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On the debt side? Look, Sam, as I mentioned, we're probably a little bit -- these are on the share side or on the debt side, I'm sorry?

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Samuel Thomas McGovern, Crédit Suisse AG, Research Division - Research Analyst [24]

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Both, stock and debt.

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David I. Goldberg, Beazer Homes USA, Inc. - VP of IR & Treasurer [25]

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Well, so we've announced the ASR for $16.5 million along with the press release today. We'll discuss, as we kind of continue moving forward, thoughts around the timing on the share repurchases and what we would do. Certainly that will depend a little bit on market conditions and what's available. In terms of the debt, again, it's probably a little premature to give you the time line, but we're certainly thinking about it, and we'll come back when we have more definitive plans from that perspective.

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Samuel Thomas McGovern, Crédit Suisse AG, Research Division - Research Analyst [26]

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Okay. Got it. And then just last question. In terms of the ASP growth, how much of that was regional-exposure driven versus higher prices on a same-store basis?

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [27]

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It's 100% mix, and there's no assumption. Just look at our backlog ASPs, we just got a slightly different mix in the backlog that will come through the P&L this year.

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Operator [28]

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(Operator Instructions) And our next question comes from Susan Maklari with Crédit Suisse.

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Susan Marie Maklari, Crédit Suisse AG, Research Division - Research Analyst [29]

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My first question is around, Allan, you mentioned that you're working on deepening your relationship with some of your suppliers, and I want to get a little more color on that. Does some of it come from the acquisitions that you've done in your increased local market share in certain geographies? And how should we think about your ability to really use this and leverage it to maybe help margins as we do come into a period of slower demand?

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

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Sue, so absolutely having scale in local markets helps, but I was really referring initially to the relationships with our national partners. And while local market matters to them, what's really important for us is to kind of align our buyer profiles and our communities with their production, their SKU counts and simplify in categories, for example, like cap mix. We have been able to go through and instead of having 5 levels of cabinets, have 3 levels of cabinets; instead of 4 front types, have 3 front types; instead of 6 colors, 2 colors. And it's amazing if we -- just looking at the distribution of outcomes, all the complexity, it feels like this Disneyland of choice for the buyer in the design center, but the fact is the same 5 or 6 selections end up being made. As we've been able to share that information with our provider and they share, frankly, retail data that they've got from the market broadly, we've really been able to hone in. And so buying the same number of cabinets but targeting a much shorter SKU count is a huge efficiency pickup. And it's not just price, that's part of it, it's also cycle time. One of the most frustrating things for our team is waiting for cabinets to get delivered. And if we know with certainty, within which cabinet categories or within the small group of cabinets that are available which ones we need, we have been able to take a day or 2 or in some cases more than that out of the cycle time. And I don't mean to overplay the cabinet argument or the cabinet example, but it's a good one for simplicity driving efficiency, which is in the manufacturer's interest and, frankly, is good for us too. And it's those kinds of things across flooring, across cabinets that we have made a big effort on. We're not going to be the biggest buyer of product from some of these companies, but we do want to be one of the best.

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Susan Marie Maklari, Crédit Suisse AG, Research Division - Research Analyst [31]

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Okay. That's very helpful, Allan. My second question is, as you target this double-digit ROA for next year, how do you think about that relative to the slight increase in use of incentives to drive volume and maybe some of the changes that are coming about in terms of ASPs and product preferences and things like that in order to continue to get there?

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [32]

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Well, there are a lot of variables. We know that with a larger community count -- and this is sort of lost, I think. If the assets don't change, the direct to community count goes up, you've got a great lift in ROA because more of our assets are generating revenue and profitability. And that's one of the things we have been spending the money activating the landheld assets that have created the possibility and the future potential for community count growth without really changing the aggregate asset level. And we're starting -- in '19, we're really going to see a benefit from that in that community count. So for us, that's really the tailwind that gives us some ammo to deal with what will probably be more challenging pace and margin environments.

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Operator [33]

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(Operator Instructions) Gabriel Fineberg with Beach Point Capital.

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Gabriel Fineberg, [34]

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I was wondering if you could give some color on -- I know you talked a little bit about how you've taken a lot of previously inactive land and activated it. Kind of how the decision process works there when you're thinking about moving land over into that active column, what the criteria are for making that decision?

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [35]

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Well, over time, the primary objective has been to make sure that any incremental capital that we invested earned a very high rate of return. And that incremental return on capital or, maybe said slightly differently, the return on the incremental capital is really the decision. There was a period of time, early in the recovery, where there was low enough priced land to stress sellers and otherwise where the return on incremental capital was better doing that. As the market has evolved and improved over the last 6 or 7 years, we found that the return on the incremental capital and activating these landheld assets has made a lot of sense.

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Gabriel Fineberg, [36]

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Got you. And these are communities that you feel with a high degree of confidence that you'll necessarily develop? Or these are just things that when you plug into your model maybe a couple years down the line, there's the potential to develop them?

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Allan P. Merrill, Beazer Homes USA, Inc. - CEO, President & Director [37]

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No, I mean, the decision when we moved something -- in the past, when we moved things from land held into active status, that means our intention has changed from a long-term view of its eventual development ability to a "right now we intend to develop it and build and sell homes." And -- so we made that decision. We got a lot of those assets that are under development. And our intent in the activation is to create finished lots, so we can get the homebuilding program going, so that not only do we earn that return on our incremental capital but we unlock and are able to recycle the capital that has been tied up in those assets, in some cases, for a decade.

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Operator [38]

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No further questions over the phone at this time.

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David I. Goldberg, Beazer Homes USA, Inc. - VP of IR & Treasurer [39]

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Okay. We want to thank everybody for dialing in, and we will speak to everybody next quarter. Thank you very much. This concludes today's call.

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Operator [40]

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That concludes today's conference call. Thank you for participating. You may disconnect at this time.