Carey Phelps - Director of Investor Relations & Corporate Communications Allan P. Merrill - Chief Executive Officer, President and Director Robert L. Salomon - Chief Financial Officer, Chief Accounting Officer, Executive Vice President and Controller.

David Goldberg - UBS Investment Bank, Research Division Patrick Murray - Crédit Suisse AG, Research Division Ivy Lynne Zelman - Zelman & Associates, LLC William W.

Wong - JP Morgan Chase & Co, Research Division James McCanless - Sterne Agee & Leach Inc., Research Division Adam Rudiger - Wells Fargo Securities, LLC, Research Division Eli Hackel - Goldman Sachs Group Inc., Research Division Sean Wondrack.

Good morning, and welcome to the Beazer Homes Earnings Conference Call for the quarter ended December 31, 2013. 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 on the Investor -- on the website.

In the Investor Relations section of the company's website at www.beazer.com. At this point, I will turn the call over to Carey Phelps, Director of Investor Relations..

Thank you, Pat. Good morning, and welcome to the Beazer Homes conference call discussing our results for the first quarter of fiscal 2014. 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. Any forward-looking statement speaks only as of the date on which such statement is made.

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

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

Thank you, Carey, and thank you for joining us. We are sorry about the delaying the call by a day. The weather and road conditions here in Atlanta required us to do so. And after the last 3 days, we should probably consider moving our corporate headquarters to Detroit, where they seem to be able to handle an inch of snow.

Well, as most of you know, in November, we introduced our 2B10 plan, a new multiyear overarching objective to reach at least $2 billion in revenue with 10% EBITDA margins. Our team has quickly embraced this new plan and produced results for our fiscal first quarter that keep us on track to attain these milestones within the next 2 to 3 years.

Specifically, during the quarter, we increased adjusted EBITDA to $21.6 million, from $7.7 million last year. This is especially notable in light of the fact that coincidentally, we closed exactly the same number of homes this quarter as we did last year. We sold 895 homes during the quarter, or 4% less than last year with 9% fewer active communities.

Contrary to most of our peers, we were able to improve sales per community slightly on a year-over-year basis. We grew our ASPs by $44,000 to $279,000, expanded gross margins by 310 basis points to 21.2%, decreased our cancellation rate by 460 basis points, and improved SG&A as a percentage of revenue from nearly 15% last year to 13.7% this year.

Finally, we ended the quarter with $383 million in unrestricted cash and spent $124 million on land and land development, compared to only $90 million last year. Overall, we are pleased with these results, particularly, because they were accomplished in a selling environment that lack the consistency and sustained buyer enthusiasm.

As in past years, we were prepared for the adverse seasonality, typical of the December quarter, as well as the more aggressive selling tactics of many of our peers with fiscal years that end during this particular quarter.

But beyond those factors, we successfully weathered the government shutdown in October, and via the flying analogy we powered through a few air pockets, characterized by very low traffic and buyer engagement in certain weeks in particular markets.

On an overall basis, buyer demand in the first quarter could be called tepid or lukewarm or halfhearted, I think you get the idea. Before giving you our take on January, and the balance of 2014, I'm going to turn the call over to Bob to provide a bit more detail on the quarter.

Then I'll come back on to discuss our expectations for the remainder of the year.

Bob?.

Thanks, Allan. First, I'd like to talk about our 2B10 plan and the progress we made this quarter. As a reminder, there are a number of different combinations that can lead us to $2 billion in revenue with a 10% EBITDA margin. But in November, we provided some specific targets that could get us there.

During the first quarter, we recorded improvements for each of the metrics included in our 2B10 targets. Total revenues for the last 12 months were in excess of $1.3 billion, up 25% versus a year ago. Let's look at each of the components that drove this increase.

Sales for community per month continue to improve this quarter to 2.9 in the trailing 12-month basis, compared with 2.5 a year ago. Looking at the first quarter, the improvement was more modest, rising from 2.1 to 2.2. ASPs also continue to rise during the quarter to $279,300 from $235,500 a year ago, up 19%.

For the 12 months ended December 31, our ASP was $262,000, up $33,000 or 14% from a year ago. Similarly, our ASP in backlog at the end of the quarter was $286,000 versus $263,000 last year. We opened 14 new communities and closed out 10 during the quarter.

This led to our first sequential increase in community count in a long time, although we were down 9%, compared with the year ago. During the first quarter, we spent $124 million in land and land development, up 37%. And for the full year, we expect to spend in excess of $500 million on land and land development, exclusive of any potential land sales.

With the increase in land spending, our lot counts and inventory totals had been on the rise. At the end of December, we had nearly $1.4 billion of total inventory, up over $200 million from last year. And we had 29,000 known and controlled lots at the end of our first fiscal quarter, up 15% from last year.

In addition to our 138 active communities at the end of December, we also had 54 communities under development, and 27 communities whose purchases had been approved but had not yet closed.

Subsequent to the end of the quarter, we approved the purchase of 8 more communities and are now in active negotiations on many others, all in support of our drive, to grow our active community count. Our projected 2014 community counts have not changed since November, when we outlined our fiscal year expectations.

We still anticipate an average of approximately 150 active communities for the year, and expect to end September around 160. Over the course of the year, we expect to see sequential active community count growth of approximately 5% for each of the next 3 quarters, give or take a couple of percentage points.

You could see on the slide that our year-over-year average active community counts are expected to be approximately down 5% for the second quarter, up 5% from the third quarter, and up approximately 20% for the fourth quarter.

Because we aren't expecting big changes in absorption rates the rest of the year compared to last year, the change in community counts is a pretty good starting place for estimates of future orders. On the cost side, we need to continue to improve gross margins and leverage our overheads.

specifically, as part of our 2B10 plan, we are targeting at least 22% in home building gross margins, and SG&A as a percentage of revenue up 12% or less. Taken together, these improvements should create a 10% EBITDA margin. Gross margin on a trailing 12-month basis was 20.6%, up 320 basis points from last year.

And our gross profit dollars increased to $53,200 per home closed during the last 12 months, from $39,000 last year, representing the 36% year-over-year improvement. During the quarter, gross margins expanded nicely, up 310 basis points year-over-year to 21.2%, with improvement in all 3 of our operating segments.

And our gross profit dollars per closing increased to $57,600 for the quarter, up $15,400 or 37% from last year. In addition to achieving improved gross margins, keeping our costs in line is a key component of our plan to reach our 2B10 objectives.

On a trailing 12-month basis, SG&A totaled 13.3% of revenue, an improvement of a 120 basis points versus a year ago. And for the first quarter, our SG&A improved 130 basis points to 13.7% of revenue. As we ramp our community count, we will incur operating cost for our new communities before generating revenues.

As a result, we expect our Q2 SG&A ratio to be above Q1, and likely the highest of the year. However, we continue to expect that full year SG&A as a percentage of revenue, will be between 12.5% and 13%. Because we have lower ASPs than our peers, we also look at SG&A per closing. By our estimates, we're among the lowest cost operators in the industry.

As a result of the progress we recorded in our first quarter, adjusted EBITDA improved $14 million over last year, and reached $100 million dollars on a trailing 12-month basis.

Turning to our balance sheet, with no significant debt maturities until 2016, $383 million in unrestricted cash and an undrawn of $150 million revolver, we have sufficient liquidity to meet our 2B10 objectives.

Looking ahead, our unsecured notes due in 2018 and 2019 become callable later this year, and we will consider refinancing them, if and when it makes sense. Finally, we currently estimate that we will be able to use approximately $443 million or $14 per share in deferred tax assets to offset future tax liabilities.

While the exact timing is not known, we currently expect to start bringing a portion of the tax asset back onto our balance sheet sometime during fiscal 2015. With that, let me turn the call back over to Allan to review our expectations for the remainder of fiscal 2014..

Thanks Bob. Our operational expectations for our 2B10 drivers for full year fiscal 2014 have not changed. Specifically, we expect sales per community per month of 3 to 3.1, and average active community count of approximately 150 for the year, with the year-end active community count around 160, and average sales price of $275,000 to $285,000.

Homebuilding gross margins between 21% and 22%, which should allow us to achieve approximately $60,000 of gross profit for closing. And finally, SG&A between 12.5% and 13% of revenues. Achieving these results will allow us to report our first full year of profitability since 2006.

And in fact, our expectations for EBITDA for the year have actually gone up. We now expect year-over-year EBITDA growth of $40 million, $10 million more than we suggested last year. In order to achieve these results, we need to continue to execute. And we do need a decent spring selling season.

While there are a number of headwinds, here is why I'm cautiously, but decisively optimistic. First, while housing isn't the screaming bargain that it was a year ago, it is still highly affordable in relation to household incomes and to alternative rental payments.

When we add the monthly payment benefits of the energy efficiency features of newly built homes, this is still a terrific time to be a new home buyer, and I think buyers recognize that the market isn't likely to revert to last year's affordability anytime soon. Second, household formations are occurring and they drive new construction.

After half a decade of waiting, young adults are getting on with their lives and moving out of their parents' basement. This leads to rising rents and increased turnover in rental properties, which in turn stimulates demand for both new and used homes. Third, let's face it, mortgages are a pain to get if the buyer has any blemishes or complications.

But the enormous mortgage lending industry is starved for business, now that the refi boom is over. And I believe these lenders' competitive instincts and desire for origination income will drive both process and underwriting improvements. Now admittedly, those are all macro trends.

On a company specific basis, I'm excited about our coming soon communities. We are going to open more than 50 new communities in the next 6 months. I think they will be very well-received, allowing us to create some momentum of our own, not just benefit from industry trends. Finally, a few words about January.

The weather in many of our markets has been awful this month. It has adversely impacted land development schedules, traffic to certain communities, sales and construction starts. But despite these issues, on an overall basis, we are absolutely seeing more traffic and enthusiasm than we've seen in many, many months.

While I don't think demand is as pent-up as it was a year ago, we have strung together a number of positive sales weeks with absorption rate about where they were last January. Based on traffic levels and buyer engagement, our team senses that February has a potential to be quite strong.

There is always risk and uncertainty lurking in our business, but we certainly prefer the current environment and our positioning to just about every period of time in the last 7 years. I look forward to bringing you the early spring selling results on our next call in May. Thanks for joining us today.

At this time, I'll turn the call over to the operator to take us into Q&A..

[Operator Instructions] Our first question comes from David Goldberg with UBS..

My first question, I think Allan, you guys did a great job last quarter kind of getting ahead, and maybe, some of the peers and maybe revamping your promotions, I mean, on increasing promotional activity, but just revamping them and throwing some interest in what was kind of a tough environment last quarter and even into this quarter and into December.

And maybe you could just talk a little bit about, as you're looking out to the selling season, how are you somewhat trying to get a jump on some of the competition, especially if demand is good but not great or great but not fantastic? How is Beazer positioning themselves of from a sales perspective as we head into February?.

Well, I think it is -- and I appreciate the compliment. We did talk in November about what we did in the September quarter and we kept doing it in the first quarter, which was, we call them competitive market analysis or CMAs.

It's doing those on a weekly basis at the community level to really figure where are we positioned, where are the opportunities between included features and incentives or the mix of incentives.

You could spend a dollar in a lot of different ways, and the question is really to figure out how to spend less than a $1 and put it in the right place where it has maximum effect. I try and look at trends, but I really get nervous, cautious about trying to say that there is a silver bullet, that there is a corporate strategy that's pervasive.

Because it's a street fight. There's a street fight in every community every week, and we're trying to teach the team to react to and be aggressive in the context to their market and do what is necessary to hit both the velocity numbers and the margin targets that they've got. And so it's a thought process more than it is a silver bullet.

I would tell you that included features, and I think all builders would tell you this, included features have crept up over the last couple of years, so we're not seeing quite as much in design center incentives as we might have seen in prior periods, because the feature levels are pretty good. So we're really focused on some internal initiatives.

We've talked a lot on this, in this form about mortgage choice. We haven't talked as much about something we call planned choice, which is the ability for consumers to make structural changes to the floor plan inside, the envelope of the home at no cost.

It's a disruptive strategy, because most of our peers charge a nominal rate for structural options. Now for adding square footages, if we're adding a third-car garage or a covered lanai, we charge for that.

But if we're changing the way the living room way -- lives, or the way that a great room and the kitchen are laid out, the shape and size of the counter or of the island in the kitchen, I mean, those kinds of things really are impactful in causing people to feel like they found the right home for them because it lives the right way.

It's a hard thing to do. It's a hard thing to design. But it actually, from an implementation standpoint -- once you kind of get over the hump of understanding how to do it, it reduces the total number of options, which I think improves both the built cost and our cycle times.

So that's a much longer and more detailed answer than you probably cared to have, it didn't really tell you something specific about incentives. But that's what we're doing to make sure that we're competing strong in this quarter..

It's actually -- it's very interesting, and that -- not that we hear from a lot of builders, a lot of builders charge for structural options. That's very interesting. My second -- just quick follow-up question was on the cancellation rate. Interesting to see a decline year-over-year, and you kind of decline also sequentially.

Is that the mortgage choice program really kicking into place that you feel you're better able to keep buyers that prequalified in the process, is that just a benefit from home price appreciation a more stable economy? What do you think you would attribute that to?.

I think psychology is better. I think home prices rising clearly helps make your backlog stick. But I'm really proud of the mortgage choice program, too. I think it makes the difference. I think lenders get less persnickety during the underwriting approval and documentation stage, when they know our sales team is trained.

At the first sign of trouble -- frankly, they're trained at the time of sale and thereafter to make sure that customer knows they've got choices. I mean, that check and balance is really crucial. No one feels entitled to our customers' mortgage business. And I think the entitlement is at the root of evil in terms of customer service.

So I think it plays a role. But I'd be delusional if I didn't admit that the improvement in home prices wasn't also a pretty important factor..

Do you think there's further room to go on the cancellation rate or are we kind of that -- a normal comfortable level?.

It's a funny thing and I've probably have said this on earnings calls before. The can rate that we have is a company that is reported is obviously the sum of all of our divisions. And we have markets that have high single-digit can rates and have markets that are closer to 30.

And I think that on a weighted-average basis, we're kind of in a place where I'm pretty comfortable I've heard others say and I agree with it, you need to have a level of cancellation rate because you're not pushing hard enough on sales, I believe, if you're not making sales that make can.

Is 20% the magic number, I don't know, but I think something in that low 20 feels pretty good. There are certain markets where buyers have legal rights of precision for 7 days where we don't record the sale until after that 7 days. Well those market structurally have lower can rates.

I also think that the can rate are a function of the buyer profile and of home prices. And our home prices are moving up a little bit, but our of buyer profile isn't really changing. So, I don't think it's really that, that is driving the can rates.

So again, arguably a long-winded answer, but I feel like we're in a zone plus or minus where we're pretty comfortable. I think we're being appropriately aggressive. Is it ticked up our down a point or 2, kind of one way or the other, I have to tell you, I wouldn't be looking for ghosts or shadows. I think we're kind of in that zone now..

Dan Oppenheim with Credit Suisse..

This is Patrick Murray. Actually, I'm for Dan.

I was looking to get some commentary on the closeouts that you're expecting in coming quarters versus the new openings with respect to geography or ASPs?.

Yes, I think ASP's on the new communities, and I don’t have that stat right at my fingertips but our anticipated ASPs for the new communities are slightly higher than for the closeout communities. Part of that is geography. We're going to be opening quite a few communities in our East segment, Maryland in particular.

And we have just opened in this quarter, a couple in California, which have higher ASPs. Our Houston and Dallas markets also are looking at some significant openings in Orlando.

In those markets, while those are not high relative to our company average within the respective markets, the communities that were opening are slightly higher than the ASP of the communities that are closing out in those markets. So I think there is a mix between markets a little bit.

We're a little bit more coastal, I think in 90 days than we are today, and that effects price and I think within markets you will also see a little movement as well..

Okay.

Just another question, could you talk about how the No Community Left Behind mindset works with or against any of the 2B10, the 2B10 initiative -- ticket?.

Sure. It's a good question. And at some point I'm going to be at risk at tripping myself up on my own acronyms, in those words, but No Community Left Behind is really the core philosophy of the company. You can't have underperforming communities. It's not okay. You have to fix it.

And sure price is a lever, but people and promotion and the 4 p's that I've talked about before, you have to have accountability to fix those things.

Well, I think what we've seen in the last 2 years is gross margins going up and velocity is going up, not just because the best stores, the best communities do better, but because we really made it cultural to not let stores get left behind.

So having gone from 1/3 or more of our communities that we're willful, to something more like 10%, that are underperforming where we would like them to be. I don't think it's coincidence that we have more confidence in having 2B10 metrics at an aggregate level, because we've got a much higher proportion of the communities performing.

So I think one leads to the other. I don't think they're in any way in conflict..

Ivy Zelman with Zelman and Associates..

Allan, when you talk about the market, you've indicated a lot of new openings in the 50 communities that you plan on bringing online. Out of those communities from your perspective and I know that you've really been focused on buying the right assets and not just buying assets to make sure you have plans.

Do you feel that the gross margins on those new communities are going to be at the current levels that you're at today? Or are they likely higher? And just talk about pricing, with respect to your full-year outlook.

If you think about your ability on an apples-to-apples basis, do you think you're going to have pricing power? Or do you think the market will be more flattish, given that the strength that we had this year?.

So I'll take the second part first in terms of pricing. When we did our 2B10 targeting and when we do our business planning, we try really hard to not let price appreciation thinking creep into the numbers.

We're forecasting every community on a monthly and quarterly basis and we roll that up and that's really the basis of our annual plan and our 2B10. There is not an overlay or an underlay of a pricing assumption.

If in -- and I think I've answered this question this way before, if you ask me, what I think is going to happen, I do think that when we get done, if we could have an absolutely apples-to-apples comparison, which is impossible because the mix is constantly changing.

But I think that we could do absolutely go apples-to-apples, I think we'd see very low single-digit price appreciation this year. That's my guide. I think it will be a little better in a couple of markets.

I think it will be flat in a couple of markets, but if you told me it was 3% or 5% or something on that order, I'm guessing that's what going to happen. That should be incrementally helpful for us if it does occur because we're not counting on it.

On the question of the new communities, through 50 communities, I have to speak in kind of generalities, I'm very confident that those communities are contributing to our outlook that margins this fiscal year are going to be higher than last fiscal year. They are helping. They are in the range of current margins.

They are not going to represent a headwind on our margin trajectory..

Okay. Well, that's very helpful, Allan. If we can now move into sort of thinking about your, I guess, consumer who you're focused on, you are still focused on entry-level.

Although you're also benefiting from moving up the price point and there is a lot of concern about the entry-level market, and kind of getting your perception, on whether or not that you think that, that sentiment being so negative toward the entry level buyer and now[ph] participating in the up turn is legitimate or do you think that there's more entry-level buyers coming to the market now that we're seeing stabilization and rates, and maybe the credit box is easing slightly.

What's your big picture view as an entry-level builder?.

I think it's been surprising that, that group of buyers has not led the recovery like they typically do. We know the reasons why. I think that they are there. I think that they will reassert themselves albeit at a lower level than in prior cycles. We are not the abandoning that first-time buyer market at all.

It's hard to serve them because land prices have gotten to places in certain markets where it's hard to kind of get to that price. And that first time buyer might have to buy a used home because we can't get lots on the ground at a level that allow us to serve that buyer. So that's really more the dynamic.

But I think, as a group, though smaller in contribution or distribution of the total buyer mix, so far this cycle I think they are remerging, Ivy, and I think we will see some benefit from that this year and into next year. Part of it psychology, part of it is the credit box that you talked about.

But I think, and you've done work in other zap on, on the household formations.

I mean, we suppressed household formations and primarily the household formation that we're suppressed, were those of younger adults, who though they may transit through renter-ship before home ownership, I think they are going to be disproportionately weighted, this newer households and the push factor of household formation is going to be at lower price points, not higher price points.

There aren't a lot of millionaires living in their mother's basement..

You mentioned about rents moving up and people looking at the turnover, going to be increasing and move out to buy and all those factors which we concur with.

How about on the credit box? Are you seeing some of the improvements that I spoke about or is it still exceptionally tight in your opinion or has there been some benefit from refi as going away as you mentioned in your opening comments?.

I think it's still historically tight. It's less historically tight I believe than it was 90 or 120 days ago, but the difference is very hard to measure. You'd need a microscope.

But I can tell you that the insight that I get about this is this is really when we talk to our divisions about at the community level, who are the lenders that we are allowing to have the opportunity to interact with our buyers. And that list is a dynamic list at the community level.

If there's somebody who is a essentially 0% capture rate, they're demonstrating that they're not very competitive either on price or service or rate, so we take them off the list and put somebody else there. We have been surprised and happily so at the waiting list, if you will, of lenders who want to be on that preferred list.

So really a unique proposition with us because they don't have to pay us anything. I don't want their money. I want them to give that money to the buyer. So it's a unique sales pitch for us on a B2B basis with these lenders because we're not trying to stick our hand in their pocket.

So, we said, "Hey, you got some extra change going[ph] around in there, give it to our buyer, don't give it to me." That is very appealing to those lenders and then you have the discussion with them about, hey, that's the good news.

The rest of story is, you've got to compete because somebody else is going to see that same loan app and if they make a better first impression, you're not going to write that business.

What I can tell you about the credit box is, I think what we're experiencing is a kind of a microcosm of a broader trend, this desire for loan volume growth is driving more lenders to our doors to say, "we'd like to be on that list", and I think as we talked a little bit on the other question, the can rate is demonstrating that they're working hard to keep those buyers and get them closed..

Michael Rehaut with JPMC..

It's actually Will Wong, on for Mike. Regarding the absorption, in the fourth quarter, your fourth quarter, you guys did a pretty substantial year-over-year increase in the absorption pace. It was up about 30%, and we saw a little bit of deceleration that in the first quarter.

Just wondering how that's stacked up relative to your expectations? I know you guys, your fiscal fourth quarter, you did a lot of things of repackaging and incentives.

Just wondering, if that 2.1, 2.2 rate this quarter really stacked up to your expectations, I know you guys kept the full-year outlook the same, but do you think that's going to be more back half-weighted now interest of getting into that goal?.

Well, it was always going to be back half-weighted right, because I expected -- I'm sorry? It was always back half-weighted, or back 3 quarters-weighted, kind of regardless of the level of improvement in our fiscal first quarter, Q2, Q3 and particular in Q4, with new community openings over that period of time, we're always going to be the bigger factor in being able to sustain, well to achieve and then to sustain 2.9 to 3.0 then to 3.1, sales from upward community was never really going to be positively influenced that average by Q1.

But kind of back to the nub of your question, yes, I was a little disappointed. We would like to of sold more homes in the first quarter.

I mean, being down 9% community count, and we were really clear about that, was always going to be a significant headwind and so, there was no way, we were -- I think rationally anybody would have assumed that we were going to have the same kinds of absorption rates we had in Q3 or Q4.

You sort of talk about the year-over-year change, I think that we didn't have a huge year-over-year change for the some of the reasons I talked about, but I'm pretty damn proud of the fact that we did have a positive year-over-year change. And I think on an absolute level, our absorptions were kind of top tier. I don't know if they were number 1.

Because I don’t think all the numbers are not in yet. And so far, I haven't seen anybody else actually increase absorptions. So I would certainly love to have sold another 50 homes, some number like that would have been terrific. But it wasn't there.

As one of our compatriots said, there was not a lot of elasticity and demand, so we didn't feel any desire to go chase it with incentives. We took what was there, and I think we did a little better than getting our share..

Okay, great. And the second question regarding gross margin. You guys are up about 500 basis points on the west. Just wondering if you could talk a little bit about what the drivers of that was, as well as in the East, you guys drove about 60 basis points and that continues to be below some of the Southeast and the west.

Just wondering if you're seeing any changes in that region or expecting any significant improvement in that region going forward?.

Yes, I mean, as we look at the full year, I think the west will be under some pressure because there are some legacy communities in that mix in the West that got the benefit of all the price appreciation, that are at the very highest margins, couple of communities in the high 20s, low 30s. Those will be impossible to replace.

We won't be able to buy new deals there. So while I think the west has historically had higher margins than most other segments for us and for other builders, I think we're going to be hard pressed to drive that segments margins much higher over the course of the year. I will tell you that I'm disappointed still with our margins in the East.

But part of our reinvestment strategy has been to be in better locations with better product. So I think that the prospects for margin improvement in our company as I look out 12 and 24 months, I think the improvements in the East are going to be a big part of the answer..

Great. And then, just last one, if I could.

In terms of the orders throughout the quarter, if you have those numbers available?.

Orders throughout the quarter, you mean October, November, December..

Yes..

It was odd. I talked a little bit about air pockets. We had individual divisions where in 1 week, like, where did everybody go? And then the next week was kind of back to normal and no one asked. They kind of expected that they might. That happened to us in Phoenix. It happened to us in Raleigh. I just -- odd in those 2 instances.

As I look at it, overall though, it was pretty consistent. Our gross in net orders in October, November and December were within spitting distance of each other, month-to-month to month. So I didn't really see a dramatic change. December was the lowest this year. A year ago, December was a little bit stronger.

We had just a phenomenal last week of the year, or last week of the calendar year in 2013 that we didn't replicate. It was an anomaly last year, and probably, I should have been smarter and realized that, that anomaly was not likely to recur, because had it, I think we would have been a little better position than the orders.

But as I looked at the month-to-month to month, it was pretty consistent in number, but it didn't feel consistent underneath at the market level..

J McCanless with Sterne Agee..

First question I had, can you give us some commentary from what you're hearing from the field and your mortgage partners about the lowered FHA limits? And what effect that's having on business?.

It's not a good thing in markets like Las Vegas and Bakersfield. It's not helpful. And it's affecting us and others. Interestingly, our FHAs share, my estimate based on what we're hearing from the lenders, and this is different than having a mortgage company. So it comes with a different health warning.

But our -- a year ago, I would have told you that we were well above 1/3 of our business with FHA. I think our backlog right now is between 20% and 25% FHA. So we've seen a pretty significant mix shift toward conventional. Part of that I'm sure is driven by the loan limits.

Part of it's driven now by the fact that FHA -- and this was an intentional strategy, it was a policy matter jacking up guarantee and season and expense premium. They have been trying to shrink that pool and they did.

So I think they thrown another log on the fire by lowering the loan limits, and so far, our buyers have moved to the conventional market as a consequence..

Okay. And then, I wanted to ask next about the other expense line that ticked up to a negative $15.8 million in the first quarter versus negative $12.3 million in the fourth quarter.

Is there any one-time items in that number? Or should we expect this as a quarterly run rate going forward?.

Bob, was feeling like the Maytag repairman here. So Bob, that one seems like it's right up your alley..

Yes, Jay, if you recall at the end of September, we issued the 2021 $200 million notes. So our interest incurred for 2014 will be higher than 2013. So basically, the disallowed interest in the first quarter went up, call it $3 million, which is really the basis of the difference.

And I think, on a run rate standpoint, it will trend down, that difference will trend down as we go forward depending upon how we layer an additional inventory, as we buy the land in excess of what we run through cost of sales..

Okay.

And then just the other question that I had, just any preview for what you all are going to be doing for the annual February sales event?.

I wouldn't want to give our competitors that much of a head start. I will simply tell you that we feel pretty good about the packaging and promotion that we will be doing, both its ability to drive traffic and sales, and the lack of adverse impact on margins..

Adam Rudiger with Wells Fargo Securities..

I may want to go back to something Bob said in his prepared remarks, when he talked about community count. He mentioned I think that you were not expecting a big change in absorptions for 2014.

I was wondering if that was based upon your view of the market, or if that was more something that -- a pace that you would planning on managing too?.

I think, by memory our fiscal year '13 sales per month per community was 2.9, and we guided to 3 to 3.1. And we were kind of hoping what happened, and of course, plans and hopes are kind of different from reality. But what we were trying to manage to was a little pick up in Q1, which we had, and it was maybe a little littler than we would have liked.

And then, it was going to be all right with us if Q2 or Q3 ran a little less hot. I said last year, 3.4 felt pretty warm in the second quarter.

And so, if we had it perfectly to control, we would have seen a weighted average increase in that sales per month for community, up from 2.9 into the very low 3's, shifting just a little bit into Q1 and it was okay with us, is okay with us, if it was off a point, a decimal point or 2 or 3, in Q2 and Q3.

That sort of mix would lead to the outcome that we were trying to get to. So that was our thinking at that time. I think with Q1 being on the lower end, still up year-over-year, we're not going to try and micromanage the rate.

I want to make sure that we're not winning sort of false prizes, trying to win a specific sales per month metric at the expense of maximizing profitability, doesn't make a lot of sense.

But I think Bob's comments were intentional, that we don't expect if I look at Q2 -- Q2 through Q4, we don't expect that those absorption rates this year will be a lot different. Could they be 0.1 different? Yes. And that would get us to where we expect to be for the full year..

Okay. And then, I look -- when I look at the words that you used in the beginning, tepid, lukewarm, halfhearted for the quarter. And then your commentary on January, it sounded to me like a different level of excitement or tone.

Is that a correct interpretation, that January to you felt a lot a better than really the December quarter?.

That is absolutely intentional..

Okay.

And then last question, when you think about your -- aside from market improvements, when you think about your company specific opportunities done a lot already, what's the -- what single area do you think you still have the most room? Or if there is such a thing as low-hanging fruit, where would that be?.

Well, it was obvious to see but hard to execute against and that was owning better land. We were out of the land market. We didn't get some of the low-hanging fruit in 2010 and '11 that our peers did. They've been blowing and going through that for the last 3 years. And we didn't get to have any punch out of that punchbowl.

The last 2 years, we've been much more on the gas and the land side. And I think starting to see the benefit of those new communities is really something we've been fighting that headwind for 2.5 years. That turns into a tailwind at that some point this year, and I like the locations that we're in.

It has also given us a chance to revise and update refresher product. So I think, having fresher looking, better elevations, really current floor plans and better dirt, god we haven't had any of that. It's been behavioral. It's been being more competitive, being more attuned with the market.

Just expecting and holding people accountable for better performance. While you get the dirt better, and you get the houses better, that will be a nice benefit that we haven't had so far..

Eli Hackel with Goldman Sachs..

Just one question quickly on January. Not to state the obvious, but rates have been moving decently lower.

Is it your view that, that's really not, at all, behind the increase in January and it's not seasonal, it's really some type of change in buyer sentiment?.

Well, it's clearly, partially seasonal. There are no question about it being partially seasonal. I think it's more than that. So I think it's kind of complicated. I don't know that consumers really know what rates are when they come into your model.

When they are in the process of qualifying and looking at loan product, that's when they know what rates are and they're doing the affordability calculations. But to get up off the couch to get in the car, to drive out, look at the community, particularly in adverse weather.

But I don't think that, that behavior is motivated by a 20 basis point change in the tenure..

Okay, that's helpful. And then just one follow-up question, I'm just going back to lending standards, do you have that good chart from chronologic sort of talking about where current standards are difficult, and the biggest one is really on the FICO score. It sounds like you thought maybe some things were starting to ease.

Do you think does that need number need to ease materially to get back to what some people call some type of normalized selling environment? Or do you think a slow ease is good enough that can get you to the 2B10 plan over the next 2 to 3 years?.

Yes, I think over the next couple of years, slow ease will be just fine. I'd love it to snap back to that historical line. It's not going to. It's just not going to happen. But if I think it moves out on that axis just a little bit at a time, a little bit at a time, that's just incrementally helpful.

And I think, frankly, relative to a lot of builders, we benefit disproportionately because of our profile of buyers. So you get any easing there that should help us..

And by the way, thank you, for raising the spider graph, there was not a small amount of controversy with my colleagues here about putting that in the deck, so I get a gold star for you..

Thank you, Eli. I appreciate it..

That was well played by you. Thank you..

And our last question comes from Sean Wondrack with Deutsche Bank..

This is Sean Wondrack on for Philip Volpicelli. Not to beat a dead horse, just another quick question on new orders. You said that cadence was pretty normal throughout the quarter, wasn't any room in major market stall. But you also noted that towards the end of last year's comparison that, that had a big influence on why orders came in shorter.

I was curious if you could quantify of that 4% of new orders being down, what percentage was from that last week?.

Yes, it's tough because we're selling out of different communities. I mean, all right, the mix changes and so it's a little bit hard. Like I said, I had designs in the beginning of the year, on another 50 to 100 orders for the quarter that would have been optimal. And that's probably 1% of the total number for the year, kind of number.

So it was hard to get too worked up over it. But I would have said, if you told me that there were 50 sales roughly spread over the quarter, but maybe a larger share of those, that very last week of 20 or 30 of them in that last week of December, that may -- that would have made the difference..

Right. And I think it's kind of a related question, when I look at some of your markets you operate in, you've obviously been in very hot markets. Some of these markets have had a lot of growth over the past 1 year or 2, to Texas, Florida, California.

Have you seen on a market-to-market basis, have you seen kind of any trends changing? Or maybe an acceleration in certain markets and kind of a cool down in others?.

Phoenix was tough in the first quarter and then December in particular. I don't know from our peers who've talked a lot about that, but I -- we found Phoenix to be pretty tough. It's up substantially, I mean, eye-openingly better in January. So it's not like they turn off the lights in Phoenix, it turns out that December wasn't very good.

I mentioned Raleigh. I was kind of disappointed in Raleigh, and I don't think it was just us. We looked at the market pretty carefully. Some of the big master plans, there really stopped marketing. I think people are feeling kind of fat and happy in that market after September, and it was kind of a wait until next year, that's my observation.

When you talked about Texas being hot, Texas is hot for a lot of reasons. It's not -- I don’t think real estate speculation, I thinks its jobs. I don't have the job number in Houston, in my fingertips, but it's in the 6 digits. I mean, it's in the 100,000-plus kind of category.

When you're creating that kind of job growth, it is absolutely a powerful driver for housing. So I've -- that trend I think continues. I think the recovery in Orlando is well underway. I was down there last week for a couple of days, looking at our new communities. That's going to be big part of our 2014, getting some new communities opening in Orlando.

We really like that market. I like the fact that they are -- have taken very intelligent steps to work on the infrastructure. They've opened new roads, toll roads and highways that make new affordable markets accessible.

And they've had a concerted region-wide effort to create job growth in the healthcare complex, which you can see, not just the trains but the occupied buildings basically at the end of the runways there in Orlando. Those are jobs and those are homebuyers. So that's a place where I think there is still very good things to come..

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