Beazer Homes USA Inc (BZH) 2008 Q1 法說會逐字稿

Good morning and welcome to the Beazer Homes first and second quarter fiscal 2008 conference call. Today's call is being recorded and will be hosted by Ian McCarthy, the company 's Chief Executive Officer.

Before he begins, Leslie Kratcoski, Vice President of Investor Relations will give instructions on accessing the company's slide presentation over the Internet and will make comments regarding forward-looking information. Ms. Kratcoski?

Thank you Christine. Good morning and welcome to Beazer Homes conference call, on our results for the quarters ended December 31, 2007 and March 31st, 2008. During this call we will webcast a synchronized slide presentation. To access the slide presentation, go to the Investor Relations homepage of Beazer.com and click on the webcast link in the center of the screen.

Before we begin you should be aware that during this call we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Such risks, uncertainties and other factors are described in the company's SEC filings including its annual report on 10K for the year ended September 30th, 2007.

Any forward-looking statements speaks only of the day on which such statement is made and except as required by law we do not undertake any obligation to update or revise forward-looking statements whether as a result of future information, other events or otherwise. New factors emerge from time to time and it is not possible for management to predict all such factors. Ian McCarthy our President and Chief Executive Officer, and Allan Merrill our Executive Vice President and Chief Financial Officer will give a brief presentation after which they will address questions you may have for the duration of this one-hour conference call. In the interest of time and allowing everyone a change to ask question, we kindly request that you limit yourself to one question and then one follow-up.

I'll now turn the call over to Ian. Ian?

Thank you Leslie, and thank you all for joining us on the call today. Yesterday we filed our quarterly reports on forms 10Q for the quarters ended December 31st, 2007 and March 31st, 2008. And early this week, we filed our fiscal 2007 periodic filings including the 10K. With the filing of these reports, we have completed our restatement of prior year's financial results and the filing of all previously past due periodic reports with the SEC.

This is an important step for Beazer Homes and we look forward to resuming regular quarterly communication of our financial and operating results. We appreciate the patience and support shown to us by our investors, customers and business partners, while we worked through the restatement. We also appreciate the hard work and dedication of all Beazer ambassadors during this period. Both those directly involved in accomplishing this important task and those who have remained focused on our business and serving our customers during this difficult time in the housing industry.

As previously disclosed, the restatement of our financials was an outcome of now complete independent investigation by audit committee. During the course of this investigation, the audit committee determined that our mortgage origination practices related to certain loans in prior periods, violated certain applicable, federal and/or state origination requirements. The audit committee also discovered accounting and financial reporting errors and irregularities which led to the restatement. We are very disappointed these issues occurred and take these findings and any instances of noncompliance with laws, regulations and company policies very seriously.

The entire management team is committed to achieving and maintaining a strong control environment and an overall tone within our company that empowers all employees to act with the highest standards of ethical conduct. In addition, we remain committed to the process of developing and implementing improved corporate governments and compliance initiatives. During this period we've been working on remediation efforts to address the material weaknesses identified in our internal control over financial reporting.

Examples to date include, the appointment of a compliance officer in November 2007 responsible for implementing and overseeing an enhanced compliance program. Adoption of an amended code of business conduct and ethics in March 2008. With the related comprehensive mandatory training program for all our employees. Changed to an independent third party administrator of our ethics hotline.

Withdraw from the mortgage business in February 2008, the hiring of a new experienced Chief Accounting Officer and reorganization of field operations to concentrate certain financial functions into regional accounting centers. More detail in our ongoing remediation efforts is described in our recently filed 10K.

From the outset we've been fully cooperating and will continue to cooperate with ongoing external investigations and will attempt to negotiate a settlement with government authorities with respect to these matters. We also continue to defend the company's interest in the related civil litigation, including the Securities class action, which have been consolidated by the court. We should expect the plaintiffs to file an amended complaint within 30 days of our 10K filing.

While we will not be commenting on any such filings, we intend to vigorously defend against these actions. Before moving on to discuss the financial results and business developments, I'd like to say that with respect to ongoing litigations, litigation and possible future settlements our public filings to date speak for themselves. Until definitive resolutions have been reached, we're not going to be providing any further comment beyond what is included in those filings.

Turning now to the current business environment, you can see by the results we have released today, market conditions remained very week for the home building industry in the first half of fiscal 2008. Characterized by elevated levels of inventory, significant competition in both new and resale markets, pricing and concession pressures, and consumer confidence levels hindered by economic uncertainty

In response we are maintaining a disciplined and cautious operating approach, as we expect difficult market conditions to persist through the remainder of this fiscal year and into fiscal 2009. The actions we are taking in response to the current market can be divided into two categories. First, in the near term we're very focused on generating cash and preserving liquidity. We are reducing direct costs, overhead expenses and land spending. We're executing selective asset sales and in some cases land swaps. We are also intensely focused on sales and marketing activities to generate orders and reduce inventory.

With all of these initiatives, we currently expect to generate cash in fiscal 2008, to build cash balances, reduce debt or some combination of the two. The second category on medium to long-term strategies, such as our decisions to reallocate capital and resources within our geographic footprint, enter into a marketing arrangement with Country Wide, and further efforts to differentiate Beazer Homes in the eyes of the consumer, such as the recently launched smart design and eSMART initiatives.

Summarizing our results for the first half of the fiscal year, we experienced revenue declines of 37% and 51% in the first and second quarter, respectively, from the same periods in the prior year. These declines were driven by decreases in closings and average selling prices year-over-year. These factors also negatively impacted profitability and margins, compared to the prior year.

In addition, as a result of continued deterioration in market conditions, we also incurred significant inventory and good will impairment charges, resulting in a net loss per share from continuing operations of $3.59 and $5.93 for the first and second quarter of this year, respectively. Also of note, given our decision in February to exit the mortgage origination business, the company has classified the results from Beazer Mortgage Corporation, previously included in our financial services segment as discontinued operations in the second quarter.

Focusing now on Q1. Home building revenues declined 37% for the quarter, due to both a 25% decline in home closings and a 13% decline in average selling price, from the same period in the prior fiscal year. The decrease in home closings was driven by declines in the west and southeast regions offset somewhat by an increase in the mid-Atlantic region. Average selling prices were most under pressure in the west and Florida.

Net new home orders totaled 1,252, a decline of 30% from the prior fiscal year with declines most pronounced in the mid-Atlantic and southeast regions. At 47%, the cancellation rate for the quarter was comparable to the 43% rate experienced in the same period for the prior fiscal year. A decline in net orders and the unusually high cancellation rate in the mid-Atlantic were due in part to cancellations arising from our decision to sell a condominium project in Virginia to an apartment owner. This resulted in the cancellation of over 100 sales contracts.

Resulting backlog as of December 31, 2007 was 2,231 units with a dollar value of $605 million representing a 47% and 53% decline from the unit and dollar value backlog levels as of December 31st, 2006. In the second quarter, home building revenues declined 49% due to both a 43% decline in home closings and a 9% decline in average selling price from the same period in the prior fiscal year.

Closings declined in all regions with the most significant declines in Florida and the southeast. Average selling prices continue to be under pressure again in the west and Florida. In the second quarter, net new home orders totaled 1,956, a decline of 53% from the prior fiscal year, with similar declines across the regions.

The cancellation rate for the quarter was 34% comparable to the 29% experienced for the same period in the prior fiscal year, but down substantially from the 47% experienced in the December quarter. Resulting backlog as of March 31st, was 2,619 units with a dollar value of $673 million. Representing a 53% and 60% decline from the unit and dollar value backlog levels as of March 31st, 2007.

I'd now like to turn it over to Allan Merrill our Chief Financial Officer to further discuss our results. Allan?

Thank you, Ian. Given their magnitude, I'd first like to spend a few moments on the inventory and good will impairment charges incurred in the first half of 2008. As with our 10K filed earlier this week, you'll find expanded disclosures in 10Qs as it relates to impairment charges split between properties held for development and land held for sale, as well as geographic segment.

Inventory impairment totaled $142 million in the December quarter. Of that amount ,$108 million related to properties held for development and $33 million related to land held for sale. Impairments recorded on our held for development inventory resulted from the significant decline in the market that negatively impacting home prices and necessitated increased sales incentives in our efforts to maintain absorption paces. Most impairments were incurred in the western region, where a significant portion of our inventory is located.

December quarter impairments representing 2,000, represented 2,886 lots in 62 communities. In addition, we incurred lot option abandonment charges totaling $27 million in the December quarter representing lots in 28 communities, the vast majority of which were in the southeast region. Joint venture impairments totaled $12.8 million in the December quarter. Included in this, is write-off of $7 million investment in Home Builders Financial Network, or HFN, a joint venture investment established to provide mortgage services to the former mortgage operations.

Inventory impairments totaled $175 million in the March quarter. Of that amount, $119 million related to properties held for development and $56 million related to land held for sale. Impairments recorded on held for development inventory resulted from continuing deterioration in the market. Most impairments were incurred in the west and mid-Atlantic regions.

March quarter impairments represented 3,534 lots, in 85 communities. In addition we incurred lot option abandonment charges totaling $13 million in the March quarter, representing lots in 12 communities. There was a significant increase in impairments related to properties held for sale during the first half of this year as a result of our decisions to reduce inventory risk in general and to exit certain markets.

Joint venture impairments totaled $32 million in the March quarter. As a result of the very soft spring selling season and continued negative pricing conditions, we tested all of our remaining good will balances as of March 31, 2008. We incurred charges totaling $48 million relating to reporting units in Arizona, New Jersey, southern California, and Virginia.

Our land position as of December 31, 2008 totaled just over 58,000 lots, 61% of which were owned, and 39% of which were controlled under option and representing a reduction of 7% from September 30, 2007. The company controlled just over 54,000 lots at March 31, 2008, 64% of which were owned and 36% of which were controlled under option, also reflecting a 7% reduction from levels as of December 31st, 2007.

We've achieved these reductions through the abandonment of options, resulting in the weighting between land owned and land controlled by option, shifting more to own land. This speaks to the purpose of the options, particularly in this type of market. We won't be surprised to continue to see an increase in the percentage of land which is owned, versus optioned if market conditions continue to deteriorate. We continue to exercise caution and discipline with regard to land and land development spending.

So far this year, we've spent about $225 million on land and land development, compared to just over $500 million in the comparable period in the prior year. In fact, we expect full year land and land development spending will be well under $500 million this year, compared to over $800 million last year. As of December 31st, 2007, unsold finished homes and unsold homes under construction totaled 679 and 1,106, representing declines of 49% and 37% respectively from year-ago levels.

As of March 31st, 2008, unfinished homes and homes under construction, totaled 439 and 1,174 representing declines of 39% and 33% respectively from year-ago levels. We have continued to significantly limit new home starts, although in some of the more challenged markets a certain number of spec units are necessary to attract buyers who cannot purchase a new home until they have sold their existing home. At March 30th, 2008, our total debt stood at $1.8 billion, a net decrease of about $85 million from our fiscal year-end in September.

However, net debt to total capitalization stood at 61% up from September due to the impact on our balance sheet of the impairments. At March 31, we had a cash balance of $277 million, which included $3.6 million of restricted cash. As the first and second fiscal quarters are seasonally low in terms of closings, cash used in operating activities was $28 million for the six months ended March 31st. Approximately half of that or $14 million were costs related to investigation and restatement.

In addition, during the first six months of the fiscal year, we repaid $100 million of secured notes and paid a consent fee to holders of our senior notes totaling $21 million. Subsequent to March 31st, we received a cash tax refund of approximately $56 million relating to a fiscal 2007 net operating loss carried back to fiscal 2005. In addition, we currently have pending asset sales with estimated net cash proceeds in excess of $100 million, which are expected to close in the next 120 days. These assets are located both in markets we're exiting and in markets where we maintain a presence.

But have determined that the sale of select assets best optimizes capital and resource allocation. We are continuing to pursue opportunities for the disposition of remaining land holdings in the markets we're in the process of exiting. As far as our revolving credit facility is concerned, as has been the case for two years, we have no cash borrowings outstanding and current availability of approximately $55 million.

On May 13th, 2008, we contained a limited waiver which relaxes until June 30, 2008 our minimum consolidation tangible net worth and maximum leverage ratio requirements, under the revolving credit facility. During the term of the limited waiver, the minimum consolidated tangible net worth cannot be less than $700 million. And the leverage ratio can't exceed 2.5/1. We are currently negotiating an amended covenant package with our bank group and expect to enter into an amendment prior to finalizing June quarter financial statements.

I'll now turn it back over to Ian. Ian?

Thanks, Allan. As I said at the beginning of this call, we're pleased to now be current in financial reporting with the filings we made this week. We look forward to returning customary pattern of releasing quarterly financial results. Allan and I would now be glad to answer your questions and I'd ask the operator to give the instructions for registering your questions.

Thank you. We'll now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) One moment for the first question. Our first question comes from David Goldberg from UBS. Sir, you may ask your question.

Thanks, good afternoon.

Hi David.

The first question is actually on the expected net proceeds from the pending asset sales that Allan mentioned. I would wondering if you could give an idea on what the thought process is and how you kind of determined which assets would go into that? Are they just kind of noncore assets or are they noncore markets? And maybe how you decided upon that number?

Okay, well there are two kind of categories within that. The first are from our exit markets and we have many of the assets in the markets that we had previously decided to exit under contract, but there are also a couple of larger assets and in particular, one large, what was going to be condominium project in the mid-Atlantic that we sold to an apartment owner who was going to lease it out rather than to sell it as condos, that was a large asset. The combination of the exit markets and what I'd call lumpy assets really drove the thought process.

Do you think you're going to be moving away from the condo-based business as you look forward? Is that kind of going away?

Well, I think when we get into significant high rise type construction, that's never been a big part of the business. I don't expect in the current environment that it will be a significant part of the business. We have a couple multifamily projects underway, but this was a particularly large and kind of middle to upper middle end project that had an estimated sell-out over several years. And ultimately the ability to recoup a significant amount of cash for redeployment or for just strengthening the balance sheet made sense to us.

Great and then if I could just get get a follow-up. I'm wondering how you guys were feeling, if you're feeling pressures in terms of foreclosures in terms of home prices? And how intense that pressure is now from a competitive standpoint and where you think that's going to be in the future?

Well David, I'd say that obviously we have to be aware of the fact there are foreclosures out there. You can see it in the average price coming down, we're having to compete with those markets. Our average price, in the second quarter was down to 255 in backlog it's about 257, which has come down depreciably over the past year.

I think that's probably driven by the markets being driven down a lot by the foreclosures. We're certainly impacted by that. We'd try to differentiate our homes. What we're doing in terms of marketing is differentiating, adding value where we can, not just cutting costs, so we want to present our homes as a better asset than necessarily a foreclosed asset.

So I think it's certainly something we have to be aware of and we have to move this inventory through the pipeline. As an industry, before we can see stabilization in price and any potentially raising of prices.

Great, thanks for the detail.

Thanks David.

Our next question comes from Michael Rehaut from JPMorgan Chase.

Hi, thanks, good morning everyone.

Hi Michael.

First question just on orders and average order price trends in the second quarter relative to the first quarter. I was wondering if you could give us a feel for if you felt certain markets slowed materially during the quarter and what was going on with the average order price recalculated it being up sequentially pretty nicely. And just if that had anything to do with the, the greater decline or if that greater order decline was more just a function of exiting those couple of projects in the tougher comp?

I'd say in general most markets are pretty tough. We haven't gotten markets that we're saying have gotten any real improvement. There's a couple markets that stand out against the bad picture which would be Texas still holding up reasonably well even though down somewhat compared to last year less than the decline we've seen across the board.

I'd say, Indianapolis, a strong position for us and again, only slightly down over the last year. Another one, which is somewhat out of character, but is Sacramento, which I think we've seen through pricing initiatives there, we've seen stabilization there. So I think those are the markets that in new order sense are somewhat stabilizing.

In terms of new orders, in terms of average sales price, as I just said, that our average sales price across the country in backlog today is about 257, very comparable to where we closed in the March quarter. So that might show some stability sequentially, obviously it's considerably down compared to last year. Year-over-year our average price in the March quarter was down about 9%. We have to take that into account. We're seeing pricing pressure out there. I think for the foreseeable future we're still going to see it.

You also have to take into account the exit markets which is somewhat impacting those. We're coming out of five markets and not getting full price for those homes. Total understandable. We factored that in to the decision to come out of those markets. So even though that's not a large percentage, you have to factor that in because we're taking fairly substantial discounts to clean the inventory out of those markets and get the cash back in.

Okay, I guess next question is just on the, your geographic focus. As it continues to shift, where do you see, and obviously also as the market continues to contract significantly. And where do you see yourselves two or three years ago, do you want to just concentrate on five to ten markets or do you want to try and keep as broad of a national scope as even with the exit of certain markets? You're still in a lot across different regions. Any particular geography's that you want to focus on more than others?

Well, you've obviously seen us announce the withdrawal of the markets in the midwest in particular and Charlotte for specific reasons. The fact now is that we have to continually look at this. This is something that's an ongoing process. As the market declines, as we have to take impairments, as we reduce our equity base, we have to be very cognizant of the resources we have.

So what we are doing is, continually looking at the strategic plan that we have put into place over the last couple of years and not only saying which markets do we want to be in, but what do we want to be in those markets? What's the right position for us to be? And as you know we have a range of product, whether its from economy value style or even active adults in limited markets.

So I think in each of the geographic markets that we're in, what we're currently doing is really establishing exactly what we're going to deliver in those markets, partly based on the land position we have today. We're not, effectively not buying new land today, but also based on the supply and demand equation in each of those markets. It's something that's fluid. We're going to be moving through the land that we have.

I think as we do get to the point where we can buy new land, that's I think is when we have to make the decision, do we buy that in, what land do we buy in each of the markets we're in? It's a fluid situation, it's evolving, we have to be aware of what's happening in the market and our position within that. Because at the moment it is very tough.

Okay. And one last question if I could, just on the accounting of some of the restatements. I was wondering if you could review the issue with the model home, the model home accounting and how you had accounted for it before and how you do it today and also how that compares to the rest of the industry?

The last part of your question, I couldn't possibly answer Michael in terms of what others do, but in our specific situation, the issue was that we had not properly documented all of the elements of the sale lease back transaction and we determined, actually the audit committee determined in their investigation that there was a contingent and continuing interest in the resale of the model homes that was conditioned upon lots of things happening.

But there was the possibility that it was never actually realized that the company would have a sharing in profits from the sale of models once the counter party did the transaction, sold the homes at the end of the lease period. Had that been properly and fully documented, it would not have qualified under FAS98 for sale treatment and it would have been treated as a financing transaction.

Now the fact is, in the restatement, we treated it as a financing transaction, so you see a liability on the books, that liability doesn't represent actual new debt, it's essentially like deferred revenue. We'll be as we terminate each of the individual leases, we'll be able to bring that back into revenue and into income, in exactly the same dollar amounts that we had historically recognized.

So through, I think the notes we showed, the difference through fiscal year-end 2006, about a $21 million difference in income. That entire $21 million will come back into income as we terminate the leases related to the sale lease back.

I mean, it turns out to be a very technical issue, but this notion of continuing interest in any form has the capacity to spoil the sale treatment and I think when, when all of the details of the transaction were well understood, we decided it hadn't been correctly accounted for.

Great, thanks a lot, Allan.

Ye.

Our next question comes from Dennis McGill from Zelman and Associates. Sir, you may ask your question.

Good morning.

Hi, Dennis.

Hi, my first question just has to do with the capital structure that sits today. You guys are in pretty good shape from a liquidity standpoint and obviously helpful to get current again. When you think about the next couple of years and shrinking your geographic footprint and down sizing the size of the company. What's the longer term plan to get the asset level, particularly inventory level back in line with appropriate debt levels over the next couple of years?

Well, it's Allan. I would say over the next nine months or so, we've been really focused on a couple of things. One, obviously getting the financials restated and two, through our, as Ian talked about, our strategic review of markets, what I'd call in simple terms, the left side of the balance sheet. What level on investment and which markets we want to have.

I would tell you now with our filings completed, we are absolutely starting to look at the right side of the balance sheet and how that ought to be positioned in the near term and longer term. We haven't made any particular determinations about that at this point, but I would certainly say we're mindful of what's happening in the marketplace, we're mindful of the continuing profitability pressures we face. We are mindful of continuing risks in further impairments.

So it's something that we're very focused on and, and I suspect that over time we will take some actions, but at this time we don't have any current plans.

And I guess within that part of -- one of the options you'd receive is additional equity?

Well I think we have to look at the debt to capital for sure. You can see companies operate in bands of 30, 40% of debt to cap up to 50, 60, in the 60s. But I think depending on where you are within that, what the term structure of your debt is, whether or not you're in investment or harvesting mode. You have to be careful not to get caught at the high end leverage ratios with near term maturities, when you should be investing.

And as you said in the preface to your question, we are in a very good position from a liquidity standpoint, we are in a very good position from a term structure of maturity standpoint. So we probably have somewhat less concern about the leverage ratio currently, but it's a mix of the items you have to look at together.

Okay, and if we look on the option side of the business, it looks like there was a tick-up on both the deposits as well as the take down value. Were there new option contracts assigned in the quarter?

Well, it's an interesting question. I suspect in the ordinary course we would have new options, but I am not sure what number you're looking at?

We only had 110 million of option deposits as of 3/31, Dennis.

What was that number again?

110.

110, as of December, it was 130?

Yes.

I may be mixing those up, I apologize. Just on the last question would be related to impairments. Can you give some sense, Allan, what's come back through the income statement through the gross margin line from prior impairments?

I don't have a quick number for you there. It's very difficult to give that kind of detail. In part because we've got so many statement adjustments.

As I'm looking at the numbers in here in addition to impairment numbers. So I'd be doing you a real disservice to even guess at that. I would say that in general, we've been disappointed, as I think most builders have been that impairments don't flow back through quickly when prices are falling at the same time. I mean, you don't really see a pick-up from that because it's offset by subsequent price declines.

It has certainly offset a lot of what anybody would have hoped would have been a pick-up in margin. But there have been a lot of moving parts for us. I think in coming quarters, we'll have a better handle on that. But right now, having just restated the last nine plus years, I reallydon't have a good estimate for you.

I'm sorry, one other one. On the balance sheet, the income tax receivable you have is about 100 million more than you received in May, is that the balance of the expectation, the balance of the expectation of what you'd be able to recoup next year?

I think as a technical matter, our maximum ability to recoup next year can be looked at in the context of the cash taxes that we paid in 2006. We paid $170 million in cash taxes in 2006. You've seen, so far this year, a pretty significant increase in that income tax receivable. I don't know how high it will get, but I will tell you that, that income tax receivable will get larger. It's possible our recovery next year will be up to the full amount of the cash taxes that we paid looking back to two years.

Okay, thanks again. Thank you

Our next question comes from Susan Berliner from Bear Stearns. Ma'am you may ask your question.

Thank you. I apologize, I got on a little late. I just had two questions relating to the bank line. One was I'm assuming that you can't repurchase bonds in the open market, why the negotiation is ongoing. And the second question, if you could remind us the limitations on secured debt, I think when you did the consent in October, it was 700 million less the bank lines. If you could go over that, that would be great.

Well you answered your own question. You've got it exactly right. $700 million is the limitation until we're back to a 2/1 EBIT to interest coverage for four quarters. The bank line is $500 million, so that gives us essentially a basket of $200 million for other secured debt. The first part of your question, related to our ability to repurchase bonds and you would be correct in terms of using capital for restricted payments, whether that is purchasing debt or buying back stock.

And if I could sneak another question. I guess with you selling assets just in excess of $100 million coming in the door and then you will also be generating free cash flow in addition to that for this year?

For the balance of this year, yes.

Did you guys quantify that at all?

We didn't.

Okay, thank you

Our next question comes from Alex Barron from Agency Trading Group. Sir, you may ask your question.

Yes thanks, hi guys. I wanted to ask you, I wanted to know what total percentage of communities I guess have been impaired at least once?

I don't know that number off the top of my head. I'm sure that in Florida and California it's quite high. But I don't have that number, I apologize.

Okay. My other question was, I know, I don't believe Ian [Wray] is your auditor, right?

No, we have Deloitte.

Okay. So I was wondering. I know that there is kind of a difference in views about deferred tax allowance and just kind of wondering what types of discussions you guys are having with them about that issue, potentially having to take in allowance?

There's some language about this in our Q's. We've not at this point reserved against our tax asset, which is I think at March , 31st, about $300 million. There is a point if losses continue and there is no light at the end of the tunnel in terms of the ability to use that, when I think we and Deloitte would come to the conclusion we need to reserve against that deferred tax asset, that's still possible. It's happened with other builders and it may well happen for us. At this point it hasn't happened.

I think as we look at the next couple of quarters, we'll be looking very closely both at the cumulative loss that has occurred over the trailing three and four years as well as the prospective possibility of profits. So I think it's very much an open question whether or not we'll need to, in subsequent quarters take a reserve against that deferred tax asset. But I have to say that it's an excellent question and warrants attention, something we're paying a lot of attention to

Okay, and in terms of just strategy, I guess I've seen some builders that seem to, are trying to get rid of spending spec inventory and like a build to order model. And other guys seem like they are just continuing to try to spec build and just trying to find the price point, I guess, the even flow production strategy. So what are you guys kind of trying to do here?

We'd like to build to order if we can, but with cancellation rates reasonably higher this time, it generates spec inventory. so we are trying to use that as our spec inventory. As we said in the prepared statements, there are certain markets where people are not coming out to buy a new home until they've sold their existing home. Again they want to move in fairly quickly, so we do feel that we need to have some spec inventory.

We're not generally putting a lot out there. We're using cancellation rates to drive some spec inventory and be able to deliver that to people who want a home quickly. So I would say we're more on the build to order side, but inevitably, they're going to be spec out there.

All right, thanks a lot guys.

Thanks, Alex

Our next question comes from Stephen Kim from Alpine Woods. Sir, you may ask your question.

Hey guys.

Hi Steve.

Congratulations on getting your financials out.

Thanks, very much.

I wanted to ask you a question regarding your geographic dispersion of lots that are owned versus lots that are under option. I guess what I'm trying to get at is, is there a different sort of geographic spread between the two?

Well, obviously it depends by market and if you looked at out west, we would tend to have more of an owned position than we have optioned. If you look at the mid-Atlantic, we're fairly well balanced between the two, it is almost equally balanced between owned and options. West is more than 2-1 owned to optioned and then I think if you look at the southeast, it's again, reasonably well balanced.

A market like Texas would, it's fairly easy to buy land there so we don't have to have long options. So again we can buy that there. Currently, as we said in the prepared remarks, we're 63% compared to 36% owned to optioned at this time and that's gone up because we've taken so many of the options out of the equation.

One other point I'd just make, Steve, is that in the exit markets, we were almost exclusively in an owned posture.

Mm-hmm.

Which is, factored into the thinking about what the proceeds would be coming out of that, so that's, that's been one of the things that has also kept the own percentage up. That will adjust here over the next quarter.

Okay, great. Second question I had relates to your backlog. Do you have a sense for where the margins currently reside in your backlog relative to what you reported in the the March quarter?

Well, it's across the board really, Steve, in any one market we've got better assets and not so good assets. So the margins, what we've been trying to do is, individual communities or even markets that we don't feel have got an up turn have got real underlying profitability in them, we've been driving those for cash. And in other communities we feel have got underlying value, we've been less inclined to reduce margins there.

So I would say it really depends on the asset value to the extent, in some cases, with actually multiple communities that we think it's too good to burn through at this time, at the sales price we see today. So you have got the whole spread within a market. You may have multiple assets, markets, communities that are delivering certain margin, and others that are delivering cash. There's no uniformity at this time. It's very much community specific.

Okay, and last question relating to how you compensate your divisional management, sort of operating management in the field. Have you made any adjustments to, to how you are approaching the issue of compensation for those individuals in any way, whether it be the metrics you used or in terms of any kind of guarantees or anything like that, that you can talk about?

Yeah, well obviously over many years we used value created an EVA model to drive the business and drive compensation. In this type of environment, that doesn't work. The compensation committee of the board is well aware of that and so last year, had a discretionary plan in place and underneath that were some sub metrics that the comp committee looked at, to define how a discretionary plan is paid.

And again, the same this year. We have that as well. I don't want to go into the various metrics, but obviously you can understand whether we're looking at unit delivery, whether it's profitability, cash, those are fundamental operating metrics that we're going to look at to determine how we use the discretionary plan.

So I think it's something that we are overall looking at right now in terms of compensation and how we retain the managers that we want to retain, within the company in these tough times. It's something the comp committee have authorized a study at this time that we're looking at for long-term compensation whether through cash payments or salary, cash payments in terms of bonus and then potentially long-term equity enhancements.

So we are going through a study with that right now. But it's a difficult time to come up with a solid, fixed plan, we have to be fairly fluid in terms of market by market.

Okay, great, appreciate it. Thank you guys.

Thanks Steve

Our next question comes from Joel Locker with FBN Securities.

Hey guys.

Hi, Joel.

Just want to know on, just your SG&A still around $74 million and revenues coming down faster than SG&A, just want to get your take on what you can do, lowering overhead or anything else to bring that dollar number down?

Well, as we talked about, in the fall, we had a consolidation of 31 accounting centers down to six. We have reduced that down to five, actually, just since the beginning of this calendar year. So we are very focused on that regional/divisional infrastructure.

At the corporate side, we acknowledged $14 million in the first half in investigation expenses, $17 million which were basically almost exclusively in the third and fourth quarter of last fiscal year, so al ittle over $30 million in investigation expenses on a trailing 12-month basis. So I have said to the team , that they're a bit like the federal budget, in the sense that those are like the interest payments. That's the non-direct examinatory part discretionary part of the cost structure.

With the investigation over, and despite our continuing cooperation in the external investigations, that dollar amount will be able to come down significantly over the coming year and probably represents the single biggest opportunity for cost reduction amongst the fixed elements

Right, and just on your gross margins also, hovering around 12 and 15% for around four quarters and then just dropped 520 bits sequentially from the December to March quarter. Just kind of wanted to know if there was any one-time charges or if that was just price degradation?

There are, I think we broke out the impairments of that.

That's excluding impairments. Went from 12.5 to 7.2 or something like that, 12.3 to 7.1.

It sounds to me like a bit of an anomaly. Because Idon't think it's totally price degradation, it must be a mix issue, it's a very small base of closings in that quarter. So I think let's look at that over a couple of quarters and see, I think in one quarter off a small base, you're mostly seeing seasonality affecting deliveries in potentially lower price markets that are in south as opposed to the midwest or the north.

There are a lot of things that, that could be. I would caution you against jumping into that connection that there is a dollar for dollar margin for dollar connection there.

Plus the exit markets which have a finite life. When we're clearing out of that inventory there, with substantially reduced margins which are not going to trail into future quarters.

So your margins in backlog or gross margins at least are higher than what they reported in the second quarter? Is that a fair assumption?

It is. It is a fair assumption

Alright, thanks a lot.

Thanks, Joel.

Our last question comes from Timothy Jones from Wasserman & Associates.

Hi Ian.

Hi, Tim, how are you?

I'm fine thank you. First of all, the $55 million you talk about available, is that basically your borrowing base?

It is. We have an opt in structure where we decide how many assets we want to put into the borrowing base. We put in enough to cover the LC's that we have issues, we put in additional assets to get access to $55 million.

We're in the process of pushing additional assets in to increase that availability above the 55 million. But given the cash position, the cash tax refund and the asset sales, the, the time spent to perfect the liens and all the work necessary to collateralize assets, it just hasn't been a top priority to push that number up. But we have intent and in fact are working on putting additional collateral in there so that, that availability expands over the coming quarter or two.

So your new borrowings will be secured?

The whole $500 million line is secured.

Okay, all right. So that's, I can understand that. Now the, you still didn't really talk about the deterioration in your orders, between the first and second quarter. One was down like 30% and then 53 %. Somebody asked you the question, but I didn't quite understand your answer.

Well one of the issues, Tim there is that it's difficult to sell week in, week out to the customer in an environment like this. So we've been quite promotional in terms of how we, we sell it. We have two major promotions every year, one in the March quarter and one in the June quarter and I would say the March quarter promotion this year was not nearly as successful as it was last year.

So the comp we had in the March 2007 promotion was substantially higher. We do have another promotion coming up in June, we need that to keep the new orders moving, the new orders moving. It's a tough time at this time. We're certainly aware of the fact that orders are down. Reasonably tough comp in that March quarter because of the big promotion last year.

I didn't realize it's already been a year. Time flies when you're having fun. Last one, just a housekeeping question. If you have to write down, let's say you continue to have losses and do have to write down a portion or all of the $200 million deferred taxes. Most builders, especially the ones using Ernst and Young rather than Deloitte, the banks are adding back that charge to the tangible net worth covenant, do you expect that to happen for you?

Yes.

Thank you.

Thanks, Tim. Operator anymore questions?

Mr. McCarthy, we have no further questions.

Thanks very much. Well thank you operator. I'd like to take this opportunity to thank all of you for joining us today. And to remind you a recording of this conference all with the slide presentation will be available this afternoon in the Investor Relations section of our website Beazer.com. Thanks very much. Good-bye

This concludes today's conference call. You may disconnect at this time.