Beazer Homes USA Inc (BZH) 2009 Q1 法說會逐字稿

Good morning, and welcome to the Beazer Homes first-quarter of fiscal 2009 earnings conference call. Today's call is being recorded and will be hosted by Ian McCarthy, the Company's Chief Executive Officer. Joining him on the call today will be Allan Merrill, the Company's Chief Financial Officer, and Bob Salomon, the Company's Chief Accounting 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, you may begin.

Thank you. Good morning and welcome to the Beazer Homes conference call on our results for the quarter ended December 31, 2008. During this call we will webcast a synchronized slide presentation. To access the slide presentation, go to the investor home page 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. 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 Form 10-K for the year ended September 30, 2008.

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.

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. We are also joined by Bob Salomon, our Chief Accounting Officer.

In the interest of time and allowing everyone a chance to ask questions, we do kindly request that you limit yourself to one question and then one follow-up. I'll now turn the call over to Ian McCarthy.

Thank you, Leslie, and thank you all for joining us on the call today. Before we begin our discussion of the results we released this morning and the current business environment I would like to make a few brief comments on the company-specific issues that we continue to work through.

As previously disclosed, Beazer Homes and our subsidiary Beazer Mortgage Corporation, are under investigation by the US Attorney's office in the Western District of North Carolina and by other federal and state agencies concerning matters that were the subject of our audit committee's previous independent investigation. We continue to fully cooperate with the ongoing external investigations and to defend the Company's interest in the related civil litigation.

At this point I would like to confirm that with respect to ongoing investigations, litigation and possible future settlements, our public filings to date speak for themselves. And until the definitive resolutions have been reached we cannot provide any further comment beyond the details included in those filings.

We remain absolutely committed to our enhanced compliance program and our code of business conduct and ethics. We're also pleased to welcome Kenneth Khoury to Beazer Homes who joined us as Executive Vice President and General Counsel in January. Most recently Ken was general counsel at Delta Airlines and his 30 plus year legal career has included both private practice and extensive in-house counsel experience including 15 years with Georgia-Pacific. His depth of experience managing a broad array of corporate legal activities across multiple and complex industries will be extremely valuable as we navigate the current challenges in the housing markets.

Turning to the business environment, I am sure it comes as no supplies surprise when we say that the housing industry continues to face the most difficult business conditions in many decades. During our first fiscal quarter this challenging environment was greatly exacerbated by continued weakening in the overall economy characterized by rising unemployment, low levels of consumer confidence and ongoing disruptions in the financial and credit markets, all of which negatively impacted buyer demand for new homes.

Against this backdrop we continue to adapt to the reality of lower home closings by further reducing our cost structure. Combined with our disciplined focus on generating and maintaining liquidity, we believe these actions will help us weather this unprecedented housing environment.

We currently believe that any economic stimulus plan ultimately passed by Congress will address housing, which we view as a positive, but exactly what form that takes remains unclear. In the meantime, and until there are signs of stabilization on the horizon, we continue to diligently focus on controlling what we can to best position ourselves in the current environment and as such we maintain a very disciplined and cautious operating approach.

Our financial results for the first quarter are a reflection of the difficult market and economic conditions that we and our peers continue to face. Nonetheless we reiterate that in these difficult times maintaining and enhancing a sound financial and liquidity position remains our top priority.

At the same time we continue to implement near- and long-term strategies aimed at returning to profitability and positioning ourselves for the eventual market recovery. These strategies include continuing to pursue direct cost reductions and efficiencies in our business; reallocating capital end resources within our geographic footprint; and differentiating our homes through our SMARTDESIGN and eSMART initiatives.

This past weekend marked our third annual February promotion and this year we focused the promotion on our eSMART value proposition through an eco-sales event, encouraging buyers to save money and save energy with the purchase of a new Beazer home. While the preliminary sales count was below last year's level, it represents an important and hopefully sustainable improvement from the levels experienced during the first fiscal quarter.

On the cost reduction front we have taken meaningful steps throughout the downturn and continue to do so. As of December 31, 2008 we had reduced overall headcount by 32% from levels at December 31, 2007 and by over 70% from peak levels in early 2006. In January we took the difficult decision of further reducing our headcount by approximately 300 and also flattened our structure by eliminating our regional organizations. We expect to incur approximately $4 million in severance and other costs related to this reduction in force during the second quarter of this fiscal year.

While such decisions are not taken lightly it has been necessary to continue to align our cost structure with the reality of lower home closing volumes as the housing slowdown has persisted. Over this time period, in order to improve efficiencies we have reorganized marketing, purchasing and accounting functions and consolidated certain divisions. Our SG&A expenses for the first fiscal quarter declined 36% compared to the same period a year ago and approximately 50% compared to two years ago driven in large part by these actions.

In terms of direct construction costs we continuously collaborate with supply-chain partners and conduct ongoing contract review and negotiation. In addition, we continue to achieve direct lower home construction costs through reductions in house plans and specifications, SKU rationalization and intensive value engineering. We've also recently appointed one of our most experienced senior operating managers to head up an even more focused initiative to further streamline every aspect of our purchasing and procurement activities and further implement best practices across the organization.

Let's now review our financial results for the first quarter of fiscal 2009. For the first quarter we experienced a total revenue decline of 54% from the same period in the prior year. Total gross profit for the quarter before impairment and abandonment charges declined 150 basis points to 11.4% year over year, but improved by 450 basis points from 6.9% in the September quarter.

The sequential improvement is attributed to the benefit of previous impairment charges, a sequential increase in average selling price due to mix, as well as lower direct construction costs and a greater level of rebate income. After impairment and abandonment gross margin for the quarter was 5.9% compared to a gross loss of 20.8% for the comparable period of the prior year. This was a result of lower inventory impairments and option contract abandonment charges in the first quarter compared to the first quarter of the prior year.

Net loss from continuing operations was $2.08 per share compared to a loss of $3.57 per share in the prior year. For the first quarter home building revenues declined 53% resulting from a similar decline in home closings while the average selling price of homes closed during the quarter was generally flat compared to the same period of the prior year.

Our year-over-year consistency in average selling price was due to changes in both product and geographic mix as generally housing prices continued to fall across the country during the past year and continued to exhibit weakness during the quarter.

To help illustrate how aggregate changes in average selling price do not necessarily provide clear indications of overall pricing trends, our two markets with the highest level of closings, Indianapolis and Houston, each had year-over-year average selling price increases of approximately 8% to 9%. In other markets, including several in Arizona, California, Nevada and Florida, we experienced double-digit declines in average selling price year over year, indicative of overall pricing trends reported in these and many other areas of the country.

Home closings declined in all segments with the most significant declines in the East, Southeast and, not surprisingly, our exit markets. It's important to note that we have essentially completed our remaining home building activities in the exit markets which comprise our other home building segment. As of December 31st we only had 10 homes left to close, four of which are currently in backlog.

In light of the significant turmoil in the economy and financial markets during the quarter, there was a general hesitancy by consumers to make home purchase decisions. As such we did not pursue a strategy of offering additional sales incentives or sales price reductions in order to generate additional sales based on our belief that such a strategy would not significantly improve the level of new home orders for the first quarter.

Based on this strategy new home net orders totaled only 545 for the quarter, a decrease of 56.5% from 1,252 net orders in the first quarter of the prior fiscal year. Net orders declined 49.4% in markets with the Company maintains a presence and 93.9% in the exit markets. The cancellation rate for the first quarter was 45.6% compared to 46.6% for the same period in the prior year. Resulting backlog as of December 31, 2008 was 965 units with a dollar value of $227.2 million representing a fixed 57% and 63% decline from the unit and dollar value backlog levels as of December 31, 2007.

I'd now like to turn it over to Allan Merrill, our Chief Financial Officer, to further discuss our financial results and other items. Allen?

Thank you, Ian. First I'd like to spend a few moments on the various non-cash inventory-related and goodwill impairment charges incurred during the first quarter. As with our previous filings, you will find additional disclosures as it relates to impairment charges by segment in our 10-Q which we will file later today.

Inventory impairments totaled $12.2 million in the December quarter; of that amount $12 million related to properties held for development and the remainder related to land held for sale. Impairments on held for development inventory were primarily in the West and East segments; the December quarter impairments represented 339 lots in six communities.

In preparing our first-quarter inventory impairment analysis we attributed much of the decline in new home orders to the unprecedented macroeconomic events which led to a significant curtailment of consumer purchases including homes, cars and other big-ticket items. As Ian indicated, we did not offer additional incentives during the quarter to chase volume.

As we indicated in our press release issued this morning, if we resume offering additional sales incentives or sales price reductions in response to further market deterioration, it is possible that such changes could lead to additional impairments and that the level of reduced inventory impairments for the first quarter may not be indicative of future levels of impairments.

During the December quarter we also incurred lot option abandonment charges totaling $465,000 and further reduced the carrying value of our interest in joint ventures by $1.3 million. Finally, we recorded a pretax $16.1 million goodwill impairment charge related to the Company's goodwill in Houston, Maryland and Nashville. As of December 31, 2008 we had no goodwill remaining recorded on our balance sheet.

Our land position as of December 31st totaled 36,642 lots, 75% of which were owned and 25% of which were controlled under option. This reflects reductions of approximately 8% and 37% from levels as of September 30, 2008 and December 31, 2007 respectively. Excluding property held for sale, 46% of our remaining owned lots were either finished lots or lots upon which home construction had commenced; only 1% was in the form of raw land.

We continue to exercise caution and discipline with regard to land and land development spending. During the first quarter of fiscal 2009 we spent $59 million on land and land development compared to $108 million for the same period a year ago. The land and land development expenditure for the first quarter included approximately $20 million related to the renegotiation of several land banking arrangements which enabled us to complete land purchases at meaningful discounts to previously contracted prices.

Together with approximately $10 million in purchases made in the fourth quarter of fiscal 2008 and $20 million of purchases to be concluded during the second quarter of this fiscal year, we will have satisfied our obligations under these arrangements. The remaining $20 million is included as options with specific performance provisions in our consolidated balance sheet under other liabilities.

This was a situation where our liquidity allowed us to capture a significant discount on future lot prices in several of our existing communities. We do not have any other sizable multi-market land banking arrangements that are subject to similar opportunities.

As we indicated last quarter, based on current sales spaces we have relatively few active communities that will require significant land or land development spending in 2009. In light of this, and with our intense focus on maintaining liquidity, our current expectation is that land and land development expenditures will be below last year's level of $333 million by approximately $100 million.

We continue to maintain strong discipline with respect to new home starts and speculative inventory. As of December 31, 2008 we have 503 unsold finished homes and 597 unsold homes under construction, representing declines of 26% and 46% respectively from year-ago levels. The modest sequential increases from September 30, 2008 are representative of the natural seasonality of the business as we prepare for the spring selling season.

As of December 31, 2008 our total debt stood at $1.7 billion, decreasing about $46 million from the prior year and $11 million from September 30, 2008. We had cash and cash equivalents of $437 million compared to $584 million at September 30, 2008 and $237 million at December 31, 2007.

There have been a fair number of questions about the sequential decline in our cash balance from our fiscal year end in September. The September quarter is historically a high water mark for us as it relates to cash balances and is usually our strongest quarter in terms of home closings. Consistent with the seasonal nature of our business the December quarter is traditionally a use of cash quarter as we generate fewer closings coupled with investment needs in advance of the expected seasonal increase in sales in the spring. This was the case this year as well.

In addition, we made the $20 million purchase of land related to the land banking arrangement, had approximately $48 million in interest payments and, as previously announced, restricted approximately $19 million in cash to sufficiently collateralize our outstanding letters of credit under our revolving credit facility. As such we don't think changes in cash during our first fiscal quarter should be extrapolated to arrive at an estimate for the change in cash for all of fiscal 2009.

We continue to be in an environment of very low visibility for the business; this includes visibility into the effects of any stimulus plan which is yet to be finalized. As such we are not prepared to give a year-end cash forecast at this time. I can say that owing to the $168 million tax refund already received, our large concentration of finished lots and the associated reduction in anticipated land spend, our efforts to reduce overheads and of savings we are achieving in direct costs, we are making every effort to maximize our cash position as we work through this fiscal year.

It is possible that we will generate cash this year, but that will be dependent on the number of home closings which we cannot predict at this time. At December 31st we had no cash borrowings under our secured revolving credit facility and had no plans that would require cash borrowings. As a result of changes in the collateral pool we will post an additional $1.7 million of cash to fully collateralize our outstanding letters of credit. I'll now turn it back over to Ian.

Thanks, Allan. Before opening it up to questions I would like to express my appreciation to our many stakeholders. In particular I'd like to thank all of our Beazer ambassadors for their tireless efforts during the first quarter who will be instrumental towards achieving our primary objective of generating and maintaining our liquidity throughout fiscal 2009 and positioning us for a return to profitability upon a market recovery. We would now be glad to answer your questions and I would ask the operator to give the instructions for registering your questions.

(Operator Instructions). Michael Rehaut, JPMorgan.

Thanks. Good morning, everyone. First question just on the cash -- I know you gave as much as you could basically and there's still a lot of variability in terms of what -- how things are going to play out the next nine months. But then -- Allan, when you said it's possible you can generate cash this year, were you referring to pure cash flow from operations exclusive of or excluding tax refunds?

Thanks for the question, Michael. No, and I appreciate the chance to clarify that. I think the indication that I was giving is that our cash balance at the end of the year has the possibility of being greater than what it was at the beginning of the year or the end of our prior fiscal year. But that will be directly tied to closings which we're not forecasting at this time.

Right, but are those comments -- so those comments include the cash tax refund and --?

Yes.

That's correct. And so, can you give us an idea of what type of units or closings you would need to get to a positive cash flow?

At this point we're going to refrain from making those kinds of guesstimates.

Okay. Second question just on the capital structure. I know you've kind of been hamstrung by the litigation and investigations that are pending right now. Any update to efforts to recapitalize or what you're -- in that arena? At this point you have inventory that is -- inventory and cash that's about only 20% above your debt. Given further impairments that could quickly fall below. So just any strategy or insight into how you're thinking there?

I guess the two comments I can make -- or remake, I guess. Firstly, we continue to expect to -- or it is our plan to attempt to resolve the issues with the regulatory authorities before we address the right side of the balance sheet and that continues to be the case. And secondly, as we have been for some time, we continue to be in an active listening mode an we've had lots of constructive suggestions from all sorts of constituents about things we might consider and we continue to receive those suggestions.

Okay, thank you.

David Goldberg, UBS.

Thanks. Good morning, guys. First question, is actually on the impairment charges and just trying to get an idea -- given that you guys decided to stop cutting prices and the way the mechanics of the impairment testing work, did you consider using a lower price in your indication of impairment tests to reflect what kind of pricing you might need to actually clear sales at this level where you are today?

David, it's obviously a complicated set of questions tied up in that. I think what we have typically done is relied on the facts of where we're selling prices and absorptions, where our competitors are selling prices and absorptions. When prices are lowered, and that's a fact that is manifest in home sales contracts, that clearly factors into the equation in doing the impairment testing. We made a number of sales, obviously it was down 54% from last year, but we made a number of sales during the quarter without having to offer the so-called extra inducements.

So we used the facts of our pricing and absorptions in our impairment analysis as we always do. What we didn't do was try and chase an extra 100 or 200 or 300 units with price because had we done that then we would have had to consider whether or not those prices were indicative of current market trends. And what we tried to say is that we wanted to get into the spring selling season out of what is obviously the weakest period seasonally and all of the macro issues that were happening in the quarter to have a better sense of where markets were. And I think over the next 90 to 180 days we'll have a pretty good sense of that. And then if things change our impairment calculations will reflect that.

Thank you, thorough answer and I appreciate the detail. I guess the second question -- I know you can't talk too much about the investigations, but just trying to get an idea on the timing, it seems like this has dragged on a little bit longer than maybe people thought it was going to. And why is the investigation, as kind of broad high-level details -- why is it taking longer? It's not potentially broader in scope or anything like that. And maybe you can give us an idea of when you would expect that we could get some sort of resolution on it?

David, it's very difficult for us to give any further clarification on that. As you know, we really can't. All we can say is what we've said in our filings and we are actively trying to resolve those issues and cooperating with the authorities wherever we possibly can to resolve it. And we understand that it appears to have taken some time, but I can assure you that we have a commitment to trying to resolve it.

Great, thank you.

Ivy Zelman, Zelman & Associates.

Good morning. Actually it's Dennis on for Ivy. I was just hoping you could provide a little more color on the option contracts that you mentioned you had exercised through the land banks as far as what areas are these contracts in, what was the pricing relative to the initial pricing and how do you feel comfortable that you're getting those at absolute attractive pricing as opposed to looking at it relative to the prior pricing?

Well, obviously that was all factored in. This related to nearly a dozen different individual land banking agreements that had the same counterparty and we looked at that in the aggregate and looked for an opportunity to, as I said, dollar cost down our pricing.

I think the fact that we had cash gave us a lot of leverage in that discussion. We clearly were aware of our current sales prices and what was happening from a competitive standpoint. So I think we had some market indications of value and it wasn't solely done in the context of what the historically contracted values were. And we thought it made sense.

These are all individual decisions, but because we had the ability to take a group of these and deal with them in total with one set of negotiations we just thought it made good sense and it was purely optional, it was an opportunistic decision by us and one that we think will benefit us going forward.

Given that distressed land opportunities I would think are going to be more plentiful as we move forward and where your balance sheet is currently, wouldn't it have made more sense to just park the cash on the balance sheet and walk away from whatever the deposit might have been?

Between deposits and what the long-term obligations were going to be in those communities we certainly looked at that. But these are active selling communities; there was no incremental overhead, no incremental expense on our part to achieve these savings. I think anytime you do distressed asset purchasing or negotiations, that asset got distressed for a reason and so there's a risk of not knowing what you don't know dealing with somebody else's assets.

These are assets in many cases we had been working through for years and we know them inside out. We knew them better than anybody. So I think others may have a different view; we thought this was a very prudent course of action to reduce our cost and to use our balance sheet in a limited way while still bringing down our aggregate plan in land development spending by a material amount in the quarter and for the year.

How many of your remaining option deposits would be tied to similar land banking arrangements?

None, really. We said that essentially there aren't any other large land banking type arrangements that we have. We have individual options in select markets, but there aren't any other larger opportunities that exist within that portfolio.

Okay, that's helpful. And just one quick question as it relates to the spec. You had mentioned that the increase was seasonal. I'm just trying to -- maybe you could elaborate on that a little bit more. Because I think our number shows up maybe 25% and obviously the sales pace was down and you're not incentivizing to the same degree. So I'm trying to understand the expectation as you head into the calendar first quarter as you're building that spec?

I think it was about a 12% increase, but I think the issue in part was -- well, two things. One, we ended the year September, our fiscal year, with sales actually being up year on year. And as a result of that that was one of the factors that we considered. Obviously after September 15th with Lehman and all the things that happened in the market at large, that changed.

But we had gotten down to such low levels homes under construction at any stage of completion that as we looked into the spring selling season with any kind of improvement at all, even below last year's level, but any kind of improvement at all we were at a real risk of being at a disadvantage of not having homes that could be delivered in a relatively short period of time for buyers. And with the emphasis on first-time buyers and with home buyers who have sold a home having a home available within a reasonable period of time seemed to be a smart strategy.

So it's up a little bit, but I think it's still -- on an overall level I think if you take the two numbers together it's about 1,100 homes under construction. We're talking about two and three homes per community at various stages of construction that -- we're very comfortable with that level of construction exposure.

Dennis, this is certainly an area that we control very closely. But when you have cancellation rates in the mid-40s that's going to throw some specs back into the system. But it's something we look at all the time.

Okay, fair enough. Thank you.

Larry Taylor, Credit Suisse.

Good morning. Just following up on Dennis's question. When you look at what's going on in DC, would something like this [$15,000] credit, if it were to pass and become law, change your view towards specs? Would you turn the dial up at that point or would you wait (technical difficulty) to see what the impact on demand was?

I think we can tell you just from the experience this weekend -- as you know, over the last 10 days or so there's been a lot more talk about housing now. The Administration, Congress are all talking about housing, how they have to address it, one through foreclosure modification and the like. And then secondly talk of this $15,000 credit.

The traffic that came out this weekend and the people who bought was certainly talking about that. They would expect to be the beneficiaries of this if this went through because I believe, assuming it goes through, it will be on closing not on purchase and not on signing a contract. And there's a lot of discussion amongst the buyers who were out this weekend.

So I would say we believe, yes, there would be a positive impact of say a $15,000 tax credit; I think there would be a benefit and if we saw that benefit in the traffic coming through then certainly we might look to look at the inventory levels that we're holding. Obviously we'd rather make presales, but obviously we'd look at that as we went forward.

So a lot of complicated factors to take into account here, but I think you can tell by the way that the housing market, for sale market is at historically low levels, the apartment market is really suffering as well. There are a lot of buyers, potential buyers doubling up at this time, going back to live with their parents and the like. And I think historically you'll see that any stimulus to the economy I think will generate some activity. So we really do believe that that is a very positive impact if it comes through.

Okay. And then -- thank you. And a separate question. When you look at your spend, and I think you gave a number that if net it out is something in the low to mid 200's for your spending this year on land. Is that going to include any additional option payments that might be required?

Well, the total will have in it $40 million of the $50 million associated with the restructure of these various land banking agreements. Is there a single new deal in there? There might be. I don't know off the top of my head, but there isn't an expectation of a significant expansion of new communities, that's for sure.

Okay, but those numbers include (multiple speakers) those payments?

Yes, they do, they do, otherwise they would be down more, that's the punch line.

Okay, thank you.

Lee Brading, Wachovia.

Just a follow-up on that one question on the land spend. Kind of backing (inaudible) roughly 230-ish or so for the year in land and land development and you spent I guess in Q1 $60 million, is it simple just run rating we should be looking at about $60 million a quarter or is most of it going to hit in the next couple of quarters?

Well, we said that there's a $20 million component to the restructure that will occur during the current quarter. That amount will not be recurring and so it isn't going to be absolutely straight lined, it will be more heavily weighted toward the nearer part of the remaining fiscal year.

Okay. Just remind me too on the inventory, we had the line item land held for sale about $83 million, any update on the status of that and any nibbles out there on that?

Well, there is good dialogue and that's obviously something that we have to look at every quarter and we made a very modest adjustment to the carrying values in those assets during the quarter. I would say that we have active marketing efforts underway on all of those. The calendar fourth quarter and our first fiscal quarter just was an extraordinary period of time to try and complete any sale and so there was very little done. I think we still have confidence in our ability to monetize that asset group and we did pretty well with it last year. So I don't think that's misplaced confidence.

Okay. On the gross margin, ex impairments decent gross margin this quarter. Obviously one of the reasons I would imagine would be just you guys holding your sales price at this point. A couple items -- is gross margin in the backlog, can you give me any indications on that? And also just is there a target that you're comfortable with? If you can hit a 10% to 11% area, that seems to be an ideal spot for you guys right now?

I wish the business was so fine-tuned that we could just pull levers and manage to the gross margin. And let me correct one thing -- I think it's important that what we did with pricing in the quarter from a sale standpoint would have had very little effect on margins in the quarter because, as you would know, the closings during the quarter would have related primarily to sales in prior period. So I just want to make that point of clarification.

I don't think there is a bright line target that we could give you. Obviously we're encouraged to see some improvement there. Over the next couple of quarters we'll see whether that's starting to form a new baseline or whether there are opportunities for further improvement from there. But at this point I don't have a specific numerical target for you.

Is it around this ballpark in the backlog?

Well, we're not going to talk about the backlog margin simply because it's not a metric that we have computed in and generally made available. I would say that there's nothing that I'm aware of that we feel compelled to disclose that's scary or different by order of magnitude in our backlog. But I don't have a particular number for you.

Okay, thanks.

Joel Locker, FBB Securities.

Just was curious on the SG&A, if you had any -- or the amount of restructuring severance or litigation charges you had in the first quarter?

In the quarter we had about $1 million in severance expense and a little over $2 million of investigation-related and legal fees. I think there will be some disclosure about that in the Q when we file it today.

Right. No other restructuring or taking a division down or anything -- or will that hit the second quarter?

Well, the severance -- Ian mentioned that we'll have about $4 million in severance during the current quarter related to the reduction that we had in January of about 300. So that will affect the next quarter.

Right. And the last question -- on your senior bond covenants, do you have a tangible net worth where you have to redeem some of the bond's partial redemptions? And with that minimum tangible net worth covenant are tax valuations allowed of yet do you know?

I'm not sure I got the last part of the question.

Of the tax valuation allowances, are at those allowed to compute with the minimum tangible net worth covenants for the senior bonds?

I don't believe so. But the answer to your first question is yes. Most of the senior notes do have a tangible network covenant at the $85 million level. And if it were the case that our net worth was below $85 million for two quarters we'd have an obligation to make an offer to purchase up to 10% of the notes at par.

So it's just 10% then?

Yes.

All right, thanks a lot, guys.

[Garlan Buchanan], Babson Capital.

Good morning. Would you expect any benefit from any kind of NOL look back that may be pending?

We would have a modest benefit, but because of the change of ownership that has occurred, unless there was some subsequent change to the 382 language which is independent at the five-year carry back, then the effect on us would not be very significant.

Okay. And then looking at slide 15, owned lots, and then also your press release on the inventory breakdown. All those finished lots, those are within development projects in progress?

Yes.

Okay. And then lots for current and future development, what is the split between those and land held for future development and development projects in progress.

We don't have a breakdown on that.

Okay. All right, thank you very much.

Timothy Jones, Wasserman & Associates.

I don't know if I missed it, did you -- what was that $18.3 million charge in other expenses? What did it comprise of?

Tim, that's the interest expense that does not get capitalized under the interest capitalization rules. So that's direct interest expense.

I got it, okay. And you seem to -- you have a tremendous amount of land right now relative to your business, especially this $400 million of land held for future development. Does that bother you that you may have too much in that respect given the outlook for the industry?

No, I think, Tim, we've looked at the land that we're using today, the land is held for sale and the land is held for future development. We look at that all the time. We think those are assets that have future value to the Company and so we're holding on to those; they've been mothballed at this time. But if we feel at any time that it's not something we want to use in the future or the business goes down further then we'll certainly look at that and decide whether we need to move that across to land held for sale. But we look at that all the time.

Could I get a clarification on something you said in your presentation?

Sure.

You said that -- and I was wondering, you really did not -- you said that that you only took $12.7 million of impairments on the land and that it was not indicative of future outlooks for the rest of the year. Could you go a little more into that for me, please?

Tim, it's Allan. I think we said that we took $12 million, that was what the impairment modeling and testing provided. What we said is if house prices or inducements, concessions increased during the balance of the year it's possible that impairments in future quarters will be higher. Because any reduction in price or increase in incentives given to buyers would be a negative factor for the impairment testing models and we didn't do much of that in the first quarter.

So we just said that the smaller impairment number, in light of the operating strategy that we had, is appropriate. If the operating strategy is changed as a result of deterioration in the market there it leads to lower prices or greater incentives to buyers and could have the follow-on effect of having future period impairments be larger.

But to be clear, Tim, we're not forecasting here that there are going to be substantial incentives going forward, we're just not sure. And I think if, as the previous caller talked about a stimulus package, if a stimulus package did come in and started to accelerate the sales rate, then that might mitigate against future incentives. There are a lot of unknowns at the moment.

I will say that I think that new home pricing was really impacted last year by the foreclosures, but I think now buyers see the difference between new homes and foreclosed homes. And I think there is a good job being done by the industry in terms of differentiating that. As I said this weekend, we worked very hard in our sales campaigns to talk about not just the initial purchase price of the homes but the cost of living in the home with the energy features that we're putting in.

So a lot of things like that I think are going to somewhat mitigate against some of the future prices that we're going to have to offer to bring the buyers back. So there are a lot of factors that we don't understand today. We're not forecasting for this -- on this call that we will have substantial impairments in the future, it's unknown at this time. There are too many variables at this time.

Thank you.

Alex Barron, Agency Trading Group.

Good morning, thanks. I wanted to ask you do you have some sort of number for how many lots or what percent of your communities have been impaired at least once?

I think there may be some disclosure about that in the 10-Q. I don't have that in front of me. But we have given that kind of disclosure -- I know we had it in the K and I'm sorry I don't have that right at my fingertips.

Okay, that's fine. I also wanted to ask, do you have the benefit to gross margins from previous impairments?

Yes, I can tell you that that number was in the $25 million range.

Okay. How about the interest expense through cost of goods sold?

That will all be broken out in the 10-Q, including the piece that's directly expensed as well as the piece that's included in cost of sales.

Okay. All right, thanks a lot.

Jim Wilson, JMP Securities.

Thanks. Good morning, guys. I was wondering, as you look forward at the full-year land spend, could you give a little color on -- with what you've reworked on option takedown thoughts versus further land development on existing holdings? And the second part of that would be has there been any change in focus on geography or could you even just highlight where a lot of that actual land spend is likely to occur geographically?

Jim, it's Allan. It's hard to say, there are a lot of factors and I think you just did a good job of listing many of them off. I think I'd start with the point that if you take the land banking restructure out of the equation, we're really suggesting a level of land and land development spending that's on the order of half of what it was in the prior year.

And it is comprised of some land acquisition and that would typically be in the circumstance where we're taking the unfinished lots in conjunction with home sales and we're on a program that we're comfortable with that we continue in. There's a very small part of that that would continue to be in the land development side because, as we've said for a couple of quarters now, with such a large concentration of finished lots or nearly finished lots we're not really facing major land development expenditure in any of our markets.

In terms of trying to segment it by geography, certainly there's none being spent in the exit markets, but I would say that there is probably some combination of land or land development spending in each of our markets over the balance of the year.

All right, fair enough. Thanks.

(Operator Instructions). Michael Rehaut, JP Morgan.

Thanks. I just had a follow up on an earlier question regarding senior notes tangible net worth covenant. You said that if it was under $85 million for two quarters you'd need to buy 10% of the outstanding notes at par?

Correct.

Does that apply to the entire $1.677 billion of -- in the long-term debt bucket? I know that there are different notes and issuances there. If you could just clarify.

Yes. It doesn't apply to the convert which is $180 million and it doesn't apply to the sub debt. So I think the total principle amount is in the range of 1.35.

Okay, great. And would you -- it would just be a one trigger of a 10% or if you continue to be under that for additional quarters would you have to buy 10% every quarter or would there be any change to that?

No, my recollection, Michael, is that it's every six months. So I think that that would be a continuing obligation after the first six months. We're obviously not there now and so we're at least six months away from facing it the first time. I'll be happy to look at that and confirm it to you. But of course it's also in all of the indentures. So I'm sorry I don't know that. But I think it's a continuing obligation.

Okay. And then just one last clarification. You said there was 503 unsold finished specs and 597 of unsold specs under construction?

In various stages, yes.

Okay, great. Thank you.

Garlan Buchanan, Babson Capital.

A quick follow-up. Regarding the backlog, can you give any figures around how much would need to be invested to bring those to sale?

I don't think we have that figure at hand, Garlan.

All right, thank you.

Joel Locker, FBN securities.

Just on the tangible net worth, where did it stand at the end of the first quarter? I can see where equity is, but I just wanted to get the number on the tangible net worth.

It's a little over 250.

A little over 250. All right, thanks a lot.

Alex Barron, Agency Trading Group.

Thanks for the follow-up. I was wondering, what is the criteria that causes you guys to expense interest versus being able to capitalize it? And my quick follow-up was where on the balance sheet are any CDD obligations?

Well, the CDD obligations are described in the footnotes in the financials. They're not on balance sheet liabilities. As it relates to the interest capitalization, that's a -- it's a complicated thing, but the simple way to think about it is there's a pool of assets that are eligible for capitalization, there are others assets that are not eligible for capitalization. You can only capitalize the portion of your interest in proportion to the portion of your assets that are eligible for capitalization.

And so there's a ratio there that a portion can be capitalized and is and then is relieved through cost of sales. The other portion is directly expensed. I think beyond that I'll be happy to talk to you about it off-line, but I think that's probably all the audience cares about at this point.

Okay, that sounds good. I'll probably follow up with you. Thanks.

I'll now turn the call back over to Ian McCarthy for closing comments.

Thank you, Operator. I'd like to take this opportunity to thank all of you for joining us today and a recording of this conference call with the slide presentation will be available this afternoon in the investor relations section of our website at Beazer.com. Thanks very much.

Today's conference has concluded. You may disconnect your phone at this time.