Beazer Homes USA Inc (BZH) 2009 Q2 法說會逐字稿

Good morning and welcome to the Beazer Homes second quarter 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 the instructions on accessing the Company's slide presentation and will make comments regarding forward-looking statements. Miss Kratcoski, you may begin.

Thank you. Good morning and welcome to the Beazer Homes conference call on our results for the quarter ended March 31st, 2009. During this call we will webcast a synchronized slide presentation. To accession the slide presentation, go to the Investor home page of Beaver.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 30th, 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, Senior Vice President and 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 current business environment and the results we released this morning, I would like to review the status of the discussions with the US Attorney for the Western District of North Carolina regarding their previously disclosed investigation.

The Company has had several discussions with the US Attorney to negotiate a possible resolution of its investigation. Although we have not reached an agreement on such a resolution and cannot reasonably estimate the Company's total liability, we recognized expense in the quarter ending March 31st, 2009, of approximately $11 million and $2 million to cover payments that we believe are probable and reasonably estimable for fiscal years 2009 and 2010 respectively. Our negotiations with the US Attorney are continuing and we believe future additional payments are reasonably possible. Though there is no agreement with the US Attorney, such negotiations have included the possibility of future payments linked to the Company's ability to return to generating positive earnings and a limit on total liability of approximately $50 million over 60 months. There can be no assurance that we can conclude an agreement with the US Attorney on these terms or on any financial or non-financial terms that are mutually acceptable. At this point until a definitive resolution has been reached, we cannot provide any further comment beyond what we have said today.

Earlier this week we also announced the settlement of the securities class-action lawsuit in which the case will be dismissed with prejudice in exchange a for monetary payment of $30.5 million. The Company did not admit any liability and will receive a full and complete release of all claims. Amounts paid on behalf of the Company will be funded through insurance proceeds, and as such, no monetary payment will be made by the Company. This agreement is still subject to court approval.

Turning to the business environment, as you've heard from other home builders lately, the housing industry remained under considerable pressure during our second fiscal quarter. As a result of continued weakening in the overall economy, low consumer confidence, rising unemployment and increasing foreclosures. But there are also very early signs of improvement in some of our markets.

Consistent with historical patterns which include our annual February promotion, we generally saw sequential improvement in sales trends compared to our fiscal first quarter and as the second quarter progressed. We are hopeful that historically low interest rates, increased affordability and federal and state housing tax credits will entice more perspective buyers to purchase a new home. Together with a competitive environment characterized by much lower levels of competition from private builders, these factors are for a slight hint of improvement, though it is certainly premature to conclude that a sustainable recovery is yet under way. As such, we continue to maintain a disciplined operating approach and remain focused on generating and maintaining liquidity.

Our financial results for the second quarter are a reflection of the difficult market and economic conditions 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. Operationally, 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 both direct cost reductions and overall efficiencies in our business, reallocating caps on our resources within our geographic footprints and differentiating our homes -- through our SMARTDESIGN and eSMART initiatives.

On the cost reduction front, we have taken meaningful steps throughout the downturn and continue to do so. As of March 31st, 2009, we had reduced overall headcount by 43% from levels at March 31st, 2008. And by over 77% from September 2006. Other examples of recent efforts to lower costs and increase efficiency include the streamlining of our warranty process through the establishment of a centralized customer care call center in Phoenix. This call center will also have a sales support function when we complete the rollout of our new Salesforce.com CRM system in July.

Through these changes we will be able to lower costs and provide better functionality. In terms of direct construction cost, we continuously collaborate with supply chain and trade partners through contract review and negotiation. In addition, we continue to achieve direct lower home construction costs through reduction in house plans and specifications, SKU rationalization and intensive value engineering. In terms of reallocating capital and resources within our geographic footprint we've essentially completed our remaining homebuilding activities in the seven markets we determined to exit last year. As of March 31st, we had only three homes left to close across our exit markets, two of which are currently in backlog.

Our differentiation efforts continue to center around our SMARTDESIGN and eSMART initiatives. eSMART which we launched in April of 2008 includes up to 10 standard eco-friendly features in every home we build that save energy, conserve water and improve indoor air quality, as we recognize that consumers are ever more focused on green products and features. For example, Yahoo recently reported that 77% of consumers surveyed describe themselves as green and 57% have made a green purchase in the past six months. We are currently in the process of expanding and announcing our offerings in this front, based in part on what we've gained from our investment in Imagine Homes. Through this development, we have been collaborating for three years with a San Antonio based green builder, named the NAHB top green production home builder of the year in 2008.

As we previously reported, our February eco promotion resonated strongly with consumers and drove more qualified traffic to our sales centers leading to over 500 net new home orders in the month of February alone. This activity further reinforces our belief that as more Americans look for ways to live an eco friendly and energy-efficient lifestyle, those considering the purchase of a home are evaluating the many benefits of new construction with a builder that understands and responds to what consumers want. Our SMARTDESIGN and eSMART initiatives enable us to differentiate our homes not only from other new homes but also from existing homes and specifically against foreclosures. In addition, as a further differentiator, our customer satisfaction is critically important to our success. Beazer Homes has always been committed to our customers and to quality customer service.

For many years, we have internally measured our customer's levels of of satisfaction through a proprietary three-stage index that tracks perceptions of our leads, prospects and customers. And we gather input from realtors as well. We're pleased to report that we have achieved dramatically higher scores over the past several months with an all time record score in March. With referrals from family, friends and realtors, such an important source of leads in our business, our efforts in achieving these high customer satisfaction scores should benefit us in the years to come.

Let's now review our financial results for the first quarter of fiscal 2009. For the second 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 was 10.8%, an improvement of 440 basis points from 6.4% a year ago. This improvement is attributed to the flow back of previous impairment charges in the quarter as well as from lower direct construction costs resulting from our cost control initiatives including renegotiated vendor and trade pricing where possible.

After impairments and abandonments gross loss as a percentage of total revenue for the quarter was 16.6% compared to a gross loss of 39.9% for the comparable period of the prior year. This was a result of lower inventory impairments and option contract abandonment charges in the second quarter compared to the second quarter of the prior year. Loss from continuing operations was $2.97 per share, compared to a loss of $5.93 per share in the prior year. The results for the quarter include approximately $13 million in estimated payments related to the governmental investigations previously described.

For the second quarter home building revenues declined 53% resulting from a 48% decline in home closings and a 10% decline in the average selling price compared to the same period of the prior year. Home closings declined in all segments with a decrease year-over-year of 39% in markets where we maintain a presence and 97% in the markets we have exited. Net new home orders for the -- totaled 1,129 for the quarter, representing a decrease year-over-year of 36% in markets where we maintain a presence and 98% in our exit markets. This level, however, was more than double the number of new home sales generated in the first fiscal quarter. This was due, we believe, not only to normal seasonal patterns but also to our annual promotion in February and positive momentum from the recent housing stimulus. Notably, in California, where the additional $10,000 new housing tax credit became available as of March 1st, we saw traffic increase that month by more than 30%, compared to the previous month. The cancellation rate for the second quarter improved to 29.8%, compared to 46.1% in the first quarter of this fiscal year and 33.7% in the second quarter of the prior year. Resulting backlog as of March 31st was 1,280 units with a value of $297 million.

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

Thanks, Ian. And Ian discussed earlier, we have been very focused on increasing efficiency in our business and diligently managing overhead expenses.

Slide 13 provides a break down of our SG&A expense since the reported number in total for the quarter lacks transparency as a result of the various legal, severance and settlement accruals incurred this quarter. By removing commissions which are a purely variable component as well as non-operational G&A expense, including costs relating to severance, legal and professional fees and FAS 123R stock compensation, we arrive at an operating G&A, so to speak, totaling 17.9% of revenue in the second quarter and 16.6% of revenue for the first half of the year. These levels are still too high, but they don't yet reflect the benefits of our recent overhead reductions. Based on current run rates, we estimate that the operating G&A ratio as we have defined it here will decline in the second half yielding a full year level in the low teens as a percentage of revenue.

Next I would like to spend a few moments on the various non-cash inventory related charges incurred during the second 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 expect to file later today. Inventory impairments totalled $49 million in the March quarter. Of that amount $35 million related to properties held for development and $14 million related to land held for sale. Impairments on held for development inventory were primarily in the west and southeast segments. The March quarter impairments represented 1,752 lots in 22 communities. During the March quarter, we also incurred lot option abandonment charges totaling $2.5 million primarily in the east segment and we further reduced the carrying value of our interest in joint ventures by $8.3 million.

Our land position as of March 31st totaled 34,407 lots, 80% of which were owned and 20% of which were controlled under option. This reflects reductions of approximately 13.2% and 36.5% from levels as of September 30th, 2008, and March 31st, 2008, respectively. Excluding property held for sale, approximately 45% 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 second quarter of fiscal 2009, we spent $56 million on land and land development compared to $119 million for the same period a year ago. As disclosed last quarter, the land and land development expenditure for the second quarter included approximately $20 million related to the renegotiation of several land banking arrangements which enabled us to previously 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 concluded during the first quarter of this fiscal year, we have now satisfied our obligation under these arrangements.

As we indicated last quarter, based on current sales prices, 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 more than $100 million, even with the $40 million we have spent related to the land banking arrangements. We continue to maintain strong discipline with respect to new home starts and speculative inventory. As of March 31st we had only 379 unsold finished homes and 381 unsold homes under construction representing declines of 14% and 68% respectively from year ago levels and declines of 25% and 36% respectively from first quarter levels.

As of March 31st, our total debt stood at $1.7 billion, decreasing about $60 million from the prior year and $35 million from September 30th, 2008. We had cash and cash equivalence of $560 million compared to $584 million at September 30th of 2008 and $274 million at March 31st, 2008. The cash balance as of March 31st, 2009, includes the previously disclosed cash tax refund of $168 million.

While we continue to be in an environment of low visibility for the business, we can say that in light of our significant cash tax refund, slightly lower estimates for land spending and a somewhat better selling environment, we are targeting a year end cash position comparable to the level at the end of last year before the impact of any potential recapitalization transactions. In order to hit that target, we will need to close at least 4,000 homes this year. Year to date, we have closed 1,752 homes and we have another 1,280 homes in backlog. That is just over 3,000 homes.

With our spec level at March 31st and the specs we have released since then that can be closed this year, we have an adequate universe of homes in production to reach that target. What's not certain is the level of future sales. We will need to sell and close another 1,000 homes in the second half of the year. By way of comparison, we sold and closed just under 1,300 homes in our continuing markets in the second half of last year. So, if we achieve 80% of that activity in the back half of this year, we have a good chance of reaching our cash target at year end.

The Company had no cash borrowings under its secured revolving credit facility as of March 31st, 2009, and has no current plans that would require cash borrowings. As of March 31st, 2009, the Company had restricted $11.3 million in cash to sufficiently collateralize outstanding letters of credit. As described more fully in our press release, we have entered into a limited waiver related to our revolver. The waiver agreement addressed a covenant test related to permitted investment levels but also had the effect of preserving several key terms that would have changed given the decline in our tangible net worth below $250 million.

The substance of the waiver is that during the waiver period we can preserve the facility size at $150 million, maintain the current collateral coverage in the borrowing base at 4.5 times, maintain the current facility pricing at the Euro dollar margin plus 5% and waive a potential breach of our investments covenant. In exchange for this waiver, we have agreed to not borrow under the facility during the waiver period, having had no plans to do so and to maintain the current level of restricted cash in the secured borrowing base. We are permitted to issue new letters of credit. We would like to thank the members of our bank group for their continued support in approving this waiver .

As described in the press release, the investments covenant, [limit] investments and joint ventures, non-guarantor subsidiaries, guarantee obligations of debt and certain other investments to a maximum of 35% of tangible net worth. At March 31st, 2009, the Company's investments as calculated for the purposes of this covenant were $63.1 million, representing 44% of tangible net worth. The waiver agreement suspends required compliance with this covenant and allows for certain additional investments.

While we are discussing investments, I do want to point out that the investments covenant under the secured revolving credit facility is substantially different from the permitted investment and restricted payment covenants under the Company's senior notes. And currently we do not expect those covenants to preclude any required investments. The bank waiver is an interim step while we consider the overall capitalization strategy for the Company. With today's disclosure, regarding our discussions with the US Attorney, we are likely to begin to address our capitalization. The three primary objectives of our actions will be to reduce total indebtedness and interest expense, increase our net worth and protect our liquidity. While we are not prepared to make any specific announcements today regarding our capitalization plans, we want investors to understand that we may employ one or more of the strategies we have previously described in our public filings.

Let me end by saying we have appreciated the input we have received from various constituents regarding our capitalization over the past several months. We hope to be able to put many of these constructive ideas to work in the next several months. I'm now turn it back over to

Thanks, Allan.

Before opening it up to questions, I would like to conclude that while the housing industry remains under considerable pressure, we are cautiously optimistic that historically low interest rates, increased affordability and federal and state housing tax credits will help. And while there are very early signs of improvement in some of our markets, we remain cautious and disciplined in our operating approach. I would like to express my appreciation for the support of our many stake holders as we continue to work through these challenging times. We are committed to returning the Company to profitability upon a market recovery for the benefit of all of these stake holders.

Allan and I would now be glad to answer your questions and I'll ask the operator to give you instructions for registering your question.

Thank you. (Operator Instructions) Our first question comes from David Goldberg with UBS.

Thanks. Good morning, everybody.

Hi, David.

The first question is really on last call you guys talked about the senior debt and some of the requirements that if the tangible net worth gets below a certain level, there's a requirement to tender for a certain amount of senior debt. And I'm wondering if you can give me an update where that stands? It seems like with the loss this quarter you're getting much closer to the tangible net worth and how you're thinking about that moving forward.

David, it's Allan. The covenant is that we need to keep tangible net worth above $85 million. And if we fall below that level for two consecutive quarters, there is an obligation to make an offer to purchase up to 10% of the senior notes. So we have not tripped that covenant. And obviously that is among the things that we consider as we think about the overall capitalization strategy for the Company.

If I could get a follow-up to that, I guess the question is that since you guys -- I guess it was my understanding, and tell me if I'm wrong, but it was my understanding that when you think about the capitalization you were hoping to get a settlement with the US Attorney's office first. I guess the question I have is -- what if it doesn't come in time? The tangible network is getting closer, especially if you have to reserve more for the US Attorney's office investigation. Is it possible you're going to move before the suit is concluded, if necessary?

Yes. Today's comments I said that I think it is likely that we will address our capitalization with today's disclosure regarding the discussions that we have had.

Okay. Great. And then just my follow-up question was on the SG&A. I know you said there were some extra charges in the SG&A and the real number maybe was in the 17% range if I heard you correctly. Maybe high 17% range. And I'm wondering if you look at the overhead changes that you've made -- the cuts that you've made this quarter -- I know you said they're recent future benefits -- where do you think the run rate goes to and how do you bring it down further other than generating a lot more operating leverage out of the business?

I would refer you to the slide in the presentation, because I think this is one of the areas where SG&A can be defined by different people to mean different things. And I've tried to lay out very, very clearly in the slide that the add backs, or carve outs, if you will, to get what I've called the operating SG&A. We showed that level at just under 18% for the second quarter and I've indicated the full year should yield a result in the low teens. So obviously we have expectations that in the back half of the year it will be substantially lower to get to an average for the year that's in the low teens.

And I think in terms of run rate, that's as much visibility as we have and I think it reflects a broad -- a wide number of things that we have done beyond just headcount. I don't really want to get into talking about next year this quarter. But I think that does demonstrate as we look into the next two quarters, we have real expectations to get better leverage out of the business at its current run rate.

Okay. Great. Thank you.

The next question comes Michael Rehaut with JPMorgan.

Thanks. Good morning, everyone.

Hi, Michael.

First question just on the comments about -- you hit on it a couple times -- very early signs of improvement in some markets. And at the same time, there is a seasonal pattern going on here. I think the two types of ideas are intersecting, in a way, particularly when you talk about traffic improving in California up 30%. But that's only versus the previous month.

So I'm trying to get a sense of the orders. Maybe you could give us what the absorption was year-over-year, meaning what was your community count down to get a sense of an absorption rate basis. Where were you for the quarter year-over-year? And if you could try to talk about California more from a year-over-year basis as well.

Okay, Michael, let me have a go at that. As I said in the prepared remarks, we recognize there is a seasonable improvement in this -- in the March quarter compared to the previous quarter. But what I also said was that we saw improvement as the second quarter progressed. What I would add to that -- to your question is -- we have continued to see that improvement through April. So I think that we recognize that it's not just a seasonal improvement. We are really seeing a general improvement in the market. Now, it's not in every market.

Let's start with California. California definitely has seen improvement for us.

Ian, if I can just ask, isn't March typically always better than January?

I would say definitely. But I also just mentioned April as well there. I mentioned April. The improvement, the sequential improvement we had going through the quarter improved again into April as well. Just to add that color.

But I agree with you , yes, it is better in March compared to January. But I think if you take it mark-to-market by market, because I was clear to point out the improvement is in some markets. California for us is definitely probably the biggest improvement. We're really benefiting from the $10,000 tax credit in that market. We've seen sales improve for us to the point where I'm really pleased to say we're actually seeing margin improvement now as well. We're not having to give the same level of discounts in those markets that we were. So that to me is not just a numbers improvement but also a very slight incremental improvement in margins, which I think is very encouraging.

I would say also that we've seen good signs of life in the mid-Atlantic. That's a market if you listen to our calls and I'm sure others, we have expected improvement in the mid-Atlantic from New Jersey right down into the Virginia, Maryland markets. We've definitely seen an improvement there, which I think is very encouraging.

Our business in Texas is holding up pretty well, both in Dallas and Houston. So I'm encouraged by that. And recently we've seen some activity in Phoenix. It's still very price sensitive in Phoenix, but we've seen some activity. And the last market I would say that we've seen some really quite good improvement is in Indianapolis where obviously we have a very large market share in that market and we are taking the benefit there of reduced competition at this time. So we're seeing some good improvement.

On the other side, I think we have to recognize that nearly all of the southeast, and in particular Florida, is not doing well at this time. It's still very tough there. We're looking to see what costs we can take out, how we can put different plans in there and how we can address that. And I would say obviously the other market that is still quite depressed is Las Vegas.

We don't give community count Michael, so I can't give you an absorption rate there. But, I hope that gives you a favor of where we're seeing that improvement. We have to be cautious at this time because this may be driven by the tax credit. It may be driven by these historically low interest rates. But we think if we can get some momentum back into some of these markets, it may be self sustaining. We're building at such a low rate now as an industry, the industry is moving down slightly. I think the competition is coming out of the market. It's very difficult for the private builders to get financing.

And so I think we want to watch this. We want to see it as we go through this quarter to see if we can build on this in the markets that are appreciating and possibly see if we can see an effect in some of the weaker markets that can get the benefit of the low interest rates at this time. So I hope that gives you some

No. I appreciate that, Ian. And specifically the regional breakdown. It's very helpful.

The second question -- the SG&A breakdown was also interesting. And, Allan, you spoke to the operating G&A. But just to have it a little more apples to apples versus the industry, what are your expectations for -- well, first of all, the SG&A ratio, is it fair just to take out the severance and the $13 million to get to a better ongoing SG&A ratio for the quarter?

And, also, in that context, you talked about operating G&A for the full year being in the low teens. I was wondering if you could speak to operating -- SG&A for the full year.

The reason I have broken it out this way is I really can't -- I think the commissions which drive is a variable number will fluctuate in predictable ways with revenue. But, severance costs, legal and professional costs and stock-based compensation costs I'm not going to make a forecast about. So what we've done is made the forecast about those operating elements of G&A. And you can make your own assumptions and work backwards to get to an aggregate level of SG&A.

I don't think in answer to your first question that it's right to just back out the severance cost and the $13 million and look at the quarter and say that's the go forward. If that had been right, then I wouldn't have made the statement that I did about where we expect to be for the full year.

We absolutely expect that operating G&A to be a lower percentage of revenue in the back half of the year. And meaningfully so such that for the full year we're down in the low teens. And that's the right way to look at it.

But I guess I'm not trying to argue, I'm just trying to get a sense of more of like the -- it's tough to say one time. But in trying to back out maybe the severance and the $13 million, is that at least -- obviously something you don't expect to do over every year every quarter. The stock-based compensation and the commissions I think are a part of the business on a normal basis and some level of legal and professional. I'm just trying to get a sense of -- first off, that $13 million that you did identify, I assume that is in the legal and professional?

Yes, it is. And the six and change that is in addition in the legal and professional we believe is higher than what the normal run rate for the business will be. But instead of making a forecast about that number, because I can't predict the timing and the nature of our cooperation and negotiation process -- we've netted that out to really focus on those things that we have a lot more control over.

Okay. Just two housekeeping questions. The contribution to gross margins from previous impairments and also the interest expense for the quarter.

The gross margin impact was in the range of $20 million. And I think the interest expense --

We had about $11 million was amortized to cost of sales and an additional $21 million is another expense.

Okay. Great. Thank you.

Thanks, Michael.

The next question comes from Ivy Zelman with Zelman & Associates.

Thank you. Good morning, everyone.

Good morning, Ivy.

Obviously you guys are seeing -- it's certainly better than where you were from an improvement standpoint for orders and I'm sure that gives you some morale pickup for your firm. What do you think, honestly, Ian, you need to do to get back in terms of units from here. What type of annualized volume or even if you talked on a quarterly run rate would you need to be at to get to a break even and give us some understanding how we should think about that. Because I think what we're all struggling with as the market gets better, how much better does it need to get so people can start to model in profitability. Because we all seem to think it's looking fairly gloomy right now. So can you help us there, please?

Well, I (inaudible) and we're giving a forecast for the future. We'll certainly look at that as we go through the year.

But let's just look at the market as it stands for today. We're up to four years into this downturn. We're building in the low to mid $300,000s. We absolutely have to expect and much better economists than me are forecasting that -- for example NAHB is forecasting next year an improvement in stocks of 45%. You've got others predicting even more than that. When this market turns -- and absolutely it will turn -- it will turn fairly fast. So the benefit we'll have from that when it does turn is we'll get higher sales per community.

This is not like growing the business as we had to grow it back through the 90s where to grow the business we had to buy new communities and move forwards, move into new markets. We have -- almost to the point an excess number of communities today -- for the level of sales we're making. We have the large number of communities. We can increase the pace through those communities and it will drop down to the bottom line.

So without giving you an exact forecast, I am reasonably confident that with external factors, including interest rates, obviously consumer confidence, unemployment rates, with those stabilizing, let's say towards the end of this year and into next year, I feel very confident that as we get into next year, we'll be looking to get back to profitability. That's what we're looking internally at. That's what we're trying to model to make sure that as we get back to 2010 we're looking at profitability. That's not an exact forecast today. That's just saying that's what we're trying to model.

We're going to meet with all of our division managers in the next few weeks to look at our budgets for next year. We're a September year end. So we're looking at that over the next few weeks to plan for 2010 but we can certainly give some more guidance as we go through the year. I would say to you I think everyone is feeling -- certainly we've felt a slight improvement as we've continued into April. There are many external factors.

And I would say the one factor that we can't take account of that is hard to assess is the impact of foreclosures. But that's why we are doing everything we can to differentiate ourselves from foreclosures. And I think we're being able to be quite successful there in terms of particularly the energy savings that we offer our buyers. That's why I said we've had that program in place for a year now. We're going to enhance it. We're going to show the benefit to the consumer. We're working now on the cost to the Company to do that. But then be able to portray to the consumer the benefit of the homes that we're going to build going forward and compare that back against the foreclosures.

So, I am very cautiously optimistic that as we get through 2009 and we get into 2010, we'll have a platform there where we can get back to profitability. That's what we're looking at.

Ian, thank you. That was very helpful. I realize you can't give guidance on volume but it sounds like -- if I can summarize your comments -- assuming NAHB is right and you had a 45% increase in starts which was reflective of demand, that can give the industry an opportunity to become profitable if that type of balance was actually achieved.

With respect to your sales, how much of your business right now, and you may have said this so I apologize, was sold to the first-time home buyer?

Ivy, I would say it's about 40%. Something like that. I would say probably maybe even slightly higher now with the tax credits coming through. We don't track that all of the time, but I would say it's in that order.

Ivy, I would also say that over 50% of our houses now are under 2,000 square feet which can also be a little bit of an indicator.

Helpful. Secondly on that same thought process, if you were to look at your cash flow, you guys have obviously done better than we had anticipated with respect to the first quarter or second quarter, sorry. When you think about the promotion activity -- 60% or less would be to the second time move up or first time move up, et cetera. People that have to sell their existing home. That seems to be really where the market is significantly more challenged.

Can you give us an idea, talk about the promotional activity that you mentioned. What type of discounting you're still doing. If you can give us some reference to that. And am I correct in saying that that second -- the non-first time home buyer market is still struggling given people's inability to sell their home, negative equity or just unwillingness to sell at the capitulated price.

Well, since 2006, we have had two annual promotions a year. So we've always had a promotion in February and we always have a promotion in June. So we are working towards another promotion in June which is -- obviously these promotions generate a lot of activity. And we do believe that we get a lot of benefit from that both before and after the promotion.

In terms of ongoing promotional activity, I'm very encouraged. When I see a market like California where we're able to start pulling that back, I think that's something that -- and improved margins. I would say in order we should expect numbers to go up first and then to see margins improve.

Ian, if I could interrupt you on something, I do agree with you. There's no question California -- based on our own work -- is showing improvement.

But doesn't it concern you that the tax credit for the $10,000 is going to likely be exhausted by June/July and you could wind up seeing a dip there? It seems as if the California economy is in pretty bad shape as some articles in the journal referenced this morning. I would just imagine that if they don't renew that, you guys can see what has been a nice light at the end of the tunnel.

We're about halfway through that $100 million. There's probably about another ten weeks of that to go. I think it's doing a good job in increasing the market overall, the demand overall taking out some of the industry that's there. And I would say if you take my point that we're seeing a slight improvement in margins, it's going to help stabilize pricing in that market.

Now, could there potentially be a downturn after that? Yes, potentially there could be. But as you also well know, consumer confidence is very much part of home buying. And I think if we can see that kind of stimulus in the markets, if you want to refer to articles in the paper, talk about what happened in Sacramento. Sacramento has rebounded now in terms of overall sales by about 45%. Now, from a very low base. But it is rebounding.

Yes, but the market also had the benefit of foreclosures held off market. And if you look at the notice of defaults in California, what's going on right now is that you guys have had the benefit as a new home industry of not having to compete against foreclosures. And now that those have been expired, you're seeing that there's a record level of foreclosures that are actually going to have to be worked through the pipeline.

I'm not trying to dispute with you that California has gotten better. I'm just concerned that it could be very short lived and the pressures there might wind up disappointing investors because they are really artificially inflating the market right now and people really do need a deal to go out and buy homes.

And if you could elaborate -- I'm sorry I interrupted you -- but back to the first time move up or non-first time home buyer marketing.

Let's get back to California for one second. I think the fact is there is improvement there. I made it very clear, I think, to you just now, that we are concerned about foreclosures. They are going to come through the pipeline. We have continuously worked to differentiate ourselves. Buying a new home from us today with the energy features we have in there, the energy features we're going to have in there going forward compared to a foreclosure, compared to the costs that you have to put into a foreclosure after you've closed your mortgage, there is a lot of factors there.

No, no. And the thing is I'm looking for a house right now for my sister. And, do you know what, she doesn't want to drive all the way out to where the new construction is. And, guess what, there is a lot of stock available right in the neighborhoods she wants to live in.

So I think that new construction will continue to be an alternative for those that have to have new. But I think we can't all disagree or at least agree upon the fact that if there's so much stock, it doesn't necessarily have to be even foreclosure. Just existing stock of people trying to sell homes. It's just one of the challenges that will continue to maybe impact the rebound for new construction that we have to all be thinking about. Because today new construction represents as a percent of total transactions, significantly below the norm, which was like 16%. I mean, we're in the single digits now. Maybe 10%. So I think that will remain a growing challenge.

And you may differential yourself with your green and all of your initiatives, I'm not saying that. But if you have to drive to new construction versus being five minutes from where you really want to be, that's some of the issues I think that are also part of the problem or the equation.

Right. Ivy, what I would say, and we need to move on because there is a few questions.

Sorry.

That would like to come in.

Sorry.

But what I would say to you is what you have to look at today and you all know this -- is the supply and demand. There is excess supply coming through from foreclosures. There is not a lot of excess supply from new homes in the market.

But the other side of the equation is -- demand today is so low and it cannot be sustained at that level. When household formations for the next five years are going to be something like 1.5 million a year compared to the previous five years when it was only 1.2 million. We've got the echo boomers coming through right now. We cannot sustain the housing level -- new home housing levels in the three hundreds when you have that level of household formation. We do not have an oversupply right now. So I think have you to look at the demand side.

I'm worried about the foreclosures. I give you that absolutely. But on the demand side, it has got to come up. There will be demand coming through. And when you get that, that's why you get that spike back up. Because it starts to gain momentum.

So, Ivy, you and I can have a discussion offline. Thanks very much.

Okay. Thank you.

The next question comes from Lee Brading with Wachovia.

Thanks for taking my questions. I was worried I wasn't going to get in.

I wanted to discuss your confidence level in the second half. You talked about a target of potentially 4,000 units and that was not your guidance but it was in order to maintain or achieve a cash balance that is flat from a year-over-year standpoint. And you compared, last year that you did about 1,300 in that second half from a GAAP standpoint when you look at what you actually have done with backlog and you have about a 1,000 GAAP to close.

And I'm just trying to reconcile, for example, I know you don't give communities, but what would that assume that you're looking at from a year-over-year basis as I imagine community count is down? And then just a little bit, how sensitive is that number? For example, what if you hit like 3,500, where would your cash move from there? .

Lee, it's Allan. I think, first of all, the community count is not down by a very large percentage so there is very good comparability in the year over year. I think in terms of confidence levels if we continue to see the levels of demand that we saw at the end of quarter and into April, I think as I said we have a reasonable chance.

The relationship between the roughly 1,000 units we need to hit the target and the 1,300 we did is 75% to 80% of what we did last year. And I think we feel like we've got a shot at doing that. I won't tell you that you can just do some linear math equation to take closings down and then forecast cash. Because it really depends on which units close and it really depends on the stage of completion of other specs that we release later in the year that would not be for fiscal year 2009 closing.

And to the extent we pull back on that number, that would tend to offset some part of a shortfall in closing activity. So we tried to go further than we've gone before to give you the algorithm for how we're thinking about getting to that cash balance. But it's hard to create a sensitivity table for you for all possible permutations and combinations around that.

That's fair. I appreciate the comments. Also on the lawsuits and the litigation that's going on, congrats, it sounds like you're finally able to move forward on some of these items. In regard to the shareholder issue or the class action suit you received -- insurance ended up covering that.

On these others in regard to the US attorney's office and some of these others, how much will insurance cover these costs?

Those will be paid by the Company.

Okay. And then you talked about recap and I imagine there is not much you can really say in regards to that. But in regards to your need for revolver, can you just comment on your thoughts in regards to that? Because we've seen others just get rid of the revolver. How much do you really need that facility?

Well, we've had the view that having the revolver has an administrative benefit as it relates to issuing LCs and it has a signaling or optical benefit to the market as to the existence of a revolver. But we clearly had taken notes of what others had done in the industry and we find as others have that the relationship between the pricing and the availability of those kinds of facilities is pretty tough right now. The banks are in -- obviously have their own issues to contend with.

And I think what we've said is that as a part of our overall recap strategy, we'll consider where the revolver fits into that. So this is a bit of a place holder as we address the broader capitalization issues. I'm not going to make a prediction about the revolver beyond that, other than to say that the things that have historically caused us to want to have one remain in place. But we're clearly aware of what others are doing and we have said unilaterally we have no plans that would contemplate any need to actually borrow on a revolver.

And just one quick housekeeping, you said basically land and development sales -- that could be about a little less than $230 million or at least $100 million less than you did in '08. What did you do today? I think Q2 was $56 million. Can you remind me what it was in Q1?

I don't have that number in my fingertips. I'm sure I can can dig it up. I'll call you back with it. I'm sorry, I don't have it at my fingertips.

All right. Thanks.

The next question comes from Joel Locker with FBN Securities.

Hi, guys. Just one quick housekeeping question. On the $48.3 million of impairments, does any of that run through landfills?

Did any of that run through what?

Landfills rather than home sales?

Yes. I think we said that a portion of it related to property held for sale. And a portion of it related to land held for development. Is that your question?

I saw the $13 million or so. I saw the loss of only I think it was or actually a gain on the [lands] -- I'm sorry -- or a $2 million -- a $0.2 million loss on land sales. I was just wondering if that was affected by impairments. Just trying to break out the gross margin for home sales and land sales without the impairments.

I believe all of the impairments actually flow through the home.

All flow through the home. All right. Thanks a lot, guys.

Do we have another question, operator?

Yes. The last question comes from Alex Barron, Agency Trading Group.

Thanks. Good morning, guys.

Hi, Alex.

I know a lot of builders have talked about lowering their ASP to compete against the foreclosures. I missed the early part of the call so I'm not sure if you guys are doing the same thing. I imagine you are.

My question is how long can the labor and materials portion of home buildings go today in various markets?

Alex, I think it's a good question. Obviously there is a constraint.

We are still taking costs out of our supply base and we're working with our trades, with our suppliers to take costs out. We've been doing this for a couple of years -- a few years now and we've had some good success. Obviously there's a diminishing return at some point. I would say in the last 12 months, having previously taken out something like 10% a year, I think this year, year over year we're at about 6%, we've taken out. But what we're doing is we're really trying to go in there and value engineer as well.

So this is something that in good times you haven't got time to do this. You're building, you're selling, you're raising prices. When times are tough like this, you have to go back in. We're looking at every aspect of the home, whether it's the roofing, shingles, the drywall. We're not accepting turnkey packages to the same extent we used to. We're doing our own takeoffs now. We're making sure we're getting that down so the wastage is limited.

We have to look at all of these different aspects. I would certainly say that we can't go on forever. There is a limit. The trades and the suppliers can only get to a certain level. But I think we're going to get a lot of efficiency as Leslie pointed out.

Now half of our homes are under 2,000 feet. So that's the other great advantage in this industry. You can put the pinches on the home and squeeze it down for the benefit of the customers.

So I think that we are looking forward to when the market starts to pick up. Because I think we're so efficient now in our building and our supply base that we really do believe that once we start to see some pickup, once we start to see the pricing pressure that we have today moderate, then I think we believe that returning to profitability can come within a reasonable time frame. And I think that's something that is going to be the benefit of the downturn that we become more and more efficient in taking costs out of these homes.

But when you talk about being profitable again, is that based on your current land holdings or is that is that based building on new land that you had acquired at distressed prices in today's labor and materials costs. I guess I was trying to get at how in absolute terms or how low can these labor and materials components go? Is it like $30 a foot, $40 bucks a foot? Somewhere in that range?

No, I think that's too low. I don't think we can get to that level. And to your previous point, we will be building in the communities that we're in. Obviously we've had to impair many of those communities but they're now turning profitable with the flow back of the impairment. There will be opportunities to buy additional properties going forward at today's market price. I think we're marking to the market price right now.

Again, I think it's a case there will be a turnaround here. We will see a benefit. We would like to get more absorption to our communities and that's the best way we can to get profitability.

Because I think we just can only take our sticks and bricks costs down to a certain level and I think we're still working on that. We're still trying to find efficiencies. But we would certainly like to see some turnaround at some point.

So it sounds like you're talking about profitability as you get volume the SG&A leverage will go down. My second question was -- I was wondering if you guys had a count there of what percent of your total communities have been impaired at least once of the stuff that you guys own right now?

I don't have that number in precision, but clearly more than half of the communities have been impaired.

Okay. And what markets would some communities not have been impaired yet?

It's possible. And I don't have this number, but it's possible, frankly, that there are communities in any market that haven't been impaired. I don't know that you can say that there is a market where [definitionly] everyone has had to be. It doesn't work that way. It's project by project.

Okay. Great. Thanks, guys.

I just want to make a follow-up comment in response to a question we had a minute ago that I copy flatfooted. I didn't have the number at my fingertips. We were asked what the land to land volume development spending in the first quarter was and that number was $59 million which was comparable to the $56 million we had at this quarter.

Hopefully, Lee, you're still listening and that's the answer to the question.

Operator, do we have anymore calls?

At this time I show no questions.

Okay. Well, thank you. And I would like to take this opportunity to take all of you for joining us today. And as usual, a recording of this conference call with a slide presentation will be available this afternoon in the Investor Relations section of our website at Beazer.com. Thanks very much.