霍頓房屋 (DHI) 2007 Q3 法說會逐字稿

Good morning.

My name is Amanda, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the D.

R.

Horton Incorporated, America's Builder, the Largest Home Builder in the United States, Third Quarter 2007 Conference Call.

All lines have been placed on mute to background noise.

After the speakers' remarks there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS) I would now like to turn the call over to Don Tomnitz, President and CEO.

Sir, you may begin your conference.

Thank you and good morning.

Joining me this morning is Sam Fuller, Senior Executive Vice President of Finance, Bill Wheat, Executive Vice President and CFO, and Stacey Dwyer, Executive Vice President and Treasure.

Before we get started, Stacey.

Some comments made on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Although, D.

R.

Horton believes any such statements are based on reasonable assumptions there is no assurance that actual outcomes will not be materially different.

All forward-looking statements are based upon information available to D.R.

Horton on the date of this conference call and D.

R.

Horton does not under take any obligation to publicly update or revise any forward-looking statements.

Additional information about this issue's that could lead to material changes in performance is contained in D.R.

Horton annual report on Form 10-K and the most recent Form 10-Q, both of which were filed with the Securities and Exchange Commission.

Sam?

Home building revenues totaled $2.5 billion in the quarter which included $33.1 million related to the reversal of a portion of our FAS 66 Deferred Revenue balance.

In prior quarters, FAS 66 required us to defer revenue equal to the gross profit dollars associated with home's closed in which the buyer's financed their home purchasers through our mortgage company with certain loans with a low down payment and the loans were still held for delivery.

This quarter the balance of those loans held for sale decreased and we are recognizing $33.1 million of revenues related to the homes that closed in prior quarters.

Excluding the FAS 66 reversal, our average closing price on 9,643 homes closed this quarter was approximately $252,800, down 6% compared to $267,700 in the year ago quarter reflecting the softer pricing environment over the past year.

Bill?

Our gross profit margin on home sales revenues in the third quarter before inventory impairments and land option write offs decreased 710 basis points to 16.7% from 23.8% in the year ago quarter.

This was a 100 basis point sequential decrease from our second quarter margin of 17.7%.

Included in the 16.7% margin is a 120 basis point benefit related to the FAS 66 reversal previously mentioned.

Excluding the impact of FAS 66, our core margin would have been 15.5%, down 830 basis points from the year ago quarter and down 220 basis points from the March quarter.

Our overall margin declines were due primarily to core margin compression resulting from the increased use of sales incentives relative to last year and the lack of pricing power as reflected in our 6% decrease in average closing price.

Don?

Our third quarter results continue to reflect a more challenging housing environment.

Gross margins in our average closing price showed continued decreases.

Net sale's orders did not meet our expectations, posting a 40% decline compared to the year ago quarter.

Pricing continued to be soft and our average sales price of new net sales order decreased 11.5% to approximately $237,000.

When we reported second quarter results, even though the first month and a half of the selling season had gotten off to a weak start we still had two to three months left in the traditional selling season.

It is now clear that the selling season did not materialize this year and our disappointing sales results and elevated cancellations have caused us to have an increasingly cautious outlook.

It is unclear to us when the housing recovery will begin.

There are several factors contributing to this outlook.

Continued gross margin pressure from pricing and incentive actions, continued high level of new and existing homes available for sale.

Weak demand for new home buyers, mortgage financing availability which has been negatively impacted by credit tightening in the mortgage markets and strained housing affordability in markets which have seen rapid price appreciation over the past several years.

While we don't belief interest rates by themselves have a significant impact on the most home buyers decision to purchase a home, the recent increase in interest rates does factor into the affordability calculation.

Bill?

We have reviewed all of our projects and identified those projects whose performance indicated potential impairment.

At quarter end, we reviewed our watch list of these projects with our region president's, evaluating the results of pricing adjustments we put in place in our third quarter and estimating it further adjustments would be need to do maintain our targeted absorption.

All of these evaluations were done with the view that current market conditions will continue to be challenging and may further deteriorate.

And the evaluations also incorporated our uncertainty as to when the housing recovery will begin.

Our impairment analysis assumed flat or reduced pricing compared with current sales in the project or for comparable projects.

Since our expectation for a recovery has been extended, we also reviewed more long-term projects for potential impairment.

As a result of that review process and our changed outlook we recorded impairments to our inventory and goodwill balances.

During the third quarter we recorded inventory impairments of $835.8 million as a charge to cost of sales.

These charges are associated with projects that had a pre-impairment carrying value of approximately $2.1 billion.

The regional break down of the impairments is as follows.

California, $319 million; our west region, $182 million, primarily in Las Vegas; our southeast region, $137 million, all in Florida; our southwest region, $119 million, primarily in Denver and our northeast region, $79 million.

Stacey?

FAS 142 requires that we test goodwill in each operating segment, regions in our case, for impairment at least annually.

During our third quarter we determined that an interim test to evaluate goodwill was needed based on the level of inventory impairments we've recorded and the unfavorable housing market conditions.

Our initial evaluation has concluded that impairment is probable for all of the goodwill balances in our California, west and southeast regions and a portion of the goodwill balance in our Northeast regions.

Accordingly we have expensed $425 million in the June quarter as an estimate of this impairment charge.

We will complete our analysis in the fourth quarter which may result in a change in our goodwill impairment estimate.

Total goodwill remaining after impairment at June 30, is $153 million.

Sam?

We continue to adjust our land option contract relative to current demand, which resulting in a $16.2 million write off of earnest money deposits in pre-acquisition costs related to lands option contracts during the third quarter.

Our supply of land and lots at June 30, 2007, is approximately 252,000 lots owned and controlled, down 36% from our peak of 396,000 lots at March 31, 2006.

Two-thirds of the lots at June 30, are owned and one-third are optioned.

We started our current fiscal year with 323,000 lots, a 6.1 year land supply based on trailing 12 months closing and our 252,000 lots now represent a 5.4 year supply based on trailing 12 months closings.

Don?

Home building and SG&A expenses for the quarter was 10.5% of total home building revenues compared to 9.9% a year ago.

For the nine months, our home building SG&A was 10.8% compared to 10.5% a year ago.

Our ongoing SG&A goal for each fiscal year is to be at or below 10% of home building revenues.

While we will not achieve our 10% goal this year, we are reacting quickly to the changing market and managing our SG&A expenses relative to our revenue levels.

On an absolute dollar basis, we reduced our third quarter SG&A expenses approximately $89 million from a year ago on 28% fewer closings.

We continue to focus on being the low cost operator in the industry which remains one of our distinct competitive advantages.

On April 15, we renewed $250 million of 8.5% Senior Notes which resulted in charges related to the early retirement of debt or approximately $12 million this quarter.

Bill?

Financial Services pretax income was $18.2 million for the June quarter compared to $27.5 million in the year ago quarter.

And $52.7 million for the nine-month period compared to $74.7 million in the year ago period.

The pretax income decreases in both periods were driven primarily by a reduction in the origination volume at our mortgage company, as our Financial Services operating margin has remained relatively flat as a percentage of revenues in the mid 30% range; 95% of our mortgage company revenue was captive during the quarter and our company-wide capture rate was approximately 64% compared to 67% a year ago.

Our average FICO score was 717 this quarter, comparable to the year ago quarter.

Our average cumulative loan to value for the quarter was 90% compared to 89% in the years ago quarter.

As the mortgage markets continue to change we have seen a shift in the type of product buyers have chosen in the third quarter.

Alt-A products totaled about 14% of our volume compared to 40% in the March quarter.

Sub-prime was less than 1%.

And second liens have dropped to approximately 2% of our volume compared to 6% last quarter.

Government loans increased to over 20% compared to 15% in the March quarter.

And conventional conforming and jumbo loans have increased to 60% of the volume, compared to 33% in the prior quarter.

Sam?

Well, our effective tax rate has historically been in the approximately 38%, our rate this quarter was 25.9%, primarily because the majority of the $425.6 million goodwill impairment charge is not deductible for tax purposes.

Our reported net loss for the quarter is $823.8 million, or $2.62 per share.

However, our core operations before impairment and debt retirement charges generated pretax profits of approximately $178.4 million.

All of our operating regions remain profitable before impairments and write offs.

We continue to focus on managing the core business at a profitable level by controlling our costs and adjusting quickly to changing market conditions.

Stacey?

Our total number of homes and inventory increased slightly to approximately 27,000 homes from 26,000 homes at March 31, we expect to reduce our homes in inventory by September 30, 2007.

Total speculative inventory remains above our mid 30% target at 48% as of June 30.

However, we reduced completed spec homes by 14% to approximately 3,700 homes from 4,300 homes at March 31 and are down 26% from our peak of approximately 5,000 completed homes.

Only 200 of our unsold homes have been completed for greater than a year.

Our home building leverage ratio net of unrestricted cash was 44.7% at June 30, 2007, an improvement of 170 basis points from a year ago.

As of June 30, we have approximately $1.7 billion available on our $2.5 billion home building revolving credit facility which matures in December, 2011.

On April 15, we called 250 million of 8.5% Senior Notes which we refinanced with our revolving credit facility.

Our overall home building debt balances remain flat with the prior quarter.

Don?

Our cash flow from operations this quarter was $73 million; positive for the fourth consecutive quarter, bringing our total for the nine-month period to $547 million, and for the trailing 12 months to $1.4 billion.

We are on track to achieve our goal of 1 billion in cash flow from operations for the fiscal year.

Our land spending remains limited and we expect our fiscal 2007 land expenditures to total between $500 and $750 million for the entire fiscal year.

In addition, we continue to challenge our land development spending enlight of our current absorptions.

We are developing smaller phases and delaying development of new phases based on demand in individual communities.

In closing, D.R.

Horton will cost continue to manage very conservatively during this housing downturn.

Spending that has already been slowed on land inventory, land development, residential inventory and SG&A will be reduced further.

We will continue to focus on generating cash, liquidating our own lots, reducing our inventory balances, selling completed homes and paying down outstanding debt.

We will continue to evaluate our approach to pricing, incentives, product type and finish out on a community by community basis.

Our goal is to properly blend our margin and volume relative to our inventories.

Finally we thank the entire D.R.

Horton team.

While it is difficult to outperform the markets our core operations in each of our operating regions were profitable and we continue to outperform our competition.

Thank you and we will entertain any questions you may have.

(OPERATOR INSTRUCTIONS).

Your first question comes from Michael Rehaut of JP Morgan.

Thanks, good morning.

First question I was hoping you could answer, I know it's a little hard with kind of analyzing age of land but the impairments this quarter are obviously a huge step up from previous quarters.

I was wondering if you could go over first off, how many communities were impaired this quarter and how many of those were impaired for a second time, what does that bring to the total number of communities that you've impaired?

And also this quarter, how old the age of the land from, when did you buy the land that was impaired today?

And then I have a second question.

Sure, Mike.

We impaired 121 communities this quarter.

Of those 121, 20 are projects that we have previously impaired.

And that brings our cumulative total of projects that we've impaired to around 180 projects to date.

I don't have the information regarding timing necessarily of when the land was purchased in front of me necessarily.

Perhaps you could also, switching gears, just go through kind of a regional review and break down of which markets you're having the most difficult in seeing the continued high levels and perhaps deteriorating levels of negative pricing and incentives and which markets you're seeing some more stable trends or a leveling off.

This is Don.

I will tell you that we don't see a lot of strength in any of our markets currently.

We don't see any positives in a number of our markets.

If you look at our sales that we were trying to achieve for the quarter, obviously we did not achieve that in the quarter.

Most importantly I would say to you when we had our April division mid year president's meeting in Fort Worth, we sent our division president's back with marching orders to meet the market in each one of their markets and that resulted in a 40% decline in our sales for the quarter.

So the result currently D.R.

Horton doesn't see strength in any of its markets right now.

In terms of that had you highlighted it at our conference about a month ago, a month and a half ago a 6,000 unit number for Phoenix.

Is that still in the cards or how is that market in particular for you?

I will reiterate one more time.

I wish Phoenix was our worse market.

Because in Phoenix we still will close the number of units we have internally projected and I think I said we expect to close about 6,000 units in Phoenix and our margins in that market are extraordinarily good.

Thank you.

Your next question comes from Nishu Sood of Deutsche Bank.

Good morning.

First I want to do ask about your pricing relative to your volumes.

I don't see one interpretation of the disappointing order performance in this last quarter was perhaps prices hadn't come down enough to define where the demands was.

Looking at it that way were there some adjustments made within the quarter to bring the prices down to where the demand is or has anything happened subsequent to the quarter?

How are you thinking about approaching that?

Specifically, our division president mid-year meeting wasat the latter part of April.

So when we instructed our president's to go back and adjustment their pricing to meet the market in order to hit the number of units we want to do close in each one of those markets they began that process.

Unfortunately it took about two weeks to get to that point so we really didn't have our new pricing in place until mid-May.

So our sales results for the third quarter down 40% reflect our new pricing only having been in place for about six weeks.

We are hopeful that the new pricing going forward will get us closer to the number of units that we want to close but that is yet, remains to be seen.

If you do see that pricing already showing up on our sales numbers our average sales price in net new sales orders this quarter was down 11% compared to the prior year.

And we will tell you that pricing will continue to be adjusted project by project as we, as they evaluate the results of the actions that have been taken thus far so there will be continued pricing action.

We clearly have an internal goal that we are not going to speak about here to close x-number of units in this FY.

We believe we are on target to close that number of units and we are adjusting our pricing to make sure that we do hit that internal target.

Another question in terms of pricing and the impairment that you've taken, you mention that you are now assuming, for example, instead of perhaps flat pricing before pricing to actually decline somewhat, maybe if you could quantify that for us a little bit and give us an update what have sort of absorption you're assuming.

I know that some people have been assuming a pick up in absorption a couple years out, maybe some specifics in terms what have type of price declines you are expecting and for how long.

That's certainly go egg to vary project by project but to the extent that we have not been achieving the absorption we would like to see on a project-by-project basis based on the inventory level in that project we certainly are assuming further reduction inside prices.

I would tell you in many cases those assumed reduction inside prices could be very well five to 10% reductions assumed.

But again that will vary from project to project.

Frankly, we are adjusting our overhead for fiscal year '08 to do fewer closings in '08 than we do in '07 but we are anticipating being able to internally to do the same number of closings in '08, that we do in '07 but we are staffing the Company for a lesser percentage.

Got it.

One final quick question.

I was impressed to hear that you're maintaining your cash flow forecast enlight of conditions that have obviously gotten much worse.

Just wondering what is the offset there with fundamental deteriorating that's going to keep your cash flow at the previously targeted levels?

Two primary components that are going to be generating the cash flow for the Company.

We do continue to earn a profit, precharge's so that's certainly a components and then certainly inventory reductions will be a large portion of the cash flow expected as we reduce our homes in inventory and our overall inventory balances in the fourth quarter.

With analyzed our projected closings for the rest of this quarter and quite frankly we can't see any way that we cannot achieve our projected $1 billion in cash flow for us this year.

Thanks a lot.

Yes.

Your next question comes from Rob Stevenson of Morgan Stanley.

Good morning, guys.

Can you talk a little bit more about what you wound up seeing throughout the quarter as the quarter progressed in terms of when and sort of where you saw the big legs down in operating fundamentals and what from an operating standpoint you saw some success in during the quarter.

First of all I can tell you that our sales in each of them, each month of the quarter were choppy.

I would say to you that our April sales were, our may sales were better than our April sales and our June sales were worse than our May sales.

So it was very choppy throughout the quarter.

Our CANN rates consistently increased pretty much throughout the quarter month by month by month.

I think that's a direct reflection of our division president's doing exactly what we've asked them to do and that is to make certain that we right every buyer that we believe we can get qualified.

So I'm not so concerned about our CANN rates being as high as they are because I clearly believe we are trying to right as many buyers as we can.

On the other hand the CANN rates did increase during the quarter and we had some of the highest CANN rates ever for the quarter.

So in terms of that, though, you don't think that the CANN rate picking up was materially impacted by tighter lending standards and the sub-prime issues because you were able to trying to qualify them to make sure that they were going to be able to to be qualified ahead of time.

I don't think there's any question that the CANN rates reflected the troubles in the mortgage industry and the changes of the underwriting guidelines and the change in the type of mortgage available in the marketplace.

In some of our instances cross the country we are writing the same, we are trying to qualify the same buyer two and three times based upon the changing conditions in the mortgage industry.

And then as a follow-up question, have you started seeing any sort of real meaningful decline in cycle time from the sort of more abundance of labor, et cetera, out there?

And what sort of, can you sort of help us quantify that a little bit or even anecdotally.

I can anecdotally do that to you.

I have done ten days going from Savannah to New Jersey going through our Northeast region and talking to our construction people.

One, there is a high available of subcontractors, a positive that's ancillary to that is that there are decreasing costs pretty much across the system in terms of high availability of subs.

Our cycle times are decreasing.

They are all relative to this product and the community and the market.

But in general we are picking up just as a rough number 4, 5% on our construction terms in terms of being able to drive down the number of days it's taking us to build a house.

Okay.

Thanks, guys.

Next question, Larry Taylor of Credit Suisse.

Good morning, guys.

A couple of things.

One is obviously the significant magnitude in terms of the write downs.

As relates to land values and as you look across the marketplace, are land values do you think still going down or are we in a situation where things are starting to look more attractive?

I wonder if you could give us more color and maybe a little more color and maybe a little bit of an anecdote.

I don't see land values decreasing significantly in any market currently because largely reflection of a couple of thing.

Number one, a number of sellers aren't real until a position where they need to sell.

Perhaps more importantly there are not a lot of builds who need to buy.

In the markets that I was just in over the last 10 days, land prices are pretty static just because simple because irrespective of the price of the land there just are not a lot of buyers out there today.

How do you reconcile that with the potential for continued price decreases here in terms of, it sounds like as you're looking forward you have become a little more aggressive in pricing to move volumes.

How is that likely to unfold in terms of the marketplace?

I believe -- I'm not sure I understand your question.

Basically if you have lowered pricing you anticipate lower prices, land prices are static.

I wonder if it's possible that we could see a further decline in land prices, and your sense of sort of the stability out there or to the extent that you are more cautious than you were about values going forward on the land side?

I don't see immediately on the horizon any significant decrease in land prices.

And as a result I believe as we need to replace land right now we don't need to replace much land but to the extent that land prices do not come down then I believe we are faced with trying to find ways to increase margins other than through land purchases and lower prices.

I just don't see the land coming down significantly yet.

That's great.

Thank you.

And then lastly the free cash flow that you are expect to go generate, can you give us any more detailed sense of how you might apply that free cash flow?

Go ahead, Bill.

Number one use is to pay down debt.

At the end of the quarter we do still have balances outstanding on a revolving credit facility so that would be the first source of debt that would be repaid.

As we get beyond the ends of the fiscal year we do have a debt maturity of $215 million in December so that will be available as well and then we look look at other alternatives, but certainly debt repayment is the first priority and we certainly have continued to pay our dividend to our shareholders and that has certainly been out there as well.

Right now debt reduction is number one.

Thank you very much.

Thank you.

Your next question comes from Greg Gieber of A.G.

Edwards.

Bill I assume your last comments can be read as saying the dividend is secure.

For for the time being, correct?

To answer your question directly, yes.

Thank you, that's important.

A question I had on your charges, I got the impression, correct me if I'm wrong here, that you are also looking at the value of land where projects had not yet started.

Is that correct?

Yes.

So how much of what you rundown was stuff that's not currently in production and how much was land, just I guess in terms of either value or lots?

We got it broken down between projects where we are actually delivering homes, building and delivering homes versus those that are before that stage.

And so this quarter the impairments are broken down, 75% of the impairment dollars that are part of the charges represent projects that are not yet delivering homes.

And 25% of the charges represent projects where we are delivering homes.

Okay.

In terms of dollars.

Now, that is a heavier weighting towards earlier projects than in previous quarters.

In previous quarters it's been more heavily weighted towards projects where we were delivering homes.

That's very useful.

In approximately what percentage of the cases did you assume still falling prices?

All of our cases we assumed either flat or falling prices.

Okay.

I just wanted number of falling because a lot of your peers are just, in the past few quarters have just assumed static prices.

We -- well, maybe Bill can answer this question better than I but most of our assumptions and I would say most, let's say over 50% of our assumptions were clearly we assumed price decreases and I sat through every one of those impairment meetings, I don't remember very many of them where we assumed flat to be quite frank with you.

It's a project by project certainly but the majority, the trend is prices are declining, the price in backlog is lower than the price we've been closing homes at.

Clearly when the trends is downward certainly we are assuming reduced pricing.

I do want to clarify one piece as a matter of the 75, 25% split.

The 75% of the impairment charge relates to inventory dollars that are on our balance sheet resides in construction in process.

And -- I'm sorry, I'm saying that backwards, 75% represents dollars in the land underdevelopment line, 25% represents dollars that reside in the construction in process line.

Okay.

Sounds like a very thorough review.

Last question I have for you, DT, you said that June was down from May yet, you had you cut prices.

Do you feel there's a need that you are going to have to before the year is out make another whack to your prices?

I think that's entirely possible.

My general feeling is as I spend so much time in the road, division by division and subdivision by subdivision, my general sense is we are real close, I believe, to a, I guess a point where we are pretty much settled in our pricing.

There could be some other price reductions but in general we take a look at the impairments and the margins that we should generate post impairments and then add into our mix our good subdivisions where we are generating good margins without any impairments I think we are close to the bottom of our pricing.

The disappointing thing to us is that our division president's didn't really have the time to have the whole quarter with their lower prices.

We only got six weeks of that.

So as I believe we move into a full quarter, fourth quarter, we will see a bigger benefit from our price reductions that were implemented mid-May.

Thank you much.

Your next question comes from Dohyun Cha of McKay Shields.

The question has been answered.

Thank you.

Your next question comes from Dan Oppenheim of Banc of America Securities.

Thanks very much.

Was wondering if you could talk about some of your trends in California and about the management changes where you had a three CO structure last year and then moved away from that and running the California operations, with the declines out there have you made any further changes there or are all the division president's in place?

Is there much more focus on sales and sort of adjusting prices there than in other markets at this point?

Frankly, we are continuing to reduce our overhead in California and we are in the process of a third generation of that as we speak.

We recently merged our two Ventura county divisions into one division, just based upon where we felt the future sales were going to be in that area.

And we are also in the process of merging some back office operations in northern California and Southern California to more accurately reflect how many people we actually need in a back office , in a region versus

In terms of managing the operations, have there been any further changes in the top levels there?

No, Chris chambers is our regional president out there and doing a fine job in a tough market.

Okay.

Thanks.

Your next question comes from Bob Thompson of Advantus Capital..

I just had most of my questions been answered but I just wanted to check on your amount outstanding on credit revolver.

We have cash borrowings of $750 million outstanding on the revolver.

And can you comment in any possible M&A consolidation in the sectors and if you get yourself involved in the coming 12 months?

As I said it in numerous conferences over the last five or six months, obviously acquisitions are something that we can't comment on and generally speaking in the industry, still my position that even though we are all priced a lot more competitively than we were it's difficult I think to determine what the future value of any land that you would assume in any acquisition as we continue to adjust our impairments and our write offs on our existing land.

So.

And do you expect more positive cash flow in the next quarter or is it a little further out?

Our goal is to be positive to cash flow in '07, obviously, the $1 billion our goal is to be positive cash flow in '08.

We haven't given any projections yet on our level of free cash flow in '08 yet.

Okay.

Thank you.

Your next question comes from Carl Reichardt of Wachovia Securities.

Good morning, guys, how are you?

Good.

Bill, usually I ask this, can you tell me what the benefit was in gross margin if any from the reversal of impairments this quarter.

The flow through from previous impairments is still relatively minimal for us this quarter, Carl.

It's about $7 million this quarter.

Thanks.

And then bigger picture question, information your peers have talked about permanently exiting some markets and somewhere they have a relatively large presence.

I'm curious how you're thinking about it.

You guys are both broad and deep nationally and as you look at conditions currently is that something that's more on the table now that perhaps you might re-regional or shrink be the business back to more core markets and how does that impact the satellite operation or is that something that's off the table?

We both look at each satellite as well as division in terms of what kind production, what profits we are getting out of there.

I think most specifically California we are shrinking back from where we were in some of the inland areas and shrinking back into our more coastal markets but we look at each satellite operation individually and to date we have not collapsed more than just two or three of those.

And it's, we are just evaluating one at a time.

Terrific.

Thanks, guys.

Your next question comes from Susan Berliner with Bear Stearns.

Hi, I apologize if I missed this I wanted to go over the speculative inventory, I think you said 3700 units.

Is that correct?

3700 completed homes, Susan.

And how does that compare to last quarter?

That's down from 4300 at the end of last quarter.

Great.

And then 48% of the backlog is spec?

48% of our homes in inventory.

Homes in inventory.

Okay.

Great.

Thanks very much.

Your next question comes from Jim Wilson of JMP Securities.

Good morning, I was wondering, Don I guess from last quarter in your discussion of cash flow you mentioned I think for the year if I recall that you expected actually land purchases, might be 500 million within the scheme of what you expected the entire cash flow to be and I would assume that is out of existing option arrangements and some other form of commitment and I was wonder if you could color that a little bit and discuss if it's indeed out of option you are going ahead exercising on how much, or what terms have changed since you originally struck on those deals?

From the beginning of the year we said just to clarify that our land spend would be between 500 and 750 million for the year and we would be within that range at the end of the fiscal year.

And by the way a lot of our land spend happens to be from projects where we are closing lots where we've got a contract to by lots in order to build homes on those and we've got either primarily homes where we got a sold home that we need to get started.

As far as our lot option contracts clearly we are down probably about 40% what have we originally had under option contract and to the extent and the 60% willing to renegotiate with us or renegotiate where we need to get to as a result we have written of that earnest money and the due diligence associated with that and we are down to about 40% of our original position.

It's going to vary market by market in terms of how we've restructured the closing price as well as the number that we have to take down per quarter.

I guess what I was trying to maybe tie that to is I know builders are not tying up new land, certainly land funds who are some sizeable discounts on deals but I was wondering if you had, if you could give your perspective on where you have been able to renegotiate lot options and tie that into thoughts because that's what would be going on in the overall land market, I would think.

Jim, I'm not as optimistic about how well we've done on renegotiating our land deals.

We've had to write off almost 60% of our option lots, it seems like we had a lot of hard line sellers out there who by the way are getting a little softer today.

But once we exit the community then we don't have much of a desire, today no desire to go back in and restart operations.

I don't know if that answers your question but generally we have punted 60% of our option deals.

Final other question, out of those option contracts you walked away from could you give a little color on were they in particular heavily weighted in any of your geographic locations or in turn option struck, say later cycle at higher prices as opposed to much farther back in history?

I think Bill can answer.

Yes, this quarter it's more heavily weighted towards the Northeast.

I don't have a accumulative number in front of me, though.

We can get that information and get back to you.

It will be in our Q as well.

We certain had a lot in all our regions.

It will be broken out in our Q.

(OPERATOR INSTRUCTIONS).

Your next question comes from Alex Barone of Agency Trading Group.

Yes, thank you.

Good morning.

I wanted to ask you, do you have a breakdown of the number of communities by each region that were impaired this quarter?

Alex, I think the breakdown that we provided was the dollar amount by region and in front of us right now we just have the total communities which we've already talked about.

Okay.

So you don't have that.

Okay.

Can you talk about generally speaking whether the assumptions -- two things, one is what triggers I guess an impairment and secondly, is it that gross margin has to go below zero or is it operating margin has to go negative?

And secondly what assumptions are you generally building in to the communities that are impaired in terms of sales pace and I guess the new margins that you're plugging in?

I can answer the second part of that question first and that is its on a community by community basis where we are looking at our total number of lots in that community.

We are looking at our current sales base and we are looking at our sales price and we are saying, gee, where do we want our absorption to be in that community so we can work our way through that community in a timely manner.

So we are addressing to the extent that we are write down our cost that's taken into consideration but basically it's a sales and absorption level.

So we are adjusting our pricing, community by community to hit our absorption level to get out of the community in a reasonable period of time.

Alex, on what actually triggers an impairment it is when the, the expected operating margin essentially for our project is expected to be at a loss on an undiscounted basis, if the operating margin is going to be in a loss in a project then it would be deemed to be impaired and at that point then you would go through the fair value analysis to determine the amount of the impairment same as what it's been each quarter as we've been going through this process.

Specifically to your gross margin question, gross margin did not have to get to zero.

It's the gross margin in a project less than direct expenses associated with the project, it's not our fully loaded SG&A but there is some component of SG&A that must be covered.

Got it.

Don, when you say it's kind of an acceptable sales pace can you give us some idea in your mind what that means on average?

Yes, clearly what what was like to do, we always said we like to be in and out of a subdivision within about a two to three-year time period.

Obviously as sales have slowed we try to adjust our pricing so we get our capital back as quickly as possible but most importantly within that range of two to three years.

One last one, how many communities I guess have you impaired total in California as a percentage of your total?

I don't have that specific number.

Again, California has been the, over 50% of our total overall impairments certain until terms of dollars and I would expect the number of communities wouldn't be all that different from that.

Okay.

Thanks.

Thanks.

Your next question comes from Kenneth Zener of Merrill Lynch.

You said it was 7 million in the quarter that you got from prior impairments rolling through your income statement?

Yes, that's the flow through from prior impairments in prior quarters.

I appreciate that, I think you guys are setting a good example for other builders.

When you started forecasting price declines in your community what was your auditors response to this given that that's kind of different from what you've been doing in the past and I think what the majority of builders have been doing today?

Yes, the natural question of any auditor, an auditor is required to be skeptical by nature so they are skeptical when things are good and skeptical when things aren't so good.

The question is well, why now, why are you assuming price reductions now and as you lay it out in our prepared statements today there certainly have been a number of thing that have occurred in the housing market over the past quarter that have certainly caused kind of the next leg down, certainly the mortgage is tightening has certainly played a role in that.

But then our performance, our sales being disappointing, our cancellation rates increasing again this quarter and the actual actions that are ongoing out in the field right now where we have to, actually taking pricing down further because our absorption are not where we want them to be.

We can actually walk the auditors through the process of the fact that in this project we have lower pricing and are continuing to do lower pricing.

So it's a matter of showing them the facts, showing them the documentation and the support that's in the plans for each project and walking through the assumptions with them.

I think the real conclusion was from what I heard from Bill and Mike Murray our controller was that our auditors were very clear and understood why we were taking those impairments especially in lighter of our price reductions and we implemented in mid-May and our lack of sales relative to our goal for the quarter.

So I think --

Right, I think it's interesting dialogue and I want to connect that dialogue to kind of your pricing strategy that had you in California where it had been rock solid through December and we went to rock bottom in March and it sounds like were rock minus 5 to 7% now.

What type of conviction level is there there, what do the auditors say, why not more, essentially, where was your conviction level that more price discounting wasn't necessary?

Because it seems to be an elastic band at the lower prices, then they pull down the rest understandably because it's a an elastic market right now and it's deflating.

What was your response to, why not more?

I appreciate it.

First of all in California, like Bill said that has resulted in almost 50% of total impairments today and I think we are slightly over $500 million in California and we are impairments totaling somewhere right at $1.2 billion.

So we've impaired California harsher than other areas just simply because the market has performed worse out there.

I would say to you that at some point in time in the impairment process and I think in some markets where we are reaching this point now we can continue to lower our prices but we are not going to generate incrementally as many sales as the decrease in prices that would justify.

So in some markets we are just going to accept slower absorption simply because dropping the prices another $20,000 don't get us the number of absorption we thought it should get.

So we are better off selling four a month than selling six a month.

Thank you.

Yes.

Your next question comes from Joel Locker of FBN Securities.

Hi, guys, just wanted to see how much actual home buyer deposit capital you had against your 4.35 billion in backlog, if you had a number for that?

Joel, that's not a number that we have handily in front of us.

Our average deposit is probably somewhere about 3 and 5%.

So we get the earnest money deposits up front basically at the point they sign a contract.

We also hold additional funds though as people make custom changes to their home and they visited our design centers so our cumulative deposits are probably higher than our 2 to 5% range.

Has that changed year-over-year even in the last three months as a percentage?

It would not have changed essentially, no.

Just on your SG&A how much of that total 267 million was overhead and how much was actual selling expenses?

It's primarily certainly going to be overhead.

Over 50%.

Over 50% of our overall SG&A is related to people.

As has that percentage changed either in the last year or so?

Not significantly, no.

And I would telling thank you those costs have come down more quickly than our selling costs, than our advertising and marking costs.

Marketing costs is maybe down slightly but certainly not to the extent that the rest of our overhead is.

How much is your headcount down just from a year ago?

It's -- our peak was 10,007 employees and we are somewhere right around 6700 today.

You said 10,007 or 10,700.

10,007.

Just call it 10,000.

We are down to 6700.

The peak was in mid '06.

Mid '06.

All right.

Thanks a lot.

Your next question comes from Stephen Kim of Citigroup.

Hi, guys, sorry I was on another call.

I wanted to see if I could get your CANN rate once again.

I didn't catch it.

Our CANN rate this quarter was 43% -- excuse me, I'm sorry, 38%.

That seems a little more reasonable.

In terms of trends through the, trends going forward, obviously you're talking about lowering your, having to lower prices and I should assume that we should anticipate that your gross margin might move downward at probably the steeper trajectory as we had in the fourth quarter versus what we saw on a sequential basis in the third quarter.

I'm not missing anything there, am I?

I think you are missing something because clearly as I travel around the country and Bill has seen it in our numbers our costs are coming down and more dramatically than what they had as when we first entered this downturn so we are beginning to offset, I should say recapture some of the pricing that we've had to give up on.

As when we look at the average home closed our average stick and brick cost in each home is down about 5% from where it was a few quarters ago so we are starting to see that flow through our closings.

Now certainly I think there's been even more cost reductions negotiated out there but because we are not starting as many homes those aren't all being realized yet but certainly we are starting to see it come to our closings, some offset.

Being in the field there is definitely softness from our vendors and softness from our subcontractors in terms of pricing.

Great.

So what you're saying that may actually net out sufficiently so that you don't see a steeper drop in your gross margins sequentially in 4Q versus what you saw in 3Q.?

That's certainly our goal, yes.

Well, it's an admirable goal, I hope you achieve it.

Appreciate it.

Thanks very much.

Next question, Timothy Jones, Wasserman and Associates.

Good morning.

Here it comes.

I'm confused with what's going on here.

You have said that, first of all, why you took such a greater write off this quarter than the prior quarters.

I mean, mortgage tightening started in February.

Your sales the prior quarter I think were down 37% versus 40.

You're saying that you're hitting your goals on deliveries and you're saying that you don't expect gross margins to come down.

And you're 250 some thousand average price was actually a little higher than your projection for this year nine months ago.

I don't think, all things being the same I still don't get the difference, I can't find out where the difference is that if your margin is going to stay the same, if you are delivering what you want and so forth, the only way is a huge rise in SG&A and I don't believe that will happen one bit.

First of all I did not say that our gross margins were not coming down.

What I said a few moments ago was that I felt like I said our goal was to make up for the deterioration of gross margin by driving down our costs.

And as Bill indicated we are beginning to see some flow through from our cost reductions over the past two, three quarters and we are continuing to see having been in the field for the last three weeks a substantially decreases in vendor as well as labor costs in all of our communities.

So as a result we expect those future decreases to also help shore up our gross margin.

But still you have to have a substantial net/net drop in gross margins to justify these write downs.

Now, Tim, we did have a substantial drop in gross margin in our actual results this quarter.

Our margins were 15.5% before FAS 66.

That was down 220 basis points from the previous quarter, down over 800 basis points year over year.

So our margins did take another step down.

Regarding volume, while we do expect to hit the target that we had internally here for this year in terms of closings, when we look at our sales pace right now our sales pace right now is not on that same pace and so that's what we are trying to shore upset sales pace to hit absorption that we want to see and we believe we are going to have to take further price adjustments to hit that absorption level as well.

Plus our second, don't forget our second quarter sales, not to wine here but our second quarter sales comp was on a much tougher number than what the third quarter is going to be.

It's down 40%, that was against down only a 4% the previous year so it's actually, you hate to say it actually a little bit worse than the 40% appears.

And our comp for the fourth quarter I think we are down mid 20% someplace so basically we are, we were one of the last builders to enter into a slowing sales cycle simply because we began reducing our prices earlier as opposed to later so our comps are a lint more difficult.

We have an easier comp this quarter.

There is one other factor, Tim.

We are at the end of the traditional spring selling season.

In March it was early in the process.

Yes, there were some weak results but we are at the end of the selling season.

We know a whole lot more about the overall sales environment now than we did back at the end of March.

So clearly we are more comfortable making some further assumptions as we look forward on each project.

So you're basically saying because of the weak sales and so forth that you basically gotten more conservative about your outlook for next year?

That is correct.

Thank you.

Your next question comes from Randy Raiseman of Durham Asset Management.

Just a quick question around selling price.

If you are saying kind of the price where we are today or I guess the price that you guys reported percent of revenue Q1, or this most recent quarter is kind of what you see kind of going forward, just want to understand what that translates into as a change from where we were last year and then just as a bigger picture kind of how in your experience, how do your home prices, the changes you sigh there correlate with what you see in the existing home market?

And then lastly if you could just give a sense by region or any large areas where you've seen much bigger swings in the change in average selling price and kind of to what magnitude.

I will take the middle part of the question first.

Frankly, I believe that our new home prices are adjusting at a steeper rate than the existing home prices are.

And that's a function of the fact that we are able to drive down our costs more readily and more quickly than someone who has a fixed cost in a home.

And as an adjunct to that the person that has an existing home especially if you are an investor or speculate most of those that are on the market for resale today are homes that are 100% financed so they don't have much leeway in terms of adjusting their price downward so most of those homes in my humble opinion are being rented.

The great thing about being in the new home business versus the existing home business is we are able to have more variable and adjust our cost and prices downward to meet the market.

And change the market that we offer as well to be able to hit an affordable price point.

How about any particular regions, if you could give us some of the real hot bed areas what you've seen in change in price in the quarter?

I believe clear until Florida we are continuing to find equilibrium in the Florida market.

I just got finished going through our Northeast region from Savannah, Georgia, all the way up to New Jersey, and I believe we have found equilibrium in that market.

Our sales are much better there, our pricing is more solid there.

We are still struggling in California.

Our sales are not where they need to be and our CANN rate is higher in California than it is for the rest of the Company.

How much are prices down in California?

I don't have a real feel for how much they are down in general.

I think what we are really fighting in California is not so much a pricing issue is just an affordability issue.

There are -- we've got down to 10% of the people can afford a medium price of a home in California and after you take out all of these unusual mortgages that have been available in the marketplace they are uncomfortable and I think somebody put out some statistics recently, maybe only 4 or 5% of people in California can afford a medium price of a home.

It's an issue of not just a big pool of buyers out there.

Phoenix is good and Texas remains to be a very strong state for us.

We have a lot of our assets in Texas and we have markets still good in Texas.

Thank you very much.

Your next question comes from Stephen East of Polly Capital.

Good morning.

The question on the gross margin, we've been dancing around this it seems like the entire call, if you look at your order rates, your orders that you have right now, how is your gross margin compared to what you saw last quarter, the 15.5% gross margin?

Is it hire, lower, and approximately how much so?

Current sales today, margin is lower on current sales today than on the homes that we've been closing.

There will be some offsetting factors but margins will be lower.

Any type of magnitude you can share with us?

I really couldn't tell you on that right now.

Okay.

All right.

And then on,DT, you said in the past that you all expected to have lower charges because of your greater profitability, if you are the most profitable you should have the lowest charges.

I guess I'm struggling with trying to figure out, have you all become much more conservative in how you're looking at this process or is this an indication that the rest of the industry is going to start another round of impairment charges rolling through?

I can't speak to the rest of the industry.

I can speak to Horton and, yes, we've become much more conservative as we move into this.

You'll recall I was the one who said '08 was not going to be very good and '07 was going to be terrible.

The real reality of life is that where we see our sales today and where we see the mortgage industry today, we've clearly become much more conservative in when we anticipate a recovery in the housing industry.

As a matter a matter of fact we are clear in our conference call we aren't predicting a recovery because we don't see one on the horizon.

It's more a function of, yes, our sales are not where we need them to be, where do we need to mark our inventory to get to the sales point we want to and there are impairments.

One last question, where do you want to get your lot inventory to and how long do you think that takes you given what you all see in the environment right now?

If you look at it on a trailing twelve-month basis it's not a good indication of where our lot inventory should be, it should be closer at a trailing quarter of sales and I would say we would like to clearly get that down under a four-year supply on a trailing six-month basis.

About how long do you think that would take you given this environment?

I would say where we are going we have another couple of years.

Okay.

All right.

Thanks a lot.

Your next question comes from Bob Sells of L&K Capital Management.

Two questions.

In terms of cost, can you just go one step deeper on the cost structure and help us understand, of the portion of your COGS what portion, I guess it would be ex land is controllable and how much have you benefited by either the reduction in commodity prices for materials and the flexibility of vendors?

Do you have a sense on our COGS?

Our cost of sales is about a third land, a third materials and third labor.

The labor component is really what we attacked first when the market started pulling down specifically in particular markets because that is a very local labor pool and very sensitive to changes in volumes in the local market.

So we were negotiating with framing contractors, plumbing, electrical contractors real particularly we were talking with our national or regional suppliers.

We have now moved on to where we are talking with our national and regional suppliers.

Those are going to be the components that are manufactured and are standard in most homes.

And we've had success negotiating pricing.

Kind of preliminary goal for us was to achieve somewhere between a five and a 10% cost reduction.

I think we are clearly on track to do that.

One thing I want to say though is it's a an on going process and as long as the market remains soft and as long our margins remain under pressure we will continually renegotiate every cost that goes into our homes.

When you say 5 to 10 percent, is that 5 to 10% of those costs or 5 to 10% of COGS points?

It would be 5 to 10% of the cost components that we can negotiate.

So that would be basically the 65 to 70% that's materials and labor.

Got it.

Then in terms of spec homes, you have a stated goal I think of getting to 30% of the homes under construction being expected.

It was 48% this quarter.

You haven't made a lot of progress.

I assume there are more optimistic goals going into the first quarter or so.

When will we start to see some dramatic progress towards that goal?

Not dramatic but material progress towards that goal?

Do you expect some next quarter or is it a multi-year process?

Clearly our goal is to get it at 35%.

I don't want to argue about 30 to 35% but 35% is our goal and you will see that in this quarter.

You will see a substantial decrease in our specs this quarter.

One of the things that's been are keeping our specs higher than our planned level is cancellation rate.

We have our spec starts we can't control the cancellation rates may delay us getting down to 35.

We do think we will show an improvement this next quarter.

Thank you very much.

Your next question comes from Michael Rehaut of JP Morgan.

Hi, thanks, just a couple of follow-ups here.

First, you had gone through in your opening remarks about the goodwill write down.

I was hoping that you could just repeat where you had written down the goodwill completely and which regions it remains and also if you have an exact number in terms of what portion of that was or what percent was tax deductible and at what rate.

Right.

Of the $425 million of impairments, the breakdown, Northeast is $39.5 million, southeast, $11.5 million, California, $300.3 million, and west is 74.4.

That's the 425 that we've written off.

We have $153 million remaining in goodwill.

And that is, that resides in our southwest region, we have $102 million in southwest.

Northeast we have 35 million remaining.

And our south central we have 16 million remaining.

Now as far as the, as far as the tax deducibility of the goodwill it's only about 5% of the goodwill charge will be tax deductible.

Only 5%.

It's an estimate, about 5%.

Thanks very much, Bill.

The second question, just another point of clarification, right now you have 48% of your homes under construction are speculative?

That is correct.

And you're hoping to get it down, did you say all the way to the goal of 35% by the end of the fourth quarter or would that be over a couple of quarters?

I think that's going to be over a three, four, three to four quarter period.

Three to four quarter period.

And likewise you are still looking to reduce the number of completed spec homes from 3700 as well?

That's absolutely right.

We are down from 5,000 then we went down to 4300 last quarter, 3700 this quarter.

So we are making good progress on those.

Very good.

Thanks a lot.

Your next question comes from Alex Barone of Agency Trading Group.

Thanks, guys.

Just wanted to ask, what was the dollar amount of assets on the watch list last quarter and this quarter?

This quarters number here in front of me, it's right about $1.1 billion, 1.17 is the number that's on the watch list at this quarter.

It was less than 1 billion last quarter, like somewhere in the 850 range I believe is what we had in our 10(Q).

894 was the watch list number last quarter at March.

Got it.

And do you have also the dollar break down of your pretax income by region available or?

It would be in the Q.

Let's see here, I'm not sure if -- I'm not sure if we have every last number tied down but it may vary just a little bit in the 10(Q), but --

That's fine.

I just wanted to understand something.

So like if you guys are still generally profitable in every region and you said only 25% of the impairment came from homes that are from effectively selling communities, does that mean, does that mean basically that you only are impair then those communities that are no longer profitable and maybe another write down could imply more?

If I understood your question what we really impaired this quarter, 75% of it was as we said land in which we are not building homes today.

So basically the first round of impairments were on the majority of them were in subdivisions where we are building houses and we've impaired those.

And now relative to our sales level in those communities, not being what they should be, then we've looked at our adjacent vacant land and we've said is, well, gee, if our sales aren't where they should be in our existing communities that we've already impaired then what does that mean to the land that's out there.

So as a result this quarter we took the vacant land and said, we don't believe that we are going to be able to sell homes for what we thought they were going to be and that's how those got impaired.

What is the breakdown, I guess, of communities that are kind of vacant land as you call it versus communities with actively selling houses?

I think what we ended up with was as I recall from the numbers, we have about, this is on our balance sheet this quarter we've got about $325 million rough numbers of land that's being held for development.

Is that correct?

That will not be developed in the next 12 to 18 months I recollect that's what that number is.

But I guess what I'm asking is how many total communities do you guys -- you say you look at every one of them.

I guess let me ask it another way.

So how many total communities do you guys have and what the breakdown is between those that are selling houses and those that are not selling houses?

We can give you the percentage but as you know we've never put out the number of communities that we have because we define communities differently -- every builder defines their communities slightly differently.

The breakdown that we gave you during the call or I think in answer to one of the other questions about 25% of the impairments this quarter related to our homes in construction inventory line; 75% related to the inventory land and lots underdevelopment line.

I think that may be the breakdown that you're looking for.

Well, I guess I went to your Web site and I counted almost a little over 1,000 communities so I was just wondering if those are just the once that are actively selling and I was just trying to get a feel for how many don't show up on the Web site that aren't selling anything.

First of all, what shows up, what we define as a community on our Web site where we are marketing homes and the ways we count communities and our corporate office for financial purposes are two different things.

We've got communities where it may be one community to us and it could be four communities out there in the division because we have four different product lines in the same community.

It depends on the purpose in which you are actually looking at the assets out there so it could be very different.

Your --

Which is the reason we don't disclose it.

Your next question comes from Jennifer Mccan of Stifle Capital Managements.

My question is revolving around your inventory.

I guess I was operating under the assumption and correct me if I'm wrong that when the market began to turn inventory would create a positive cash flow from operations, or at least assist in that cash flow.

Year-to-date I have your inventory down about 750 million but we have 1 billion of inventory impairments which means you are still using cash with inventory.

Granted there's a breakdown there and I'm looking at that as well but I'm trying to understand is when do we see this reverse and start to contribute to cash flow from operations?

Well, Jennifer really two thoughts on that.

As you look at this current fiscal year, you've seen our homes in inventories start the year at about 21,000, we are still at about 27,000.

So the increases that you are seeing on our development, excuse me, on our inventory really relates to development costs that we continued to put into land that we currently owned to bring those lots to a position where we can build houses on them.

If you go back a full 12 months, though, and include the fourth quarter of last year, you actually see a large amount of cash flow from inventory reductions in our fourth quarter last year as we brought our homes under construction from 40,000 down to 29,000 homes started this year.

So you have actually seen a large portion of cash flow from inventory reduction already.

What was the cash flow contribution in the fourth quarter of last year, then?

I don't have the number in front of me but about 870 million, 840 million, somewhere in that range.

Okay.

And you will see a significant inventory reduction in this quarter just based upon, one, we are starting fewer homes than we have in the past.

Secondly, this is our biggest quarter in which to close homes and we have a lot of units to close this quarter.

And this quarter, in the previous three quarters we spent right at $500 million on land.

We are saying we are going to end the quarter with, the fiscal year with between $500 and $750 of land and I doubt that we even get close to the 750 but even if we do we are still going to have a significantly less inventory spend this quarter versus what we have had for the rest of the year.

So the majority of your inventory reduction will probably be becoming from the line item you call residential land and lots?

It will in the coming quarter.

Okay.

Thanks.

Thank you.

Your next question comes from Mike Jelisavcic of Longacre.

Hi, just want to, could you guys quantify what options were?

The dollar value of options?

For lands that we have under contract?

That would fall into the inventory line on your balance sheet.

Actually thing that we have under option are not included in our inventory balance because we don't currently own them.

The dollar value that we have under option that we have the right to purchase going forward.

That number.

About $2.3 billion.

Your next question comes from Greg Haendel of Transamerica.

Hi, could you guys just repeat, I missed it in the call, the cash flow from operations for this quarter and your free cash flow from this past quarter?

Yes, our cash flows from operations this quarter was $73 million.

Okay.

Thank you.

At this time there are no further questions.

We want to thank each of you for joining our Q3 fiscal year '07 conference call.

We are committed to run this company as conservatively as we have and we are continuing to reduce our cost along every level including SG&A as well as our land cost, our vendor cost and our subcontractor cost and we look forward to a good end to the fiscal year '07.

Thank you.

This concludes today's conference.

You may now disconnect.