KB Home (KBH) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to KB Homes first quarter earnings conference call. As a reminder, today's conference call is being recorded and Webcast on KB Homes website at KBHome.com. KB Home's discussion today may include certain projections and forward-looking statements regarding KB Home's business, future actions, and expected results. These are based on management's assessment of the Company's current business and assumptions about future operations conditions, which should not be considered guarantees of future performance. Please be aware that KB Home's actual results may differ from those that are expressed or implied by the projections and forward-looking statements that may be made today due to risks, assumptions, uncertainties and other risks and events outside of the Company's control, and that the differences may be material. Many of these risk factors are identified in the Company's periodic reports filed with the SEC, including the annual report on Form 10-K, and the Company urges you to read them.

For opening remarks and introductions, I would now like to turn the call over to KB Home's President and Chief Executive Officer, Mr. Jeffrey Mezger. Please go ahead, sir.

Thank you. Good morning, everyone. Thank you for joining us today to discuss the financial results for our first quarter of 2007. With me this morning are Dom Cecere, our EVP and CFO, Bill Hollinger, our Senior Vice President and Chief Accounting Officer, and Kelly Masuda, our Senior Vice President of Investor Relations and Treasurer.

From a macro perspective, the fundamental economic drivers for housing remain healthy, including favorable demographics, low interest rates, job growth, and growth in personal income. At the same time, there continues to be an excess supply of unsold inventory, driven in part by a lack of affordability. The problems in the subprime lending marketplace are creating further challenges in assessing the state of the housing market and the near-term outlook. During these times, we remain focused on achieving all-out operational excellence with our KBnxt business model, leveraging our core business strengths and disciplines as a build-to-order home builder offering choice and value to our customers.

Now let me share some of the financial highlights for the first quarter with you. Net orders for new homes were down 12% this quarter versus the first quarter of 2006. This compares to a year-over-year decline in orders of 38% in the fourth quarter and 43% in the third quarter of '06. We entered the first quarter with 17,384 sold homes in backlog, and we delivered 6,655 new homes during the quarter, down 16% from the first quarter of '06, with 11% fewer active communities. The lower community counts were a strategic move to scale back community count growth and lower our investments in land and land development, and in turn generating free cash flow until the U.S. housing market begins to show some sign of stability. Housing gross margin in the first quarter was 17.7% of revenues compared to 18.8% in the fourth quarter of '06, as we continue to adjust prices to remain competitive in markets where there is still an excess supply of unsold homes.

We generated $1.8 billion in revenue in the first quarter, which was down 19% from one year ago, driven primarily by the 16% decrease in unit volume and a 5% decline in average sales price. We exceeded consensus estimates, earning $0.34 in EPS in the first quarter, with 80.6 million fully diluted shares outstanding, 7% fewer shares than in the first quarter of 2006. We ended the first quarter with $328 million in cash and nothing outstanding on our revolver. Inventory was reduced by approximately $200 million in the past three months, from $6.5 billion at year-end of '06 to approximately $6.3 billion at the end of the first quarter of '07. As I stated, we are maintaining our discipline as a build-to-order home builder, authorizing the start on the vast majority of our homes only when we have a qualified buyer, and providing these qualified buyers the opportunity to customize their homes with extensive choice at our design studios.

We continue to maintain that our choice-value approach and build-to-order business discipline is far better than building spec homes based on a pre-determined plan, and then forcing a value on the customer through discounts or incentives in order to sell those homes. We've taken the actions necessary to continue to generate significant free cash flow in 2007, with a land pipeline and overhead structure that has been realigned based on our backlog position and sales rate expectations. We enter the second quarter with 18,406 sold homes in backlog with a dollar value of $4.8 billion, one of the largest in the homebuilding industry. Now I will ask Dom to take you through the financial highlights for the first quarter.

Thank you, Jeff. The average sales price of homes delivered in the first quarter of 2007 decreased 5% to $261,400 from $276,200 in the first quarter of 2006. In the U.S., the average sales price in the first quarter of 2007 was down 8% to $267,400 from the year-earlier quarter, while France was up 15%. Our order cancellation rate in the first quarter improved to a more historical normal rate of 31% of gross orders, compared to 48% in the fourth quarter and 53% in the third quarter of 2006 respectively. Cancellations were 20% of the beginning backlog entering the first quarter of 2007, improving from 24% of beginning backlog in the fourth quarter and 25% of beginning backlog in the third quarter of 2006. We believe the improvement in order cancellations experienced in the first quarter was driven by having converted over 80% of our backlog to deliveries in the past two quarters, and replenishing this backlog with buyers at more affordable price points who are obtaining loans under the more restrictive guidelines that are now in place. We averaged 364 active selling communities in the U.S. in the first quarter of 2007, which was down 11% on a year-over-year basis. We are curtailing community count growth in submarkets where there is an excess supply of finished lots and returns on invested capital are below our targeted return threshold.

Housing gross margin was 17.7% this quarter, down 110 basis points from the 18.8% reported in the fourth quarter of 2006, driven by pricing in the U.S. being down 4% from the prior quarter. SG&A as a percent of housing revenues in the first quarter of 2007 was 15.1% compared to 13.5% in the first quarter of 2006. SG&A costs are seasonal, with higher cost incurred in the peak selling season and the ratio improving as deliveries pick up throughout the year. The increase in SG&A compared to the prior year was driven primarily by higher marketing and advertising costs, in addition to increased sales incentives to remain competitive in what continues to be a challenging housing market. We are maintaining tight controls on SG&A spending, continuing to reduce cost and improve productivity.

Diluted earnings per share was $0.34 in the first quarter compared to a First Call consensus of $0.25, with 80.6 million diluted shares outstanding, down 7% from 86.2 million shares outstanding in the first quarter of 2006. Our debt to total capital net of cash at quarter end improved to 49% compared to 52% in the first quarter of 2006. Company-wide, we had approximately 123,000 lots owned and controlled at the end of the first quarter, including France, compared to 197,000 lots one year ago. In the United States we own and control 104,000 lots, which represents less than a four-year supply of land on a forward-looking basis, with 63,000 lots owned and approximately 41,000 lots optioned. We currently have approximately 10,000 homes under construction in the U.S., 83% of these homes are sold and 17% are spec. We had only 600 finished unsold homes nationwide, averaging 1.6 unsold home per active selling community.

In summary, it continues to be a challenging housing market. However, we are well-positioned to weather the storm. We continue to reduce inventory, we are limiting our market exposure by building homes to an order backlog with a qualified buyer and have limited spec production. We made money this quarter, we strengthened the balance sheet, and we have a solid order backlog of sold homes going into the second quarter. We are properly positioned for the market, while making great strides to improve the affordability of our homes and lower our cost of production. Now I will turn it back to Jeff for the wrap-up of the first quarter 2007 conference call.

Thank you, Dom. Amid further tightening of guidelines for subprime mortgages, funding for subprime home loans that don't require a down payment or proof of income will be difficult to find. While subprime is a small component of our sales activity, our mortgage partner, Countrywide, will still offer a wide variety of loans to qualified subprime borrowers who can document income and make the required down payments. The leading economists for the NAR and at the University of California believe that the problem in the subprime market will likely be contained with a healthy job market providing a basis for moderate income growth. In 2006, approximately 13% of mortgages for a KB Home were financed with subprime loans, compared to 20% nationally for all mortgage originations. KB Home does not hold any mortgage loans or have any risk for early payment defaults, a benefit derived from our mortgage joint venture, Countrywide KB Home Loans, which began making loans to home buyers in September of 2005. This great partnership allows us to focus on homebuilding and leave the mortgage approval process to the experts. The primary risk we see from changes in subprime lending is the overall market risk of a potential slowdown in housing demand from buyers not being able to qualify under stricter underwriting standards, or the possibility of increased excess supply of unsold homes from a rise in foreclosures.

I would point out that in our core markets, strong job growth and growth in personal income are the underpinnings for a healthier housing market, with foreclosures in these areas still occurring below the national average. There are still options for home buyers who have little or no money for a down payment or a blemished credit profile that have the income to qualify. These options include FHA and VA loans. The down payment for an FHA loan is approximately 3%, and can be a gift from a relative, friend, or qualifying organization. A VA loan, on the other hand, is a true 100% financing alternative, can be a zero move-in program with seller paid closing costs and prepaids. We anticipate seeing government loans filling the void and once again becoming a meaningful percentage of mortgages selected by our home buyers.

We continue to focus on our KBnxt operating model as a build-to-order home builder with a six-month order backlog, having buyers qualified for a loan under the new guidelines before building the home. And we have reduced the number of active selling communities and our lot positions to align with lower market demand, generating free cash flow to further strengthen the balance sheet and maximize shareholder value. Year-to-date, we have seen cancellation rates return to normalized levels. As planned, community counts in the U.S. in the first quarter are down 11% from the first quarter of '06. Traffic volume in the U.S. was down 8%, in-line with the decline in community counts, and net orders for the total Company were down approximately 12% in the first quarter compared to one year ago.

While the sequential trends from quarter to quarter are modestly good news, we are now in the peak selling season, and we will have a much better feel for our financial outlook for the year in another eight to 10 weeks. We expect the second quarter of 2007 to be challenging, with continued pressure on pricing and margins. The correction that started last year has affected individual markets to varying degrees. That being the case, some markets could show signs of bottoming out, with the contraction in housing starts reducing supply and providing some stability in the second half of this year. This isn't the first homebuilding slowdown we've seen since KB Home was founded 50 years ago. We have a solid order backlog and an experienced management team with a business model that can weather tough times and emerge well-positioned to take advantage of opportunities when the markets recover. We will now open up the lines to take your questions.

Thank you very much. [OPERATOR INSTRUCTIONS] Margaret Whelan, UBS.

It's actually [Dave Goldberg] on for Margaret. How are you?

Good morning, Dave.

Wondering if you guys could give us an idea on where you think free cash flow could be for '07, and what are expectations are there? And what the priority is going to be between paying down debt and delevering versus share repurchases moving forward.

Dom can answer that.

Hi, Dave. We have positioned ourself very well to generate free cash flow. The free cash flow really comes in the second half of the year when our deliveries pick up, while our investments that we've made in buying land and developing land is significantly below a year ago, and as soon as the [inaudible] ten weeks that we can determine the number of deliveries that we're going to have for the year, we'll have a good feel for our free cash flow. And exactly when the markets are going to begin to stabilize will determine how much is used for share repurchase versus growth versus reducing debt.

Do you have a point you're trying to get to on the debt? Is there a targeted debt to cap level?

Our targeted debt to cap has continued to stay between 45% and 50%, and we've been at the low end of that range.

Okay. And then I guess as a follow-up, I was wondering where margins were for homes that are currently in backlog, and if you know what percent of buyers that are in backlog are using subprime financing?

That's two different questions, Dave.

Sure.

[inaudible] margins, Dom?

I think the margins in backlog aren't dissimilar to what we may have today. The question is, will that be the margin when we close. It's gotten more stable, so we can't fully answer it, Dave. We still are seeing some pressure on margins. But we had 17.7% average margin in the first quarter, and I don't think it's going to be down significantly. But we don't know -- we can't peg exactly where it's going to be yet in Q2.

And terms of the prime exposure in the backlog?

As to that question, Dave, let me start with a few general comments. I know this will be a topic on the call. If you were to line up 50 mortgage bankers and 50 people from the investment community, you wouldn't get a consensus on what a subprime loan is. Everybody has a different opinion. So I can only share with you subprime relative to how we see it here at KB. And as we stated, it was less than 15% in '06. We expect, obviously, it will go down here from that level even in '07. In our business model with Countrywide, we start the home after the loan is approved, we gain the credit approval first. And we don't feel that our backlog is at risk on the business that's with Countrywide. We're approaching right now a 70% retention rate with Countrywide, which is very solid, and we do not broker any loans out of the venture. So the 70% backlog with Countrywide is going to go through our normal process, get an approved loan, and then we'll build the home and close the home. On the 30% that's not with Countrywide, you can assume that it's roughly the 15% or less that we ran in '06. So if there's any backlog at risk, it would be the 15% of the 30% that's outside, so less than 5% of our backlog. We're comfortable our backlog is solid.

Stephen Kim, Smith Barney Citigroup.

Thanks for that rundown on the subprime. I thought that was useful. When you guys talk about your SG&A, we have in our notes -- I think that this is something that we had gotten from you in February, that you're expectation is somewhere around 12.7% for the year, basically flat with last year. The way that the first quarter came in made us wonder whether there was anything sort of unusual in that first quarter, maybe something related to stock option expense or something. Can you basically just address the SG&A for the year, whether you still sort of feel that the 12.7% is sort of a reasonable target, and if there was anything unusual in the first quarter?

Stephen, the biggest change in the first quarter was an increase in advertising and an increase in sales incentives that drove it up 130, 140 basis points above the prior year. It's hard to say what SG&A is going to be for the year until I know my deliveries for the year. But we are continuing to have very tight controls on our SG&A spending. I would say today that it's probably going to be up year-over-year, but I don't think it's going to be up significantly. But it will be up.

And what about if there was anything unusual? What about -- you mentioned in your K, about some maybe $7 million or something like that in charges? Something -- ?

Yes, there was -- the $7 million was in the K, was in there. But the primary driver was really advertising and sales incentives, most of them marketing costs.

Just a reminder, we ask our audience to limit it to two questions per line. Ivy Zelman, Credit Suisse First.

The comments you made regarding your community count being down year-over-year and looking at pulling back on bringing new product to market. Assuming you guys are being more prudent because you're not adding inventory to the market, obviously you can see that as a positive. On the other hand, there are costs of waiting to bring product to market, carry costs, and those do compound. So how long do you wait and watch those costs go up on the balance sheet, because those costs are capitalizing to inventory, before you realize that it might make more sense to actually work through the inventory, because unlike wine, land does not get better with age, and that you could actually incur more impairments on land by not bringing it to market than you would otherwise? That's the first question.

And the second question relates to your backlog. How many loans in your backlog? And overall in 2006 in backlog was Alt-A loans? And realizing if any of those loans are being reworked today because the programs that Countrywide has offered are now changing, i.e., Countrywide eliminated the 100% combined LTV, and we've seen stated and no doc loans significantly get more expensive to do. So can you give us sort of a framework to understanding away from subprime, your other exposures? And have you seen any backlog that had to be canceled because the programs were no longer available? So those are the two questions.

That was way more than two.

Well, I had to talk fast before you cut me off.

Ivy, let me again go back to Alt-A. It's just like subprime. You can't get a clear definition of what an Alt-A loan is. There is no question that the underwriting guidelines have tightened up where people will have to document their income, document the source of funds, much tighter than in the past. And in subprime in particular, some of the 100% loans have gone away. From our point of view, the buyer has other options. And in part, what drove all this activity was the fact that it was easy money. A lot of the 100% loans in California, the buyer had money in the bank. They just used it for other purposes.

So anytime these type of things go on, it settles out, it clears the market, and people go back to buying homes. And underneath all of this, there's a huge desire to be a homeowner. So people -- if they need to scrape up 3% on an FHA loan, or 5% or 10% on a conventional, they'll find ways to save the money or borrow the money from a relative or get it from another source. And if you look at our can rate, we've already shared that it's normalized. It's back to the levels it was at in '05 and '04, so we haven't taken a hit to our backlog as a result of the change in the underwriting guidelines. Past that, Countrywide is a better spokesperson on this than we are. So I'd rely on what they're telling you as far as what's changing in their view of the market versus ours, because our backlog is solid and we're just building homes.

As to the lot count side, most of it flows through in the ordinary course. We're managing it on a community-specific basis. I'm not aware of a lot of communities -- not very many at all, where we just put finished lots on the shelf. We're building through the finished lots. The key is that we're selling a home on the lot and then building it. We have shelved in a few very land-constrained markets the assets we have where it's dirt and nondeveloped. And the dirt component of the cost in a lot is much smaller than the improvements and the fees you pay when you start development. So I don't know that I agree it never gets better with time, because as the inventory gets imbalanced in the land constrained markets, the raw land we've shelved will absolutely have a lot of value.

Ivy, if I could just chip in on it, because we had at one time 173,000 lots owned and controlled in the U.S. before we started taking these impairment charges. We're now down to just 103,000 lots owned and controlled, so we don't have a significant inventory exposure from a lot position. And that's one of the things that's benefiting it. Land gets expensive when you turn it into a finished lot and open a new community. So expanding communities and finishing lots in a market that doesn't want the demand we think is more risky than just managing our inventory properly, realizing that we're trying to keep a three-and-a-half to four year supply of land ahead of us, and roughly half of it optioned.

Carl Reichardt, Wachovia Securities.

On the community count question, what's your sense for what you think it will be by year end? What your average will be for the year, Dom?

We expect to average around 400 in 2007, which is down from 444 in 2006 in the U.S., Carl.

Okay. And then, Jeff, in the release, you made a comment about the current housing prices not fully reflecting moderating demand for new homes. And I want to see if that's a foreshadowing in your mind, that in order to return your sales rates to a more normal pace per store, you may need to come down harder on price or price-incentive combination than where you sit currently today? Or whether or not that comment was more innocuous than that, because I read it as an intent to get more aggressive.

Yes, that -- it's more innocuous than that, Carl. I dont' have that page of the release in front of me. But I believe I was referring to the overall housing inventory, not just -- and overall housing prices, not just new home. Our concern is that many of the markets we operate in have a large overhang of resale inventory that hasn't cleared the market. And either people will take them off the market, or they'll adjust their prices to move their resale if they can. And with that kind of overhang, we have a concern that some of the markets we're in could get impacted. And that's why we've come out a little more conservative in our commentary. We do see sales occurring as we're reporting, but until we get through the selling season and see what happens with the inventory levels on resale, we're not ready to say that the markets have bottomed and that prices have stabilized. We think there will continue to be pressure on pricing for the next few quarters.

Greg Gieber, A.G. Edwards & Sons.

Let me just follow-up on that previous question. If we do get a significant downward movement in house prices, given that your operating margins, while admittedly slow -- seasonally low in the first quarter, were only at 2.5%, can you give us just some sense -- a qualitative sense of the risk that you might have to take more charges on various communities, were there to be a meaningful movement in price downwards?

Yes, I mean, if prices continue to erode, it would be more than likely you'd have an impairment charge, obviously. The good news for us is that the last time we looked at impairment charges, we owned 173,000 lots, owned and controlled. We're now down to 103,000 lots owned and controlled. So our exposure is significantly lower than it was the last time. And also, the first time we took an impairment charges, there were a lot of one-time items that we took to walk away from options and made some strategic decisions to sell off land, that we don't have to go through this second time around. So now we're down to just traditional impairment that we might have. So while we have an exposure, we think we have one of the lowest exposures in the industry.

Greg, as you know, it's market- specific and submarket-specific. So if the inventory overhang in Phoenix, for instance, were to drive the market prices down 5%, if we're in an A location, good submarket, it may not even impact the price in that community. We just don't know.

Just a follow-up to that and I have one other question. You look at your land inventory, how much of it compared to a year ago would you call C quality land? Is that where most of your pruning has occurred, I would assume?

There's definitely been a flight to quality locations in all the markets that we're in. I don't know that we track it on A versus B versus C. The options we abandoned in the fourth quarter probably were in the C markets, and we'd still be in the As and Bs that provide the return. But I don't know that we track it that way.

I don't have it in front of me.

Dan Oppenheim, Banc of America.

Hi, this is [Mike Wood]. Can you talk about what you're seeing so far in March in terms of changes, since either the first quarter of February in terms of year-over-year trends and traffic and net pricing?

We're only three weeks into the second quarter, so it's way too early to provide any color on the second quarter.

But in terms of March, can you give any color there?

No. Too early.

Okay. In terms of the -- you mentioned the discipline in the build-to-order. Can you just talk about your success there with all of the inventory homes that are being heavily discounted? And also heard from some private builders that some mortgage -- some of the lenders weren't willing to give commitments longer than 30 days. Are you seeing any of that? And has that impacted your build-to-order model?

Let me give you a couple of responses, Mike. First off, I think it's a great testimony to our build-to-order model that we have the backlog and we're converting the backlog and delivering on the plan. And it demonstrates the value that the consumer puts in having the ability to pick what goes in the home and customizing it for their needs. In the normal course of business, we'll lock the interest rate as long as the buyer elects to. We have a great partnership with Countrywide. And I can't speak for the private builders, but we haven't heard any issue where the ability to lock loans has been challenged or the time line has been reduced.

And again, in the fourth quarter, we converted 53% of our backlog to revenue. First quarter we converted 38%. In both quarters our conversion of our backlog to revenues were over 30%. So actually everything seems to be improving on that line. And again, 83% of the homes that we have under production are sold and in backlog with a qualified loan.

Jim Wilson, JMP Securities.

I was wondering, can you give a little color on what you've been seeing in terms of pricing and sales at a more local level? I'm thinking of California in particular, and then Southeast as the other. So contrasting what the Bay Area looks like to you in condition, sales volume, pricing versus Orange County versus the Inland Empire. And then maybe a little color on the Southeast, that would be my two questions.

Sure, Jim, I can answer that. In every market that we're in, as we've said, it's still unclear. There's no real trends emerging that we can pick up, other than as I have touched on, a flight to quality locations and a flight to value. Where you offer product that's at a price point that the median income in that submarket can afford that's near an employment center, you still sell very well. From a regional point of view, it's interesting in Northern Cal, we're doing quite well in our San Jose business, which is primarily affordable for San Jose product priced under $600,000 or $700,000. Northern Cal slowed down a little earlier than Southern Cal, and I think the fact that San Jose has firmed up for us is a good sign. Compare that and contrast that to the Central Valley or Sacramento which remain difficult for us. I think that's a good illustration of the normal housing cycle, where things get tight, people can buy homes a little closer in to work, San Jose firms up, and then over time eventually the inventory will clear and prices reset in Central Valley and Sacramento, the more commuter markets, will come back.

In Southern Cal, we're having good success with communities that are a first-time, first move-up, that are close in to the employment centers. It's a little softer in the more commute-oriented buyer, the longer drive is a little bit softer for us. Orange County, San Diego, we're not large players in either of those counties, but there's still a lot of pressure on pricing, there's still a lot of inventory. We're not seeing them rebound. If you go over to the Southeast, it's actually holding fairly well in Charlotte, Raleigh, South Carolina for us. Atlanta it is a little bit tougher. Drop down to Florida, we're doing well in Jacksonville. Orlando is holding for us, a little tougher in Tampa for us right now. We don't have a large position in Treasure Coast or Fort Myers, and those two markets remain very difficult. So on a regional basis or an individual city, there's no clear trends yet.

And the West Coast, just to add to it, on the West Coast our orders were up 5% in the first quarter. Southeast, they were flat year-over-year. Where we had a decline in orders were in the Central and the Southwest where we had a significant decline in the community counts.

Kenneth Zener, Merrill Lynch.

I have two questions. Regarding France's contribution to your results, using the publicly-stated results from KBSA, their gross margins in the fourth quarter are about 24%. Assuming a stable margin in the first quarter from your French operation, this implies about a 16% level in the U.S. versus your reported 17.7%. Can you comment on this, and what France's can rate was, which helped blend to the 31% level?

Well, we have a French operations that's doing very well and is a nice balance for us. And you're correct that their margins in the French business are higher than our margins. However, at the bottom line we have to eliminate half their profit. So it puts it a little bit more in balance. But at the margin level, you're correct. And then on the cancellation rates, I believe -- let me just look in the U.S. Our cancellation rates in the U.S. were 34%, which by the way was very close to what we had in the '03, '04 time frame. So not a significant difference. And in France, it was 22%.

Okay. And I guess can you discuss your concern that in the inventory markets where we track it, it seems that inventory growth is fastest in the subsegments where the public builders are building. And I think, Jeff, this goes to your question about being close to the job centers. Can you comment on what you think this might mean given that builders were building farther out, not only in Riverside, but in other markets, about the recovery rate that you might see relative to prior cycles when the existing inventory wasn't so high? Thank you very much.

I don't know that the inventory levels are necessarily higher than previous cycles. I think you'll see the classic rebound, if you will, where the closer-in markets will firm up first, and then it will slowly work out to the more exurb markets once prices have reset. In land constrained markets, where builders went much further out, that's probably where they're having the biggest challenges. It's also where you -- it's easier to acquire lots on an option basis and we abandoned a lot of those in fourth quarter. So I think you're seeing a normal cycle here that will emerge, and each market will rebound at its own pace based on the inventory overhang and sales rates.

And there's still a significant housing shortage in California. The issue was affordability. So when you get your price points more affordable, demand will pick up.

Steve Fockens, Lehman Brothers.

Just one question, guys. The investment in unconsolidated joint ventures went up about, looks like roughly $33 million, $34 million sequentially. Was that either some attractive places to put your cash, or were those required contributions, or is there any color you can give on that?

It's spread across a lot of joint ventures, but it wasn't anything significant in different markets. And over the long-term, that number is coming down anyway.

So you think this one quarter is just maybe a little bit of an anomaly?

More of an anomaly. Yes.

Okay. Thanks very much.

Michael Rehaut, JPMorgan.

A couple of questions. First, land charges for the quarter, I assume as they weren't broken out, they were minimal. But could you review if there were any on the option side or the write-off side?

Yes, we had -- I would say that our impairments and option write-offs were back to kind of normal levels that we see in an ongoing business. So there was nothing significant.

So you're saying less than $5 million or --?

No, it's closer to $8 million.

Okay. And that's mostly the options, or the land -- option walkaways or -- ?

$4 million in options, $2 million in community impairments, and $3 million in land sale impairments.

Great. And then on the -- kind of a bigger picture question on the quarter, with the margin decline from 4Q, I was wondering if you could try to give us an idea what the percent of closings were from canceled resold homes, that certainly I would assume played into the lower margins, and what that compares to in terms of a normal percentage?

Mike, that's almost impossible to know, to be honest with you. You'd have to go division by division and look at every house that closed and find out whether it was resold. We haven't done that. We just track the fact that we've got our cancellations back to normal levels, our backlog solid, and we're in pretty good shape going into the second half of the year. And we won't see anywhere near the levels of cans and resales that we saw in the past.

Joel Locker, FBN Securities.

Just on the backlog conversion I saw in France, that's about the only sector that didn't pick up, and was wondering if you were having any kind of labor or material shortages over there?

Not really, Joel. The business model is a little different over there in that it's a lot more condos, which in France take 18 months to build. So they will presell the building, and one of the differences in France is kind of interesting. They actually -- the buyer takes title to the property when you start construction. So we convert the title and then build the home, but it may take 18 months to come through to delivery. So their backlog position is a little more extended time-wise than ours in the U.S.

Right, it was just -- ?

To your point, France -- the backlog conversion has declined, which means the U.S. was even -- significantly better -- .

Right.

Than what we have done in the past.

Right, I understood that.

I think our conversion in the first quarter was 49%.

Right.

Which is a pretty significant conversion of our backlog.

Right.

And that's just a sign of our cycle times beginning to contract.

Right. And just the second question, on your last call you made a comment on possible margin expansion in the third and fourth quarter, and I was wondering with the recent comments about pricing pressure if you still think that's a possibility?

it will be community-specific, Joel. We've actually have some communities today where we've been able to raise prices a little bit. But that's definitely in the minority. And our color was tied to opening new communities, retooling the different product lines, a lot of things that are yet to unfold. If the markets were to stabilize and we're able to execute on all that, at some point in time, you'll see margin expansion. But I don't think we can peg it today to a third quarter or a fourth quarter.

I mean, we know our costs are coming down as we open new communities. What we don't know, is we don't what's going to happen with price in the next eight to 10 weeks, and that's the unknown factor. When we know that, we'll have a better feel for margins in the second half. That's why we said at our second quarter conference call we'll give you a better outlook for the year.

Larry Taylor, Credit Suisse.

I wonder if we could go back to the question of buyer borrower demographic for you guys? And I understand that there are different definitions out there, but maybe we can just talk about some of the characteristics. So I wonder if you could comment on the percentage of buyers who funded with stated income or low doc loans, who had 5% or less down, or who had FICOs at less than 620?

Yes, Larry, that -- Countrywide does that, we don't track it, because we're the home builder. We do know that in the first quarter, our average loan to value in the closings was 91%.

And our FICO scores on average were 700. That hasn't changed, by the way, for years.

But basically you guys are saying that you don't track some of the inputs to that, or split it into a strata to be able to look at, for example, how much is 5% or less down?

No, because we don't start the home until we have a loan approval.

And we don't take any risk on the mortgage, because it's -- Countrywide approves it. If we ran a mortgage company -- if we had our own mortgage company, we'd have to track those. But we don't, so it's not a risk for us.

William [Nobler], Atalanta Sosnoff.

Would you bring us up to date again on the market value of your French holding? I'm curious, at the fourth quarter call, I think you suggested it was about $800 million.

I think it's trading at almost close to 60 Euro now, which would be close to $80 U.S., I guess. You multiply that times 10,922,000 shares. So that's probably close to $800 million.

Okay, and also -- ?

-- or higher.

10,922,000?

Yes, 10,922,000.

Right.

Times $78. I don't have a calculator in front of me. But it's north of $800 million, I think.

Right. You also indicated that 17% of your backlog is spec. Just refresh my memory, how does it get to that level? Or is that any different than the past?

In normal times, William, we like to run at about 10% unsold, no more. Some of these spec occur if we've sold out a cul-de-sac and there's one lot left, we'll start it just to complete the cul-de-sac. If you start a condo building, it's typically 50% presold, because the build time takes so long. So you have those type of things that drive it up to 10%. To get to 17%, we still have an overhang of some of the cans that occurred in the third and fourth quarter, where we're having to resell the property. It's interesting in our business, the standing inventory sale is much harder for us than the dirt sale, as we call it. Because our whole business model is focused on choice, value and sell a customer the lot, and let them pick the features they want. But even at 17%, I believe it's by far the lowest in the industry right now.

Thanks a lot.

Susan Berliner, Bear Stearns.

Just a couple of questions. One is, can you clarify at all what your incentives, as a percentage of the homes are?

I mean, our incentives that we show in our financials are always between 1% and 2% of the home. We adjust base prices, so we don't do sales incentives.

Okay. And number two -- ?

The best way to look at it is what happened to pricing year-over-year, pricing year-over-year is down 8% in the U.S. So that's the best way to look at it.

Okay, thank you. And secondly, can you talk at all about the banks potentially tightening. I think there's obviously some of your peers that are struggling a little bit more than you guys. Are the banks focusing more, or questioning you a lot on coverage? Are you concerned at all about potentially needing to get a waiver at year end?

Well Sue, if you look at our most recent covenants, we had plenty of capacity. And in fact, we [cleaned] down our revolver and our coverage was 5.2 times at year end.

Stephen Kim, Smith Barney Citigroup. Mr. Kim, your line is open.

I'm sorry, can you hear me now?

Please go ahead, sir.

Dom, can you hear me now?

Yes, I can hear you.

Sorry, about that. I just had a technical issue here. Sorry about that. My question is with respect to the interplay of existing homes on the market and new homes on the market, and I was wondering if yourself or Jeff could comment on what you're seeing in your markets? You've expressed so far some reasonable concern about perhaps the existing home market needing to adjust prices downward because there's still a lot of inventory out there. But one of the things I didn't really hear you say was, perhaps an abatement of fire sale prices for specs that yourself and probably more your peers, had as a result of the massive cancellations that we went through during the winter. And my sense was that generally speaking and sort of getting to Mike Rehaut's earlier question, that when you have a canceled unit, it results in a significant erosion in the price and the margin. My sense is is that your cancellation rate dropping is going to sort of help this situation somewhat, and that that's going to be somewhat of an offset to what goes on in the existing market. Can you comment on whether or not you think that might be a realistic offset of any consequence? Or if you think that the existing home dynamic is far more significant?

I think you hit on a valid point, Steve. What we're -- in most of the markets we're in, the significant concessions and discounts on the new home side from the third and fourth quarter have abated. And again, in most of the markets, the new home price has come down much more than the resale price, and in fact, is an equilibrium, where you have the more historical spread between new home and resale pricing. The concern is that resale pricing has been stickier, you now have this huge overhang of inventory that has to clear the market. And if buyers do what they have to to move their product and resale prices were to drop again, new home pricing would have to follow to some degree. And that's what's unclear and going to play out over the next few months. But you're absolutely right, that the can rate has subsided in part because the discounting has slowed.

And that is all the time we have for questions today. At this point, I'll turn the call back over to our host for any additional or closing remarks.

All right. Thank you, everyone, for joining us today for our first quarter 2007 earnings conference call. Have a great day, and hope to talk to all of you more in the future. Thank you.

Once again, this does conclude today's conference call. Thank you for your participation, and have a great day.