KB Home (KBH) 2007 Q4 法說會逐字稿

Good day, everyone and welcome to KB Homes fourth quarter earnings conference call. As a reminder, today's conference call is being recorded and webcast on KB Home's website at KBHome.com. The recording will also be available via telephone replay until midnight on January 16, 2008. You can access this recording by dialing area code 719-457-0820, or 888-203-1112. And entering the replay pass code of 9544624.

KB Homes' discussion today may include certain predictions and other forward-looking statements. These statements may cover market or economic conditions, KB Homes business and prospects, its future financial and operational performance and or future actions, and their expected results. They are based on management's current expectations and projections about future events but are not guarantees of future performance.

Due to a number of risks, assumptions, uncertainties, and the events outside its control, KB Homes' actual results could differ materially from those expressed in or implied by the forward-looking statements. Many of these risk factors are identified in the Company's periodic reports and other filings with the SEC, which the Company urges you to read with care. For opening remarks and introductions, I would now like to turn the call over to KB Homes President and Chief Executive Officer, Mr. Jeffrey Mezger. Please go ahead, sir.

Thanks. Good morning, everyone. Thank you for joining us today for an update on our business and financial results for our fourth quarter and fiscal year ended November 30, 2007. With me this morning are Dom Cecere, our Executive Vice President and Chief Financial Officer; Bill Hollinger, our Senior Vice President and Chief Accounting Officer; and Kelly Masuda, Senior Vice President of Investor Relations and Treasurer.

We can debate the details but I think you will all agree that the last 18 months represent one of the most challenging periods the home building industry has confronted in recent history. By mid-2006, demand for single family homes had approached near term saturation levels, prices peaked and began falling back from their historically high levels and speculation distorted conditions in some of the country's fastest growing markets. Since that time, the industry has grappled with a series of problems that continue to feed off one another, and intensify the challenges of an already weakened housing market. These include an oversupply of new and resell inventories, rising foreclosure activity, intense competition for sales, reduced affordability, declining consumer confidence and most recently, turmoil in mortgage lending and other credit markets. Our fourth quarter and full year results clearly reflect the impact of these issues.

In the fourth quarter, we booked an additional pretax non cash charge related to inventory and joint venture impairments and the abandonment of land option contracts totaling $403 million. This charge was triggered by price declines and slower sales rates, both of which impacted inventory values. We also were required for book purposes to establish a valuation allowance on our deferred tax assets, that resulted in a non-cash after tax charge of $514 million. The allowance was determined in consultation with our independent registered public accounting firm. For tax purposes the benefits associated with our deferred tax assets may be carried forward for up to 20 years. Given KB Homes track record of results over its 50 year history, we believe we will generate sufficient profits over the next several years to convert these deferred tax assets into cash and reduce our effective tax rate.

The impact of these two accounting events, coupled with diminished results from our home building operations, produced substantial net losses in both the fourth quarter and the year. Dom will walk you through these results in detail in a few minutes. These are not the financial results that any CEO wants to report to shareholders. As disappointed as I am, I can also tell you that we have made significant progress over the past 12 months, improving our home building operations, strengthening our financial position and right-sizing our overhead structure for current conditions. At the same time, we have continued to invest in the product and marketing innovation that has always made KB Home a leader in our industry. I would like to spend my time this morning reviewing our progress with you.

Let's start with current market conditions. As we enter 2008, we see no indication that markets are stabilizing. On the resale front, there were roughly 4.25 million existing homes for sale at the end of November. That represents more than a 10-month supply. With this continued overhang of excess inventory, prices for existing homes, which had held up fairly well for the first half of 2007, have begun to decline. Over the last five months, average sales prices have dropped almost 8%, from a peak of $276,500 in June of '07 to $256,800 in November.

As for new homes, inventories have come down somewhat since the beginning of 2007, driven largely by home builders reducing production. However, new home sales in November were off 34% from a year ago, representing a seasonally adjusted annual rate of just 647,000 units. At this sales pace, the inventory of new homes now stands at more than a nine-month supply. We believe pricing and margin pressures affecting our industry will continue until these inventory levels are in better balance with demand. And that will not occur in our view until prices have stabilized and consumer confidence is restored. With these current market dynamics, we don't believe sales rates are improving enough to clear excess inventories in the short term. Against this market back drop, we continue to execute on a number of strategies that we adopted in the spring of 2006 to reposition our businesses for today's realities. We've discussed these initiatives in prior calls. I would like to review our progress now.

First and foremost, we have moved quickly to solidify our financial position, strengthening our balance sheet and generating cash. We delivered 8,132 homes in the fourth quarter, converting into revenue more than two-thirds of our backlog at the beginning of the quarter. This is a clear illustration of the benefits of our build to order business model and the reductions we have achieved in our average cycle time from sale to close. We generated just under $700 million in cash in the fourth quarter, ending the year with $1.3 billion in cash and no amounts outstanding under our $1.5 billion bank revolver. We have reduced our net debt from a peak of $3.3 billion in the third quarter of '06, to $837 million today, surpassing the goals we established earlier in the year.

Entering 2008, our capital structure is in excellent shape and we are well-positioned to capture potential opportunities as they arise. To reload our lot pipeline for higher margin deliveries. Our leverage ratio, as measured by the ratio of net debt to total capital, has improved to 31%, at fiscal year end '07 from 43% a year ago. And we've accomplished that, despite the negative impact on book equity of inventory impairments, abandonments, and the fourth quarter's deferred tax asset valuation allowance. We have reduced own to control lot counts by 65%, from 186,000 at their peak in the first quarter of '06, to 66,000 today. Of these, just 45,000 lots are owned and 21,000 are controlled via land option contracts. And, we have aggressively converted other operating assets into cash where it made strategic sense. Most significantly the sale of our 49% stake in our French operations on highly attractive terms at a price close to a recent market peak in France.

Second, we have intensified our focus on our unique core competencies and operating disciplines. Our most important market segment remains the first time home buyer and we have been relentless in our pursuit of design in production strategies that produce a more affordable product that is highly desirable for this buyer, and also competitively priced against the resell market. We have reinvigorated our commitment to adhere to all aspects of our KB Next operating principles. We are a build to order home builder with even flow production based on an order backlog of sold homes with limited spec inventory.

We have capitalized on our unique strategic partnership with Countrywide, to provide attractive mortgage programs for our buyers while minimizing our exposure to defaults. In the fourth quarter, 79% of our closings were processed through our joint venture. Of these JV closings 90% were conforming or government loans, compared to 33% one year ago and 81% of the borrowers chose a fixed rate mortgage. We've carefully reviewed our market positions, community counts, and overhead requirements, reducing exposure where it made strategic and financial sense.

Our net orders were off 32% in the fourth quarter, in large part due to the reduction in active selling communities. For 2008, we are now estimating that our community count will be down 25 to 30% versus 2007. As we have shared in the past, it does not make sense to invest the cash required to open a community if we cannot achieve our financial targets. On a regional basis, net orders for the West Coast were down 12%, Southwest net orders were down 16%, in Central, net orders fell 43%, while on the Southeast they were down 40%. For both the Central and Southeast, we are experiencing a more dramatic drop in community count and sales comps due to exiting the Indianapolis, Gulf Coast, Texas Valley, Fort Myers, and Treasure Coast markets.

Third, we have continued to build a highly visible brand, pursuing strategies that differentiate KB Home from other builders in the marketplace. Over the last 12 months, we've introduced newly designed, more affordable homes in our active selling communities at lower price points. Our KB Home studios remain at the core of our unique built to order approach, allowing home buyers to customize their homes with thousands of design choices at an affordable price. This remains a huge advantage, as option revenue from our design studios in 2007 average 31,500 per home, or 13.3% of the base price. That compares to 32,300 or 12.4% of the base price per home in 2006. And these comparable results were generated during an environment of significant pricing and affordability pressure, underscoring the importance the consumer places on choice and value.

We have launched highly successful co-branded initiatives with two of the world's leading brands, Martha Stewart and Disney. We now have Martha Stewart communities in six states across the country, offering buyers the opportunity to create a home that features Martha's distinctive design. Under our collaboration with Disney, our home buyers in all communities will be able to choose from Disney's imaginative line of home products, designed exclusively for KB Home buyers.

We're making great progress in our My Earth environmental initiatives with the goal of positioning KB Home as the most environmentally friendly national builder. For example, we announced in December that we will ex exclusively offer only Energy Star certified appliances in our home. Having one business model Company-wide, allows us to leverage volume with our national accounts and provide this enhanced product in every community with minimal additional cost. This is but one of several opportunities we have identified for our My Earth program. It builds our brand, helps the environment, is appealing to the consumer and does not add to the cost of the home.

In summary, we've moved aggressively over the past 12 months to strengthen our financial position, and align our operating structure to reflect current market realities, while continuing to enhance key strategic programs for our future. All these initiatives are serving us well in today's market conditions, but just as importantly they set a foundation for future opportunities. As the market recovers I believe we will be better positioned than most, favorable demographics and continuing population growth in the markets we serve provide an expanding pool of renter households that will drive first time home buyer demand for the foreseeable future. With our unique product appeal, our effective Countrywide partnership, our dedicated sales counselors, and our built to order approach, KB Home is the clear choice for the consumer.

I'd like to close my remarks by thanking all our KB Home employees for their extraordinary accomplishments in 2007. I'm proud of their performance. They've moved quickly and effectively to reposition our Company for today's market conditions, and done a great job in preparing us for the market opportunities to come. In our 50 year history, KB Home has successfully managed through many tough economic cycles, each time emerging a stronger Company. With this track record, and the steps we have taken to properly position ourselves, our future is bright. Now, let me turn the call over to Dom for a financial review.

Thanks, Jeff. Let's start with operating results, net orders of 2,574 homes, new homes, in the fourth quarter were down 32% on a year-over-year basis. Community counts entering 2008 are down over 30% from the prior year. We had 380 active selling communities in 2007 and expect community counts in 2008 will be down 25 to 30% from this level. We entered the fourth quarter with 11,880 sold homes in backlog, and converted 8,132 or 68% of our backlog to revenue. That compares to conversion ratio of 42% in the third quarter and 60% in the fourth quarter of 2006.

Cancellations in the fourth quarter were 30% of beginning backlog, and over the last six quarters, this ratio of cancellations to beginning backlog has ranged between 29% and 33%. The average sales price of the homes we delivered in the fourth quarter decreased 12% to 247,800, from 280,000 in the fourth quarter of 2006. That average sales price was just slightly below the 256,800 average sales price for a resale home in November. Year-over-year sales prices were down 19% on the West Coast, 14% in the Southwest, and 7% in the Southeast. Sales prices were up 4% in the Central region, solely due to mix.

Our housing gross margin in the fourth quarter excluding impairments and abandonments was 10.1%. That's down from 13.9% in the third quarter and 14.9% in the second quarter of 2007. The average sales price has dropped 9% in the last two quarters, while resale pricing was down nearly 8%. SG&A expenses in the fourth quarter decreased 31% from a year ago, and at 11.3% of housing revenue was slightly better than 11.4% in the fourth quarter of 2006. This improvement primarily resulted from a more than 50% reduction in G&A in the fourth quarter compared to the year earlier quarter.

Home building's pretax loss from continuing operations for the fourth quarter included $320 million of inventory, land option contract and joint venture impairment charges and $82 million of option abandonment charges related to 5800 lots under option contract, approximately $100 million of these charges were against non consolidated joint ventures. Excluding these charges, our continuing operations remained slightly profitable in the fourth quarter. At the end of the fourth quarter, we owned or controlled approximately 60,000 -- 66,000 lots, down 65% from a peak of 186,000 lots owned and controlled in the first quarter of 2006. Of this 66,000 lots total, we own less than 45,000 lots today, approximately a two year supply of land and have approximately 21,000 lots controlled via land option contracts.

We had approximately 6,000 homes in production at the end of the fourth quarter, with just 16% or 945 homes unsold. That's up slightly from 14% in the third quarter of 2007, one of the lowest levels of spec production in the home building industry. Homes in production are down almost 70% from the peak in the second quarter of 2006. A clear illustration of our adherence to our build to order business model. We had approximately 484 finished, unsold homes in inventory at year-end, spread across 418 active selling communities. Just over one per active selling community.

Now let's move to the balance sheet. As of November 30, 2007, our debt, net of cash, totaled approximately $837 million. That weighted represents a 62% reduction from over $2.2 billion of net debt just one year ago. We reduced debt net of cash by approximately $1.4 billion, improving our net debt to total capital ratio to approximately 31% at the end of 2007, from 43% at year-end 2006. Our tangible net worth declined by approximately 37% over the last 12 months from $2.9 billion at the end of the fourth quarter of 2006 to $1.9 billion at the end of the fourth quarter of 2007. This was largely the result of approximately $900 million in after tax impairment and abandonment charges and approximately $514 million related to the deferred tax asset valuation allowance. As we generate future profits, the valuation allowance will reverse and book equity will be restored.

As noted in our press release, we have begun discussions with our bank group regarding the balance sheet impact of a non cash FAS 109 valuation allowance on certain net worth covenants. We've already received a waiver from our bank group covering this issue for the fourth quarter 2007 and we expect to complete an amendment to our financial covenants in the first quarter of 2008. We have a long-standing relationships with many of our banks and remain confident especially in light of our strong cash position and low leverage that we will successfully negotiate the necessary modifications on our bank agreement by the end of this quarter. Now let me turn it back to Jeff for closing comments.

Thanks, Dom. In closing, I would like to reiterate a few key messages. As we have now demonstrated, we moved quickly to strengthen our financial position and generate cash. In fact, we exceeded our goals in that regard for 2007. Our strong balance sheet and ample liquidity provide us the opportunity to selectively reload our land pipeline with higher margin communities in 2008. We have intensified the execution on our unique core competencies and proven KB Next operating disciplines and we continue to build a highly visible brand, pursuing strategies that successfully differentiate KB Home from other builders in the marketplace. We have a proud 50 year history in which we've navigated through difficult times like this before. Every time coming out a stronger Company. Our past experience managing through downturns helped us in identifying the appropriate steps to take and these actions now have KB Home well positioned to capitalize on opportunities as they arise. It is unclear when the markets will stabilize. And therefore, difficult to provide a forecast for 2008. I can assure you that we will remain diligent in prudently running the business at whatever volume market circumstances support with the primary goal of restoring profitability. With that, let me open the call for your questions.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) First up in our roster is Stephen Kim at Citi.

Hey, guys. Thanks for all the information on your call. Had a quick question regarding your deferred tax asset balance. Just want to make sure that I'm clear on what your residual balance that exists today implies for your ability to harvest deferred tax assets over the next four quarters? My understanding of the E&Y interpretation is that they're essentially requiring you to write off whatever deferred tax assets are unlikely to be harvested through delivering homes or bulk selling land in the next four quarters. But I was curious as to whether or not that interpretation applied both to the deferred tax asset created by the impairment charges, as well as the deferred tax assets that have been built up or accrued related to other corporate activities, like deferred comp and other things like that? I just want to make sure I understand what exactly we can expect in terms of cash flow implications from the $222 million you have deferred tax asset on the balance sheet right now.

I'm going to ask Bill Hollinger to respond to you on the 200--.

Hey, Bill, long time, no speak.

Hey, I'll try to do the best. It might need some multiple follow-ups. First of all, I kind of answer your last part of that question. The 222 million, we would realize that probably in '08 and '09 so that really represents a long-term receivable that we would collect here in '8 and '9, the years. We fully expect to get that. There's really no issue on realizability of that. The issue of what you said, as far as the auditors interpretation, there is really I don't think any difference or view in terms of the impairment or in terms of the valuation allowance to either the impaired deferred tax assets or the unimpaired deferred tax assets. So that issue is more or less one and the same.

I see. Okay. That's great. No, that helps greatly. The second thing I wanted to ask relates to what you're seeing in terms of buyer activity in your communities. Can you give us a sense for -- if you have seen any change in the kinds of buyers who are actually stepping forth and actually on whom you're actually closing transactions with, are you finding that there's an increased number that are currently renting? Are you finding that there is a shift in the age of your buyers? I'm talking really in the last three months or so, three to three to four months or any other salient difference that you have noticed in terms of your actual closed customers in the last quarter or so?

Steve, I can talk to the period through November. We don't make comments intraquarter. But I don't know that things have changed much since November in terms of buyer profile. We're definitely seeing a buyer that views owning the home as their lifestyle and something they intend to live in for a while. The days of buying it to flip it six months from now as an easy make or as an investment really are gone. This is a true normal housing climate traditional buyer. A lot of the move-up buyers are having difficulty disposing of their existing home. In many cases, upside down on their equity. Those buyers for the most part in our business have left the market, quote, unquote, because they can't dispose of their current residence and that's why we're focusing very diligently on lower price points and reaching out to the first time buyer who has the ability to close on a transaction.

Moving on to our next question, this is Ivy Zelman at Zelman and Associates.

It's actually Dennis McGill. How are you.

Hi, Dennis, how are you?

Doing well. The first question just had to do with the dividend. Is there any covenants that you guys would have to revisit in response to the dividend over the next year? Do you feel that that's fairly safe?

Dennis, I'll have Kelly Masuda answer that one.

From a covenant compliance perspective, Dennis, we have cushioned both under our revolver and our senior subordinated debt. Implying that you would not have to make any adjustments currently?

Correct.

That's correct.

And then just second question would be kind of a big picture view, realizing where you guys are today, you're in a great liquidity situation, you've got a lot of cash on the books, you've got $17 of cash per share, which is basically where your stocks trading today. The market's making a pretty dire case for what the fair value of your assets, what your debt's currently at. I'm just wondering what your interpretation of your view is right now? It seems overly bearish in our mind, looking at where your balance sheet situation is, and looking out over the next five to seven years, but maybe you guys could answer what you think is going on in the view of the market, just thinking about what you know about your assets right now.

I think the market now at least understands that we have $1.3 billion in cash. As you all pointed out, that's $17 a share. We also have $700 million of deferred tax assets. That's another $9 per share of future cash. We look at it as a $26 value and the market has our stock down under $18. So we believe that the stock is undervalued compared to the liquidity of the assets that we have in place.

Okay. I guess that's it for us now. Thanks.

Moving on to our next question, this is Carl Reichardt at Wachovia Securities.

Jeff, last year, some of your peers talked about attempting to hold margin headed into the spring selling season tactically. I'm curious if you had sort of a broad overview of what your base marketing strategy is headed into this spring, if it's much different than what you've been running the last couple of quarters? I'd just like your thoughts on that.

I think you will see a shift, Carl, as I said in my final closing comment. We're focused on the primary goal of restoring profitability. We have this war chest of cash now. It's patient money for us. We're not going to jump and do anything it. We're going to stay opportunistic and we're focused on increasing margins. So we don't need -- you can always use more cash. We don't need it right now to run the business. What we need is more profit. That's where the focus will be in '08.

Is that a function of the -- well, I mean this is a -- is that a function of the mix of your stores likely changing in 2008 and into 2009 because you're able to reinvest into some deals that make more sense? Or is that a function of an existing communities where absorptions are slow saying we're willing to take those slower absorptions?

I think it's both, Carl. Clearly, we think we're well positioned to acquire new lots that are aligned with our strategy at lower price points and higher margins and that's where our focus will be.

Okay. Great. I'll get back in queue. Thanks, Jeff.

Next up we have Michael Rehaut at JPMorgan.

Good morning.

Good morning, Mike.

First question, just on the orders and the order ASP numbers, were you surprised, given the sharp drop off in orders, relative to the fact that your order ASPs came down another 20% from the third quarter, and if you could give us a little bit color on in terms of the order ASP number, which we have it 174 on average, I know it is region by region it's very different, but particularly like the West Coast, how much of that change was mix versus pure price declines?

Mike, we can work with you offline on the numbers, because you're trying to track back from backlog to backlog at the end of each quarter. Our prices are not down any where near the kind of numbers that you just quoted. In terms of our price drops, however, it's a combination of things, in part the markets have softened a bit so prices came down in the normal course, but we've strategically moved to reposition to lower price points and smaller product that's more affordable. In many of the land constrained high price areas, frankly our product got too big for the normal consumer. So we're moving our prices down strategically with these smaller products. However, at the same time, our community count is way down. So sales in part, the negative sales comp is that we've intentionally reduced community count because we don't want to fuel a bunch of cash in the communities where we can't get our returns. So in terms of sales rates the last thing I was going to say is in terms of sales rates, our lower priced product is actually selling well. It's the move up communities that continue to struggle.

Your community count on average for 4Q was 418, did I hear that right?

Yes, the -- but those were a lot of closed out communities. Entering 2008 our community counts were down over 30%. That's what affected the order trends and the reason the prices were down is because resale prices. We've been pricing against resale. Resale prices dropped 8%, we dropped 8% with them. Our pricing is tracking against resale, which is right about 250 grand right now.

Okay.

But it's really a question of whether you invest in opening more communities in a market where there's no demand. We've decided that we would rather generate cash than open new communities and be prepared to grow the business when the market starts to recover.

What was the average community count for 4Q and the 4Q end community count?

Well, the average at 4Q I believe was 418, but that's -- that's the peak always in the year and then going into '08 it's going to be -- we average 380 and we're going to be down to just under 300, I believe.

Okay. Last question. If you have it. In the quarter, can you give us what the gross margin benefit was from impairments in prior quarters?

I don't really think it means anything, so probably the answer is no.

Other builders have been able to provide that.

Some do and some don't, I think, Mike.

Pardon?

Some do and some don't.

Well, thanks a lot.

Moving on now to Dan Oppenheim, Banc of America Securities.

Was wondering if you could talk about the -- a little bit more in terms of move up and price points, if you look at your cancellations, if you were to think about that, how much of that was coming from move up buyers that weren't able to sell, versus low end buyers where there was a financing issue or just getting cautious in the environment?

Dan, that's a moving number by market. So I really -- we don't have the data that would detail entry level buyer versus a move-up buyer at hand. I've seen a lot of media coverage or analyst coverage talking about the first time buyers' inability to get a mortgage. It's absolutely not true. FHA, VA financing or in the price points that are slightly above that, the conventional conforming, there's ample liquidity out there. They just have to have a 3, 4% down payment on FHA loans and they go. So as we shared in our statistics, we've quickly moved to a different mortgage product that is qualifying the buyer.

And by the way, in our backlog now, one out of every three buyers are government loan.

Okay. Then in terms of the inventory, talking about how it takes some time to work through that, what are you thinking about your community count plans for 2008?

Well, we said they would be down 25 to 30% in '08 from '07.

Sorry. I missed that. Okay. Thank you.

Next from Merrill Lynch, this is Ken Zener.

Hello. I wonder, how many of your owned lots, the 45,000 are in active communities?

Vast majority.

Okay. So when you talk about not investing, upwards of 80, 90% of your lots are in those active communities?

I would say yes, probably closer to 80 than 90.

Can you talk about what you expect to spend on land development and land acquisitions in '08 versus '07?

It's probably down another 30%, I'll repeat the spending, about a 3 billion a year, half purchased land and half development and that's been cut by two-thirds. But it's going to be dependent on what demand is going to be throughout the year. But it's definitely less than $1 billion.

Okay. And I guess of the -- going back to the FAS 109, the 514, is it your auditor's opinion that you have to actually report taxable income in each period to recognize it or do you just have to reverse the trend where you now start having positive taxable income?

Well, I think it was kind of both. But I'm not sure I understood the question. Can you repeat it again.

I mean, once you start reporting positive taxable income, can you recognize or reverse the whole piece that was turned around based upon your current negative taxable income?

I mean, again, there's a lot of judgment and facts and circumstances that surround this issue, but you're first going to have to get yourself out of the, in all likelihood the three year cumulative loss issue before you can start recognizing it. So you might turn profitable but you may not be able to recognize it until you get yourself out of this cumulative loss situation.

Just one last question. Jeff, on the last quarter I asked you about this large joint Inspirada joint venture in Vegas. Was that part of the joint venture impairment this quarter?

We did take an impairment in Inspirada this quarter.

What was the change in assumptions? Because last quarter it was described as something bought really well below the market. Was it volume or pricing?

Well, prices have continued to come down a bit in Vegas, in particular resales and we still view Inspirada as a great asset. It's in the top submarket. It's a entry level product. But it got squeezed a little bit in price like the rest of the market.

Thank you.

Question now from Jim Wilson, JMP Securities.

Thanks, good morning, guys.

Good morning, Jim.

Was wondering if you could give a little color regionally on two things, would be my two questions. One on impairments during the quarter where you took them, I'm not sure I missed it? And the second on margins preimpairments? I know your overall number but was wondering what it -- if you can give any color in general what it looks like by region?

Well, let me look for the -- let me look for the Q&A title we had on that. In the fourth quarter, over 30% of the impairments were in California, 46% were in the Southwest, 17% were in the Southeast. Those are the major three areas for impairments. It was in 57 communities which included 11 JVs. On margins by region, I'm not sure I could give you that. I wouldn't have that. I just don't have it in front of me.

I was just wondering any sense of where is higher, where is lower, things of that nature? I can get back to you on it.

Yes, there's not as big of swings as there used to be.

Okay. Fair enough. That's good. Thanks.

Now from UBS this is David Goldberg.

Wonder if you could give us some more color. You were talking about the percent of the average selling price that was coming from options in the design studio. I wonder maybe if you can give us a little bit of color if there's been a change in what kind of options people are choosing and maybe the profitability of the options that they're choosing?

One of the shifts we saw through '07 was less money on the sizzle type options, and more focus on the core things like cabinets, flooring, less of the luxury lifestyle and more of those things that are fundamental in need for the consumer. Really don't right now expect that our studio sales will change much going into '08. I think they'll continue to spend the same dollars, just move it around to more core items.

I guess my follow-up question was just about Countrywide. If you're thinking at all about changing the JV, any concerns about liquidity and availability of capital or anything like that, maybe bringing in a warehouse line or something like that moving forward?

Well, we don't have that concern right now. Countrywide has been a great business partner. They've stepped up in every way along the way and we had a great fourth quarter in our closings, in large part because of their performance. We have our own line in the JV and it operates independent. So it's -- to us, it's a great partnership and we'll just keep running it with them.

Great. Thanks.

Next up is Timothy Jones, Wasserman and Associates.

Congratulations on the 2.4 billion reduction in inventories.

Thanks.

Nice to see for once. Talking, not for you, for the industry. Okay. First, a question. I'm really surprised on this 46% impairments in the Southwest. But you include more -- that's not just Texas. Was that in the other markets that you have in the Southwest?

That was actually Las Vegas and Arizona.

Yes. That's okay, because I don't think you would have any in Texas.

We have a little bit in Albuquerque.

I'm intrigued on -- I'm pleased with your 30% reduction in communities. You have the strength, financial strength, to -- rather than have to sell these marginal communities to mothball them. Do you have any kind of number there that you'll just put it aside, either partially completed or communities and just mothball them and just carry them?

We don't have that many. Remember, we're down to 45,000 lots owned. So we really have just got -- we've really just gotten ourselves into a very lean land position overall.

That's a nice position to be in. Lastly, can you tell me what's going on in the Central region, why these sales are down so sharply there?

Well, as I mentioned in my comments, Tim, while Indianapolis wasn't a large business for us, it was 600, 700 units a year in '06, so that's gone now. We pulled out of Texas Valley, which was 300 or 400 you units in in sales in '06 and also now from the Gulf Coast. So we've knocked down our community count and that on an annual basis is probably, from the markets we withdrew in that region, it's probably 1,000 sales a year. But even in the markets that we're in, like Houston, Dallas, San Antone, our community count is down year-over-year. That's driving a lot of the negative sales comp. The Texas market is actually holding up okay, relative to the Coast.

That's what I thought. So thank you very much.

Next up we have Joel Locker, FTN Securities.

Just wondering if you had a breakdown of the other 90%, with the 10% gross margin, just the 90% expenses between land, labor, and materials?

I don't know if I have an answer to the question. I don't think I quite understand the question. Oh, you mean the 90%, what is -- how much is land and how much is the construction of the house?

Land, labor, and materials, if you have.

Oh, yes, well, off the top of my head, I would say it's 55% is the construction of the house, 30% is land -- 25% is land, and then another 10 is expenses. I mean, I don't know if I hit that right but--.

Another 10 -- 10% expenses.

55% -- 54% of direct construction, and -- oh, that's got the impairment in it, Kelly. So talk to me again. 55, 25, and 10.

55, 25 and 10.

Yes.

And the other I guess question, you had $290.3 million of just of impairments between land and option walk aways. What part was the actual option and preacquisition cost charges?

$72 million is abandonment.

$72 million was abandonment. Thanks a lot. I'll jump back in the queue.

We'll move on to Andrew Brausa at Banc of America Securities.

Hey, guys. Wanted to know if you could comment on the absorption trends you saw throughout the quarter and whether you saw month to month any sort of major changes?

Well, we don't typically get into too much of the month to month trends, Andrew. I can tell you and this is a ways back, keep in mind the quarter ended in November, but with September clearly got rattled because that was on the heels of the credit market tightening up and a lot of the mortgage product having been eliminated in June, July, and August. I don't recall in reflection that it was materially different from month to month.

Okay. And I guess obviously you don't have anything maturing until late 2008 and obviously plenty of cash on hand as you guys alluded to. When you look out into 2008, you see community count down 25 to 30%, is there any sort of order of magnitude of cash flow you guys might be expecting to get into the Company?

We do expect in '08 to be cash flow positive, if things hold and we run the business.

We'll know later in the year. The big swing factor is how many homes do we get delivered in '08. Once that's solidified and we see the selling season, then we'll know how much cash we generate. Our goal is to be definitely cash flow positive, just like we've been in the past. Just not to the same level.

The question now from Alex Barron at Agency Trading Group.

I was hoping you could break out the impairments between what you did for option write-offs versus I guess community write-downs, land write-downs?

Well, we said options was -- oh, go ahead.

72 million and 218 million.

And 218 million community impairments.

Thanks. I was also wondering, as far as your joint ventures, were there any sales of any of the joint ventures or did you walk away from any that maybe some other partner took on or vice versa, any joint ventures that you had to consolidate where somebody else walked away?

We did dispose of three in the quarter through a sale, Alex. We manage all our JVs just like any other community and it is our intent to lessen our investment in JVs through '08.

Can you comment at all on purchase price or locations?

Of the three that we disposed of?

Right.

One in Texas, one in Sacramento and Tucson? One in Tucson.

Okay. Great. Also, I didn't catch, or if you mentioned your finished specs for the quarter?

Well, I think it was around 484 I believe is what I said, just a little over one per community in the quarter.

Okay. Got it. Last question, as far as your -- I apologize about that. As far as your community count, I guess it seemed to have gone up slightly from last quarter. I was just wondering how to interpret that?

You really can't. I mean, it's -- in the fourth quarter is when we're closing out of a lot of communities and we're opening new communities to enter 2008. So it's an anomaly. It comes right back down in Q1. It's best that community count is just to look at the year to year and not quarter-to-quarter.

Now we'll go to Lark Research and Steve Percoco.

Could you give some additional information on the impairments, for example, what was the fair value after impairments of those properties that you took charges on?

I wouldn't have that to be honest with you, in front of me.

Okay. Can you give us any idea of the assumptions that you have used to determine the threshold for impairment going forward?

We're using the same assumptions every quarter on impairments. I mean, the good news is we're down to 45,000 lots owned and only 20,000 optioned and our land which was our peak at 7.2 billion is down to 3.3 billion. So we're working our way through it. We've really got to play a lean lot position and our inventory has been shrunk significantly since the beginning of the -- well, since six quarters ago.

Next up we have Larry Taylor at Credit Suisse.

Thanks very much. I wonder if you could talk about the potential uses for free cash flow in 2008? Do you have a priority and if market conditions don't change, do you intend to continue to stockpile cash? Would you reduce other debt on the balance sheet?

Well, we did say that we would generate free cash flow next year. So we're going to continue to generate cash. There's no debt that would be reduced until December 2008 when 200 million of the senior subordinated debt comes due.

Okay. And can you envision -- I think that answers the question that you would basically be stockpiling cash, in other words, continuing to build liquidity?

Yes, unless we see a change in the market.

We intend to keep ample liquidity until there's signs that the markets have stabilized and we'll reinvest as opportunities come up.

That may already answer my second question. Let me ask it anyway to be clear. Are there any markets today that you would invest in or opportunities going into the first quarter here, given your liquidity and financial wherewithal, where you could see yourselves putting money into those markets?

Are you referring Larry to our existing markets or new markets?

Either existing or new markets. But basically where you'd be increasing your investment, essentially building a larger block of available lots for example.

Well, I was asking in that we do not see the need to enter additional markets right now. There's no much upside in market share gains where we're at. In any given market we're absolutely interested in investing in the right opportunity at the right price point. There's demand in every market that we're in. You just have to figure out how to make margin at an affordable price point. And that's where we're headed in '08.

You would say we're not there yet or?

We think there will be better opportunities in the future.

Thanks very much.

All right.

With that, ladies and gentlemen, we'll wrap up the question-and-answer session and I'll turn things back over to our speakers for any additional or closing remarks.

Okay. Thank you for joining us today. We hope to speak again with all of you in the near future. Have a great day.

Again, that concludes today's conference call. Thank you again for joining us ladies and gentlemen. Have a good day.