KB Home (KBH) 2008 Q1 法說會逐字稿

Good day everyone and welcome to KB Home's first quarter earnings conference call. As a reminder today's conference 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 April 6h, 2008. You can access this recording by dialing (719)457-0820 or (888)203-1112 and entering the replay pass code of 7868747. KB Home discussion today may include certain predictions and other forward-looking statements. These statements may cover market or economic conditions, KB Home business and prospects, it's future financial and operational performance and/or future actions and their expected results. They are based on managements current expectations and projections for future events, but are not guarantees of future performance.

Due to risks, assumptions and uncertainties, and events outside its control, KB Home 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 Home's President and Chief Executive Officer, Mr. Jeffrey Mezger, please go ahead, sir.

Thanks, Courtney. Good morning everyone. Thank you for joining us today. For an update on our first quarter results. With me this morning are Dom Cecere our Executive Vice President and CFO. Bill Hollinger our Senior Vice President and Chief Accounting Officer and Kelly Masuda, our Senior Vice President of Investor Relations and Treasurer.

The first quarter of 2008 continue today be challenging. The most recent available national data indicates year-over-year declines in both sales activity and sales prices for new and existing homes. Inventory levels in both categories remain elevated at about a ten month supply. Additionally, the on going turmoil in the financial markets and rising concerns about recession are negatively impacting consumer confidence.

Earlier this week, the Conference Board reported that the Consumer Confidence Index fell 11.9 points to 64.5 in February, a level usually seen only during recessions. In addition, consumer expectations about the future fell to their lowest point since 1973 when a recession was followed by inflation. Many potential buyers either cannot or will not make a purchase commitment today. Some are worried about losing their jobs, others believe prices have further to fall. Many are simply unable to qualify for financing given the more restrictive lending environment. Competition remains fierce for buyers who are prepared to close a sale a reality which continues to pressure both home prices and margins. While these factors impacted our first quarter financial results, the good news is that the apparent acceleration of these negative trends also gets us closer to the eventual recovery.

For the quarter, we took 224 million of impairment and abandonment charges and a $100 million charge for a deferred tax asset valuation allowance. Largely as a result of these charges, we reported a net loss for the quarter of 268.2 million or 347 per diluted share. The impairment charges were triggered mainly by additional price reductions in several of our markets where rising inventory levels and tighter mortgage underwriting standards are creating intense competition for sales. Record declines in home prices have continued into 2008 with home prices dropping approximately 11% year-over-year in January, according to the S&P Kay Schiller Home price index, primarily due to the higher supply of new and existing homes. These factors contributed to our need to make additional price reductions in many of our communities.

In addition, consistent with our focus on cash flow and a strengthened balance sheet, we booked $77 million in impairments for future land sales and targeted asset dispositions. About 16% of the impairment charges roughly 36 million were taken against our investment in unconsolidated joint ventures. Our total investment in unconsolidated joint ventures has dropped 32% to 281 million at February 29 of '08, compared to 413 million a year ago. As most of your projects have a three to five year life, you will continue to see our joint venture investment levels winding down over the next year or two and the associated debt being reduced.

Regarding the deferred tax asset valuation allowance, as you recall, we took a substantial charge in the fourth quarter of 2007 due to the accounting interpretations in this area. In the first quarter of 2008, we were required to book an additional charge to fully reserve the tax benefits generated from our pretax loss. We would expect to generate further reserves if we were to incur additional impairments and losses in the future. As of February 29, 2008, our valuation allowance on deferred tax assets was over 600 million. Despite having this valuation allowance for book purposes, we expect to realize these tax benefits in future periods when we return to profitability. We continue to execute on the action plans we put in place 24 months ago that have us well positioned during the downturn. We remain focused at KB Home on strengthening our financial position, trimming our home building operations and overhead structure where appropriate for current demand levels, and making prudent strategic decisions to position us for the future.

Let me give you a progress report on our top three strategic initiatives. First, financial strength remains our top priority. At February 29, 2008 our cash balance was unchanged from year end at roughly 1.3 billion. That reflects a concerted effort to preserve cash given that we typically use cash in the first half of any year and then generate cash in the second half. We anticipate generating positive cash flows for the remainder of the year.

We further reduced our inventory levels to 2.9 billion ending the first quarter with approximately 59,500 lots owned or controlled. That is down 68% from a peak of 186,300 lots owned or controlled in the first quarter of 2006. Our quarter end inventory balance was down 48% from the 5.5 billion balance at February 28, 2007. On the debt front, our leverage ratio net of cash was 35% at quarter end. This is below our targeted range of 40 to 50% and also well below our 46% ratio a year earlier. We had more than 2.3 billion of liquidity at the end of the first quarter with no borrowings outstanding under our 1.3 billion revolving credit facility. Finally, we amended our credit facility in January with favorable terms that we believe reflect our solid financial status. We also believe this amendment provides us with the additional flexibility to operate our business as we navigate through today's market conditions.

Second, we continue to take steps to consolidate our home building operations and focus on our market strengths. We operated from 38% fewer communities during the first quarter, reflecting our strategy to down size operations in certain markets as backlog is delivered and completely exit others. As I have mentioned on previous calls we see no reason to invest the cash required to open a new community if it will not achieve our financial targets. We will continue to operate with fewer communities until we see reasonable signs of a recovery and can justify additional investment in new properties. Last year, as you know, we chose to exit Indianapolis, Fort Myers, Treasure Coast, Golf Coast, and McCowen. More recently, we have decided to wind down operations in Washington D.C., Chicago, and New Mexico. That said, we are honoring all existing obligations in these markets and closing out communities in a measured, prudent manner while continuing to uphold our high standards of quality and customer satisfaction. We will continue to evaluate and re-evaluate our existing markets based on current and projected financial performance.

Our most important and largest geographic footprint remains in the sun belt, the region of the country expected to deliver the strongest population and job growth going forward. We believe we are strategically positioned in the right markets too grow our business in the future as a home building industry begins to stabilize. Addressing affordability, we have reduced square footage and simplified our floor plans to meet buyer demands. We have also offset pricing pressures to some degree with a strategic focus on cost cutting, and including value engineering of our home designs and renegotiating labor and supply contracts. We continue to focus on featuring design elements that blend low cost with high value, putting the custom home experience within reach of our home buyers. As a result, the vast majority of our communities now offer homes priced within current FHA, VA and conforming loan limits even before the recent loan increases were authorized.

In fact, after the FHA increases are applied, 95% of our communities are priced within FHA range. We have also launched a series of Why-Rent events across the country in which Countrywide KB Home Loan counselors help customers determine their buying power. With pinup demand as a result of population and job growth we continue to target renters who do not need to sale a home in order to purchase a new home. Affordable monthly payments really resinate with today's buyers especially renters who may not realize that home ownership is within their reach.

Third we remain committed to the operating disciplines and product innovations that have made us an industry leader. No matter what changes we make to the size of our operations, our KBnxt operating business model defines how we operate. It puts a total focus on our customer and employs a fact phase and process driven approach to what and where we build. It helps us deliver even flow production, outstanding customer service, and is a built to order system that gives buyers both choice and value. We believe it provides a road map to success in both strong and more challenging housing markets.

I will be the first to acknowledge that we have not pleased with our sales results for the quarter. Entering the new year we have strengthened our balance sheet significantly, lowered our community count and achieved our cash balance objectives. With those accomplishments in place, we were in a position to be more patient with our actions and to wait for a better day. We elected to hold pricing and focus more on restoring profitability. During the quarter, the markets continued to move away from us leaving us at a competitive disadvantage.

As a result, our gross sales dropped while our cancellations as a percent of backlog held steady and our unsold inventory increased some what compared to our year end total. We have taken additional steps to reposition our communities in order to clear out this inventory in the second quarter. We remain primarily a presold builder, a strategy that provides maximum choice to our customer and predictable delivery results for us. Our built to order approach offers buyers the lowest possible base price for their new home, with personalized design options from our KB Home Studios that fit their needs and their budget. While a lower community count will result in fewer sales year-over-year for the second quarter we intend to close the gap relative to our first quarter comparison.

In our marketing efforts, we are focused on unique high-impact promotions that increase traffic at the community level while increasing national brand awareness. Strategic partnerships with Martha Stewart and Disney provide us with a conclusive competitive advantage over other builders as well as over the resale market.

In addition, we are overcoming consumers uncertainty about buying a home right now with two powerful programs, Price Protection and Rate Lock. These give home buyers the confidence to buy a new KB Home home without worrying about the price of their home falling or interest rates rising while the home is being built.

Our Countrywide KB Home Home Loans joint venture continues to perform very well. During these turbulent times for the mortgage banking industry, it has been extremely beneficial for us to operate through our low risk joint venture.. Our preliminarily review regarding Bank of Americas announced attention to acquire Countrywide later this year, is that it will be business as usual for our mortgage banking joint venture. The strategic alliance we have with Countrywide has been great creating many synergies. We also believe the merger of Bank of America and Countrywide is a positive one for the mortgage industry and has the potential for creating additional stability in the financial markets.

One recent measure of our success as an industry leader came from our peers, this month, Fortune Magazine published its 2008 list of America's Most Admired Companies, ranking KB Home #1 Among Home Builders. Their rankings based on surveys among industry members placed us at the top of every category including quality of management, innovation, long-term investment value, financial soundness, social responsibility, and the use of corporate assets. Being named #1 in our category puts KB Home in the very privileged company of other category leaders including Apple, GE, Walt Disney, BMW, Nike and Southwest Airlines.

While we firmly believe the long-term fundamentals of our business remain strong given current macro economic conditions we see no reason to believe that new and resale absorption rates in the next few months will improve dramatically enough to clear excess inventories. Prices need to adjust further for that to occur. Until that happens and until some measure of consumer confidence is restored we believe pricing and margins will remain under pressure. That said we do see indications that improvement is on the horizon.

To begin with, existing home prices are dropping, and both nominal and inflation adjusted terms. Whether you look at the dramatic declines registered by the S&P Kay Schiller Home Price Index or the more modest decline reflected in the office of Federal Housing Enterprise Oversight results the trends is down.

Earlier this week, the National Association of Realtors reported that the median price of a resale home in February, 2008 was down 8.2% from February 2007. This decline was the largest on record. And that is good news for us, because our biggest competitor is the resale market and a drop in price of this magnitude could clear the overhang of inventory more quickly and lead to price stability earlier rather than later.

Today, in most of our markets, we believe our prices are at or below the resale median for that market. While existing home prices are likely to fall further in 2008, we have anticipated this and have taken steps to insure that our prices remain competitive and compelling to consumers.

Another source of encouraging news is mortgage rates. Even with on going credit market turmoil, interest rates for a 30-year fixed rate loan are now below 6%. That is approaching the lows we saw in 2003, when rates hit their lowest levels in 27 years. It is also good news that HUD this month finalized new FHA loan limits for the majority of the markets in which we operate. While there are still many unanswered questions, in March Countrywide, KB Home Home Loans began accepting loan applications at the higher FHA, VA and conforming loan limits. This combination of low interest rates, increases in loan limits and the upcoming tax refund could provide some welcome stimulus to home buying especially as apartment rental rates are increased in many markets and renters reconsider the math of purchasing their first home. There is no silver bullet to restore consumer confidence but hopefully these are precursors to market recovery.

Whatever the future brings we remain focused at KB Home on running our business prudently at whatever volume market circumstances support with a primary goal of restoring profitability. We continue to pursue cost reductions and to seek out ways to improve our core business process.

Taking these steps, not only addresses today's difficult market conditions but also sets an important foundation for future opportunities. And they will come. Every crystal ball is different, as to time it will take, but the market will eventually recover. When it does we will be ready. I believe that with our proven KBnxt operating business model, financial strength, market experience and commitment to product innovation, KB Home will emerge from this downturn as one of the strongest national players.

Now, I will turn the call over to Dom for our financial review.

Thanks, Jeff. Let us start with operating results. Reflecting the actions we have taken over the past few quarters, to reduce inventory and community counts, by consolidated or exiting underperforming communities, net orders of 1,449 new homes in the first quarter were down 75% on a year-over-year basis. Community counts in the first quarter of 2008 were down 38% from the prior year. We had 224 active selling communities in the first quarter of 2008 compared to 364 in the first quarter of 2007. Our community count was lower in each of the four segments with year-over-year decreases ranging from 19 to 56%. The decline in net orders also reflects challenging conditions in most of our markets.

Our conscious decision to wind down operations in certain markets, our efforts to hold the line on pricing and margins, our growing supply of new and existing homes, including increased foreclosures, add tighter consumer mortgage lending standards, as well as a decreased consumer competitiveness. The cancellation rate in the first quarter of 2008 was 26% of beginning backlog. Over the last several quarters, the ratio of cancellations to beginning backlog has ranged between 26% and 33%. Weak overall demand for housing has negatively impacted the cancellation rate when compared to gross orders and this comparison that cancellation rate in the first quarter was 53% and improvement from 58% in the fourth quarter of 2007, but up from 34% in the year earlier quarter which was closer to our normal historical rate.

We entered the first quarter with 6,322 sold homes in backlog and converted 2,928 of 46% of our backlog to revenue. This compares to a conversion ratio of 49% in the first quarter of 2007. Our backlog remains geographically diverse with the largest portion of our backlog value in the West Coast region.

In the first quarter of 2008, we incurred a net loss of 268 million or $3.47 per diluted share compared to a net income of 27.5 million or $0.34 per diluted share in the first quarter of 2007, which included 16.8 million or $0.21 per diluted share from our French discontinued operations. The loss resulted primarily from a 43% decrease in revenues, 224 million pretax non-cash charge for impairments and abandonment and a 100 million charge for deferred tax asset valuation allowance. Excluding the impairment and abandonment charges and the valuation allowance, we would have reported a net loss of 27.6 million or $0.36 per diluted share.

We delivered 2,928 homes in the first quarter of 2008 down 43% from the year earlier quarter, largely due to our efforts to resize our operations and reduce community counts. Each region delivered homes, fewer homes compared to the year earlier quarter; we anticipate operating from significantly less communities for the remainder of 2008 as compared to the prior year. The average sales price of the homes we deliver in the first quarter of 2008 decreased 7% to 248,200 from 267,400 in the first quarter of 2007. Year-over-year sales prices were down 17% on the West Coast, 14% in the Southwest, and 4% in the Southeast. Sales prices were up 4% in our Central region.

We believe our average selling price will continue to decrease in the short-term as we continue to address affordability challenges and tougher lending requirements and continue to operate in an environment against a backdrop of significant decline in the resale prices. We have and continue to work diligently to offset these pricing pressures by reducing cost with a series of strategic measures that include re-evaluating spec levels, fine tuning and value engineering our home designs, and renegotiating supplier contracts for improved terms.

Our housing gross margin in the first quarter of 2008 fell to negative 6.2% from negative 4.3% in the fourth quarter of 2007 and a positive 15.5% in the first quarter of 2007. Excluding impairments and abandonment charges our housing gross margin in the first quarter of 2008 was 9.0% compared to 10.1% in the fourth quarter of 2007, and 15.9% in the first quarter of 2007, reflecting lower sales prices and an increased use of incentives and discounts to sale homes. We anticipate our margins for the balance of 2008 will remain compressed due to continued price pressures and heightened competition for sales.

Selling, general and administrative expenses in the first quarter decreased 78 million or 38% from a year ago. As a percentage of housing revenues; however, these expenses rose were 17.6% from 14.9% in the year earlier quarter, mainly due to the substantial decrease in housing revenues reflecting our community count reductions. We expect our SG&A expenses as a percentage of housing revenues to remain above the 2007 levels for the duration of the year as it will take some time for overhead to align with the lower revenue levels. Nevertheless, this area will remain a constant focus for us for the rest of the year.

Our home building pretax loss of 276 million for the first quarter of 2008 included 217 million of inventory and joint venture impairment charges and 7 million of option abandonment charges related to about 700 lots under option contract. Approximately 36 million of the impairment charges were against our investment in the on consolidated joint ventures. During the quarter we impaired approximately 88 projects, some of which were active and some of which were not. The impairments were mainly driven by price reductions we made in certain markets due to increasing levels of housing inventory in the marketplace and tighter consumer mortgage underwriting standards and our monetizing properties and certain markets where we decided not to make additional investments.

The Financial Services business for KB Home contributed pretax income of 7.9 million in the first quarter of 2008. Our Countrywide KB Home Loans mortgage joint venture continues to perform well. Within the joint venture, the retention rate for the first quarter of 2008 was 79% compared to 63% a year ago. The FICO score for the joint venture mortgage customers for the first quarter of 2008 were 701 slightly higher than a year ago. Buyers also continued to use fixed rate product with only 14% using adjustable rate mortgages in the first quarter of 2008.

Government and conforming loans represented more than 90% of our first quarter deliveries with a similar percentage in our backlog. Our total pretax loss of 267.9 million in the first quarter of 2008 compared to pretax income of 15.3 million in the first quarter of 2007. Our income tax provision of 0.3 million as a percentage of the pretax loss was not at the statutory rate because we recorded a $100 million charge for deferred tax asset valuation allowance as required under the Accounting Rules. The allowance essentially eliminated any tax benefit for the quarter under Generally Accepted Accounts Principles. For tax purposes the majority of tax benefits associated with our deferred tax asset can say be carried forward 20 years and we expect to realize the benefits as we generate profits in the future. Including the value rate on our valuation allowance recorded in the fourth quarter of 2007 we have more than 600 million of deferred tax asset that is are fully reserved as of February 29, 2008. To the extent we generate taxable income in the future to utilize these tax benefits, we expect our effective tax rate on future income to decrease as the valuation allowance is reversed.

Now I will move to the balance sheet. As a result of the actions over the past several quarters we have streamlined our land position significantly, reducing inventory and community counts while consolidating or exiting underperforming markets. At February 29, 2008 we had 2.9 billion in inventories compared to 3.3 billion at November 30, 2007 and 5.5 billion at February 28, 2007.

At the end of the first quarter we owned or controlled approximately 59,500 lots down 68% from a peak of 186,300 lots owned or controlled in the first quarter of 2006 and 43% from the 104,100 lots in the first quarter of 2007. Of the 59,500 total we own less than 42,000 lots, which is is approximately a three year supply of land and we have approximately 17,500 lots controlled via land option contracts.

Homes in production are down almost 72% from the peak in the second quarter of 2006 and down 48% from the first quarter of 2007. This is a clear illustration of our rigorous adherence to our built to order business model. We have 4600 homes in production with 30% or 1400 homes unsold. This is up from approximately 1,000 unsold homes in the fourth quarter of 2007, but still one of the lowest levels of spec production in our industry. We had approximately 900 finished unsold homes in inventory at year end spread across 224 active selling communities. We had total debt of 2.2 billion at February 29, 2008, which was essentially unchanged from year end and 714 million lower than the balance at February 28, 2007.

As of February 29, 2008 our debt net of cash totaled approximately 845 million compared to approximately 837 million at year end and 2.5 billion at February 28, 2007. Our net debt to total capital ratio was approximately 35% at the end of the first quarter of 2008 compared to 31% at year end 2007 and 46% at February 28, 2007. The net debt to total capital ratio at February 29, 2008 was adversely impacted by the impairment and abandonment charges and by the deferred tax allowance recorded during the quarter.

Now I would like to spend a few minutes talking about unconsolidated joint ventures. We have participated in unconsolidated joint ventures for a number of years, through these joint ventures we reduce the capital we had to invest in order to share access to potential future homesite. In some instances, participation in joint ventures allows us to obtain land that we could not otherwise have access to. They may also provide an opportunity for more favorable terms. The risk that corresponds to these benefits is that we could be adversely impacted by our joint venture partners failure to fulfill their own obligations.

As of February 29, 2008 we had $281 million invested in unconsolidated joint ventures. All of our joint ventures, 28 had more than 1 million in assets and only 10 of these had more than 50 million in total assets. Five unconsolidated joint ventures represented about 75% of the $281 million investment. The majority with public builders and financial sound developers in good sub markets. Of our consolidated joint ventures, 21 have bank debt with varying levels of obligation on the debt. The majority of unconsolidated joint venture partners are large, well capitalized builders with financing structured as acquisition and development loans. We strategically manage our unconsolidated joint venture assets like any other asset in terms of bulk sales, building through, or phasing development. . The majority of our joint ventures continue to perform despite market conditions.

We are working with a subset of our joint ventures to resolve either partnership or financing issues. Due to confidentiality constraints we cannot disclose the details of ongoing discussions but we continue to digitally work with our joint venture partners and banks to find the best solution for our shareholders. Any additional information will be disclosed in our SEC filings.

During 2007, we began to reduce the number of joint ventures in which we participant and the related indebtedness of such joint ventures. Are unconsolidated joint ventures investments are down 32% from 413 million at February 28, 2007. As we continue to make further strides, our investments should continue to increase in the foreseeable future. Turning to an update on the status of our credit facility, we would like to thank Bank of America and the rest of our bank partners for working in an expedited manner to address the impact of a deferred tax valuation allowance charge on our revolver credit facility financial covenants.

As previously mentioned we completed an amendment to our revolving credit facility on January 25. In the amendment we reduced our minimum consolidated tangible net worth from 2 billion to 1 billion and reduced our overall facility size from 1.5 billion to 1.3 billion. The November 2010 maturity date for our revolving credit facility was not impacted by the amendment. With 1.3 billion of cash at quarter end and on borrowing revolver we have substantial liquidity to navigate the downturn and be opportunistic when land prospects arise. Now I will turn it back to Jeff

Thanks Dom. I have a couple of closing comments before we begin to take questions. A few weeks ago, the NHEB Research Center announced that KB Home was the first builder in the U.S. to achieve National Certification under the National Housing Quality program. This means we are the first and only National Builder to have completed a rigorous quality audit in all of our divisions insuring that our top notch quality assurance systems and those of your trade partners are aligned to improve both quality performance and customer satisfaction. It is an achievement that we feel sets the bar for quality in our industry and it is something we are celebrating and promoting in all of our sales offices across the country.

In these market conditions, product quality and customer satisfaction will be a true differentiator. While today's market is difficult for home builders, people have and will continue to buy homes. The challenge is capturing a larger share of the more limited poole of consumers in a buyers market. We have implemented a number of strategies that position us not just for when the market recovers but for selling homes today. We are firmly committed to our long-term strategy of providing a high-quality built to order home for the first time, first move up, and active adult buyer.

No matter what the market is doing, the desire for home ownership remains constant, especially for the first time buyer. I am confident that once we turn the corner on today's challenging economic conditions the future will once again look bright. Favorable demographics and on going population growth in the markets we serve will provide an expanding pool of renter households to drive first time home buyer demand for years to come. We will be there to make sure their dream of home ownership becomes a reality. Our decisive actions taken in 2007 to bolster our cash position, reduce inventory and community count and consolidate or exit underperforming markets puts us on the path to insure that we are building a bright future for our company, our homeowners and our shareholders. For more han 50 years KB Home has driven innovation and progress in the home building industry. This KB Home team has skillfully navigated many difficult market cycles each time emerging as an even stronger company and we will once again, but we're not waiting for the future to come to us. I am privileged to work with a seasoned and talented leadership team with deep expertise in this industry who have and will continue to seek out the opportunities that the market presents today. As we move ahead, we will continue to realign our business to the shifting market while also strategically capitalizing on emerging opportunities in order to drive results that we are proud of. With that let me open up the call for your questions.

(OPERATOR INSTRUCTIONS). With we will pause for just a moment to give everyone an opportunity to signal for questions. We will take your first question from David Goldberg with UBS.

Thanks. Good morning, guys.

Morning, Dave.

The question is about the gross margin and gross margin trends. Dom you commented that gross margins are going to be compressed for the rest of '08. I guess the question is as you look forward to land position and the cost basis on the land position, when do you see those pressures a little bit and where do you think assuming prices were to stay stable, where do you think margin can say get to as we look out a little further?

David, the big question is what is going to happen to resale prices the next couple of quarters. That's the factor that is difficult to predict. There was a significant decline in the last couple of months and the inventory is yet to correct. So if I had the crystal ball to, to forecast what happens to resale prices I could have a better understanding of what would happen to our margins.

Maybe the better way to ask the question, Dom, is how much lower is the cost basis maybe percentage wise on land out in the future versus land you are delivering on now?

Well, I mean, I think as we reload, we have a lean land position, as we reload new lots, we are reloading with margins closer to our normal levels which would be closer to 20%. But with the existing lots today there's not a lot of margin in those lots.

If I could just get a follow up, Jeff you were talking about price protection and rate locks, I was wondering how extensive the use of those were, if you have an idea of how you are thinking about it especially if we think price declines moving forward, thinking about the potential liability it creates for you guys.

It is only to the home under construction for that period of time, Dave.

Yes.

We rolled the program out in January. It has been well received by the consumer. Frankly, if you have a home in backlog, with an approved loan and a borrower is ready to close and the markets he rode around you, you have to react to that anyway, all we commit to is if we were to lower the price of our homes in that community, while their homes under construction, we will give them the lower price, it has nothing to do with what a competitors does across the street or a resale down th street.

With the rates you lock it up for the construction period then.

Correct. There's no risk to that for us, it is one of the synergies we have with our partnership for Countrywide.

Great. Thank you.

Thank you. Next from Michael Rehaut with JPMorgan.

Hi, Thanks. Good morning.

Morning, Mike.

The first question relates to comments you made earlier about order trends and I think you kind of indicated that aside from the difficult market conditions that you had tried to hold price to some degree and the market kind of got away from you a little bit. I was wondering if you could give some color in terms of , perhaps over the next quarter or two, what the degree of incremental price cutting you might have to do and in particular, on a percentage basis from where you are today, which regions in particular do you feel that, that you felt this more, relative to others, more acutely relative

Obviously, Mike, it is a market specific and community specific answer because there's different price trends and pressures depending on the inventory in that sub market. The, the impairments that were taken in February were a reflection of the steps we took to adjust to market conditions coming out of the quarter. And on a price range in the region it could be 2 to 5%.

Okay, 2 to 5%. And so, which regions do you feel that you, that, that you took the more full brunt of that or was it inland California or Vegas or other areas that kind of stand out?

I don't have the data in front of me, Mike, but it will be in the Q and it was in the market that is ran up the hottest in the good times continue to slide the most in the down times.

Okay.

So the coastal markets.

Okay. Just one other question, Dom had kind of reviews some information on the JV and understanding you might not be able to talk about specific individual JVs but I was wondering if you could give us an idea of the amount of, that is associated with the JVs in its entirety. How much of that is, is currently, not the interest is not being paid on the debt where the liabilities in terms of future impairments or remargining or you might be more susceptible. If you could just give us an idea of the overall debt levels and percentage of debt that is not properly functioning.

Mike, this is Dom. The information on the amount of debt will be in the Q. So you will have to wait for that. But I want to go back to something we said which is we only have 28 joint ventures and only 10 have more than 50 million in assets. So we are really settled, there's five JVs that represent 80% of our investment and that's where most of our debt is. And that is where the majority of large public builders and financially sound developers. We think we have a good handle on it.

And remargin payments. I mean is there an expectation there to keep some of them more solvent?

There will always be margin repayments but I can't tell you exactly how much today. Again I would say our portfolio of joint ventures is not onerous.

Okay.

Thank you. We will next hear from Allen Ratner with Shellman & Associates.

Good morning, guys. Dom I was hoping to follow up on a comment you made to David in his commission about kind of the idea of prices stabilizing and you mentioned the kind of will depend on the existing home market. Several builders have committed that one advantage in the new home market right now from an affordability standpoint is that prices are actually below existing homes in many markets and that is kind of opposite of what it is historically been. They have kind of argued that as a buffer built in toward some of the existing home price declines that may happen. Do you think if existing home prices start to come down whether its a function of foreclosures or other things in the market that the new home builders will respond in step to keep pricing below the existing market or do you think that gap eventually closes and returns back to what it has been historically?

Allen, this Jeff, I think over time it will stabilize because the consumer does put a premium on new home versus used. In our case we're certainly, we feel below the median in everyone of the markets we operate and we are below the resale median, but it depends on how deep the resale adjustment is to clear inventory will impact what the new home pricing does. That's what is still to be told. You mentioned foreclosures, that's really a gray area. We can't get our arms around what the foreclosure activity is, how many are actually going on, how many are selling, what it is doing to pricing. But it is, there's a lack of clarity for us on where the resale pricing will get to other than we know it has to come down further to clear inventory. If it comes down too much we will have to adjust our prices more.

Got it. Jeff you had mentioned kind of that you have taken steps in 2Q to reduce inventory and gotten a little more aggressive on pricing than you may have been in the first quarter and that contributed to impairments in the quarter. What was the exact timing in terms of your aggressiveness on the pricing? Did it happen in February or subsequent to the quarter and have you seen any kind of important in absorptions as a result of that aggressiveness?

We don't talk intra-quarter about trends in that quarter. The steps we took we're the latter part of February.

The latter part. That would completely be captured in your impairments. There wouldn't be any risk based on the pricing.

We do our impairment process every quarter at the end of the quarter and this quarter scrub included any steps we took to generate sales.

Okay. Perfect.

Thank you. And next to Kenneth Zener with Merrill Lynch.

Hello. Just wanted to discuss you guys paring down the business, so your exit strategy. In my mind there's a big difference between Chicago D.C., which are large markets for the public builders and smaller places like Albuquerque and Indianapolis. Can you talk about how you think about Chicago, D.C., these markets longer-term given your prior interest and what your motivation is for trimming those markets? Is it really just to get the G&A out because I know you are still building out (inaudible) 15 odd communities -- it seems like you will be revisiting these markets given their appeal over the long-term. I'm surprised you are pulling out given that land prices are collapsing and given your very strong liquidity.

Ken, you are right we could revisit it someday but we don't feel in the short run. The filters that we use as we evaluate the markets are where we see the trends in the marketplace relative to pricing and supply and the demand. Our view of the profit projections going forward over the next two to three years offset by whether we have a franchise in place and a real brand in that marketplace.

In the case of D.C. and Chicago, we entered the markets later in the cycle. We never really got to scale. They're both markets that you could get back into if you wanted to and rather than continue to carry the overhead to support a small entry, where you are not going to reinvest because we feel that lot prices are still declining and land prices are out of whack. We decided to leave, if you go to Albuquerque its a little different look Albuquerque a market we call a secondary market, much smaller. It was a distorted market over the last few years in that it was larger in activity levels than the underlying economic demand would support. It was fueled a lot by investor activity from other areas. As that market has receded, its backed down to a scale that we don't think supports our business model where we look at a market and want to have a large business there's a certain activity level that you need to sustain in order to support the cost of a studio and get your returns. We didn't feel that Albuquerque strategically fit that need. While I say that, what we also mentioned in the release, the markets were in a significant upside in market share. We had rather focus on the markets where we have been a long time. We have a brand, there's a lot of upside to our business there where we could grow our business significantly without entering any markets for a while and at a point in time where we've achieved that and were getting to critical mass again in many of your markets we would revisit okay what's the next growth platform. We don't see the need to look for that growth platform for years.

Given that price is the prominent dictator, when you made the go-no-go decision exit, lets say doe you see, what were your numbers telling you that land was still overpriced.

It is not necessarily that our land is overpriced because we deal with it every quarter as I said on our impairment scrub..

Right, the buyers, for the sellers price.

Within the marketplace, we didn't see opportunities to acquire assets that would hit our financial thresholds, IRR or margin. Thank you.

(OPERATOR INSTRUCTIONS). And we will take your next question from Jim Wilson with JMP Securities.

Thanks. Morning, guys.

Morning.

I was wondering on the cancellation rate front and it would seem entirely focused on the entry level and the lower end, so its going to be higher. You see things all being just the underwriting process, the prescreening process, in of itself, particularly as things have changed over the last couple of months that might start to lead to meet a better cancellation rate experience.

Jim, there was a nuance to the data that we shared in the script, that Dom shared. Our can rate as a percent of backlog was 26%, which is lowest its been in several quarters. Our backlog is firmed up relative to what we saw through '07. The can rate as a percent of orders was distorted because we didn't have a high enough gross level. We converted our deliveries to our historical percentage of backlog. So we did fine delivering the backlog, we didn't sell enough houses, and my expectations is we get our sales pace on the growth side, you'll see our can rate settle right back down to a more historical levels.

That makes sense. Its great you've given the detail on the JVs, those five largest at 75%, is it safe to say or can you say that the two-- you're investment in the two in Las Vegas, is that kind of even half of the total for those five or something that, something in that neighborhood?

I don't think, we don't give out the detail by proxy but obviously Las Vegas is a large investment for us.

Okay. Thanks.

We will move on next to Tim Jones Wasserman & Associates.

Still confused on these or new large markets you said you are either getting out of or slowing down. I applaud getting rid of all the margin roll once you got out of the five. On the Washington D.C., Chicago and New Mexico, are you saying you are not buying more land? Are you saying you are decreasing your exposure by or are you saying you are getting out of these markets?

What we stated in our release is it is a withdrawal from the market. We have made the decision not to invest additional dollars there. So we have assets in every one of these markets we have to manage to. But our view today is that we wouldn't invest additional dollars, Tim but if you put it in perspective in Chicago in '07 we delivered 150 homes or something like that. It is not a large business. D. C. it was the first year of deliveries, a very young startup without a lot of deliveries--.

How many there? Less than 100 I think. How about New Mexico are you talk about Las Vegas or what?

No, no. Albuquerque, 3 miles-- .

No, no. Las Vegas is in Nevada.: I'm having a blond moment.

That's okay.

I don't think you can say that.

A question, can I just get some housekeeping? You gave us the so, the excellent number I might add, your homes under construction, your inventory unsold under construction and finished inventory for this year. Could you give me the comparable numbers for last year, with the 4600, the 14 and the 900?

I could get it to you. If you would call Kelly will give it to you after the phone call.

Thank you. And we will move next to Joel Locker with FBN Securities.

Yes, guys, just wanted to talk to you about your SG&A a little bit. Saw the 38% improvement year-over-year but with revenues starting to slip a lot further than that just wonder when you think the actual SG&A as a percentage of revenues would start to stabilize and head down to the low double-digits or so.

Well, in the first quarter our-- that's our most difficult quarter because that our least amount of deliveries, but sales were down 43%, SG&A was 38%. We did significantly cut SG&A it was down close 80 million year-over-year and we also announced that we were as Jeff just talked about getting out of some markets as those unwind, that saves SG&A. It will come back in the balance when you see demand pick up.

Going forward with the backlog down 60% or so you would have to really start cutting SG&A and could you even exiting those markets could you cut SG&A by 60% which looks like what your revenues will start to be down at least in the next couple of quarters. Or will it linger around these higher levels for at least until.

It will be around the higher levels for the next several quarters.

Higher than '07.

Right.

A lot of our SG&A isn't fixed. I mean you have got a lot of selling expenses and fees and everything else that commissions that follow revenue, it is not a fixed cost totally that doesn't adjust when volume adjusts.

Right. One last one, in the first quarter do you have a break down between head count and the selling expenses?

No, I don't have it off the top of my head.

What I can tell you is that we have demonstrated over the years that we have been aggressive and persistent in lower our overhead and we took a lot of steps in '07 and made significant progress and we will continue to do so in '08. But it is a tougher challenge now with as you mentioned our scale is going to be down, unclear what we will be able to tell you after our selling season concludes but it is, you are chasing revenue.

Right.

Remember a large portion of it is around marketing, advertising, sales allowances and sales commissions. Our sales head count is all commission based. So, I mean, when you adjust your community counts these expenses automatically adjust with them.

Right.

We will go next to Nishu Sood with Deutsche Bank.

Thanks. Hello, everyone.

Morning.

Wanted to ask about you mentioned that you have begun to offer loans under the higher FHA and conforming loan limit, just wondering what is the rate differential on the loans under the higher limit versus the loans under the prior limits?

That's one of the things that is still being resolved, Nishu.. The loan limit between the old limit and the new increased limit we are being told may have a slightly an incrementally higher rate because it will be in a different bond when it is sold.

Got it. Do you have a sense of ball park range, 30 basis points or like 100?

Less than 100 possibly less than 30.

Okay.

They're talking 25.

Okay. Great. And second question, a lot of the builders have been talking about concept of price and in elasticity. The stage at which a community gets to a point where lowering prices isn't really going drive your absorption any more. I can imagine that that phenomenon is going to pick up as the pricing in the resale market continues to adjust. What percentage of your communities would you estimate roughly ball park, are in a state of price in elasticity already?

Let me answer with a different response to your question. The price in elasticity at the higher price points. If you have a $700,000 home that is a jumbo loan or above conforming, and you drop the price 100 grand and the buyer has a home to sell, it is still pretty in elastic but when you are dealing with the lower price points in a first time buyer, it is all about affordability. So anytime you move your price you are expanding you buyer pool.

Thank you. Next, we will move onto Stephen Kim with Alpine.

Hi, guys.

Morning, Steve.

Morning. A couple of questions for you. First, can you give us a sense for what percentage of your buyers currently, have a house to sale and whether that's ratio changed at all the last year or so.

It is very limited. We have some very strict requirements before we will even take a contingency sale. Larger deposits, we have a lot of filters, its one of the benefits of having a JV Partner Countrywide where we can flag contingency loan app because we don't like them. We like to sell homes where we get paid for them when they can close and we don't view a contingency sale as a sale today. I won't say that we don't have any because there's some but it is a very limited amount. I couldn't tell you what it was last year but it is higher than it is today.

That's why our backlog is solid. We need to sale more houses.

Okay. Great. Second question I had relates to your option deposit and lenders of credit, do you know what that amount was if you include the letters of credit and what purchase price underlying purchase price they, they are related to?

Kelly? I don't even know how to --

Well we had about $229 million of letters of credit and generally between 50 and 60% are related to communities with the balance being deposits. Part of that is also earnest money deposits, Steve.

Okay. The 229 includes cash deposits you are saying?

No, no, the 229 million includes letters of credit related to communities and letters of credit related to deposits on land purchases of which part of that is earnest money deposits and part of that is hard deposits.

I see. Okay. Well great I will use that. Thanks.

Thank you. And we will move next to Alex Barron with Agency Trading Group.

Yes, hey, good morning, guys.

Morning.

I wanted to I think you mentioned cash flow, but I don't, I didn't cash the amount if you mentioned it this quarter. The operating cash flow.

It was just slightly positive this quarter. You will see it in the Q. What we have said on the comments in the cash flow is generally we use cash in the first half and generate cash in the second half. We went through the first quarter without really using any cash. We felt that was a positive.

Okay. Are there any amounts that you had to spend on joint ventures like either buying out your share of joint venture lots or making remargin payments or anything like that.

That will all be in the Q.

Okay. My other question.

I would say the amount of money we spend on the land, purchase and land development is significantly lower than the last couple of years.

Right. My other question with your community count you said that the community count has been coming down and I guess some of it I am assuming communities you sold out of. In others, the ones you shut down. I was wondering if you had a break down of those two.

No, we don't track that, we said that our community counts you were down about 38% in the first quarter. That trend will continue through the year.

Last question if I can, what is happening in Texas. I mean that would seem to be a market is holding up pretty well but looks like your orders were down quite a bit. Is it just becoming more competitive or what would you say is happening in Texas.

Texas held up better than the coast in 'o7 and we are seeing it soften some.

Thank you very much. That does conclude the question-and-answer session today. At this time I would like to turn the conference back over to Mr. Mezger for any closing or additional remarks..

Thank you for joining us today for our first quarter '08 call. Have a great day. We look forward to speaking with all of you again soon. Thank you.

Again, that does conclude today's program, we thank for attending and have a great day.