Lennar Corp (LEN) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Lennar Corporation's second-quarter earnings release.

For the conference today, all the participant lines are in a listen-only mode.

However there will be an opportunity for your questions, and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded.

Ladies and gentlemen, today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to Lennar's future financial and business performance.

These forward-looking statements may include statements regarding our business, financial conditions, results of operations, cash flow, strategies, and prospects.

Forward-looking statements represent the Company's estimates only on the date of this conference call and are not intended to give any assurance (inaudible) actual future results.

Because forward-looking statements relate to natters that have not yet occurred, these statements are inherently subject to risks and uncertainty.

Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements.

These factors include those described under the caption Risk Factors Relating to Our Business contained in our annual report on Form 10-K for most recently completed fiscal year, which is on file with the SEC.

Please note that Lennar assumes no obligation to update any forward-looking statements from past or present filings and conference calls.

With that being said, I would like to the conference now to the President and Chief Executive Officer, Mr. Stuart Miller.

Good morning, everyone, and thank you for joining us for our second-quarter 2006 conference call.

We are pleased to share our thoughts on progress and performance in both our Company and as well the homebuilding industry.

As always, I am joined by Bruce Gross, our Chief Financial Officer, who will give a detailed financial overview after I give some introductory remarks.

After Bruce's remarks, we will have our traditional question-and-answer period.

As always we would like to ask all of you for your cooperation in limiting to just one question and one follow-up, so that we can be as fair as possible to all of our participants.

Of course, we welcome you to reinsert yourself in the queue if you have additional questions; and we are going to attempt to answer as many questions as possible in the one hour more or less that we have allotted for the call.

So let me begin by saying that we are very pleased to report a very healthy performance in the second quarter and first six months of 2006.

Given current market conditions, our careful and balance sheet focused management approach has kept our inventory low and controlled, while we have continued to close homes and produce strong bottom-line profit.

We have been able to maintain operations at expected revenue levels to the second quarter, while we methodically taper back to meet reduced demands in the market in general.

Our $4.6 billion revenue has been maintained in order to avoid the buildup of inventory on the book.

As we have continued to generate excellent profits, up almost 40% year-over-year, we have delivered our backlog and continued to pare down our land position strategically.

Our 33.5% debt to total cap and our unusually strong liquidity position at this point in the annual cycle reflect our commitment to our balance-sheet-first focus.

Finally our repurchase of some 5 million shares of stock reflect our confidence in the position of our Company, our unwavering belief in the long-term prospects for our industry, and an investment analysis that has showed that this is the best investment among the competing investments to consider as we invest available cash.

Nevertheless, as we have continued to see weakening conditions in many of our strategic markets, we are experiencing slower sales, higher cancellations, and greater use of incentives and discounting.

While we have maintained a sales pace that is down only 3% year-over-year, we are also reporting a lower backlog of $6.5 billion, down 11% year-over-year, and margin erosion which will flow through future quarters that is now estimated to reduce our gross margin by approximately 300 basis points for the year.

Accordingly we are reducing guidance for 2006 from $9.25 to a range of $8.00 to $8.25.

Given the fact that the market has not yet reached the supply-side demand equilibrium in many markets, we recognize that these numbers are still subject to further adjustments as market conditions continue to reveal themselves and evolve.

So, what are the market conditions?

Throughout the second quarter, we have seen further deterioration in many of the largest markets across the country.

We attribute this deterioration to a combination of factors.

First, we see a weakened demand from primary home purchasers due to reduced home buyer sentiment stemming from a view that now is not the best time to make that strategic purchase.

These purchasers have placed themselves on the sidelines, awaiting a better price, but remain ready and able to purchase when the time is right.

Next, there has been a wholesale evaporation of the investors/speculators from the market.

These purchasers have determined that new investment in residential real estate will not yield the immediate, riskless returns that they have grown accustomed to; and that demand has gone to almost zero.

We think that ultimately is a healthy thing for the industry.

Additionally, both the primary purchasers and the speculator/investors are in some instances walking from existing contracts and therefore creating an increase in cancellation rates and therefore supply.

Finally, there is an additional increase in supply from the investor/speculators of the past years putting their investments on the market for sale and pricing to sell.

Supply and demand have shifted and are shifting in many markets more rapidly than expected.

A reasonably mild overhang of inventory has been created which will have to be absorbed before normalized conditions will return.

Home price reductions and incentives will continue to be used in these markets in order to stimulate stalled demand and bring the market back to equilibrium.

How deep will this go, and how long will it last?

The reality is that any projection at this point would be only a guess.

Just as a downturn had been anticipated but its timing miscalculated regularly, a correction to the positive will be dependent on a myriad of factors which will interrelate in what I think of as random timing, or at least unpredictable timing.

Nevertheless, the fundamentals that drive our business remain strong and I believe delineate a healthy long-term prognosis for the industry.

In that regard, I would point you to the very credible research compiled by the Joint Center for Housing Studies at Harvard in their recently released State of the Nation's Housing Report for 2006.

Generally it points to an overall strong demand trend for housing in America over the next 10 years.

Against that backdrop, let me speak briefly about Lennar's strategy as we operate in these market conditions.

Our strategy is in three distinct parts.

First, to devise and execute locally crafted strategies; second, to generate strong cash flow and enhance our balance sheet; and third, to offset margin deterioration.

To begin, we recognize that there is not currently, nor has there ever been, a uniform national homebuilding market.

In fact, while some markets like San Diego, Sacramento, Phoenix, and Washington DC are down significantly, other markets in the country like the Texas markets overall and the Carolina markets remain reasonably strong.

Therefore each of our divisions in each market has mapped out its own unique strategy to keep inventory levels carefully managed and to keep our homebuilding machine working with an orderly tapering down of production to meet lower demand levels where appropriate.

Next, we generate strong cash flow, first by recalibrating each division to moderate growth, no growth, or reduced growth, as appropriate.

The reduction or elimination of growth has always been a source of cash generation in the industry, as inventories stop growing and cash accumulates.

Additionally we reduce our land assets by reducing land acquisitions while we remain focused on our land pare-down strategy, selling land that is excess to our recalibrated needs.

Finally, as price reductions and incentives give way to margin deterioration, there are a number of opportunities to offset margin reductions that have become more effective as the froth has been taken out of the market.

We have consistently said that the ability to use our size to manage and reduce construction costs would be enhanced during a market slowdown.

Volume and stature is becoming significantly more important to our building partners in each market, as we are able to reduce construction costs as the market slows, or at least offset material increases.

Additionally as we have tapered back volume, we are vigorously and rigorously focused on reducing overhead to match that volume.

In conclusion, let me say that in spite of weakening conditions in many markets across the country, we are very optimistic about our industry overall and about our position in particular.

Our performance to date has shown focus and discipline in a changing market; and we have continued to focus on our balance sheet first and are very well positioned to continue to navigate these turbulent waters.

We have always said that we use a strong balance-sheet-first approach so that cyclical shift can be an ally and not an adversary for our business.

As we look ahead to very strong industry trends over the long term, we feel that our near-term performance will position us very well for future opportunity.

With that, let me turn over to Bruce Gross.

Thank you, Stuart.

Good morning.

I would like to touch on three areas in the financial review.

First, I'd like to provide some color on our second-quarter earnings.

Second, I will discuss our strengthening balance sheet.

Then third, I will provide some details on our revised EPS range.

Beginning with second-quarter earnings, home sale revenues increased 53% during the quarter year-over-year.

That is a result of a 40% increase in deliveries and a 10% increase in average sales price, both on a wholly-owned basis.

The increase in deliveries was driven by our focus to maintain even-flow production, and large increases were achieved in all three of our operating regions, East, West, and Central.

The average sales price on wholly-owned deliveries increased from $293,000 to $322,000 year-over-year with the regional breakout as follows.

The East Region was up 15% from $283,000 to $324,000; and New Jersey and Florida were up the most in that region.

The Central region was down 2% to $189,000.

The West region was up 10% from $388,000 to $429,000; and it was Arizona and Nevada that accounted for most of that increase.

The gross margin percentage decreased during the quarter by 140 basis points as a result of a significant increase in the use of sales incentives in most of our markets.

The East region had flat year-over-year margins due to improved margins in both Florida and the Carolina, while Maryland, Virginia, and New Jersey declined.

The Central region declined, with the largest percentage decline coming from Minnesota.

The West region margins declined in all the states except Arizona during the quarter.

We are carefully managing our inventory levels; and therefore gross margins will vary not only based on geography but also by the stage of production.

We are more aggressive on incentivizing unsold homes that are further along in the construction process.

Again this is due to our focus on strong cash flow generation.

SG&A percentage as a percent of revenue from home sales decreased by 30 basis points versus the prior year.

This was primarily due to reduced personnel-related costs.

This was partially offset by the use of more brokers, so broker commissions were higher, as well as advertising costs.

Additionally during the quarter, we incurred approximately a $0.03 charge for the expensing of stock options.

This compared to zero in the prior year.

Again, this is because we began expensing options this year.

This expense is reflected both in SG&A and corporate G&A expense line items.

Our gross profit on land sales during the quarter was $41.1 million versus $72.7 million in the prior year.

This number is net of $21.8 million of write-offs of option deposits and pre-acquisition costs related to land that the Company no longer intends to purchase, due to our reevaluation of these communities based on the changing market conditions.

These write-offs were in all three of our regions.

Of the 333,000 home sites that we owned or controlled at the end of the quarter, 69% of those home sites were controlled; and this provide us with flexibility in the decision to purchase the home sites or to decide to walk away.

Joint venture profits decreased to $14.8 million from $21.7 million during the quarter.

This was due to higher land sales to third parties in the prior year's second quarter, as well as lower gross margins related to homebuilding activity during the current year's second quarter.

New home orders including joint ventures net of cancellations were down 3% year-over-year.

Our cancellation rate was 27% approximately during the quarter.

This is at the high end of the range that we've talked about historically being 20% to 30%.

The level of sales incentives did increase through the quarter.

That was the main driver for our revised EPS range, which I'll talk about in a couple minutes.

Our wholly-owned backlog dollar value declined 10%.

The wholly-owned backlog average sales price was $359,000, which is 2% higher than prior year's second-quarter backlog.

Turning to Financial Services, the pre-tax from continuing operations was up significantly.

It was $34.6 million versus $19 million in the prior year's second quarter.

Our mortgage profit was $23.3 million compared with $10.2 million in the prior year.

The improvement in mortgage is attributable to higher originations as we closed more homes and a greater percentage of fixed-rate mortgages, which are more profitable than variable-rate mortgages.

Our mortgage capture rate was 64% versus 68% in the prior year.

Of the mortgages that we capture, the fixed-rate component was 63% versus 37% variable; however of the variable percentage approximately 90% of those are fixed for between three and 10 years.

From a credit quality standpoint, our FICO scores for our customers did not change significantly from the prior year and remain in the low 700s for the mortgages that we originate.

Our title pre-tax performance improved to $11 million from $9.7 million in the prior year.

Turning to the balance sheet now, as we always say we remain a balance-sheet-first focused Company, and we have strengthened the balance sheet in this quarter in a number of ways.

First, our homebuilding debt to total capital, as Stuart mentioned, declined from 35.4% to 33.5%.

Our EBIT increased 34% to $588 million.

Our interest coverage improved to 12.2 times coverage on a rolling four-quarter basis.

Our homebuilding debt to EBIT improved to 1 times.

We issued $500 million of long-term debt during the quarter to further diversify both our debt securities and our maturity dates.

We began accessing the commercial paper market during the quarter; and our most recent issuance of commercial paper was $500 million at a pricing of LIBOR flat.

These balance sheet improvements occurred even while we repurchased 5 million shares of stock totaling approximately $269 million during the quarter.

There are currently 7.4 million shares remaining to repurchase under our current Board authorization.

Additionally, we managed our inventory levels by improving our backlog conversion ratio to 68%.

Our inventory balance is approximately $8.9 billion at the end of the second quarter.

Inventory actually declined sequentially from the first quarter; however normally the second quarter show a rising inventory balance as we are building out our backlog.

This more efficient approach to even-flow production will continue to support strong cash flow generation.

Now third and last, I would like to talk about our revised EPS goal, as we are now looking at a range of $8.00 to $8.25.

The key points to highlight with this revision are as follows.

First, deliveries.

Although there is a slowing sales pace in many of our markets, we remain disciplined and carefully manage the inventory levels, as I mentioned.

We indicated in the first-quarter conference call that our homebuilding manufacturing plan is running efficiently as we increased our 2006 delivery goal with that first-quarter conference call.

Today we are reaffirming our previously stated goal of delivering 48,750 homes approximately in 2006.

Our gross margin as we have experienced growing cancellations, at the same time that incentives are increasing in many of our markets, as a result of that we are adjusting our gross margin percentage estimate to a range of 23% to 23.5% for the full year.

Land sales, although we continue to operating in many supply-constrained markets, in this more challenging environment we are adjusting our land sale goal to a range of $190 million to $200 million pre-tax.

Our earnings from unconsolidated joint ventures we are estimating to be approximately $130 million pre-tax, as we do expect some of the previously anticipated land sales and joint ventures might be deferred to future periods.

We are expecting improved performance from our Financial Services division to a pre-tax range of $115 million to $120 million.

This is a result of an expected improvement in our mortgage capture rate and a continued higher percentage of fixed-rate mortgages, which are more profitable.

With an intense focus on reducing expenses, our goal is to improve SG&A to approximately 11.3% as a percent of revenue from home sales for the year, as well as corporate G&A improving to 1.3% as a percentage of total revenues.

The share count that we are using in this new revised goal is approximately 161.5 million weighted average shares, and does not at this time assume any additional share repurchases.

The quarterly ranges to achieve our new $8.00 to $8.25 goal are as follows.

In the third quarter, $1.90 to $1.95; and in the fourth quarter $2.55 to $2.60.

In summary, our strong balance sheet and operating strategy position us well to be successful in these changing conditions.

At this point, we would like to open it up for any of your questions.

(OPERATOR INSTRUCTIONS) Ivy Zelman, Credit Suisse.

If I may just say, Stuart, that was the best opening of any CEO so far on giving us an explanation of the market; so, well done.

With respect to my question, I guess it refers to even-flow.

We have had a lot of people trying to understand why some builders are aggressively incentivizing.

I understand with even-flow there's obviously advantages, in your opinion, to selling homes at what the market is demanding the price to be to generate those starts and then generate that construction activity et cetera.

Is there some kind of breakeven point?

Or can you walk us through the methodology on why that might be a better strategy, as opposed to maybe sitting back and shrinking your operations in a market that is clearly challenging?

Then if I may come back for a follow up, please.

Sure.

The first thing I would say is that certainly our Company, like the other larger homebuilders, we do not adjust like a speedboat; we adjust more like a cruise ship.

So there is a certain level of momentum that is built into our production.

So to think in terms of making sharp changes and sharp adjustments would probably result in a buildup of inventory.

It is our belief that an orderly program of managing to market conditions, delivering the inventory that is already in the ground or that is already slated to go in the ground, and managing an orderly process of production is probably going to be the most efficient way to manage through a changing condition.

Additionally I would say that to project when there will be an acceleration of demand I think is a mistake.

All we can do right now is kind of wait and see how market conditions reveal themselves.

So it seems that any kind of quick or erratic change in behavior would be anticipatory of what might be a more severe downturn.

I think that a more moderate kind of response to market conditions enables us to maintain a machine should the market itself stabilize, or to taper back in an orderly way, managing what I think is our overhead in a more productive way and also being able to control costs more effectively.

Okay.

I think I get it.

I don't want this to be my follow-up, but is there a point where it does not make sense to offer someone $100,000 off a $500,000 product because it does not make you any money per unit?

Is there a breakeven point?

Well, I guess my answer to that would be no; because if the home is either in the ground being built, or it would come back as a cancellation or something like that, I think you have to recognize that, number one, you're not going to sell a home at anything that is different than what market conditions dictate.

Market is market.

Secondly, I don't think that inventory on the book ripens.

I don't think it gets better.

So I think that for all of the builders what we are seeing is that we are meeting up with market conditions, however they present themselves, in order to keep the balance sheet fresh and liquid.

That is fair.

Thank you.

The second question refers to your write-offs a year ago.

You mention write-offs this year.

What is that, compared to a year ago?

Did you mention any abandonments on deposits on options?

If so, how much is that relative, again, to a year ago?

Again, the numbers that we talked about was -- in the current year the write-offs of options were approximately $21.8 million; and the number in the prior year was approximately $3 million apples-to-apples.

That is something that we do on a regular basis, but it was more pronounced due to the change in market conditions.

I'm sorry, your second part of that?

You know what?

I said write-offs but I assume that you meant write-offs but you meant the abandonments on options, so I think you answered that.

Let me sneak in one quickie.

Newhall, any update?

There has been some negative press on regulatory constraints; and just from your perspective an update on what the opportunity is in '07 to get some of those lots delivered.

There really isn't an update and we can't answer that question because we have to adhere to our program of one question and one follow-up.

All right, I will come back.

Thank you.

Margaret Whelan with UBS.

Actually it is Dave Goldberg on for Margaret.

Good quarter.

I was wondering if you could talk to us about traffic patterns at your-Everything’s Included [video] homes versus your Design Center homes.

If you could talk about your ability to -- in moving to the Everything’s Included model, if that limits your ability to provide options upgrades versus discounting prices in a slower demand environment.

I think that as far as traffic is concerned, Dave, our traffic patterns at Everything’s Included community centers versus design studios are probably on par with each other.

We don't see a differential between the two at all.

In terms of offering incentives through options and upgrades versus price adjustments, we find that it is really six of one, half-dozen of the other.

With our Everything’s Included program we are able to alter the product offering to be inclusive of the things that are most important to the market at a particular moment in time.

It has been our experience that our customers find and appreciate that less gamesmanship in the discussion or negotiation process is appealing.

I guess as a follow up, I am a little bit confused, going back to the last question, on how moving towards an even-flow production model is not going to create more inventory; and how you alter the even-flow production mix and timing based on the market conditions.

Can you elaborate on that a little more?

Yes, we think that if we have a base kind of production level that we move towards, and if we keep our inventory level very carefully managed, using pricing as the mechanism to move inventory, we are able to -- in a very orderly fashion -- taper back the production level at an even flow, on an even-flow program.

We are able to taper back the production level to where we see market conditions warranting them.

How long does it take, I guess, to change from one production level to another?

I mean, what is the lag in recognizing the conditions in the market?

In each market it would be different.

Is there a lag that is kind of built into the way even-flow works?

I don't think so.

I think you just start fewer homes and build to a lower even-flow level.

Okay, thank you.

[Tim Jones] with [Wasserman].

A couple questions.

The first one of course is -- remarkable that you are only down 3% on your orders.

You have cut your gross margin outlook, which is understandable.

Can you give me an idea of how much incentives [they] are running?

You see these things in the paper about these huge discounts, and I would like to maybe get people to get a better idea of what's an incentive running and what is in that 300 basis point drop?

For the quarter, in terms of incentives in the homes that we closed, that was running about 7.1%.

That compares to about 2.8% in the prior year.

So they are running about $25,000 per home on average.

That would include any types of incentives, whether it is free options or closing costs.

Anything that would be considered an incentive would be included in that number.

Thank God you finally gave that number.

It will get a little bit larger obviously with the new sales.

But that is a very -- maybe (indiscernible) -- could it top out like at 10% or something would you guess?

There would be no way to guess at where there might be a top or when it might stop or any of that.

Recognize that each market is unique.

So we are applying national numbers to a very unique situation.

That is a very good number to have.

The other question real quickly is -- you gave your cancellations of 27% this year.

What did that relate to last year?

Last year the cancellation rate was very low.

It was running in the teens last year, so it was below our normal range of 20% to 30%.

So then if you were up at least 10% or so, or even 9% or 10% cancellations, your gross orders were up ex cancellations.

That is correct.

Thank you.

Stephen Kim, Citigroup.

This is Jahanara for Stephen Kim.

Couple questions.

The conversion ratio was higher this quarter.

I was wondering if there was any closings that had been pulled forward from your August quarter into the current quarter.

I'm sorry, we missed that.

What ratio?

The closings ratio, which was 70% of your backlog.

Yes, the backlog conversion ratio.

That is really -- as we have talked about for several quarters -- our focus on efficiency and our manufacturing homebuilding model.

That is not by chance.

We expect that the conversion ratio will continue to increase from this point.

So 68% was the number we had and that is -- you might be excluding the joint ventures (multiple speakers) number.

But we would expect that is more in tuned with an even-flow production model, and we would expect that we will be hitting that level or a little bit higher for the next couple quarters as well.

Okay.

My next question is on land sales.

The reduced guidance is for $190 million to $200 million.

I guess the question is -- do you have contractual relationships in place that give you comfort in that number?

Because land sales can vary from quarter-to-quarter.

I guess I'm just trying to find out how sure can we be that we are going to hit that number?

I think that anything is subject to change in current market conditions, even where there are contractual relationships, which we do have in many instances.

If the market turns particularly negative, it is possible for people to walk from contracts and leave deposits behind.

So to try to inject certainty would be too aggressive right now; but we feel good about that number to give it as guidance right now.

Okay, great.

Thank you.

Carl Reichardt, Wachovia Securities.

Ivy and Tim stole my questions, but I will ask this.

Of the $400 million in land sales, was that all the residential, Stuart?

Or was there a reasonably significant commercial piece or adjacent piece?

No, that would've been primarily residential.

Great.

Actually I got everything else.

Thanks.

Alex Barron, JMP Securities.

I wanted to approach a little bit on your pricing in new orders.

I noticed it's down about 50% in the East and the West from where it was in December.

I am wondering if that is the primary way that you guys are offering incentives, just lowering the price.

No, every market is different, and I can't emphasize this enough.

In different markets you will have new communities that are opening; and there you might have a repricing strategy.

In other markets, the market might be strong and there is very little by way of incentives.

It might just be closing costs or something like that.

In other markets it is primarily incentive-driven on particular homes that are being offered for sale.

It really varies.

Okay.

The 300 basis points you talk about, that is year-over-year from '05 to '06 levels?

That is correct.

Okay.

My second question has to do with -- I noticed in a couple markets you guys are running something called, like, price guarantees, where if you happen to drop the price it sounds like you will give everybody the lower price.

Is that something that is relatively new?

How widespread is that?

Is that meant to lower cancellation rates?

It is designed to help build consumer confidence.

The guarantee is expressly limited to the time between which somebody goes under contract and the time that they close.

So we are just -- this is an attempt in some of our divisions to give people confidence that they are not going to go to contract on a home, and wake up the next morning and find out that we are offering at a discounted price to other -- to newer buyers.

Okay, thanks.

I'll get back in the queue.

Myron Kaplan, with Kaplan Nathan & Co.

Good quarter, [alas].

You alluded to the further weakening of some of the key markets.

Can you elaborate on that at all?

Well, as we have gone through the second quarter, Myron, some of the markets across the country have progressively weakened, and weakened to a greater degree than might have originally been thought.

We have seen that in markets like Sacramento, like Phoenix, like San Diego.

Washington DC is probably the weakest market relatively, and that trend has continued as we have gone through the second quarter.

As we look ahead, how will it evolve?

I think that it is really up to wait-and-see and let market conditions unfold as they might.

So given this widespread weakness, do you anticipate possibly reducing the amount of this kind of dual offering with the design studio marketing, and simplifying your operations, with going back to -- or just say reducing it to the Everything’s Included model?

That is a fair question for us right now.

I think that we are primarily focused on going back to an Everything’s Included orientation really across the Company.

We have found that that is the most effective and efficient model of production and pricing.

We find that especially in softer times we are able to use an Everything’s Included model to generate the very best value in the market, and I think that is what the market is looking for.

So you would have a model which gives you lower costs, greater efficiency, and the virtues of simplicity kind of.

Exactly, and that is very much where we are going.

So you are?

You gradually, like the cruise ship, you will gradually -- right now you would tend to head in that, steer more in that direction.

To say it more directly, we are in the process of in most instances phasing out the design studio.

Right, okay.

Thank you.

Dan Oppenheim, Banc of America Securities.

I was wondering if you can talk about the environment for land sales right now, as other builders are certainly talking about curbing their appetite for acquiring land.

How are you looking at the goals in terms of selling land this year?

Would you reduce that in a slower market?

Similar to homebuilding sales, land sales will meet more challenging times.

There is nothing immune about land relative to softening conditions.

So as we say about homebuilding, sales in specific markets, we're going to have to wait and see how the market evolves; but we feel good about our number, the number that we're guiding to right now.

Again, Dan, we significantly decreased in our revised goal our projection for land sales, down to $190 million from what was previously more in the $270 million range.

Okay, thanks.

In terms of looking at the Everything’s Included program, given the inventory of spec homes out there, with the higher inventory of spec homes does that mean you need to offer more incentives on the Everything’s Included program, and that they are somewhat competitive with one another?

I'm not sure I am following that question.

If you have spec homes where essentially everything is included on a spec home, because it is built, wondering how that is different from the Everything’s Included program in terms of just -- if there are more spec homes, does that mean you have to offer more incentives on the Everything’s Included program?

No, I think that -- I see what you're saying.

Look, Everything’s Included has always had to compete against spec homes.

That is what the existing home market is.

But I think that all homes -- Everything’s Included, design studio, and everything -- is just going to have to compete in the market conditions that exist, recognizing that people with spec homes, speculator homes, they are basically selling an Everything’s Included program where the home is specced out.

They are going to be less reluctant to drop prices as they choose to move their inventory.

We are just going to have to compete head to head with that.

It is going to be a home by home kind of evaluation until the overhang of inventory is absorbed.

Okay, thanks.

Greg Gieber, AG Edwards.

I wondered, you talked about the [let-off] of the option deposits; you said it was spread across all regions.

Were there particular markets where you did more, they were more concentrated in?

If you could give us some insight there.

Also tell us when these deposits, these options were acquired.

Are they recent purchases or going back a couple years?

What I would say is it is a number of different deals that comprise the $21.8 million.

So it was not one deal or two deals; and it was over various periods of time.

It was really part of a careful re-evaluation of each of our option deposits due to the change in market conditions.

That is why it was really widespread across our three regions.

Okay.

I don't think you gave the number of what your outstanding spec inventory was.

What was it in terms of the homes that are under construction, completed, now versus a year ago?

Because I would think that your even-flow model might require -- seems to suggest sort of an increase in number of spec homes that you'll start each quarter under normal conditions.

Well, as we look at spec homes for the inventory that is actually completed and unsold, that number actually went down.

It is less than one per community.

For the inventory under construction that is unsold, that is really in sync with our increase in deliveries this year.

So it's really from a percentage standpoint not much of a change compared to the prior year.

(indiscernible) on a normal basis what percentage of your construction starts are spec?

You know, I would not look at that way, Greg.

The way that we look at it is we are matching our construction starts with our sales space.

As you look at it that way, what we're trying to do is at this point match starts and sales, in order to achieve the delivery goals that we have.

Okay, thank you very much.

Michael Rehaut, with JPMorgan.

You mentioned in the prepared remarks that, given that conditions are still challenging, and they were obviously below expectations in the second quarter, that there could be further revisions to guidance.

I was wondering on that point, given that we are already at the end of the second quarter, which would ostensibly give you some visibility into the fourth quarter, how much of the guidance would you estimate is still at risk?

Is it more from just cancellations or incentives, as Alex Barron mentioned before?

I think that is the point, Mike, is that market conditions are still shifting around.

It is possible that we could see upward revisions in guidance or downward.

To even guess at a percentage I think frustrates the point.

If we could give you a better view, then I would not leave kind of open-ended the notion that there could be future adjustments.

I think that I have said clearly that these are times filled with some uncertainty in a number of markets.

I think that as we look across the industry we have seen a lot of movement on a quarter-by-quarter basis.

We want to leave open in everyone's mind the possibility that there will be adjustments as we look ahead.

Even our backlog, which is in large part the greatest source for visibility, has the ability to move around.

I noted in my opening remarks that one of the elements that we have seen is an increase in cancellation rate.

To the extent that that intensifies or subsides, that will alter the landscape relative to guidance.

You also mentioned the actions on the SG&A side.

I was wondering if at this point you might be able to quantify what type of dollar cost savings you might be looking at from these actions on an annual basis.

That is a good question.

I don't think that we can quantify that at this point.

I think that as we go through an orderly reassessment on a division by division basis, different divisions will see different adjustments in their SG&A as we meet market conditions.

And to tie it all together right now would be a little bit premature.

In a number of markets, those reductions can be substantial, and I would just highlight that we are not talking about wholesale reductions in personnel.

We're not talking about layoffs, but we are looking at other elements of overhead and tying them very carefully to production level.

One more if I could as I think our question in the queue taken out for some reason earlier on in the call.

But I was wondering if you could just give a little color on how orders progressed throughout the quarter, if the trend that you saw on an overall quarter basis was consistent throughout the quarter or if things worsened as you went from March into May.

Well, I am not going to be able to answer that question because it is the third one.

But if I were going to answer it, I would say that as we went through the quarter, we did see a softening in demand which gives rise to some of the cautionary flags that I am putting out there.

But I am not answering that question because we're going to have to move on.

I appreciate the hypothetical answer.

Kenneth Zener, Merrill Lynch.

I have a question regarding the $21.8 million in write-offs, the option deposit, and the pre-acquisition cost.

What was actually the split?

Was it 50-50 for the option deposit and the pre-acquisition cost?

About.

These were mainly option write-offs in the $21.8 million.

Mainly option write-offs.

So when I look at your balance sheet and I see a little over $800 million in option costs, do you guys have maybe another 50% of that capitalized on the balance sheet for engineering activities or approval investments?

No, that is all included in that number.

So it includes pre-acquisition costs, and the deposits in that $800 million number that you're looking at.

Okay, thank you.

Then the average sales price, I don't think you updated that.

Last quarter it was 325.

If we are seeing incentives in this 7% range, would that be a 3$ or 4% reduction in average sales price for the year that we are looking at?

Keep in mind as you look year-over-year, prices were still increasing all throughout last year.

So some of these incentives are bringing down the price increases that we had last year.

So year-over-year it actually went up 10% from $293,000 to $322,000.

A little earlier I broke out by region what those numbers were.

Right.

Finally, the land profit, like you noted earlier did swing down to $190 million from what was $270 million; but at the end of the fourth quarter it was $150 million.

With the increase that you had in land personnel in the first quarter, was there a particular land deal?

Or is it just the macro slowing down that led to the revised number?

We had an increase in land divisions that we talked about on the first-quarter conference call.

The reduction to $190 million as our new goal is more driven by the current market conditions.

Thank you very much.

Jim Wilson, JMP Securities.

You guys, Stuart I guess in particular, I was wondering, as you look at incremental investments to be made, or even look at kind of what you've done recently, could you describe where you are comfortable with deploying capital currently; and then where you're sort of holding off, looking for much better opportunities?

If you can give a little geographic color, like Texas you're still comfortable with investing; but Florida you're holding off, for instance.

Well, let me say first and foremost that we have evinced a comfort in investing in the balance sheet that we already have.

Last quarter, as noted, we made a strategic investment in ourselves through stock repurchase.

Just in weighing the stock repurchase versus other opportunities in the marketplace, we felt very comfortable with the assets that we already have.

In terms of markets where we are continuing to make strategic investments, I would not pull any market out of the equation right now.

In the markets like Texas or the Carolinas, where we are still seeing strength, we are clearly continuing to purchase land.

In other markets there are land deals that are being abandoned by other builders, by other investors; the land markets are tending to soften a little bit.

We think that there will be opportunities where the land markets soften more substantially.

We just remain carefully positioned to make strategic investments as they present themselves in all of those markets.

We remain firm, Jim, in our view that there will be a brighter day here.

Is there any color you can give on how land deals that you're looking at, or [could] potentially do, are changing in the way of terms?

Is it moving similarly to what you've been seeing in the pricing of product in the markets?

Is there still a lag as far as stickiness of land deals and their pricing?

Yes, I think there continues to be some stickiness; and the evolution of the repricing of land in softer markets is generally something that turns slowly as well.

I think that we just remain positioned to look at deals, deal structures, pricing as opportunities present themselves.

Great, thanks.

Steve Fockens, Lehman Brothers.

Just two quick questions.

First, what was the actual share count at the end of last quarter and at the end of this quarter?

Why don't you ask your second question as I'm looking that up, Steve?

All right.

I think this somewhat follows on the last one.

Stuart, again you had said earlier in the call that based on your investment analysis in the second quarter buybacks looked better than land.

Do you think that the analysis that you would do right now would indicate the same sort of investment decision?

Well, (multiple speakers) that was an effective way of getting us to talk about something that we never talk about.

But (multiple speakers) we're not going to look ahead and try to conjecture as to where we're going to find the next better investment, whether it is going to be stock buybacks or whether it is going to be land.

But both options are on our radar screen, and we are very focused on making sure that we are making the right investment decisions.

Maybe let me ask it a better way.

In terms of the process in deciding between the two, as individual markets soften or get better, do you change any of the -- either the hurdle rates or the risk adjustment factors?

In saying that maybe within -- based on this market which is softening, we think the outlook may not be as bad and -- I mean, may not be as good.

Therefore this is a case where maybe the capital we would have allocated to that market may go to a buyback.

Is that the kind of process that you follow?

No, because we have to inject in that the fluidity of investments between different markets.

We might conclude that the investment criteria in market A just doesn't meet our criteria; but market B we might want to double up.

So it is not like we take the investment from market A and just shift it into buyback or something like that.

I think that all elements are very fluid.

In terms of how we evaluate the purchase decision in given markets, it is not that we adjust the return criteria that is expected.

It is that we adjust in real-time and keep very close to existing market conditions the inputs into our model, meaning sales price of the home, value of the land, absorption rate, discount rates, things like that.

We keep that information very fresh and very tied to existing market conditions or where we see the market going.

To circle back on your previous question, Steve, at the end of the quarter from last year, May 2005, we had outstanding 153.4 million shares.

That is the actual share count.

At the end of this quarter it is 159.2 million shares.

Keep in mind we did see that our convertible debt security converted during that time period as well.

I'm sorry;

I maybe asked it wrong.

What was it sequentially last quarter?

Last quarter? 159.148 versus 159.210 in this quarter.

We did see some of that convert converting this quarter as well.

Okay, thanks very much.

Stephen East, SIG.

A couple quick questions.

Very quickly, Bruce, community count growth.

What was it and could you give any regional color on it?

Well, Steve, we mentioned last quarter on our conference call that we were trying to not to mislead, because the community count is a little bit misleading to people.

Although we said that, I would tell you that the community count really didn't change much year-over-year for the second quarter.

That was not a driver.

Again, sometimes you have community count growing because your sales are down a little bit, so it is a little bit misleading.

Regionally I don't think you would be able to use that to depict any trends that would be very meaningful.

But overall it was virtually flattish year-over-year.

Okay, thanks.

Then the land margins were down from historical levels pretty significantly, even if you back out the writeouts.

Is that an anomaly for the quarter?

Or given the softening markets that, Stuart, you talked about, should we expect that type of profitability moving forward?

I think that land margins like homebuilding margins are under a little bit of pressure.

But I think that overall land is really deal-specific.

So you can have a lot of mix issues that alter that landscape as well.

So it's a combination.

Okay, thank you.

With that, we would like to thank everybody for joining us on our second-quarter conference call.

We look forward to updating you again at the end of the third quarter.

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