Lennar Corp (LEN) 2006 Q3 法說會逐字稿

Welcome to Lennar Corporation's third quarter earnings release. [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 condition, results of operations, cash flows, 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 as to actual future results.

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

Many factors could cause 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 in our business contained in our annual report on Form 10-K for our most recently completed fiscal year which is on file with the SEC.

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

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

Please go ahead, sir.

Thank you, John, and good morning, everyone.

Thank you for joining us for our third quarter 2006 conference call.

We're very pleased to share our thoughts on our progress and performance both in our company and in the home-building industry.

I'm joined by Bruce Gross, our Chief Financial Officer, and Diane Bessette, our Vice President and Controller who will each participate with prepared remarks this morning.

After their remarks, we'll have our traditional question-and-answer period and as always we'd like to ask each 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 participates.

Of course, we welcome you to rejoin the queue if you have additional questions and will attempt to answer as many questions as we can in the hour, more or less, that we've allotted for the call.

Let me begin by saying that we're very pleased to report our third quarter, which reflects very consistent performance with our stated strategy, given difficult market conditions.

Our careful, balance sheet focused management approach has kept our inventory low and controlled while we have continued to close homes and enhance our balance sheet and liquidity.

We've been able to maintain operations at planned revenue levels through the third quarter while we methodically taper back production to meet reduced demand levels in the marketplace.

Our $4.2 billion revenue has been maintained in order to avoid the buildup of inventory on the books.

Low inventory levels have enabled us to maintain our production machine while we've continued to sell and deliver our land inventory, though at reduced prices.

We have delivered our backlog and continued to pare down our land position strategically.

Our 31.9% debt to total cap versus last year's 37.1% debt to total cap and our exceptionally strong liquidity reflect our commitment to our balance sheet first focus and position us well for better times in the future.

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

While we have maintained a sales pace that is down only 5% year-over-year, we are also reporting a lower backlog, down 31% in dollar value, lower average sales price in backlog, which is down approximately 6%, and material margin erosion of 760 basis points, which has flowed through this quarter and will continue to flow through future quarters.

And given the increase in cancellation rate, which is now running over 30%, we cannot accurately estimate margins for the future quarters.

While we are once again reducing guidance for the fourth quarter 2006 to a wide range of $1 to $1.30, a great deal of uncertainty remains as to the composition of our year-end number.

And since the market has not yet reached a supply/demand equilibrium, we recognize that these numbers are subject to further adjustment as market conditions continue to reveal themselves and evolve.

Current market conditions are now well documented through the presentations of the many large home builders in the industry, and results, though lagging, are now starting to show up in national statistics as well.

Yesterday, we saw that existing home sales were down 12.6% year-over-year and average price was down for the first time in 11 years, some 1.7%.

What is not yet well-documented is that conditions have continued to weaken through the end of our third quarter and in fact August might have been the weakest month yet.

Clearly, the market deterioration, driven by the speculative buildup in demand and purchases over the past years and the more recent buildup in inventories and supply from speculators, putting their homes back on the market have created an overall climate of consumer caution.

Primary purchasers are either on the sidelines or demanding better pricing before purchasing.

Customers in backlog are also demanding concessions or are walking from deposits.

Furthermore, it is unclear today whether or not there is another shoe to drop.

Questions remain as to whether the economy will weaken in a housing led recession, or perhaps if supply and inventory overhang will be exacerbated by the resetting of mortgage rates on the many adjustable rate mortgages that have fueled the market over the past years.

Rate adjustments are creating payment stress concurrent with home prices falling and equity evaporating.

But with interest rates now trending downward, it's hard to say what lies around the corner.

What is clear is that supply and demand have shifted and are shifting in many markets more rapidly than expected and the inventory overhang will have to be absorbed before conditions normalize.

Home pricing is in the process of being recalibrated in many markets through the use of incentives, broker commissions, and price reductions and the industry is being challenged to recalibrate home prices and land values as well.

Against this backdrop, I'd like to review some of our strategies as we bring 2006 to a close in the fourth quarter and as we prepare to begin 2007.

Our overall strategy is defined by our primary focus on our balance sheet.

Some of the best and brightest in the industry have noted that the best way to succeed in a home building downturn is to survive and not go broke and we agree with that notion.

Our company has intensified the focus on generating strong cash flow at the expense of maintaining margins.

The best way to generate cash flow is to deliver our inventory, completed homes, homes under construction, and developed land by reducing price to market pricing and converting inventory to cash.

We have rigorously pursued this objective by using incentives and price reductions to sell homes and to back fill cancellations.

While margins have eroded, our balance sheet continues to improve and inventories remain low.

In fact, our current inventories are less than one unsold and completed home per community while homes currently under construction have declined from approximately -- have declined approximately 8% from the prior year.

Simultaneously, we have reviewed our business plan with each division, considering sales, starts, closings, and land inventory and we have adjusted production levels so that they are tailored to each division's unique position.

An even flow production model has been crafted to ensure that scheduled production is managed efficiently so that subcontractor, repricing, and concession, and operating efficiencies can be used to preserve margins.

This should not be confused with a willy nilly approach to starting homes, but instead each division's plan is carefully designed to methodically taper back production so that inventory remains low, higher priced land positions are depleted and market conditions are not unduly forced.

Concurrently, we have aggressively reassessed every land position, every joint venture, and every deal under option or contract within the Company.

Our reevaluation is designed to ensure that our balance sheet is conservatively stated as market conditions adjust and to underscore and separate those assets that should be reduced, repositioned, replaced, or written down versus those that should be preserved and held for a market recovery.

Because questions of balance sheet write-downs have been so prevalent in recent discussions, I've asked Diane Bessette, our Vice President and Controller to review this evaluation process and our progress this morning a little later on in our prepared remarks.

Along with this reevaluation process, we have strategically restricted all new land purchases across the country.

New land deals are underwritten to new market metrics and subject to very different risk profile evaluation.

We have not completely stopped purchasing new property because with new pricing and terms, there is a market out there, but new purchases, as well as properties yet to be taken down are scrutinized to ensure future profitability.

In conclusion, let me reiterate that we are focused on the strength of our balance sheet as a foundation for defining both stability in a difficult market and also future opportunity and growth in better times.

We are confident that if we rigorously focus on liquidity and financial strength, we'll be well-positioned to reload as the market returns.

As we enter 2007 and beyond, our challenge will be to recalibrate to a new market.

We will have to renegotiate land pricing, rebid subcontracts and materials, refine and redefine product offerings, and reduce overhead in order to meet a restructured demand and reclaim an acceptable margin.

Make no mistake, demand exists.

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

Interest rates are low and now falling.

Today consumer confidence seems to be trending upward and even gas prices seem to be moderating.

Unemployment remains low and wages are increasing while the economy remains reasonably healthy and the demographers continue to point to long-term population growth as an industry driver.

With a strong financial position and a lean inventory position, Lennar will be well-positioned to change and adapt to meet the opportunities and challenges of a new environment.

So with that, let me turn over to Bruce Gross for a little more financial detail.

Thank you, Stuart, and good morning, everybody.

Our results reflect the strategy that Stuart described, which is, we remain a balance sheet first focused company.

Our earnings were 206.7 million for the third quarter of 2006 and although these earnings were lower than the prior year's earnings, we focused on maintaining our even flow of deliveries.

Our deliveries increased to 13,038 which was a 19% increase compared to the prior year's third quarter and sequentially consistent with our second quarter deliveries of 13,225.

We expect the success of even flow deliveries to continue into the fourth quarter as we have focused on generating new orders in this tough environment, which is down only 5% year-over-year.

Our 21% increase in revenues from home sales is due to the 17% increase in wholly owned deliveries and a 3% increase in average sales price on wholly owned homes from 306,000 to 316,000 year-over-year.

Although our average sales price increased over the prior year, I would like to point out that it was down sequentially compared to the first and second quarter of the current year.

The average sales price by region is detailed as follows.

The eastern region was actually up 10% from 308,000 to 340,000 and this was due primarily to the product mix that was delivered during the quarter in that region.

Our central region was flat at 205,000 and our western region was down approximately 1% to $451,000 from $455,000.

Our gross margin on home sales percentage decreased 760 basis points to 18.7% versus the prior year's quarter and this gross margin percent decreased in all of our operating regions.

The west region was down 1,050 basis points, the east region down 740 basis points and the central region, which historically had lower margins was down 400 basis points.

This decline in margin was driven by our focus on pricing our homes at market, which led to an increase in sales incentives of 760 basis points compared to the prior year.

Last year was 2.5% and the current year is 10.1%.

The sales incentives were broad-based with increases in all of our regions, so there's really no point in highlighting the various states, it was broad-based.

Additionally, we recorded a $32 million inventory impairment during the quarter, which is reflected as a charge to gross margin.

And as Stuart mentioned, Diane Bessette will provide more transparency by walking through our process of how we analyze the assets on our balance sheet on a regular basis to determine any impairments or write-offs.

Gross profit on land sales during the quarter was a loss of 300,000 versus 46.4 million of profit in the prior period.

This number is net of 15.8 million of option deposit write-offs related to land that the Company does not intend to purchase and 11.8 million of inventory valuation adjustments on land.

Our joint venture profits decreased, we had a loss of 5.9 million during the current year's quarter and that compares to 16.8 million in the prior year's quarter.

This number is net of 16.5 million of valuation adjustments applicable to certain investments in unconsolidated entities.

Our selling, general, and administrative percentage as a percent of revenue from home sales was down 40 basis points to 10.9% versus the prior year.

This decrease was primarily due to lower incentive compensation expenses accrued, partially offset by higher broker commissions and advertising expenses.

We incurred approximately a $0.03 charge in the third quarter for the expensing of stock options versus zero in the prior year.

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

And turning to financial services, we noted that the pretax income for financial services increased to 61.7 million versus 34.9 million in the third quarter of last year.

Our mortgage profit improved to 34.5 million versus 18.6 million in the prior year.

We did see success and improvement in our capture rate with our mortgage operations.

It was 67% versus 64% in the prior year.

And we also noted that our fixed rate component was up to 63% versus 37% for variable tight mortgage products and for those variable tight mortgage products, the most popular variable product is a 5/1 ARM, so it's fixed for five years.

FICO scores did not change significantly from the prior year and remain in the low 700 range and our title pretax profit decreased in the third quarter to $11.3 million from 16.8 million in the prior year as our volume and profit per transaction decreased due to the slowing housing market.

And again, over 90% of the title transactions are non-Lennar transactions.

During the quarter, we monetized our personal insurance line policies, resulting in a $17.7 million pretax profit, as we have adjusted our personal insurance lines business strategically to one of receiving referral fees.

Turning to the balance sheet, we significantly enhanced our balance sheet this quarter.

In July, we increased our revolving credit facility to $2.7 billion with 47 banks, including 10 new banks.

This was the second increase in capacity this year with the combined increases totaling $1 billion.

At the end of the quarter, we had $65 million drawn on our credit facility and we plan to have this facility paid down by the end of our fiscal year.

Our debt to total capital, as Stuart mentioned, improved 520 basis points and ended the quarter at 31.9%.

Our EBIT was strong.

We generated approximately 389 million and our EBIT to interest coverage was 10.4 times.

Our debt to EBIT leverage was 1.2 times.

These calculations are on a rolling four quarter basis.

Our strategy of carefully managing our inventory is reflected in our total inventory balance at the end of the third quarter, which totaled $8.7 billion.

Although up on an absolute basis compared to the prior year, our inventory balances have been declining since the first quarter of the current fiscal year as we execute our strategy and focus on cash flow generation.

The majority of this reduction was driven by a decline in our land under development and we have also seen a decline in cash deposits on option land.

There were 685 homes that were completed, unsold at the end of the quarter and homes under construction declined 8% year-over-year.

At the end of the third quarter, our owned and controlled home sites were approximately 309,000, and this is down from 345,000 home sites owned and controlled in the first quarter of this year. 32% of these home sites were owned and 68% controlled.

During the quarter, we repurchased 672,000 shares of stock at an average price of $40.91.

The actual share count at quarter end was 158.5 million shares.

As discussed earlier, our new homeowners including joint ventures, were down 5% year-over-year with strength in the central region driven by Texas and Arizona.

All three of our other operating regions experienced declines with the west encountering the largest decrease during the quarter of 18% year-over-year.

Our cancellation rate was 30.5% during the quarter and that compares to 16.5% in the prior year.

Our backlog dollar value, including joint ventures decreased 31% year-over-year, which is due to fewer homes in backlog as well as a lower sales price in the backlog.

The wholly owned backlog average sales price was $350,000, which is down 6% from the prior year's third quarter and with cancellations remaining at a high level, we expect the average sales price in backlog to likely to continue to decline.

We will continue to price our homes to current market conditions as we remain focused on achieving our previously-stated goal of delivering roughly 48,750 homes for the year.

However, due to the uncertainty with the housing slowdown and continuing high backlog cancellations, we're providing a broad fourth quarter EPS goal of $1 to $1.30, which would be a range of approximately $5.88 to $6.18 for the full year.

We will continue to carefully manage our inventory levels as we're methodically tapering back our levels of production, reducing standing inventory, and limiting our land purchases.

These focuses will continue to strengthen our balance sheet with low leverage and ample liquidity, positioning us well for future opportunities.

And with that, I would like to turn it over to Diane Bessette, our Vice President and Controller to discuss our process relative to asset impairments.

Thank you, Bruce.

Since we recently have been receiving numerous questions about asset impairments, we wanted to give a summary of our balance sheet management program.

Because of our balance sheet first focus, it is always important to us to keep our assets properly stated.

Given today's market conditions, we wanted to share with you our regularly agitative approach to ensuring that our assets are properly stated.

Asset valuations are governed by statement of financial accounting standards number 144, FAS 144 states that an impairment loss may have incurred if the carrying amount of an asset is not recoverable from its future undiscounted cash flows.

The measurement of the impairment loss is the difference between the carrying amount and the fair value of the asset if the carrying amount exceeds the asset's fair value.

Remaining ever focused on our balance sheet, we employ an orderly, regular, and comprehensive process for reviewing asset values, identifying impaired assets, and assessing the recoverability of these assets.

This process is based on a quarterly corporate asset by asset review performed division by division.

This review is focused on the historical and projected financial performance of each asset.

Additionally, face-to-face operations reviews are held immediately after the end of each quarter.

During these operation reviews, the management team members of each home building and land division meet with senior corporate management to review the performance and valuation of each asset.

This process includes the ranking of each asset as compared to all other assets within the division to help facilitate the process of selling or writing down underperforming assets.

The quarterly operations reviews have tied connectivity between the knowledge embedded in our operational associates closest to the assets and markets and corporate management's goal of ensuring that our conservative accounting policies are adhered to and our financial statements are properly stated.

Our process of identifying and evaluating underperforming assets is divided into three general categories.

Wholly owned inventory, option deposits and preacquisition costs, and investments in joint ventures.

So let's start with the first category.

When evaluating wholly owned inventory, we focus on inventory that has actual or projected declining financial performance as evidenced by the following measurements as applicable.

Current gross margins, backlog gross margins, projected absorption in margins, and estimated sale value if sold to a third party.

Once again, this process is performed on an asset by asset, division by division basis.

These assets are reviewed for recoverability and if recoverability of the asset's carrying value is not evident, the fair value of the assets is estimated and compared to the asset's carrying value in order to determine the impairment charge that is necessary, if any.

The second category of assets we evaluate are option deposits and preacquisition costs.

Once again, our process is to review option deposits on an option by option basis.

If the underlying asset is expected to produce a return that will be lower than in the original underwriting or is less than a desirable return on our investment, then we will likely pursue a renegotiation of the option contract.

For those option contracts where we are not able to adjust the churns to a level that will lead to an acceptable return, we will make the decision to walk away from the option contract, as it is our right to do so.

The third category relates to our investment in joint ventures.

We have an entire corporate group dedicated to monitoring our joint ventures, including evaluating the underlying assets in the ventures.

The financial performance of our joint ventures are discussed and evaluated during the operations reviews mentioned above.

The evaluation focuses on the recoverability of our investment and an estimate of fair value.

Fair values are generally supported through projected cash flows of the joint ventures.

The assumptions used in deriving these cash flows are scrutinized with a healthy level of skepticism in light of challenging an unpredictable market in order to ascertain that these investments are not misstated on our balance sheet.

In summary for the third quarter, based on the comprehensive and orderly processes described above, we are comfortable that our financial statements are fairly stated in accordance with GAAP.

And so as we look ahead, let me reflect on the question that is on everyone's minds.

What will our valuation issues amount to in the fourth quarter and beyond?

Well, the answer is embedded in market conditions that are still moving and are uncertain.

No one can predict what lies ahead, so we will continue with the processes as outlined above.

We will maintain our corporate review of the assets on our balance sheet by drilling down to the markets in which we operate and monitoring on an asset by asset, division by division, the recoverability of our assets in light of current market conditions.

We will continue to maintain an open dialogue with the associates that are managing these assets through our quarterly operations reviews.

Finally, we will continue to ensure that our balance sheet is accurately and conservatively stated in accordance with GAAP as market conditions continue to evolve.

Now we'd like to open it up for questions.

[OPERATOR INSTRUCTIONS] Stephen Kim of Citigroup.

Thanks very much, guys.

Well, I guess I wanted to ask you a question regarding your cancellation rate.

You mentioned that it was in the 30s.

Was wondering could you be a little more specific on exactly what the cancellation rate was and whether that is a percentage of backlog or a percentage of gross orders?

Steve, it was 30.5% during the quarter and that is as a percentage of gross orders.

Okay, got it.

And can you also give us a sense for the closings rate?

You had a very strong rate of deliveries this quarter and as a percentage of backlog, for example, conversion ratio, it was among the highest we've seen in quite a long time.

I would imagine some of that's because the order rate had slowed significantly, but clearly there's an initiative on your part that's getting that up.

I guess my question is, it usually rises in the fourth quarter as a percentage of backlog.

Can you give us a sense for maybe if you would expect a conversion ratio in excess of 75% in the fourth quarter, or do you think it's -- you maybe pulled some stuff out of the fourth quarter into the third?

Sure, Steve.

As you know, we've been seeing over many quarters now that we've had focus on managing our inventory levels and increasing the backlog conversion efficiency ratio.

And we did see an improvement this quarter to 73% backlog conversion from last year's 53%.

And we do expect in the fourth quarter as I outlined that our deliveries would be somewhat consistent with what we've seen in the second and third quarter, to see a backlog conversion ratio that is continuing to increase in the fourth quarter and I would expect that that would likely be 75% or higher.

That's great.

Okay.

Thanks a lot.

Thank you.

Our next question is from Carl Reichardt with Wachovia Securities.

Good morning, guys.

Diane, I had a couple of questions for you.

One is, the write-downs that you took in, I think it's largely in second quarter, which weren't in the Q but were in this press release, can you tell me where those were and where the write-downs were this quarter?

And then the second question with regard to JVs, how do you determine the financial condition of the partners that you're in the JVs with?

How do you audit that and monitor that?

Sure.

Carl, I think you said the second quarter we took some charges.

They were pretty well disbursed.

There were definitely a predominance of the write-downs were probably in our west region though, although they were dispersed throughout the country.

And, I'm sorry, your second--?

But how were they split between land--.

Between land and--.

Joint venture and options.

Is that what you're talking about?

That's in the release, but I'm curious about the geographic dispersion of the write-downs both in second quarter and then the ones in this quarter.

Yes.

Definitely the second quarter were definitely primarily less and actually this quarter, about the same, Carl.

There was some in the west, some in the eastern seaboard and that was probably the bulk of the write-downs in those two areas.

Then just a question on the JVs, just curious about the partners and how you monitor their financial efficacy and performance?

We do a pretty rigorous evaluation upon inception of the joint venture.

As you can imagine, that evaluation is very important as we're considering our FIN 46 assumptions and whether that joint venture truly is one that should not be consolidated.

So our beginning evaluation is very rigorous.

Then it's just monitoring as we go through and we're very cautious in today's environment to ensure that we really are establishing that we have a very solid financial partner for all the reasons that are obvious.

Carl, let me just add to that and say that it's very rare that we're dealing with a joint venture partner that is not very, very strong financially.

In many of our instances, our partners are either other builders within the industry, in many instances public builders.

And then we have financial partners who are maybe even stronger financially than we are in some instances.

At the front end, we're fairly selective on who our partners are going to be.

But as Diane noted, we have a separate and distinct corporate group that focuses on the joint venture part of our business and part of their oversight is to monitor the position, financial and otherwise of the partners that we have in each deal.

Okay, terrific.

Thanks very much.

Our next question is from Ivy Zelman with Credit Suisse.

Good morning, gentleman, this is Justin Spear on for Ivy.

Also on the impairment, maybe you could walk us through the $32 million impairment through cost of goods sold.

Did that pertain to selling inventory at a loss or write-off of condos?

Maybe give us an idea of the type of product that you're writing down.

Sure.

It's probably -- for geography, it was again, primarily in the western states.

As we think about the type of assets that we wrote down, they really weren't condo related.

Most of our condo developments are in our joint ventures.

These were wholly owned communities that we're building on and they were communities that as we looked at, the discounted cash flows for the future, it appeared that with what we know today, that discounted cash flows is negative and so then based on that evaluation, we went through an assessment of what would the fair value of those assets be today to the best that we could estimate them.

In regard to the guidance for the fourth quarter, is that inclusive of any expectations for additional abandonments or impairments?

As far as the fourth quarter, we gave a broad range in laying out $1 to $1.30, because it's too early to tell if there are any further issues at this point with respect to the fourth quarter.

It's dependent on the market conditions at this point, Justin.

Okay.

And then also, obviously your operating profit is down more than your peers that are less promotional.

Longer term, how do you think your strategy plays out relative to those peers with a different strategy, and is there a point where you guys alter this strategy given that we still haven't seen a bottom?

In the current market conditions, our mind is -- our eyes are focused on our strategy and actually, we feel very comfortable with the way that it's progressing and the way that we're executing.

I think in the current market, we haven't yet been able to feel a bottom in the marketplace and I'm feeling fairly confident that having cash on hand and liquidity will enable us to see a brighter day and approach that brighter day with kind of a traditional opportunistic sense that we've brought to our program in the past.

I've said many times that there are many roads to roam.

There are a lot of different strategies that can play well within our industry.

I think that a focus on balance sheet right now in current market conditions is going to play well and be a very healthy program.

Do I think that we're likely to alter the strategy?

I think that we're going to remain focused on delivering our inventory, keeping our inventory low and tight.

Our balance sheet focus, which has historically been a Lennar focus is going to remain the primary driver.

And there'll be another moment where we find unique opportunities, unique ways to approach market conditions and to start moving back in the right direction.

Okay.

And my last question, just as kind of a follow-up to the delivering inventories, what is your spec percentage build as a percentage of construction, if you give it?

And are you still selling to speculators or investors?

Well, I would say that -- first of all, to answer your second question, while we get some information on the first, as we've done in the past, we are trying to not sell to speculators.

That's not always easily identifiable.

So I don't want to give an absolute answer that we are not, but it is our policy across the board to not sell to speculators and we are avoiding that wherever possible.

You can't always tell who's a speculator and who isn't.

In terms of the percentage of inventory?

Yes, over 50% of the inventory under construction is sold, Justin.

Is sold?

Yes.

And you don't have a -- I think it was closer to 40% that was spec last quarter, is that a similar number or higher this quarter?

There's a higher percentage that is actually sold at this point.

Okay, thank you very much.

Our next question is from the line of Tim Jones with Wasserman.

Good morning.

How are you doing?

On that last question, first of all, let me get this straight, you said that only 15% of your homes under construction are sold?

No, 50, 5-0, over 50%.

Oh, okay.

I just wanted that clarified.

The first one is, can you get the -- on those numbers, can I get the actual numbers.

You said your homes under construction were down 8%.

I would like to know what your homes under construction were this quarter and a year ago.

And of those, you say roughly 50% are not sold, right?

Right.

We're running under construction this quarter, Tim, about 22,000 homes versus same period last year was about 24,000.

Okay.

And the other question would be, on the SG&A, I'm very surprised that it went down given your higher cost of outside realtors and so forth.

You said lower incentive compensation, are you talking about management bonuses?

Yes.

Oh, I was wondering, incentive compensations to the customers or something.

No, that's incentive compensation, which is tied to profitability and results primarily.

So as our numbers have come down, we certainly accrued less for management bonuses as well.

Thank you very much.

You're welcome.

We'll next go to the line of Steve Fockens with Lehman Brothers.

Hi, guys.

Just two quick questions.

First, on your current outlook and how you envision the market today including the balance sheet focus, where do you think inventory relative to, I think, Bruce you said, 8.7 billion, where do you think that could be a year from now?

We really haven't given any projections and it really depends on what happens between now and next year, Steve.

I'd hate to throw out a number because right now it would just be a guess as you're looking out a year.

Sure.

Fair enough.

But is it fair to say given the way you want to run your balance sheet, that if things continue the way they are, it likely will continue to decline as opposed to grow?

That's correct.

And you just have to carve out to the extent that there are opportunities that we think make a lot of sense to move forward on over the next year.

There could be some partial offset to that.

Okay.

And secondly, just -- this is probably even harder to answer, but I'll give it a shot anyways.

At what kind of conditions, whether it's pricing declines, slower absorption rates, et cetera, could you envision, let's say over the course of a quarter or a year write-off of land value actually exceeding the net income you generate in that year pre those write-offs?

In other words, what kind of conditions could you see your company actually losing money or book value actually declining?

I think that would be -- hypotheticals like that are so speculative, especially given market conditions.

I don't think we'd wager a guess.

I think what we've -- by way of attempting an answer, we've asked Diane to give an overview of the land evaluation process within the Company to highlight the fact that we've been very focused on reassessing each and every land parcel relative to reset market conditions for the current market.

So given current market conditions as they have dropped as far and as hard as they have, we have taken what we think are all of the appropriate adjustments at the current market conditions.

If you start creating metrics for variables that highlight a much steeper drop from today going forward, then there will be a rewriting.

If from today going forward, it stabilizes or moves upwards, then it will probably -- then there will be a stabilization.

So it's really just another way of asking us to predict the future and we simply don't have a prediction.

Fair enough.

I recognize it's hard to answer, but I'm asking even more on a gut basis.

Obviously you guys have been doing this for a long time, so just on a gut -- given what the market is doing today, do you kind of tell yourself, man, it would have to be a whole lot worse for me to actually envision losing money?

Having done this for a lot of years, my gut tells me to stay focused on current market conditions and to recognize that the market can change upward and downward very quickly.

So I try to stay focused on what's happening in the market right now today and I'm going to wait and see what happens around the corner.

Fair enough.

Thanks much.

Next to the line of Margaret Whelan with UBS.

You have answered a lot of my questions already.

Stuart, can we just go back to one thing.

You know you referenced in your prepared comments that you don't want people to feel that you're starting homes willy nilly, I think was your technical term.

I'm just trying to get a sense for, clearly you're discounting more than your peers in the public arena anyway and your margins coming down more quickly.

How are you thinking about it on a local or regional basis as opposed to just kind of a broad brush strategy?

Well, on a local level, I think that in each individual market, we're relying on our local people to focus on the existing market conditions.

We are recognizing that there is inventory in backlog and that the market has repriced the environment.

We're just going to resell to that existing market repricing.

Looking across the industry and trying to draw comparisons, I think that when we look at what we're doing relative to what's happening in local markets, what we're actually doing is competing directly with the rest of the field, both the existing home field and the new home field.

And I'm not so sure that we're far -- that our pricing at a local level is far different from the rest of the market.

It seems that your margins are coming down more quickly, and clearly if it turns out that the market continues to deteriorate for another 12-plus months, maybe then you're going to look, market stream, it looks like you have this first move advantage, but to the degree that you said that you don't feel like you've seen the bottom yet and August is possibly the worst month so far, what are you actually looking far to identify the bottom?

Well, first of all, I don't really want to look smart or not smart.

My bigger concern is just to make sure that we're managing a carefully crafted strategy.

That our people in the field know what they're supposed to be doing and that we are maintaining a very conservatively stated and positioned balance sheet.

As far as what we would look for to define a bottoming, I think it's going to be a real-time sensitivity to what on the ground market conditions actually are.

And I think that we're staying extremely responsive to the market that exists.

As we focus in our business, we have top level management meetings every day at 5:00 to assess what has happened at the local level.

We have everyday meetings in each division every morning to start the business day.

We're looking at sales, starts, closings, inventory levels.

We're looking at competition in these meetings and I think that I would be hard pressed to define or identify a metric that we can look for that's going to identify a bottoming or a turnaround, but I think that by being real-time, hands on and sensitive to what's going on in the market, we'll be able to react as market conditions change.

And I think Steve asked the question a little differently earlier, but, Steve Fockens, but is it possible excluding the option write-off for impairments that you would have negative earnings just on your home building business, even for one quarter in '07, based on when you're seeing in your backlog now?

I didn't--.

Based on what's in our backlog right now, would we be seeing any negative home building earnings, so excluding option deposits, write-offs, so again we would be predicting 2007 future as to what conditions might be there.

Our backlog has a positive gross margin, so based on what we're seeing in our backlog, the answer would be no.

However, if there is much higher cancellations and the environment changed where you're dealing with a different backlog in '07, you could have a different answer.

I think the answer would be, Margaret, that if conditions remain the same as we're looking ahead given a static environment the answer--.

The same as August, basically -- sorry to interrupt.

Yes, the same as August.

The answer would be no.

But if the market continues to move, it's anybody's guess as to what comes around the corner.

We're being very careful not to project into '07.

And we've given broad guidance for '06 reflecting the fact that the market is moving around a lot.

Okay.

That's fair.

And then just a last question.

In terms of your uses of cash at the moment, I know you're balance sheet focused, you're hoarding, but are you seeing any really good opportunities to buy land yet?

No.

I would say that right now there's no evidence of opportunities to jump in and buy something strategic.

But that changes over time and with the picture clearing and we'll just have to wait and see.

Okay, thank you.

Our next question is from the line of Alex Barron with JMP Securities.

Thanks.

I wanted to ask you guys, just how do you define a home under construction or a spec, at what level of construction do you define that?

Once we started to trench the home, it's under construction.

Okay, if you've got a slab or even before that, it's under construction?

Before the slab -- once there's a shovel in the ground, it's under construction.

Got it.

The other question centers around your orders, which obviously were a lot higher than most of your peers.

I'm just kind of wondering, I kind of backed into sort of a 14, 15% growth order rate and I'm wondering if you can help us, one, how you got there and two, what kind of community count growth went along with that?

Let me start -- the community counts didn't change much.

It was pretty flattish with the prior year, but as far as trying to back into a gross order number, what you're really asking, I guess, is, was our 30% cancellation rate disbursed across the country, and I would say that cancellations were high really throughout the country.

So I don't think you're going to see any particular area that stands out dramatically.

We had high cancellations throughout the country.

Okay.

And lastly, can you correct me if I'm wrong, but I was trying to back into sort of an average price for your orders and it seems like they're down roughly 20%.

Is that in the ballpark?

Well, if you looked at new orders compared to the third quarter of last year, just on a dollar value basis, the new orders did decline about 20%, but the average sales price is down less than that.

It's probably more like 16%, but what you have to keep in mind is that last year's third quarter was pretty close to the peak in terms of pricing.

So a fairly high number of those homes that were in backlog that were sold in the third quarter never made it to closing.

That's where a lot of the cancellations came from.

But if you look at our average sales price from the deliveries, you can see that that's probably a better measure to look at as you compare that to the prior year.

Yes.

I guess I understand part of what you're saying.

I'm just trying to get, what's a good estimate for average price to use for next year as well as obviously the margin if prices have been coming down?

Yes.

Prices have been coming down.

We haven't given any estimate looking forward at this point, Alex.

We're going to wait and see how the market continues to unfold through the fourth quarter before we give numbers for next year.

All right, thanks.

I'll get back in queue.

Thanks, Bruce.

We'll next go to Jim Wilson with JMP Securities.

Thanks guys.

We should have loaded our questions together here.

But just a couple more.

So as far as land -- I was going to ask about land opportunities and obviously, Stuart, you have decided they're not yet, or you're not yet ready to pounce on anything, but could you maybe describe what they're looking like, if they're better, but not quite to your liking yet, how they look and where maybe the deals are geographically starting to look maybe the most compelling, even though you haven't pulled the trigger?

Well, the reality, Jim, is that land pricing, land valuation moves slower than the market in general.

And I don't think that there's been a repricing yet by the land owners.

Certainly not as dramatic a repricing as the market is indicating needs to be.

So I think it would be easy to stockpile or to accumulate cash and financial positions and then pull the trigger early.

It's never been our style.

We're looking -- before we start -- before we start thinking about repurchasing, we'd like to be able to identify some of the metrics that would go in the variable positions in our models and with the market moving as much as it is, it's not apparent to us what those metrics would be.

We're going to be patient and wait for the market to redefine itself.

And then we think that there will be some opportunities to reload and reposition.

At the moment, you wouldn't say that it's significantly different amongst the southwest or the southeast as to where better opportunities look like they're coming?

Yes, this is not a moment for finding opportunities.

It's just not there yet.

There's still -- realistically, there's still a lot of sluggishness in the marketplace and while I think that primary demand is still out there, I think it's cautious, it's waiting in the wings a little bit.

It's demanding a lot of price concessions and we're going to have to let the market stabilize a little bit before we can identify the next opportunity or what the real values are that define the opportunity.

And then one more question.

Your strategy in the field of marketing homes and moving inventory and obviously by sales base and gross sales base, you're doing better, or moving inventory faster than others, have you found that your strategy is just outright marking price down is what the consumers would prefer and what gets deals done as opposed to trying to mask it through incentives in that you might be doing more direct price cuts than others, or is that not necessarily true?

There's not really a masking process going on.

It's just in different local markets, different approaches seem to be working.

And I think it's got to be very locally crafted.

It's all done in competition with the local competition.

And so in a given market, maybe price reductions would work better.

In another market, it might be just getting the brokers engaged with higher broker's fees or an incentive program.

So I think that across the board, we're finding that we have to keep that in the hands of the local people.

Okay, great.

Thanks.

We go next to the line of Michael Rehaut with JP Morgan.

Hi, thanks.

Just a couple of questions on the inventory valuation adjustments, really appreciate all the detail in terms of the process, but with the 32 million in the COGS and then the 12 million in the land sales and then the 15 million or 16.5 million in the JVs, I was wondering if you had an idea for each of those, first off, was any of that actual land write-downs in terms of write-downs of land held for sale that's more of a mark to market, I guess mostly on the land sale line.

And second, if you have any idea, if you could give us, what percent of value was that land holdings written down by?

Was it a 20% impairment, a 40% impairment, or can you give us an idea on that level?

I don't have an exact percentage for you Mike, as far as it was really looking at all of our assets, division by division across the country to make sure that we're comfortable with the way those assets are stated today.

So in some cases, where it's closer to the end of community, the percentage might be different than if it's more in the middle of the community.

So I don't have an exact percentage, it would just be a guess.

On your first question, Mike, the $12 million that you noted, that really is land that was held for sale.

Those are land holdings that we have a potential LOI on or something comparable that would give us an estimate of fair value and that is land that it is our intention to sell in the future.

So that was more of a mark to market exercise?

I'd say that's correct.

Okay.

And in terms of the 16 million of deposit write-offs, I guess more of an accounting question, is that always for you guys in the land sales line instead of just the more -- the larger cost of sales -- home building sales line?

Yes.

That is typically where we've categorized that expense, yes.

Okay.

Just lastly, in terms of cash flow generation, at this pace and given the fact that you guys are pulling back on a lot of land purchases pretty dramatically, do you expect '07 to -- can you give us an idea in terms of if you expect the cash flow from operations to increase or to what extent?

Our projection -- our thinking right now, though I have to say once again we're not predicting the future, our expectation and our strategy is designed to increase cash flow as we pull back on land sales and as we taper back on the production machine.

If we think through it, less homes under construction as we've seen in our numbers right now, our inventory right now, and fewer land purchases are going to mean that more cash flows to the balance sheet.

Stuart meant fewer land purchases, cutting back on land purchases as opposed to land sales.

What did I, -- oh, yes.

Our strategy has resulted in a cash flow positive company over several years, so with this strategy of more intensification on cash flow generation and inventory control, as Stuart mentioned, we would expect all else being equal that we would continue to have strong cash flow generation.

All right.

Just one last one, if I may, on the backlog conversion, looking it from an annual perspective.

In the mid-'90s you guys were doing something on the order of the mid-3s, let's say 3.5 on average.

In the last four years, you were in the high 2s.

Given the greater focus on production, would you expect to get back to that mid-3 level?

Let me just clarify, Mike, as we talk about backlog conversion ratio, we're talking about the percentage of our backlog that is delivered in the next quarter.

So for this quarter that just passed us, as we calculate that ratio, it was 73%.

Right, but on an annual basis, you generally do three to four times going into that year.

I know it's a different way of looking at it, but in general, it's the overall comment that as things have gotten tighter and it's been longer, gotten longer to build homes over the last two or three years, as the market cools, that production capability might improve.

So I was just wondering if you can comment on, given if you would expect it to get back to perhaps the mid-90s where you are producing at a much faster rate?

Well, we would actually -- we've been very focused on cycle times and ensuring the delivery process happening.

And the only limiting factor right now, Mike, is the fact that you just can't gauge cancellations, and you have quite a number of cancellations that are coming at a late point in the process, close to closing.

Almost as a renegotiation strategy, so that's adding to cycle time and maybe slowing down some of the conversion.

It's hard to say because there's a wild card out there, but in terms of the production machine, the availability of labor in the field and things like that, cycle times should be coming down and the conversion should improve.

We'll go next to the line of Mishu Suet with Deutsche Bank.

Quick question on the inventory number that you gave, 8.7 billion I think it was, does that include the inventory consolidated under FIN 46?

Yes, it does.

How much is it without that?

There was a couple hundred million of inventory consolidated under FIN 46.

Okay, so probably similar to last quarter?

Last quarter there also would have been 2, 300 million -- 2 to 300 million of inventory under FIN 46 that was consolidated.

And a question on the impairment process that Diane talked about, I also found that very helpful.

How long does that process take?

And the reason being that I ask, I would be wondering has that process begun, for example, for the fourth quarter yet?

That process is -- it doesn't take long, it takes every day.

So it's a process that within our company goes on very fluidly throughout the quarter, really on a day by day basis.

And the day by day meetings that we have and reflections in the field are translated into action both in communication with the corporate office and then later on, at quarter end all of these discussions and interactions kind of come to a head at our quarterly operations review where on a division by division basis we go through each and every land deal, kind of rethinking all of the information that has come up through the division through the quarter and rethinking the evaluation process.

Diane, would you add to that?

Absolutely.

There's no question that you could really make an accurate assessment if you just boiled it down to a moment in time.

The daily calls that we have are very helpful that give very meaningful information as to market conditions on a day by day basis.

And then as we actually sit down face to face, our information is validated or maybe there's new information that comes to light.

But I think we would do an injustice to the process if we really tried to analyze it at a moment in time.

It really is a day by day knowledge accumulation that gives us the information at the end of the quarter to give us our best assessment.

That's really helpful.

Just a final question, Stuart, in the past couple of quarters, you've talked about through the downturn, ratcheting down the production machine that you have to kind of match the demand out there and you've used the analogy of a cruise ship, I believe.

So looking at where things were in August, where they are now, having worsened a bit, how far along is that process and how far; if things, let's say, remained as they are now, would it take before we would see a matching, or in your mind a matching between the production levels that you have and the demand environment out there?

The reality is that the answer to that question is a very local answer.

It's division by division and there are a number of factors that go into it.

As I said, we want to make sure that we deliver the inventory that's already in backlog.

Some of that inventory is homes under construction, some of it is land that we want to cycle through.

So I haven't actually used the word ratcheting, I've used the word tapering.

There's a tapering back process.

We're recognizing that we have a manufacturing machine that is up and running and working, that there is inventory in the pipeline of that machine and that there would be a methodical pullback.

The problem with answering the question directly is that if you drew -- if you said that the market is going to be exactly as we saw it in August for the next 12 months or 24 months, then we could draw somewhat of a straight line and I could give you an answer.

But the real answer is that we'll evaluate and reevaluate the tapering back process on a daily, monthly, and quarterly basis and so when will it be complete?

It depends on when the market stabilizes, when it stops falling, when it starts recovering and things like that and I'm not a good predictor of those things.

Thank you.

Our next question is from Steven East, SAG.

Bruce, this may be directed at you.

In Stuart's comments, he said that higher priced land positions are being depleted.

What would you estimate is the average age of your land running through your income statement right now?

We don't actually have an exact aging of that land, because you do have a portfolio approach where we have communities that were purchased more recently or a little bit older, so we just -- it's not a calculation that we actually make.

Okay.

If I ask it a different way, would you think a substantial amount of what's going through now is '04, '05 type property?

You'd certainly have a fair amount of '04 or '05.

Yes.

I think the way to think about it is in '04 and '05, we were primarily focused on buying more current land, more on rolling option bases and shorter term positions.

The market felt a little bit hot and we weren't making strategic land purchases.

Some of the more strategic purchases that we have made are older land parcels.

So it would probably be fair to guess that some of the more current, shorter term positions are being run through at this time.

Okay.

Fair enough.

Thanks.

And then, on the losses at the JVs, I guess I was a little bit surprised that there were losses at the JVs while you all are still making a pretty significant amount of margin on your core Lennar business.

Can you help me out?

I guess I assumed that the JVs would be evaluated at the same level, et cetera, and I was a little surprised that we're already seeing losses at the JV level.

Steven, each deal was looked at independently and completely separate from every other deal.

So each JV would have its own dynamic, it's own performance metric and for some of those deals that might have been done more currently, where the underwriting on the underlying asset was done in '05 or '04, those JVs would in no way be immune from the direction of market conditions.

What is working well in those situations is the fact that we're sharing the downward rest very much as we had expected when we entered into those programs and we're only suffering a portion of the downside.

But it's still the underlying asset that's being reunderwritten.

Okay.

Similar to the first question then, would it be safe to assume that JVs are younger than maybe your core business is?

No, I think that there would be a comparable kind of dispersal over time.

There might be a similar number of JVs over different periods of time, but the type of properties that might have been bought might have been shorter term and more recent vintage JVs.

Okay.

And then one last question, Stuart, you mentioned generating cash flow is your priority here and to me that implies that land is fungible versus being a scarce resource.

Is that a fair implication from -- of your viewpoint right now?

At least in the current environment?

No, I think that -- I'd still -- I would still stand by the notion that land is still a scarce resource.

Well positioned land, especially in some of the more constrained markets is and will continue to be a very limited resource.

If we go back to my prepared remarks, I noted that within the Company that has grown, in terms of restocking for production during good times, we've bought some positions that have been shorter term, those have been the more recent purchases, some that are for long-term.

And we want to separate the ones that were purchased using metrics that were more current or at the highest part of the market place from those that have long-term, strategic significance to the Company.

And we want to run through the properties that were purchased more recently using the more aggressive metrics.

And for the ones that are more strategic, we want to make sure we hold on to those and position them for a better day because there are some very strategic positions that we have in our backlog and the scarcity of land in the strategic market is not going to ease up.

In a declining market.

All right.

That's very helpful.

Thanks a lot.

Our next question is from Rick Murray with Raymond James.

Good afternoon, guys.

I guess I would just start out by saying that I commend you on your strategy.

I tend to agree that it's the right way to go right now.

But in any event, I had a couple of questions pertaining to your finished lot cost.

Could you disclose what it was during the quarter as well as a year ago?

The finished home site cost is not something that we have disclosed in the past.

What we've said is that it's run roughly 20 to 25% of the average sales price when we deliver the home, and it's still within that range.

Do you have a sense for whether it was towards the upper or lower end of that range?

Well, it's probably moving around a little bit.

As the sales price might come down -- I don't want to be trite, but obviously the percentage will move up.

I'd say that we're probably consistent with where we've been, except for the reduction in pricing.

That's well stated.

The other question I had was, can you give us a sense for -- and I apologize if you've already discussed this -- but what incentives are currently running relative to your average sales price, on new orders, that is.

Well, as Stuart mentioned, August was a weaker month than the first two months of the quarter, Rick.

And we talked about that incentives averaged during the quarter 10.1%.

So you could expect that.

In August it was a little bit higher and we're not really giving an update, but we certainly haven't seen a turnaround in September at this point.

Thanks.

Last question.

Can you give us the dollar and number of forfeited deposits in the quarter?

We don't track that, Rick.

Customer deposits?

We track customer deposits, of course, because sometimes you have buyers that switch home sites and the like, it's not a number that we actually have because you're dealing with sales incentives and deposit as backlog is canceling and sometimes those buyers end up buying one of your other home sites, so it's really not a number that we track that's pure.

Was it a significant number in the quarter?

No, no.

Okay.

It's not a significant number.

Okay, thanks.

We go next to the line of Kenneth Zener with Merrill Lynch.

Is it reasonable to think of your homes delivered in the quarter from cancellations that you're back owing that it basically reflects your can rate?

Can you say that one more time, Ken?

The number of homes that you guys delivered in the quarter that had been canceled, does that pretty much approximate your can rate that you've disclosed?

So--.

The reason I'm asking, is because I'm trying to get to what the incentive split is between the held deliveries and the deliveries that you had to back fill from your cancellations.

Because if you have a 10% average discount rate, I assume it's lower for the held and probably in the midteens for the canceled.

Can you comment on that?

I would say it's fair to say, Ken, that with a 30% cancellation rate during the quarter, we're typically reselling and trying to deliver the majority of those homes within the quarter.

Right.

And then is the incentive split, going to be significantly greater, that's what I would assume, if it's 10% on average for the held or two-thirds of your closings, it's probably in the low single digits, double high teens for the canceled?

I think it's a logical read, but I can tell you that because it's so local, each division dealing with their own can and their own incentive packages.

At a corporate level, we wouldn't have information that could confirm that.

In other words, we wouldn't roll it up on a corporate basis.

Our next question is from Myron Kaplan with Kaplan Naisson Company.

Hi, guys.

I guess so your tactical decision to reduce the inventories resulting in a lower GP, but of course it's improved your balance sheet, I guess that's fair to say?

Right, that's correct, Myron.

Yes.

So if this even flow production, I know this has come up already several times already this morning, but if this even flow production results in a material reduction of this kind of ready to build lot inventory, is there any way to anticipate at what point you might decide to reduce production and keep -- basically hang on or reduce the rate at which you liquidate this inventory?

Well, I think that what we've said is that the process of pulling back is one of tapering back within the Company and it's certainly one that we've already embarked on.

As I noted in my introductory remarks, our inventory, the homes under construction is down 8% year-over-year.

We continue to look at it with locally crafted programs that are designed to make sure that we're keeping our inventory very low, that we're depleting our land reservoir relative to the less strategic parcels and that's going to continue to be a month by month, quarter by quarter evaluation at the local level and in coordination with corporate.

This land inventory that you're talking about that you're liquidating or reducing, this is more this kind of ready -- you might say the more recent layers of acquired land that was later in process and so forth?

That's right.

Presumably so that you feel as if it's kind of like a recent analogy of the investment management businesses, like recently acquired positions that you feel it's prudent to go out and liquidate aggressively, even though the holdings haven't reached your original targeted potential or what have you?

Our general feeling is that most of the current inventory is not going to get better with time, especially as we have not seen a marked improvement in the market condition.

And also, at some point at which let's say you taper down materially, that you and possibly some of the other factors in the market are substantial enough that possibly, at least in local markets, in some local markets there might be a somewhat amelioration of the supply/demand imbalance?

We think that the -- it will be absorbed under any circumstances.

That, actually, when you get down to it, the home builders are still only about a seventh or an eighth of the overall marketplace.

So the overhang that exists out there is only in small portion contributed to by the home building community.

It's in large part dominated by the resell market.

So it doesn't make that much difference?

It's just a matter of, for you you're going your way and if the conditions improve regardless of the reasons you'll possibly at that point you'll decide to top to other things?

We think that market conditions -- general market conditions and the psychology of the consumers kind of dominate the reasons for bottoming and turnaround.

Sure.

Okay.

Well, you're operating at a good profit and making a healthy profit and certainly laudable.

Thanks.

Thank you, Myron.

We'll take the last question.

That will be from Joel Walker with FTN.

I was just wanted to ask you about the even flow, it's worked brilliantly in the first, or in the last two quarters with orders being down single digits.

I was just wondering if some of your competitors or some of the larger peers have started to do that in the last month because they've been sitting on so much inventory?

What we've tried to avoid and it's a little uncomfortable, we're trying not to talk about what we feel is happening with the competitors.

You'll have to, I think, get that information from them.

There's no question that the market has become a little bit more competitive over the past, certainly as we came to the end of the third quarter and I think it's going to take a little bit of time for some of these things to shake out, but our focus remains on our business strategy of driving liquidity to our balance sheet.

Right.

Just some of the discounting by others try to go down 3 or 5% and you come down 10%, have you seen some of those others people come down 10% or 15% where you guys are, and if they do do that do you cut it to 15 or 20 or are you just trying to stay put there?

Like if they do leapfrog and jump down with you?

That's a good question.

I think that we're trying to adopt an intelligent and strategic approach.

We don't want to engage in a downward spiral where everyone is just competing to find a bottom that isn't there.

No, I think we've remained very close to current market conditions, particularly at the local level.

And we're not engaging in a competition to see who can get lower faster.

But as I said, the market has become more competitive as we got to the end of the third quarter.

Right.

But going forward, would you sacrifice negative earnings per share for just cash flow?

It just seems like that's what you've done so far, it worked well but the next step would be to go negative and just use that to shore up the balance sheet or just continue in that model if necessary?

It's a fair question.

I think that there will be a time or could be a time, I should say, where we might have to pull back on the cash flow generation in order to let the market calm a little bit.

We certainly don't want to be -- I guess the best answer is, we're not participating in a no bid market.

So we're not pricing to those kinds of market conditions and we don't anticipate doing that.

I guess the positive here, the way to positively state it is we've already done a great deal of work to shore up the balance sheet.

We're in an excellent position to intelligently regulate the way that our business works right now and we're able to do it very strategically today as we go forward.

We're not going to engage in a competition to see how low we can go.

All right, thanks a lot.

You bet, thank you, everyone.

I would like to say thank you for joining us on our third quarter conference call and we look forward to an update at the end of the fourth quarter and our year-end.

Thank you.

Thank you.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation.

You may now disconnect.