MDC Holdings Inc (MDC) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the 2004 first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Mr. Larry Mizel. Mr. Mizel, you may begin sir.

Actually this is Joe Fretz, and I'm reading the statement regarding forward-looking statements. Before introducing Larry Mizel and Gary Reece, it should be noted that certain statements made during this conference call including those related to MDC's anticipated home (technical difficulty), home gross margins, backlog value, revenues and profits and responses to questions, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties, and other factors that may cause the company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements.

These and other factors that could impact the company's actual performance are set forth in the company's 2003 Form 10-K. It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Should a non-GAAP financial measure be discussed the information required by Regulation G will be posted on the investor relations section of our website, richmondamerican.com. I will now introduce Larry Mizel, Chairman of the Board and Chief Executive Officer of M.D.C. Holdings.

Thank you. We would like to welcome each of you and thank you for participating in MDC's 2004 first quarter conference call and web cast. Following 2003, the strongest and most successful of our 32 years in business, we are pleased to report that our successes have continued in the first quarter of 2004. We capitalized on continued low mortgage interest rates, improving consumer confidence, and strong demand for new homes in most of our markets to realize all-time quarterly highs for home owners, home gross margins and quarter end backlog. Our home closings and revenues were first quarter records and we reported year-over-year increase in our net income in our earnings per share of 60 percent.

These outstanding results contributed to solid after-tax returns for the last 12 months of 25 percent on equity, and 13 percent on assets and enabled us to generate a 150 basis point improvement in our quarterly after-tax returns on revenues all which are among the highest in our industry. At the same time, we continued to improve upon our investment grade financial position by lowering our March 31st ratio of debt-to-capital, net of cash to 0.27, and increasing our cash and available borrowing capacity by 22 percent to $680 million with no outstanding borrowings under our unsecured line of credit. Shortly after the end of the quarter, we further increased our financial flexibility by extending the terms of our unsecured line to five years and increasing our borrowing capacity to 700 million with the ability to further expand to 850 million with lender approval.

As we reported last week, we are pleased with the consistent strength and demand for new homes we experienced throughout the first quarter, which enabled us to extend our consecutive months of record orders to 25. Evidence of this strength is reflected not only in the 32 percent increase in our quarterly net home orders, but in the increase of more than 20 percent in our home buyer traffic and the 300 basis point reduction in our rate of cancellations. The strength of our home orders enabled us to reach another company milestone as we accumulated a quarter end backlog of more than 7,100 homes with a sales value that exceeded $2 billion for the first time in our history.

Through a balance of organic growth in our existing markets, opportunistic asset acquisitions and strategic startups in new markets, we have successfully diversified our operations geographically and are now in a position in some of the fastest-growing markets in the country. Our commitment to this growth strategy has resulted in our entry into seven new markets in the last two years. These new markets contributed 12 percent of our total home orders in the 2004 first quarter. While our recent operating results and strong financial position gives us confidence as we prepare for the future, we are aware that many equity investors are concerned with the potential impact of rising interest rates.

We believe the strong balance sheets of the public builders, our ability to grow market share, the constrained supply of land, and the wide array of mortgage products available to our home buyers could mitigate any negative impact of rising interest rates and fuel continued growth. As the economy improves, we should continue to gain strength as jobs and household incomes continue to grow and consumer confidence increases. We believe that job growth and consumer confidence are as important as low interest rates to home order demand. Recent economic data has revealed rapid improvement in job growth with March 2004 yielding the largest monthly employment increase in four years.

Consumer confidence also has shown dramatic improvement year-over-year. In any case, we will be prepared for shifts in demand or changes in the economy and our conservative land acquisition, operation and financial strategies should continue to serve us well across a wide range of business conditions. Led by our seasoned management team, MDC will continue to drive our three pronged long-term growth strategy, gaining market share and economics of scale to meet our growth objectives for 2004 and beyond.

With expanding market positions in our existing and recently entered markets, a 14 percent increase in our active communities in the last 90 days, our record backlog and the recent signs of improving economic conditions, we're well-positioned to meet our goals of closing more than 13,000 homes in 2004, and achieving our seventh consecutive year of record earnings. I will now turn the call over to Gary Reece, our Chief Financial Officer, who will describe more specific financial highlights of our 2004 first quarter.

Thank you Larry. As Larry mentioned, this was a tremendous first quarter for the company. Beginning with net income and I think we have some slides to show the trends year-over-year, we achieved net income for the first quarter of $61 million, which is 64 percent higher than the $37 million we earned a year-ago. On an earnings per share basis, we earned a first quarter record $1.79 a share which is 60 cents above the $1.12 we earned a year ago. These numbers are above the First Call consensus estimate when we prereleased of $1.44. I believe it is a $1.51 today. These numbers are higher than we had anticipated primarily due to an acceleration of approximately 200 home closings that we were able to close in Las Vegas, Arizona and California due to favorable weather conditions.

These are closings that otherwise would have closed in the second quarter of this year. In addition, higher margins were experienced, pretty much across the board, but in particular significantly improved margins in Las Vegas, Arizona and California. This strong performance by the company is driven by our record first quarter performance by our homebuilding segment where operating profits exceeded $113 million. This is 76 percent higher than the $64 million we earned a year-ago, on revenues of 746 million which is 35 percent above revenues of a year ago. Home closings were the primary driver for these strong earnings.

We closed 2,910 homes in the quarter which is 39 percent above the 2,100 that we closed last year. All of our divisions actually experienced increased closing levels driven by a record backlog in most of our divisions. The only division actually to be down was Colorado, which had a year end backlog which was down 23 percent. You can see from this slide that most of our closings now come from the State of Arizona followed by Las Vegas and then Colorado. So our diversification continues to be displayed in not only our closings, our asset --our capital allocations and our orders, but also our earnings. We also experienced some significant closings out of our new markets in Texas, Utah and Florida, closing 245 homes in these markets compared to only 50 closings in these markets last year.

Our average selling price for the quarter is actually down from this point last year due to our growing presence in some lower-priced markets, particularly Phoenix, Dallas, Vegas, Salt Lake and Jacksonville. Most of the closing increase that we experienced, the 810 increase over last year, were in markets where the average selling price was actually below our average and generally below $200,000. This is driving part of that decline in average selling prices. This, I guess, allocation between the markets is partially offset by our ability to raise prices in most of our markets, but in particular significant pricing ability to raise prices in Las Vegas, Maryland, Virginia, and in California.

You will note from this slide, where we have displayed average selling prices, that we actually showed a decline in average prices in Colorado and California primarily due to, in California, to the fact that we had a number of homes that we closed in the first quarter of last year in excess of $1 million. Gross profit margins were a big part of the story this quarter, and were higher than we had anticipated due primarily at 26.2 percent, the highest margins for any quarter in our history. Pre-interest, these margins are 27 percent which are up 340 basis points over where we were last year. You can see from this slide the steady improvement, quarter by quarter, which is driven largely by our ability to increase prices as we have discussed previously in the markets of Las Vegas, Virginia, Maryland and California primarily.

But the strongest performer this quarter from a margin standpoint was actually Las Vegas due to the extraordinary demand for homes in that market, which created an ability to raise prices on a regular basis there. We also experienced higher margins than anticipated in California and Arizona from several high margin projects. They are in the process of closing out. I guess another factor that we discussed in prior calls is the impact of lumber, which was not quite as great as we had expected this quarter due to our ability to lock in prices in certain markets and the impact that was experienced was largely offset by certain nonrecurring items related to land development costs not incurred.

By the way, the margin improvement is also attributable to the fact that we have basically strong and consistent performance across our markets, with all of our markets, other than the new markets we have entered in the last couple of years, display margins that exceed 20 percent. Our SG&A ratio is displayed here in the next slide. You can see there is, as a percentage of revenues, our SG&A in this quarter is 13.8 percent compared to 13.4 percent a year-ago. This increase is largely due to costs associated with new regional offices, certain national departments of the establishment of new divisions that have not yet produced homes closings, and a continued increase in tech spending. These costs will continue throughout the year we hope, as we see an increased of level of closings from these new divisions and from the our existing divisions where we are expanding, that we will see some additional leverage later in the year.

On the mortgage side, we saw our mortgage company originate and broker a record first quarter number of loans, $500 million in loans which is 37 percent higher than a year-ago driven by the record level of closings here in the first quarter on a capture rate of about 78 percent, compared to 80 percent a year ago. As a consequence, our origination fees increased 13 percent to $5.2 million, however, these increases were offset by lower gains on sales and mortgage loans and higher G&A costs that have been incurred to handle not only the larger volume of homes closed, but the significantly larger backlog of homes that we will be closing in the future as well.

This is normally offset by gains on mortgage loans, but these loans have been lower than they were last year, primarily due to a more competitive marketplace for loans, which has resulted in a more normalized pricing environment for these loans. We have originated more ARM loans, which are not as profitable as fixed-rate. We had an ARM percentage of total originations at 23 percent here in the first quarter compared to 17 percent a year-ago. In addition, we brokered more loans, and brokered loans are not as profitable either because we do not get the fees or the servicing or the interest spread.

In this quarter 22 percent of our loans were brokered compared to 10 percent a year-ago period. As the next slide shows, the mortgage company has been profitable since we opened it in the early '80s, however, it is a declining portion of our business. It is a significant part of our business in terms of enabling us to control the closing of the loans with the houses, but as a percentage of our profits it has been declining and now stands at about 4 percent of the pretax profit of the company.

Our balance sheet continues to strengthen, and as has been the case in each quarter for the last five years, it has never been stronger than it is this quarter. Our equity increased to just short of $1.1 billion. It is up 32 percent from where it was a year-ago. It has steadily increased in terms of book value per share and now stands at $33, just over $33 a share, up from $31 a share at year end, and is 27 percent higher than the $26 a share a year-ago. As Larry mentioned, we have no outstanding borrowings on our unsecured line of credit.

As a result, our net debt-to-cap ratio declined to 27 percent compared to 30 percent a year-ago. We continue to maintain tight controls on our inventory levels. Our spec levels are low. We had less than 80 specs that were finished in the entire company at the end of the quarter, and in terms of a month's supply of specs we had less than a month's supply based on current levels of orders. One of the big stories for this quarter as we set the stage for balance of this year, are orders. As we reported last week, our orders were very strong for the quarter and were relatively consistent throughout the quarter in each month with each month showing -- establishing a new monthly record.

So we were able in March to set a record monthly order level for the 25th consecutive month. This quarter, at 4,429 orders is the highest level of quarterly orders in our history. It is 32 percent higher than the orders we received last year and we displayed on this slide where the order growth is coming from. You can see the increases on an actual basis in every market except Virginia and Arizona, Arizona being primarily a supply issue, and we are seeing because of a lower number of active subdivisions, we're seeing fewer orders, slightly fewer orders in that market.

In Virginia we see that they are down not only on an absolute basis but on a same-store basis, as is Maryland. And the story is pretty much the same in both of those markets where we have intentionally slowed down our starts in those markets and slowed down the release of homes for sale based upon the fact that we are getting out a little bit ahead of our construction capabilities, given some delays due to weather, timing and issuing permits and things of that nature.

So we don't want, in that market in particular, where pricing power is so strong, we don't want to get too far ahead of our ability to build the houses, so we intentionally slowed down things there. One thing to note here, you obviously see very strong homeowner growth in Las Vegas on a same-store basis and on an absolute basis. Also in Salt Lake City, strong growth on an absolute basis. Colorado, which is down on a -- which is only up slightly in the quarter on an absolute basis, actually up 26 percent on a same-store basis. So that is encouraging as we see the Colorado market showing signs of recovering.

Another point in relation to the orders, some other things that we experienced this quarter. The orders include approximately 560 orders from markets that we have opened in the last couple of years. So they are contributing significantly to our home order growth and to the growth of our company over the future. We only received about 140 orders from these markets last year. Our traffic was up not quite as high as the orders, so we are getting a better conversion rate, but traffic was up in most of these markets as well, up 22 percent overall. And another positive sign as it relates to the market that today, is the cancellation rate is lower, whereas it was 22 percent a year ago, it was 19 percent in this quarter.

Pretty strong orders contributed to the highest quarter end backlog that we have ever had, 7,112 units, which is 34 percent higher than it was a year-ago. Our average selling price in backlog has increased to $292,000 and so our dollar value of our backlog actually is up almost 50 percent at $2,080,000,000, as compared to $1.4 billion a year-ago. One reason for the significant increase in selling price and backlog is, it heavily weighted toward the high priced markets where our average selling price exceeds $400,000, that being Southern California, Northern California, Virginia and Maryland.

Actually those four markets comprise 40 percent of our backlog this quarter, whereas they are only about 20 to 25 percent of our closings. It does take longer to deliver those homes and that is why the average selling price in backlog generally exceeds the average selling price we experienced during any particular quarter. Another factor that we did mention in the press release that will impact our ability to deliver homes next quarter is that over 40 percent of the homes that we have in backlog here have yet to be started. Many of those are in these high price markets in Virginia, Maryland and California.

In addition, in preparation for the future, our growth in active subdivisions has been very positive reflecting the growth as we anticipated. We are up to 225 active subdivisions. That is the highest we have ever been and it is up 10 percent from where we were a year ago and 14 percent above where we were at year end. This slide reflects where the growth has come and you can see most of the increases are in the lower-priced markets, which is what will drive closing prices in the future and our closings for future quarters.

We are up 16 active subdivisions in Texas, 11 active subdivisions in Florida and 7 in Salt Lake City. So we will -- one element here that is somewhat, maybe not necessarily misleading, but Colorado actually shows being down relative to last year. We've been in the process of lowering our active subdivision count in Colorado. It is down seven units from where it was a year ago, but we are actually up six units from year end. So we have started to capitalize on our leading position here in Colorado and starting to build the subdivision count in this market.

Not only the -- I guess commensurate with the subdivision increases, we have seen an increase in the number of the lots that we control in the markets across the country. We now control approximately 32,000 lots of which just over 13,000 lots are optioned. This is 32 percent of the total, which is up significantly compared to previous years. In terms of total lots controlled, we are up 40 percent over where we were at this time last year. So we've got the subdivisions that are moving in the right direction. I know we had mentioned that we would be up in subdivision count approximately 15 percent for the year.

We are ahead of that pace now, although the strong sales that we have experienced in the first quarter may cause us to sell out of subdivisions faster in the second quarter. So, we will see that perhaps not grow quite as quickly over the next couple of quarters but could exceed that 15 percent growth in subdivision count by the end of the year slightly.

Nevertheless, we are in a great position from a subdivision count, from a lot standpoint. The orders are great, the backlog is strong, and we are in a great position to meet our goals for record earnings and revenues for the year and to close more than 13,000 homes in 2004. With that, I would like to conclude the prepared remarks, and would like to open up the floor to questions.

We will now begin our question-and-answer session. (OPERATOR INSTRUCTIONS). Stephen Kim with Solomon Smith Barney.

Thanks guys. Congratulations on a very strong quarter, first and foremost. I guess my question relates to your qualitative guidance on gross margins. I was hoping you could make it a little bit more qualitative for us because clearly that is going to move the needle it looks like. Can you give us any color on what kind of variability we might expect to see quarter-to-quarter here as we progress in the year, particularly in the second quarter?

In the second quarter, we have as I mentioned, we have seen pricing increases during the first quarter in several markets in a big way. We have also seen some fairly significant increases in the land costs. We are going to see the impact of increased hard costs coming through in the second and third quarters. Really the lumber impact that I mentioned, and you and I have talked about this before, while it was not as large in the first quarter as we expected, part of that was due to the fact that we saw lumber drop down a little bit just before the end of the year. It popped back in a big way and in fact went beyond where the high that it was in the early fourth quarter last year.

The effect of that is going to start to increase late second quarter and maybe peak in the third-quarter. That is going to be an impact that we're going to have to deal with. We are going to start to see some of these higher margin subdivisions closing out. We have been able to benefit from it. We will see some carryover into the second quarter, but as the new subdivisions come on, as we begin to close homes from these new markets where you have seen the buildup of subdivisions, and the buildup of orders, and the buildup of backlog. These are all, as I mentioned, these are markets where our margins are below 20 percent right now.

So as those come on and become a bigger part of what our total closing level is, that will tend to have a lower effect on it. You know the extent to which we are able to offset that through pricing increases in the future is the unknown element. We have seen in the first quarter incentives down year-over-year by about 50 basis points, and we have seen -- rebates are up 10 to 20 basis points, and the contributions from our design centers are higher. So we've got some positive things going. And we've got some things that we're going to have to deal with in terms of subdivisions and the new markets.

Gary, maybe I could help narrow this down. I'm not trying to ask a fairly specific set of questions here. Obviously, you're giving us a lot of the pieces but you're giving us them, again, in qualitative terms largely. Did I hear you right in suggesting that the markets outside of Arizona, Nevada and California generally are operating in margins below 20 percent? Is that what you were saying?

What I was saying is that all of the markets that we have been in historically, are above 20 percent. The new markets, Texas, Florida and Salt Lake, are below that level. They are where right now -- they are new markets which is why the margins are lower, but they are going to become an increasing part of the whole high pie.

How much do you think within the next couple of quarters, from what to what?

In terms of?

Deliveries.

Their deliveries? By the end of the year the deliveries in those markets could triple from where they are today because we are gearing up in Texas in a hurry and we have increased significantly in Salt Lake and Jacksonville is picking up steam as well. So I see their contributions picking up in a hurry in the last half of this year.

Okay. If they were running below 20 percent -- another thing that would be helpful would be to understand how much higher above the company average do the deliveries from Arizona, Nevada and California run or where are they running right now?

In terms of, are you talking about in terms of margins?

Gross margins. Three hundred basis points, 500 basis points?

I really can't get into that, Steve.

How about the impact of hard costs and land costs? Can give us any kind of quantity or quantification of what kind of an impact you are looking, either per house or basis point?

Sure, I will try. The hard costs, we could see on the lumber side, second quarter, 100 basis points. It could be 150 in the third-quarter. It will be increasing third quarter over second quarter. We expect a small increase in certain other items like drywall and steel, maybe several hundred dollars a house on that. But, nevertheless, some increases. On the land side, that -- land costs are going up in each market, but the ones that are experiencing the highest pricing power are also seeing the highest level of land cost increases.

I think we had a question on the last call about -- Tim Jones, in fact, asked about land as a percentage of revenues and where it could go. This quarter, the land as a percentage of cost of sales and as a percentage of revenues, is actually pretty flat to where it was last quarter and in fact is down relative to the year-ago quarter. I think that is some of the trends we have talked about. But as we see increased contributions or closings from some of these other markets -- and California is going to have an increasing impact as we grow in California.

We're moving into some higher priced communities there that we could see the land component being upwards to 50 percent in some of those communities, and that will have an impact. The impact of land with everything else held equal is probably going to grow sequentially over the balance of this year.

Got it. When you talked about your lumber being up 100 basis points to 150 basis points higher, was that sequentially or year-over-year, and same thing with your drywall?

That is sequentially.

Drywall, same thing?

Yes.

And that was a percentage of the revenues or the home price?

Yes.

Okay. That assumes no home price appreciation I assume, or is that assuming what you have already reflected in your contract?

No home price appreciation.

That's what I thought. Got it. I will jump off. Thanks.

Carlos Ribeiro from Credit Suisse First Boston.

Good morning gentleman. Most of my margin questions have been asked, but Gary when do you expect to start delivering homes from your newer markets like Tampa, Philly and Chicago?

We will probably be delivering -- we will be delivering homes in each one of those markets next year. I don't expect we will deliver much of anything from any of those markets in 2004.

The lower margins from those market should not impact this year's margin?

That's correct.

One other cleanup item. Any update on your share repurchase program?

We did not disclose anything in this quarter Carlos, and generally we keep the market up-to-date when we act.

Okay. Can you remind me what your current authorization is?

We have approximately 1.7 million shares currently that we can purchase under the current authorized program.

Thank you, sir.

(OPERATOR INSTRUCTIONS). Craig Farrow (ph) from SBR (ph).

Good morning. I wanted to see if you could give me a sense of your shadow pipeline of land. I know you've got 32,000 lots that you have under control right now, and I know historically you kind of had some additional lots that aren't necessarily -- you put money down, but you kind of consider as being under control.

We call that our -- what did you call it, a shadow pipeline? That is a good one. Can I use that?

You bet.

We generally have anywhere from 25,000 to 30,000 lots at any point in time that we have soft dollars up on that we're looking to come in and replace the lots that we currently have controlled with hard dollars. By the way, I didn't get the opportunity to mention this, but we have 13,000 lots that we control under option. We only have $30 million total at risk with respect to those options. A good part of that are letters of credit, so a relatively nominal amount.

As far as those additional lots that you have that you have put some soft dollars on, are a significant amount in say California and Nevada where your land pipeline is a little bit shorter say versus some of your other markets?

The answer is yes. We have a number of opportunities that we're looking at in both of those markets. Our goal is to, in each of the markets we are in, to continue to grow from where we are today. So we have a constant flow of opportunities coming from most of the markets, but those markets are a big focus (ph) for us.

So essentially what you are saying is, you are not concerned with finding additional land in those two markets?

We are in the market every single day in each of these markets. We have a strong group of people out there looking and we are not concerned. I guess we have shown and demonstrated over the years our ability to execute with a two to two and a half year supply of lots and we are not intending to vary from that formula.

Great. Also just following up on some initiatives on the supply side. You have done a great job with the national contracts. Can you comment at all on any other supply chain initiatives or any other ways you may be looking to expand your operating margins through controlling the expense side?

We are -- I would say that on the supply side of things, we just barely scratched the surface in terms of opportunities there. We are continuing to look for opportunities to leverage our size and our purchasing power, looking for the ability to reduce and eliminate inefficiencies in the process. We continue every day to add to our string of national contracts and we have a relatively new team of people who are with a new leader who is going to focus on that heavily. I guess the name of the game is that we really have just kind of scratched the surface here and the opportunity is in front of us.

Great. Thanks.

Jim Wilson from JMP Securities.

Thanks. Good morning guys. I was wondering as we look at -- I mean your two strongest markets for last few quarters were California and Las Vegas. How much or what percentage of deliveries came out of those? And then as you look forward maybe into '05, do you see the -- is the community count of either of those markets do you see going up or down as you look at the prospects for new or existing new inventory?

Jim, I think our expectation would be to -- in terms of community count, I'll take it backwards. The community counts in both of these markets we would be planning on increasing. In fact, we are just starting to gear up in the Southern California region. We have seen I guess some subdivisions that have sold out and gone off-line. Late last year we started to build that up. The growth in Southern California is, as you know, it is going to be a difficult market, and it's difficult to maintain the subdivisions when you can sell so quickly in those markets.

But I would say that the growth in that market is probably not going to be as fast, even in Las Vegas on a relative basis, as in some of these other markets like Phoenix and of course the new markets that we are gearing up. Las Vegas, will probably show a bit more growth from a community count standpoint than Southern California. But you know we have grown dramatically in Las Vegas over the last three years, almost doubling in size in each of the last two years. In terms of deliveries, we had approximately 33 percent of our deliveries in Las Vegas. Hold on one second, Jim. California was about 16 percent of our deliveries, and Las Vegas was 20 percent of our deliveries, in the first quarter of this year.

Then with Northern California, where do you expect that community count to go over the next 12 or 18 months?

Northern California, I think we have an opportunity to grow there. I think what we are looking at is faster growth in Northern than in Southern California, in the Bay and Sacramento.

Okay, very good. Thanks. Great quarter.

Greg Gieber from A.G. Edwards.

I had just one quick question since most of mine have already been dealt with. I believe, Larry in your opening remarks, you talked about a rather large drop in your cancellation rate. I wonder if you can tell us what the cancellation rate was and confirm for me what the size of the drop was, and then perhaps give some color if it really was as large as what I thought you said?

Larry referred to a 300 basis point drop. What we're referring to is the fact that last year we had a cancellation rate of approximately 22 percent. This year, in the first quarter, we had a cancellation rate of 19 percent.

Is there any factors contributing to that large sort of drop, because usually when rates start to move up a bit here in the states sometimes you don't see that type of fall-off in cancellation rates, sort of mix change? Does base rate have higher down payments or what?

You know, actually, our loan to value did drop somewhat relative to last year, but not measurably. I think it was 85 percent last year versus 82 percent this year. I don't think that was a driving factor. I think it was another sign of very strong demand in the markets that we are in. There are very few markets that we are in today that did not show an overall drop in cancellations.

Okay. One more related question. What percentage of your orders are being done under a very (indiscernible) mortgages today versus a year ago?

Today, our (indiscernible) product comprised approximately 23 percent of all of the loans we originated. Last year that percentage was 17 percent.

Okay. Thank you very much and very nice quarter.

Margaret Whelan from UBS.

Good morning guys. I have a couple of wrap-up questions. You mentioned that you believe that you are just kind of scratching the surface in terms of managing your costs on the supply side. Is that in aggregate or does that pertain to your procurement? I guess the question is, how much can you do to improve the process in terms of managing how you build the homes taking days out of the cycle, that kind of stuff?

I think Gary's comment is that we have been working on improving the process for the last decade which is consistent with all of the other major builders, and we still believe that we are scratching the surface. Just about every function, we can do a better job, and we are implementing a plan of information process procedure and expanded training at every level. We believe that there is a lot in front of us, and we're going to do a better job as everyone needs to do in today's world that delivers greater value for consumers, because we know if we give a better value to the consumer we will be more competitive, consequently be able to take our market share and growth in profit.

Can you give us some examples maybe of some regions where you have higher than your average margin and what they have done to achieve that?

Most of the higher than average margin in the market is (indiscernible), stronger demand than supply. I would like to say it was all of our doing, but --.

It is basically the pricing side of it?

That's correct.

I guess that's what I worry about a little bit because if at some point home price inflation turns to deflation, can you take (indiscernible) more quickly when you're losing pricing?

As you know from the way we run our balance sheet and the way we run our company, we are prepared no matter what the direction it goes. We are spending more money on the information process and procedure and trainings now than we ever have in order to maintain our competitive skills regardless of what the market does.

Alright. The second question I had is, what is land as a percent of your COGS right now?

Land as a percentage of our costs, is right around 31 percent.

Do you have a range?

It can go in some markets as low as 14 percent and as high as 60 percent.

Okay. Are you seeing any more demand from the land developers in terms of profit participation in new markets?

There is demand for everything at all times. It is a matter of at what level you want to participate. Their demand is in relationship to availability, and we have been able to work through that for many years.

Thank you very much guys. Good job.

Nice to visit with you.

That was our last question. (OPERATOR INSTRUCTIONS).

We would like to again thank you for joining our call today. We look forward to speaking with you again in July following the announcement of our second quarter results. Everybody have nice day.

Thank you. Ladies and gentlemen, this concludes our 2004 first-quarter earnings release teleconference. You may now disconnect and thank you for participating.