普爾特房屋 (PHM) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Pulte Homes Inc.

earnings conference call.

My name is Gina, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will be facilitating a question and answer session towards the end of today's conference.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr.

Calvin Boyd, Vice President of Investor and Corporate Communications.

You may proceed, sir.

Thank you, Gina.

Good morning, and thank you for joining us to discuss Pulte Homes for the three months ended March 31, 2007.

I am Calvin Boyd Vice President of Investor and Corporate Communications.

You have all had a chance to review the press release we issued last night detailing Pulte's first quarter 2007 operating and financial performance.

On the call to discuss these results are Richard Dugas, President and Chief Executive Officer; Steve Petruska, Executive Vice President and Chief Operating Officer; Roger Cregg, Executive Vice President and CFO; and Vinny Frees Vice President and Controller.

For those of you who have access to the internet, a slide presentation available at www.Pulte.com will accompany this discussion.

The presentation will be archived on the site for the next 30 days for those who want to review it at a later time.

As with prior conference calls, I want to alert everyone listening on the call and via the internet that certain statements and comments made during the course of this call must be considered forward-looking statements as defined by the Securities Litigation Reform Act of 1995.

Pulte Homes believes such statements are based on reasonable assumptions, but there are no assurances that actual outcomes will not be materially different from those discussed today.

All forward-looking statements are based on information available to the company on the date of this call, and the company does not undertake any obligation to publicly update or revise any forward-looking statements as a result of new information in the future.

Participants in today's call should refer to Pulte's annual report on form 10-K for a detailed list of the risks and uncertainties associated with the business.

As always, at the end of our prepared comments, we will have time for Q&A.

We will wait until then before opening the queue for potential questions.

Let me now turn over the call to Richard Dugas for a few opening comments, Richard?

Thank you, Calvin, and good morning, everyone.

Let me begin by saying that the first quarter of 2007 proved to be another difficult operating quarter, posing many of the same challenges that faced the home-building industry during most of 2006.

On a year over year basis, demand for new homes continued to be significantly lower, cancellation rates are still above industry norms, and impairments in land-related charges are present in the operating results of large home builders across the board.

In addition to those market conditions, the subprime lending situation that surfaced during March, has led to an uptick in cancellation rates and, maybe more importantly, has hung another sizable question mark for consumers over housing, and continues to hurt consumer confidence.

As we entered this year our goal was to take the strategic direction we set in the latter part of 2006, and carry it through into 2007.

As a result we are focused on maintaining a healthy balance sheet and managing our land and house inventory.

Pulte's loss for the first quarter 2007 was largely the result of impairments and land-related charges recorded during the period.

Roger will have more on our financial performance and these charges during his prepared remarks.

In addition, it is clear we are not getting enough overhead leverage in our core business at these reduced volume levels and we are working diligently to address that further.

We continue to reduce speculative inventory throughout the system.

Although progress in this area was not as strong as we hoped, primarily due to increase in cancellations in March, our goal remains to sell existing finish spec homes and start fewer new spec units.

We continue to closely monitor our land positions, and decrease land purchases.

While there are some markets where strategic land purchase today puts us in a position to fill an unmet need in a short period of time, those are now the exception and not the rule.

At this time we anticipate minimal investment in new land parcels this year.

Our goals for the remainder of 2007 are largely unchanged from a quarter ago: to maximize profitability and not drive for high unit volume or build home for practice.

We encourage our operators to find that blend of price and pace that helps us maximize pre-tax in each of their communities, and not add excessive speculative inventory only to discount it later in this weak market.

It's an balanced approach and we feel it's still the right way to drive the best results possible in such a challenging market.

We said in our February call that we were encouraged by some of the January statistics, only to see those positive trends decline during March and thus far in April.

It is difficult for anyone to estimate the timing of any true market recovery, which is why we feel it is important to maintain an appropriate short-term and long-term strategy that will help us achieve the most consistent results possible over time.

We will operate with our short-term tactics of maintaining a healthy balance sheet, managing land and house inventory levels, reducing spec inventory and continuing our cost reduction initiatives.

While the storm clouds of a tough environment continue to hang overhead, we believe based on the demographics that drive this industry that the long-term outlook for housing is bright.

Our long-term focus on market segmentation, maintaining financial discipline and operational excellence, and developing our people continues to strengthen our company and will help us excel when demand improves and it ultimately will.

Thank you, and now let me turn the call over to Roger Cregg.

Roger?

Thank you, Richard, good morning.

The first quarter homebuilding net new, unit order rate decreased approximately 21% from the first quarter last year, and in dollars decreased 21% to approximately $2.9 billion on a relatively flat community count versus the same quarter last year.

Revenues from home settlements for the home building operations decreased approximately 38% from the prior year quarter to approximately $1.8 billion.

Lower revenues for the period were driven primarily by lower unit closings that were below prior year by approximately 37%.

The average sales price decreased approximately 2% versus the prior year quarter to an average of $330,000 per home.

In the first quarter land sales generated approximately $41 million in total revenues, which is an increase versus the previous year's quarter of approximately $15 million.

Home building gross profits from home settlements including home building interest expense for the quarter decreased approximately 71% to $195 million, or a decrease of approximately $468 million for the quarter.

First quarter home building gross margins from home settlements as a percentage of revenues were 10.9%, compared with 22.9% in the first quarter of 2006.

The decrease margin conversion of approximately 1200 basis points versus the prior year quarter is attributed to increased selling incentives, higher material and labor cost and land and community valuation adjustments.

Additionally homebuilding interest expense increased during the quarter to approximately $48 million, versus approximately $41 million in the prior year.

Included in this interest expense of $48 million for the quarter is an additional $5 million of expense related to land and community valuation adjustments.

Also included in the gross margin for the quarter, was a charge related to land and community valuation adjustments in the amount of approximately $57 million, which contributed approximately 321 basis points to the decline in the margin conversion versus the prior year quarter.

Total gross loss from land sales posted for the quarter was approximately $16 million, the losses mainly attributed to this fair market value adjustment in the current quarter for land being held for disposition in the amount of approximately $18 million included which is in the land cost of sales.

The gross profit contribution from specific land sales transactions were approximately $3 million for the current quarter versus approximately $5 million in the prior year first quarter.

Land sales transactions during the quarter included single family custom lot sales, residential parcels and several commercial land parcels.

SG&A cost as a percentage of home sales for the quarter was approximately 15.7%, an increase of approximately 590 basis points over the prior year quarter.

The decreased conversion versus the prior year quarter was the result of lower revenues and less overhead leverage on the lower volume.

In the other income and expense category for the quarter the expense of approximately $46 million is primarily the result of write-off of land deposits and pre-acquisition costs of approximately $51 million associated with land option contracts that we determined not to exercise.

To recap the components of the $132 million in charges included in the first quarter, Home cost of sales included approximately $62 million, resulting from valuation adjustments to land inventory, contributing to a decrease in gross margin conversion of approximately 349 basis points.

Land cost of sales included approximately $18 million, and net in the other income and expense category includes the write-off of land deposits and pre-acquisition costs, totaling approximately $51 million.

In the first quarter we dropped land deals representing approximately 11,000 lots with a purchase price value of approximately $626 million.

Based on the purchase price value, approximately 92% was contracted for in the years of 2004 through 2006.

The home building pre-tax loss for the first quarter of approximately $148 million resulted in a pre-tax margin of approximately a negative 8.1% on total home-building revenues.

Excluding the charges related to valuation adjustments in land inventory and adjustments, land held for sale, the write-off of land deposits and pre-acquisition costs, home building pre-tax margins converted at approximately a negative 1% of the current quarter.

At the end of the first quarter our home building operations had a backlog of 13,344 homes, valued at approximately $4.7 billion, compared to 19,940 homes valued at $7.1 billion as of the prior year quarter.

The first quarter pre-tax income for Pulte financial services operations was approximately $13 million for a decrease compared with the prior year quarter of approximately $36 million.

The decrease during the first quarter is mainly attributed to a gain of approximately $32 million in the prior year quarter related to the sale of our equity investment in a Mexico-based mortgage banking company.

In addition, lower revenues from decreased volumes were offset by a favorable product mix shift to higher profit loans and an increase in the capture rate.

The level of adjustable rate mortgage products originated during the first quarter of 2007 decreased from approximately 35% of origination dollars funded from our warehouse line in the first quarter of the previous year to approximately 15% this quarter.

Pulte mortgage's capture rate for the current quarter was approximately 93%.

Mortgage origination dollars decreased in the quarter, approximately $601 million or 34% when compared to the same period last year.

The decrease is related to the overall slowdown in the home building closing activity for the quarter.

In an analysis of our loans in process based on dollars, at the end of the quarter, we estimate that approximately 5% of the loans with an average FICO score of 580 fall into the subprime category.

Additionally 72% fall in to the prime category with an average FICO source of 745, and 23% in the category of Alt-A product with an average FICO score of 738.

Overall the average FICO score of our loans in process is 736 with 81% of the loans in process with a FICO score greater than or equal to 681.

The other non-operating category pre-tax loss for the first quarter of approximately $7 million includes corporate expenses of approximately $8 million and corporate net interest income of approximately $1 million.

The net loss for the first quarter was approximately $86 million or a loss of $0.33 per diluted share as compared to net income of approximately $263 million or $1.01 per diluted share for the same period last year.

Fully diluted shares were approximately 257.7 million shares for the quarter.

Moving to the balance sheet for the first quarter, we ended with a cash balance of approximately $117 million.

House and land inventory ended the quarter at approximately $9.4 billion or even to year end 2006, and approximately 4% below the prior year quarter.

Land inventory during the quarter increased from year end, 2006, by approximately $80 million, offset by a decrease in house inventory of approximately $30 million.

The major components of land spending activity in the quarter included land development of approximately $460 million, land takedowns from existing land option contracts of approximately $190 million, offset by lot amortization from closings of approximately $540 million.

As we have mentioned in the past our development spending is seasonal, with a build up in the first two to three quarters of the year.

In addition, approximately 40% of the development dollars in the quarter were for active adult, as we continue to invest in the development of our Del Webb communities, such as Wiregrass and Ave Maria in Florida, Festival Ranch in Arizona, Anthem in Colorado, and Mesquite in Nevada to name a few.

For the first quarter, the company's gross debt to total capitalization ratio was approximately 35.4%, and on a net basis 34.6% with no debt outstanding on a revolving credit facility.

Interest incurred amounted to $61 million in the first quarter, compared to $59 million for the same period last year.

Pulte Homes shareholders' equity for the first quarter was approximately $6.5 billion.

We repurchased no shares during the first quarter and the company has approximately $102 million remaining on our current authorization.

Now looking ahead, and under the SEC Regulation FD guidelines provide the following guidance on our current expectations for the second quarter of 2007: Second quarter earnings per share are estimated to be in the range of approximately a break even to loss of $0.10 per diluted share.

This range does not include the potential for additional land valuation adjustments, and option deposits and land pre-acquisition cost charges.

Although we may incur additional write-offs it's uncertain at this time as to the estimate of those amounts.

This earnings per share number is calculated based on approximately 258 million fully diluted shares.

Unit settlements in the second quarter of 2007 are projected to be approximately 10% above the first quarter of 2007.

Average selling prices for closings in the second quarter estimated to be approximately $329,000.

The projected average selling price is primarily being driven by product and geographical mix as well as additional incentives for home projected to be delivered during the second quarter.

Gross margin performance from home settlements as a percentage of sales for the second quarter, are anticipated to be approximately 13.5%.

The projected gross margins for the quarter primarily reflect pricing strategies and generating sales momentum and pricing incentives experienced over the period in response to market conditions for homes to be delivered.

We are currently projecting no land sale gains for the second quarter.

As a percentage of sales, SG&A is expected to be in the range of 13.5% to 14% of the quarter.

In the home building, other income and expense category for the second quarter, we are projecting an expense of approximately $3 million to $4 million.

Given no material change from the current and short-term projected interest rate environment or a significant shift in the consumer mortgage preference, pre-tax income in our financial services operation is expected to be approximately $3 million for the second quarter of 2007.

Total other non-operating expenses are projected to be $14 million to $15 million for the second quarter.

We are projecting the effective income tax rate to be approximately 40% for the second quarter of 2007.

Given the current and continued uncertainty in this challenging market environment and the lack of visibility to look beyond the quarter we're offering no full-year outlook at this time.

We'll continue to assess conditions for the next quarter and provide an update quarterly on our second quarter conference call.

Although we have given no specific guidance for the full year of 2007, we anticipate the positive generation of cash, mainly in the fourth quarter to result in an increase in your net cash position at year-end.

We anticipate our cash position to be in excess of $1 billion, no outstanding debt on our revolving credit facility, and a net debt to total capitalization ratio in the low 30% range.

We continue to focus our efforts on reducing our land pipeline and committed to maintaining a solid and flexible balance sheet.

I will now turn the call over to Steve Petruska for more specific comments on operations.

Steve?

Thanks, Roger, and good morning, everyone.

As Richard discussed earlier, the challenging environment of the home building industry has significant impact on our first quarter 2007 operations.

Our short-term operational goals continue to be right-sizing our land pipeline and tightly managing starts and spec inventory.

Let me bring you up to date in how we're do in these areas.

Regarding our land inventory our primary focus centered on slowing the pace of land purchases, reducing the supply of lots under control, and renegotiating existing option agreements to purchase land.

At the end of Q1, 2007, Pulte controlled approximately 220,000 lots, down 5% sequentially from the fourth quarter 2006, and down over 38% from the same period last year.

As for the house inventory, the number of speculative homes at the end of the first quarter was approximately 4400 units, down 13% from the fourth quarter, and down 38% from the first quarter of 2006.

That comes on the heels of a 35% reduction in the fourth quarter of 2006, versus the third quarter of 2006.

Again, total spec units represent homes in all stages of production.

Our spec finished unit count decreased 22% from the fourth quarter, despite an increase in our cancellation rate trend during March and thus far in April.

Overall our goal of starting significantly fewer specks remains key.

Although competitive pressures will have an impact on our strategy, Pulte strives to preserve margin and not force volume where we see an absence of demand.

We will continue to work through our spec inventory, which may require more aggressive marketing by our operators.

Settlement revenues for the first quarter of 2007 declined 38% from the first quarter 2006 levels, as home closings decreased 37% for the same period.

Average sales price was also down nearly 2%.

First quarter 2007 sign-ups totaled $2.9 billion as our average sales price per sign-ups were flat for the same period a year ago, and unit volumes decreased approximately 21% year-over-year.

Our cancellation rate was 24% for the first quarter, a reduction from the 35% cancellation rate experienced in the fourth quarter of 2006.

We did see, however, an uptick in the cancellation rate during March and into April as compared to the first two months of the quarter.

Whether this leads to a higher overall rate for the second quarter and beyond remains to be seen.

Now I would like to provide commentary on what our regions experienced.

The Northeast once again showed some improvement.

Sign-ups for the Northeast in the first quarter were down 3% year-over-year, an improvement from though third and fourth quarters of 2006.

Community count was once again flat.

New home lot supply remains limited in this part of the country.

Resell inventories continue to retreat and level off during the quarter, a positive sign for this region.

The Southeast, which includes the Carolinas, Georgia, and Tennessee, had mixed results.

Year-over-year sign-ups were down approximately 36%, but margins continued to improve.

It should be noted that our Del Webb Sun City Carolina Lakes community opened last year in this quarter, affecting our year-over-year comparisons.

The active adult communities continue to have a positive impact on our results here, and our average sales prices once again increased.

Our Florida segment continues to be a challenged area for us.

The cancellation rate was 21%, lower than the fourth quarter 2006 rate and sign-ups were down 16%, again, better than last quarter.

However, resell inventories are still high and unsold spec units are still elevated, having a negative impact on gross margins.

In particular, Fort Meyers, Naples, Orlando, Tampa and Jacksonville all show excess builder inventory.

Although local macroeconomics are positive, it may take several quarters for your Florida operations to show noticeable improvement.

The Midwest, with difficult economic conditions, continued to decline.

Sign-ups were 37% lower for the quarter compared to the same quarter last year.

Chicago, Indianapolis, Michigan and the Twin Cities all showed 30% decreases in new orders.

Central region which includes Colorado, Kansas City, and Texas, declined 48% year-over-year compared with 50% in the fourth quarter of 2006.

Our cancellation rate in this region remained high at 29%, but that was still down slightly from the fourth quarter of 2006.

Our Southwest region held up well.

Sign-ups increased 2% in the first quarter compared with the prior year first quarter.

This improvement can be attributed to the sales strength of our Arizona operations, which was up over 40% year-over-year.

Community count growth of 25% helped as grand openings in our Red Rock community in Tucson, and our Desert Ridge community in Phoenix.

It just goes to show the right land at the right price continues to yield great sales results even in this difficult housing market.

Our California operations saw sign-ups decline approximately 10% year-over-year as compared to a 13% decline during the fourth quarter.

In northern California, weaknesses in Sacramento is no secret, but our Bay area and Central Valley operations performed very well.

In southern California we saw some improvement in our LA/Ventura operations, but the rest of southern California is still well off prior year levels.

In conclusion, operating conditions continue to be a struggle, but we are pounding away, and we can see some progress.

Some reports point a prolonged soft market lasting for several quarters.

The anticipated recovery seems to be a moving target at best.

As you heard us state earlier, we're stick with our short-term strategy regarding management of land, house and spec inventory without taking our eye off of our longer term goals.

Now let me turn the call back over to Calvin.

Thank you Steve.

I want to thank everyone for your time and attention on the call this morning.

We are now prepared to answer your questions.

So that everyone gets a chance, participants will be limited to one question and a follow-up after which they will have to get back in to the queue.

At this time, we'll open up the call for questions.

Gina?

[OPERATOR INSTRUCTIONS]

And your first question is from the line of Michael Rehaut of J.P.

Morgan.

You may proceed.

Hi, good morning.

Morning Mike.

Morning Mike.

I was wondering if you could give a little more detail to your comments earlier in the call regarding cancellation rates worsening in March and April.

You know, you said they were 24% for the full quarter, which is obviously a nice improvement on a quarter over all basis.

I mean, did can rates go up to 30 or 40%?

How much worse did they get?

And if you could also comment on order trends during the quarter, particularly March, given the vastly easier comp you had in March.

Yes, Mike, this is Roger.

I'll take the first part and Steve is talk a little bit about the order trends throughout the quarter.

On the cancellation rate we did see that begin to spike up to an average of roughly 30% as we come in through the month of March and in to April.

So the subprime issue started at the end of February.

The foreclosure discussion out there, the tightening in the overall lending standards that started to take place out there, all started to put pressure on consumer confidence and we began to see cancellation rates as well as some of the order rates start to come down.

They were both working in the negative direction quite frankly that made the overall percentage on the cancellation rate increase.

Yes, Mike, and as it pertains to the order rates, you know, normally we see some increase in both the gross numbers as the spring selling season started, and when we worked our way into March with all of the bad news around the subprime market, really keeping some folks out, we didn't see that--you know, sequential trend plus we had nice grand openings in January and February that I mentioned out in Arizona that drove those numbers up relative to what we saw in March.

But the net order rates in March on a year-over-year basis-- I think Vinny has probably got the exact numbers, but even though the comp was easier as you indicated from the prior year, I think that was probably in line with our overall decrease of about 20%.

Okay.

And, you know, second question, you know, regarding subprime, you know, were there any regions-- and I guess in a way this relates to, you know, the higher can rate in March and April-- but were there any regions that you felt the subprime issue or, you know, foreclosure issue or what not-- any particular regions that hurt you more than others?

Yes, Mike, this is Roger.

I think, again if you looked at our numbers, and we provided that on the web graphically for you was roughly about 5% of what we were working on now, and even before that for the quarter it was about 3%.

Quite frankly it spread in the markets, and naturally the markets you would assume would be the ones where we saw the most price appreciation, kind of on the west coast and down in the Florida market as well.

For us overall we didn't see a significant impact other than, you know, the demand in the psyche of the consumer and the confidence levels.

MIke, this is Richard.

Just to add to that just to be clear.

We believe in our business especially given the credit quality on our back log -- it's a much bigger impact on consumer confidence on housing overall, kind of the wait and see continues a little bit for consumers as a result of this, and I think that probably is indicative of the trend change from January, February, you know, into March, April, not so much the existing backlog falling out but more a question of people saying, you know, is this a good time for housing?

Your next question is from the line of Kenneth Zener of Merrill Lynch.

You may proceed.

Good morning.

Morning, Ken.

Morning.

Just wondering, follow up on the earlier question about kind of subprime, did you guys see a split between subprime affecting your Del Webb model which is targeting a different audience than, you know, your traditional product?

Ken, this is Roger.

We really didn't slice it down that far.

As you can imagine there's 1 million definitions of what this is.

So we try to focus on the overall FICO scores and we did try to focus on the products themselves to segregate that, but-- again, I think, you know, the bigger question on the demand side is, you know, how it affects the broader market overall.

So I don't have a specific answer for you by category.

Okay.

That's fair.

How about then just general comment about the Del Webb versus the more traditional model.

In the past you said Del Webb is performing stronger.

Is that still the case?

Ken, this is Richard.

It is.

Del Webb continues to perform stronger, some of the cancellation data and what have you might not be quite the spread we saw in prior comments, but still a substantial gap there.

More the Del Webb impact we have seen is people can't sell their existing homes to allow them to move in.

But generally speaking Del Webb continues to perform better than our existing traditional business.

Just a final question.

Can you give broad thought about -- I know there's discounting and price pressures, and all of these issues, but why your business model is so weak, you know, on an ex-charge basis relative to kind of the mid-single-digits that we're seeing from some other home builders and the rapid deterioration results from fourth quarter?

Obviously, it was a surprise for you, but, can you give us some real thoughts about why the model you have is performing below others?

Thank you very much.

Yes, Ken, this is Richard.

A couple of things we weren't horribly disappointed with our order rates for the quarter, so that would indicate some strength overall.

Obviously we're very disappointed in the operating results for the first quarter largely driven by the volume we have, and clearly, you know, the organizational structure that we have, you know, did not anticipate volume levels being this low, you know, consecutive quarters in a row.

So I think it's a matter of us taking a strong look at that as I indicated in my prepared comments, which we are going to do, but, you know, timing certainly plays a role here and not everybody results flow through at exactly the same time frame.

So I believe our business model is a very strong one.

I certainly believe our investment in Del Webb is going to pay off.

We do have the impact of a lot of large profitable Del Webb communities that sold out over the last 12 to 18 months and we're ramping up a lot of new ones that haven't hit their stride completely yet.

They do from a sign-up standpoint, but haven't started closing, so.

Timing is going to play a difference here.

Thank you very much.

Thank you.

Your next question is from the line of Ivy Zelman of Credit Suisse.

You may proceed.

Good morning, guys.

Good morning, Ivy.

If I can focus in on the impairments, the $131 million understanding the breakdown in the $80 million that you took that was unowned versus the walk-aways, maybe focusing in on the $80 million.

Realizing that you're obviously in many markets, can you drill down for us on where that $80 million was?

And when you look at markets today and understanding the ongoing challenges that you have and continued price pressures, can you walk us through sort of the methodology on how you're looking at impairments?

And for example, in MetroWest in DC, you know, is that a community or a project that would have been impaired or maybe the purchases you made in Tampa.

I think you bought a few thousand acres there.

Can you tell us what the story is there on potential impairments and how you look at the individual projects that are long in nature, versus the short-term projects?

Thanks.

Ivy it's Vinny maybe I can help you with a few statistics as to where first to provide a little more insight into the numbers side of it.

When you referred to the $80 million it's broken down in to two pieces.

First is the impairment, the land and community valuation adjustments that get reflected in our home cost of sales, and that was $62.4 million, just under 60% of that was really in our Central reporting segment.

And the Central reporting segment, you know, certainly includes Colorado, Kansas, and Texas.

When you look at the remaining $18.3 million and they are really attributable to the net realizable value on land held for sale, they flow through the P&L in the land cost of sales area, and all of the 18 was also in the Central reporting segment.

Thanks Vinny.

Ivy is this Roger, just the methodology that we're looking at here is when we put in place, you know, last year almost a year ago now, and we look at a combination of the pace, the price, and the margin performance, and relative to, you know, expectation and how we are meeting those expectations in those particular markets, so we look at a combination of all of those things as what we expected as we underwrote those projects.

So we're constantly looking at, you know, our community status reports to understand exactly where we are, and then we match that up against what is going on in the local market from a competitive environment, and for instance, if we expected an absorption pace of 10 and we got 2, we certainly need to understand if our pricing is competitive in that market, our overall demand in that market is going someplace else or nonexistent in itself.

As we continue to look at that on a quarter by quarter basis, that give us, you know, from a perspective of, you know, running financials to look at potentially what the current environment would do if it maintained itself going forward for the life of that project, and of course you get in to mathematics and the financial analysis of looking at do you impair or do you not impair based on those assumptions.

Again, we continue to run that, but it is also very much specific to the local market and the competitive environment in that market.

Okay.

I'm sorry.

I want to follow up on that and I appreciate the answer, Roger.

In terms of the assumptions, can you give us what the profit contribution would be after impairments?

Is it 5%, 10%?

And can you tell us within the quarter did you benefit at all from any previous impairments that would impact gross margin?

And lastly with respect to the discount rates and assumptions that you use on these communities of all of the impairments, what percent were on communities already open for sales versus what is held for future development?

Okay.

There's a mouthful, right.

Sorry.

That's okay.

Start with the discount rates, you know, in-- each project is different and, you know, our methodology is to look at-- you know, certainly the longer projects that we have that we would look at and impair would wind up with a higher discount rate, and the life that is shorter would wind up with a lower discount rate.

Our discount rates for the quarter basically range between 8% and 19%, quite frankly.

And, you know, on an average basis it roughly came out to be about 10% for those impaired during the quarter.

Now, again, when you look at margins, they are all different by, you know, the local areas so they range anywhere from-- what we would accept a 5% margin on a short product-- excuse me on a short project that may last 6 to 12 months for instance, or a higher margin of 10% to 12% to 15% for a longer-life project so all of those are different as you look at the size of the projects that get impaired.

I can't give you what the estimates would be going forward, quite frankly, because, you know, that's going to be depending on what overall contribution or units come out of those particular projects that were impaired.

But for instance in the current quarter, we basically were benefited because of the write-offs that we had taken over the last four quarters, approximately about $10.9 million.

So, again, that's about $10.9 million for all of the projects that are impaired so far right through the first quarter of 2007.

And the projects, the percent?

Did you say that?

I don't have that right here, Ivy.

Is it the majority on what is open for sale and therefore it's more likely that that's the biggest piece?

You know, actually, if you looked at what we impaired in the dollar amounts, the NRV would have been something we held for sale, that was $18 million of the $80 million and the balance of them, you know, were projects that we would have open for sale.

I'm sorry, any comments on the specific communities I mentioned Tampa or in Washington Metro West.

Quite frankly, no, none in those areas.

Okay.

Thank you.

Your next question is from the line of Steve Kim of Citigroup.

And please, if you would limit your questions to one question.

Hi, guys.

Hi, Steve.

Two questions.

Is that going to be a problem?

No, one and a follow-up.

No problem.

First question relates to your commentary about the cash balance at the end of the year, which I thought was an interesting comment.

I was wondering if you could give us an idea-- if you have a goal-- a similar goal in mind that I think would be related-- in terms of your land inventory in dollars at the end of the year?

Yes, Steve, again, Roger.

Didn't want to specifically get in to that because I have not given guidance, so I'm not prepared to do that today.

But yes we do have plans; we do have plans month to month quarter to quarter and throughout the balance of this year, and as you well know it's going to be dependent on what the demand side of this thing is.

The levers that we're pulling, basically, is quite frankly we're not underwriting any new deals.

We still have option takedowns that we continue to look at and current open projects that we're running.

Very few new communities would be coming on, and then our development dollars are the biggest spend.

For instance, If you look at this current quarter about 70% of the dollars we spent were on development dollars in to projects that we have got up and going.

As I mentioned, some of the bigger ones are the Del Webb projects.

So we have very specific goals, but the cloudy side of that is basically what is the relief?

And the relief is what you close, and that's also based on the order rate.

Although I have goals there are pieces here that we'll continue to pull levers on as we move throughout the year if we don't get to those goals that we set out for ourselves internally.

So would it be fair to say, though that you are looking at a land balance in terms of dollars that probably-- you know, isn't materially different from what you are currently carrying today, given, you know, the various pluses and minuses that you expect to, you know, experience over the course of the next several quarters?

And yet you still think you can achieve $1 billion in cash even with a-- sort of a comparable level of inventory to what we have today.

If you start the year, we wound up with $0.5 billion in cash and the bias is to run it down going forward throughout the year.

I would tell you the bias is to have less inventory at the end of the year than we started with.

So yes.

Steve, I would add, it depends on your definition of material.

Clearly we have lots of things underway to try to reduce inventory levels, but as Roger indicated we don't have great visibility in terms of how the market is going to perform, but our bias is to a downward trend that's for sure.

Okay.

My second question is simply when you go forward and try to project the impairment analysis or whether you need an impairment analysis or how much of an impairment to take, have you in your most recent quarter when you have done this-- have you incorporated the actions which you are sort of stating that you know you need to take with respect to either overhead or pricing?

Have you factors that in to your projections?

Or did you come to those conclusions after doing the impairment analyses?

Thanks.

Steven, Roger again.

You know it's a very difficult to project impairments, because as I mentioned over the last three quarters, you have to have passed an event to know that you have an impairment, and again, what I mean by that is that if pricing in a market continues to decline, you may have felt that you were impairing a project appropriately at the beginning of a quarter or roughly at the end of a quarter.

So at the end of 12/31/06 we felt we impaired a particular project appropriately based on the current environment that we experienced through that quarter.

Now as we get through the end of the first quarter and you can take that same project for instance, if pricing continued to decline in a particular market like that you may come back and have another look at it and say that you need to take another impairment, because pricing declined, and you wanted to make sure that you appropriately stated the balance sheet.

So-- to say that we can sit here and forecast is very difficult.

Certainly we know where the trouble markets are.

We certainly try to look, again, at what is going on in those markets, so we have a list.

There's no doubt about that so it's very difficult to get to a number, and that's the reason for not giving guidance, because we don't specifically know how those numbers are going to turn out once you get to the end of the quarter .

As far as forecasting, if we do take an impairment the current quarter, we would project that outgoing forward.

So I would note today if I knew what the volume was for the next three quarters at the end of the year, what contribution may come out based on a forecast for each of those quarters based on a new margin level because of an impairment, so we do bake all of those things in and have a view of that, but internally and not publicly at this point, again, because there's a lot of volatility in the market right now that will

Your next question is from the line of Greg Gieber of A.G.

Edwards.

You may proceed.

Morning, guys.

Let me just follow up on that last comment answer impairments can come because of both lower volume and lower margins.

When you look at the impairments you took in the quarter on communities, how much of that really reflected-- was low-- cuts in your sales-- expected sales volume and how much of it was pricing and margins?

Yes, Gregg, this is Roger.

Quite frankly there's a combination of all of those things in there again, you can look at pricing as one component or you can look at volume in another but they are not mutually exclusive.

You have to look at what is going on in the environment, quite frankly.

Because a poor price could mean poor volume so if you adjust price you could get volume.

So I think they are both indicative, and quite frankly not looking at them as to what is the driver, but it's the market condition in pricing, that I would tell you is the majority of the issues here, which is driving the volume itself, so if you are not competitive in a market, it's relatively-- maybe your position is poor, but again, the majority of this is what has gone in the pricing and affordability equation quite frankly.

Okay.

If I could follow-up on Del Webb.

Two questions on Del Webb were any impairments related to Del Webb communities?

And you say you're trying to cut your land inventories -- is Del Webb included in that or are you satisfied with where you are with Del Webb in terms of land?

Yes.

We did fake an impairment on a project in Colorado quite frankly, and that's a Del Webb project and our Anthem project up there, so we took an impairment on that; again, indicative of pricing environment there and the pace as well.

Everything is on the table as we look at what has gone on in the industry.

So, you know, quite frankly as we look at our cash spending and our investment across the country we certainly like our positions on Del Webb but, on the other hand, we need to manage a very solid balance sheet.

We are looking at anything and everything we do that is up for grabs here as we move through the environment, and again, trying to understand exactly, you know, where the markets are going that include those Del Webbs is something that at the forefront of our minds in those markets.

Gregg, you also asked if we are happy with our Webb positions?

As I think we mentioned over the last couple of quarters any impairments on Webb communities have been very minor relative to the total scope, and going forward in terms of Webb communities, we are very pleased with what we see.

We have several new openings coming on Webb communities we mentioned Mesquite as one project.

We have another one in Charleston, South Carolina and, we have others coming up.

We're pleased with our Webb openings and they continue to help us outperform the rest of our business.

Your next question is from the line of Carl Reichardt of Wachovia Securities you may proceed.

I think that's me.

Good morning, guys how are you.

Good morning, Carl.

Vinny do you have owned option split for the 220,000 you control.

Sure, Carl.

It's 70% owned - 154.2 thousand lots, and 30% option.

30%.

Okay.

Just under 66.

Following up on Ivy's question about the impairment reversals as I call them.

As we look at these going forward, Roger, I'm trying to figure out how to model them, and I know it's real difficult to do, but as we think about this, are we looking at more of a straight line roll through of impairment reversals as you deliver out the land that you own or is it going to be lumpier in terms of how it comes back to you.

You know, Carl, Roger.

Again, it's very difficult.

It depends on where that volume is going to come out in any given quarter.

So you have got seasonality in some of them.

You know, in some of the markets, where, you know, you would deliver those.

So I can't give you-- you know, an answer for that at this point, because, again, what is very difficult to project is, you know, where that closing volume is actually going to come in, based on the sales pace, and, you know, it could be lumpy or it could be straight line, it also depends on if this continues much longer.

But it's not a significant portion of the overall number, of course, unless the number comes down, and it's a little bigger portion of it.

But from that standpoint I can't give you a specific answer.

Your next question is from the line of Steve Fockens of Lehman Brothers.

You may proceed, sir.

Thanks.

First question in terms of SG&A, I think your guidance, Roger, implied that SG&A dollars are actually up-- flat or maybe up a little bit year-over-year.

The first question would be how much of that would be incentive related and also correct me if I'm wrong but I think realtor commissions are booked in COGS versus pure overhead and when do you think that should start improving?

Okay.

Yes.

Steve.

Roger.

First of all when you look at the numbers year to year, you know, what we have got going through here, I'm not going to give an accounting lesson, but there's some absorption that you end up having in some of the overhead costs.

And quite frankly what we have got is when you look at what we did in the prior quarter, you know, for instance, our overhead absorption, which was greater because the activity was much greater in those periods so naturally the consequence is you don't absorb enough of some of these costs in your inventory so you expense them in the current period.

That in itself gets to the bottom line of we're inefficient in absorbing those overheads, so we've got to go back and look at the cost structures tht we have as Richard mentioned.

So, you know, if you start looking at some of the numbers overall, the actual expenses are down, what is influencing it is what gets actually absorbed into inventory that runs through some of the margin on the cost versus expensing it immediately.

We have got somewhat an efficient model at this point given the level of closings and building activity that are going on in the current period versus the prior period in comparison.

Your next question is from the line of Alex Barron of JMP Securities, please proceed.

Thanks, guys.

I wanted to clarify what is the difference between the $132 million you mentioned in the press release of impairments versus the $80 million you were telling Ivy about.

This is Roger, Alex.

Ivy picked two of the items.

She picked the impairments and the net realizable value adjustments, which we have for our land held for sale one was $62 million and the other was $18 million, and the remaining $51 million of the 132 is our pre-acquisition and deposit write-offs which are sitting in other expense.

Got it.

Now as it pertains to-- to the impairments, can you tell me how many communities you guys impaired this quarter as well as where the other 40% was kind of spread around?

Yes.

We impaired 35 communities during the first quarter and we reviewed roughly about 105 communities in the quarter, and, you know, again, I think we outlined pretty much where the dollar amounts were with Vinny's, you know, percentages, but, you know, again concentration roughly was in, you know, Florida, Midwest and in the Central markets.

Got it.

Your next question is from the line of Jim Wilson of JMP Securities; you may proceed.

Thanks.

We timed that well to be back to back.

Anyway my question-- or a couple could you-- I guess it falls via that option writedown -- could you give comment not just for the quarter, but so far where you focused on walking away from options?

Basically trying to think where your geographical weighting of land and particularly option land that you had flexibility on was and where it is now, so, where you have dropped options and obviously therefore where you are holding on to them because you like your future opportunities.

Yes, Jim, this is Roger again.

You know-- we didn't concentrate specifically to walk away from, you know, specific geographical areas.

We looked at capital allocation.

Many of the markets were very satisfied in being in and don't want to walk away from them.

But given the current view of what the overall demand would be and what the cash generation could be, we need to look and balance what the cash spending would be.

So even though we had some of them out there that we liked our position quite frankly to continue to like the positions but not have the cash to put in wouldn't be prudent from a management standpoint.

As we look at the risk mitigation of managing the cash flows, you know, pretty much anything and everything was open to being looked at.

Certainly if you look across the country at where some of our concentration is it's where the population is, and we're looking to maintain those markets.

But we are doing things for the short-term, for the long-term, and we're looking at the long-term through the short-term as well.

So it was spread out throughout the country in just about all of our markets.

Just my follow-up question, on Del Webb can you give any color of-- what percentage-- however you might want to characterize it, percentage of, you know, current invested dollars are in Del Webb communities or even incremental, you know, investments made in Del Webb versus the conventional product over, say, the last couple of years?

I think if you look at our overall business roughly it floats in any particular time as you do a build-up.

40 to 45% of our business is coming from, you know, the Del Webb business overall.

You know, we're probably in that range.

Again, it floats around every quarter based on the investment level that goes in.

As we have run down some of our-- you know, I would call them flagship Del Webb communities that's we had acquired back in 2001, and we spread out more to replace those, you know, the dollar investment is coming on greater because the other ones have run off.

So, you know, again that's going to float around a little bit.

But 40 to 45% I would tell you is probably a good number for that.

But conceivably incremental investment dollars, I know you're not pretty much to work, it could be further-- heavily weighted towards Del Webb it sounds like?

No.

I would tell you what I mentioned earlier in my comments that roughly 40% of our spend in the current quarter was roughly for Del Webb active adult communities.

So that's still plays right in there with that overall balance of investment so that would say that-- in development dollars 60% went in to the traditional side of the business, and again, that's pretty much the balance that we have seen, you know, plus or minus 5% in any given quarter.

Your next question is from the line of Dan Oppenheim with Banc of America.

You may proceed.

Thanks very much.

Wondering about a comment made by Steve Petruska during his prepared marks talking about the slowdown, or downturn, may be prolonged or lasting several more quarters.

Given that we're basically two years past the peak here, I was wondering how you are thinking about this and what the base case is?

And if you are thinking sort of the worst case that goes on for several more quarters, does that mean you don't cut your SG&A so much more?

How are you looking at this?

How are you planning for SG&A?

How are you planning for community growth over the next several quarters and several years?

Dan, this is Steve.

Basically I was saying what we're hearing out there but how we're looking at SG&A is not waiting for the next several quarters.

We're on this right now.

As Roger indicated, our production volume is down significantly.

We're not making new land investments.

Therefore, community count won't be growing, and we need to align the field business structure with the volume of business that we see over, you know, the coming quarters.

And we're aggressively tackling that right now.

Dan, this is Richard, I would just add to that I think Steve-- one of his comments specifically on potential expansion of downturn was in Florida, as we commented on the region specific, and that's just because the results there continue to be very challenged with high inventory levels.

Let me echo what he said.

We're not waiting.

It's pretty clear that this downturn is going to persist for a while.

You know, we're not making any projections on when its going to turn around, but we're going to, you know, ensure that our SG&A levels are addressed aggressively given this level of business we see today.

Thanks.

Second question is relating to the land inventory that you have.

You commented that you evaluated 105 communities during the quarter, and given that you are losing money before write downs should we assume there are many communities beyond the 105 that are right on the cusp at this point?

Yes, Dan, this is Roger.

We always look at that.

Any time you draw a line there are some above and some below.

So we constantly look at the ones that are below that line and stress those.

I would always make a comment that the loss in the core business, you know, in this quarter again is relative to the volume.

And our seasonality, if you look at it, 65% or greater of our business actually closes in the back end of the year.

So naturally, I think if you look at an organization that is, you know, geared for a peak, so to speak, you know, our expenses are going to be heavy in the fist half of the year, where we don't generate the revenue or the closings, and we do generate them in the back end.

I think if you look at the current quarter and the losses, I don't-- I wouldn't anticipate those, you know, every single quarter given what we expect in closings in a typical year where 65% or greater of the closings wind up in the back half of the year and even more in the fourth quarter, quite frankly.

Your next question is from the line of Susan Berliner of Bear Stearns.

You may proceed.

Good morning, thank you.

I was wondering if you could go over what the free cash flow was this quarter?

And what you expect for the full year?

And if you can give us any comments as to any discussions you having with the banks or the rating agencies?

Thank you.

First of all on the cash I think I outlined what we actually ended up spending.

I think if you look at the balance sheet, the inventory did not move very much, that's because we invested pretty much-- a little bit more of what we ended up absorbing in amortization, or if you will, charging the cost of sales for land that, you know, we paid for before in prior years or quarters.

So, you know, that was basically put back in and a little bit more as our inventory only moved by about $50 million from the quarter of-- fourth quarter to first quarter.

I mentioned again about 70% of that was in development dollars.

The other was in option takedowns.

And again, cash generation for the quarter, we did absorb cash as you saw the cash go from $550 million at the year end or the fourth quarter ending to the end of the first quarter.

So we did invest in the business, and, you know, I just give you the split out for that.

As far as the full year I gave guidance on that as well, to tell you that we would be in excess of $1 billion in cash by the end of the year, which would indicate that quite frankly, you know, inventories will be coming down by the end of the year.

As far as conversations with the bank, quite frankly, yes, that's not something we discuss publicly.

Your next question is from the line of Stewart of Vanguard.

You may proceed.

Good morning.

I have two questions, but I just have a clarification, if I can first, because I haven't heard-- the term sign-ups is that equivalent to orders?

Yes.

Yes, it is.

Thank you.

Two questions I have is first you guided to second quarter average selling price of around $329,000; calculations I have done-- maybe I'm wrong on this-- seems as though your average sale price on your total backlog are 352,000.

If that's around the correct amount can you talk about why second quarter is going to be so low.

Yes, Stewart this is Roger.

You know, naturally what comes in to your backlog does not come out in the next quarter, and there's a mix in there, so typically, if you have a smaller home, you know, that may take 90 days, you know, in construction cycle.

You may be able to deliver that.

If you have a larger home they may take 150 day in construction cycle to deliver.

As you look at that there's a correlation between the size of the home and the price of the home.

So as you get through a quarter you have a mix effect that comes out of your backlog into your closings so it never really is one for one.

You look around the country and the timing of all of that is different, and the length of time that people sit in backlog is different.

Community by community.

So really that's the driver behind it, and what we try to do is focus in on the closings.

Not necessarily what is in backlog, so we basically try to anticipate when those homes would close based on the building cycle to be delivered in a particular quarter.

That's really the main driver of the difference.

Has the been the historical pattern, the first half has been lower price, second half higher prices.

Yes.

Typically again you have volume and as I mentioned 35% of our business-- the first half of the year is 65% in the last half-- which means 65% of sign-ups are in the beginning of the year, and 35% are in the back half of the year -- and again that is very historical for us.

And our last question will come from the line of Michael Rehaut of JP Morgan.

You may proceed.

Hi, thanks.

Just wanted to follow up on question before regarding, you know, the focus of impairments, if I could, with-- you know, you mentioned that you didn't take any impairments in Tampa or MetroWest.

You know, and that you reviewed about 100 communities and-- you know, your community count is-- I believe still, you know, over 600.

My question was, you know, are you-- when you do-- when you have been reviewing your, you know, land position for potential impairments, I assume you do that across the board every quarter, and-- so I'm surprised that, you know, given the, you know, Florida being probably one of the worst markets right now, that no impairments were taken in that region.

So I was wondering if you explain kind of the review process for Florida and why they there haven't been any impairments yet?

Yes, basically, again, Mike, this is Roger, what we end up looking at, you know, is a community status report where we are with those.

What our expectation is for sign-ups and pricing and margin, and again, if, you know, they don't rise to the level of, you know, needing an impairment at that point, doesn't mean that, you know, the next quarter or the quarter after that conditions can't change, but in current quarter conditions didn't indicate that we take impairments on specific projects.

But, you know, the diligence behind that is to look at anything and everything.

So we take our 690 communities, and we lay them out, they basically wind up in a hierarchical ranking on looking at which ones are not meeting expectations and whether it be our selling price, our margins, our pacing of those projects relative to our expectation, and they give rise to the indication that we look at making adjustments.

So just to understand, then, you know, based on current conditions in the Florida market, despite them being so difficult, at this point, still with all of that being considered the communities that you have in Florida don't warrant any write-offs?

Michael just as matter of fact, included in that 35 communities, there were three in Florida, and within Florida two in Tampa, but they were smaller dollar amounts and didn't think that it was material enough to mention.

Okay.

And is part of this due to the, you know, cost basis of the land positions in Florida and specifically Tampa?

And could you review maybe when you made the bulk of those investments?

Yes, Mike.

Again costs are indicative of pricing, so if we underwrote a project, again, at a specific price, and the cost was, you know, assumed as well, and pricing comes down, your cost could stay the same and it would be a cost issue.

So your costs would be too high and you would have an impairment.

Conversely you can look at that and say it's price.

You have to look at it in the context of really what the margins are doing which is a combination of both.

There are projects from time to time that we have talked about that are estimates of the cost for land development for instance didn't meet our expectation and we had to take an adjustment because of our cost.

All of those things play in here.

I don't have the specifics for every single one of our communities.

But we do look at all of those.

And for instance I would tell you probably the majority of these are driven today by the market pricing and the pace not necessarily the cost.

That concludes the Q&A session.

I would now like to turn the call back over to Calvin Boyd for any closing remarks.

Thank you Gina.

Thanks everyone for your participation on the call today.

If you have any follow-up questions, please feel free to give me a call.

Have a great day.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.