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Beazer Homes USA, Inc. (BZH)

Q1 2008 Earnings Call· Tue, Jun 3, 2008

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Transcript

Operator

Operator

Good morning and welcome to the Beazer Homes first and second quarter fiscal 2008 earnings conference call. Today's call is being recorded and will be hosted by Ian McCarthy, the company's Chief Executive Officer. Before he begins Leslie Kratcoski, Vice President of Investor Relations will give instructions on accessing the Company's slide presentation over the Internet and make comments regarding forward-looking information.

Leslie H. Kratcoski

Management

Good morning and welcome to Beazer Homes conference call. On our results for the quarters ended December 31, 2007 and March 31, 2008. During this call we will Webcast a synchronized slide presentation. To access the slide presentation, go to the Investor Relations home page of Beazer.com and click on the Webcast link in the center of the screen. You should be aware that during this call we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Such risks, uncertainties and other factors are described in the Company's SEC filings including its Annual Report on 10K for the year ended September 30, 2007. Any forward-looking statement speaks only on the date on which the statement is made and, accept as required by law, we do not undertake any obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. New factors emerge from time-to-time and it is not possible for management to predict all such factors. Ian McCarthy, our President & Chief Executive Officer, and Allan Merrill, our Executive Vice President & Chief Financial Officer, will give a brief presentation after which they will address questions you may have for the duration of this one-hour conference call. In the interest of time in allowing everyone a chance to ask questions, we kindly request that you limit yourself to one question and then one follow up. I'll now turn the call over to Ian.

Ian J. McCarthy

Management

Thank you all for joining us on the call today. Yesterday we filed our quarterly reports on Forms 10Q for the quarters ended December 31, 2007 and March 31, 2008 and earlier this week we filed our fiscal 2007 periodic filings including the 10K. With the filing of these reports we have completed our restatement of prior years' financial results and the filing of all previously past due periodic reports with the SEC. This is an important step for Beazer Homes and we look forward to resuming regular quarterly communication of our financial and operating results. We appreciate the patience and support shown to us by our investors, customers and business partners while we worked through the restatements. We also appreciate the hard work and dedication of all Beazer ambassadors during this period, both those directly involved in accomplishing this important task and those who have remained focused on our business in serving our customers during this difficult time in the housing industry. As previously disclosed the restatement of our financials was an outcome of the now complete independent investigation by our Audit Committee. During the course of this investigation the Audit Committee determined that our mortgage origination practices related to certain loans in prior periods violated certain applicable federal and/or state origination requirements. The Audit Committee also discovered accounting and financial reporting errors and irregularities which led to the restatement. We are very disappointed that these issues occurred and take these findings and any instances of non-compliance with laws, regulations and company policies very seriously. The entire management team is committed to achieving and maintaining a strong control environment and an overall tone within our company that empowers all employees to act with the highest standards of ethical conduct. In addition, we remain committed to the process of developing…

Allan P. Merrill

Management

Given their magnitude I'd first like to spend a few moments on the inventory and goodwill impairment charges incurred during the first half of 2008. As with our 10K filed earlier this week you will find expanded disclosures in our 10Qs as it relates to impairment charges split between properties held for development and land held for sale as well as by geographic segment. Inventory impairments totaled $142 million in the December quarter. Of that amount $108 million related to properties held for development and $33 million related to land held for sale. Impairments recorded on our held for development inventory resulted from the significant decline in the market that negatively impacted home prices and necessitated increased sales incentives in our efforts to maintain absorption paces. Most impairments were incurred in the West region where a significant portion of our inventory is located. December quarter impairments represented 2,886 lots in 62 communities. In addition, we incurred lot option abandonment charges totaling $27 million in the December quarter representing lots in 28 communities, the vast majority of which were in the Southeast region. Joint venture impairments totaled $12.8 million in the December quarter. Included in this is the write-off of our $7 million investment in Homebuilders Financial Network or HFN, a joint venture investment established to provide mortgage services to the former mortgage operations. Inventory impairments totaled $175 million in the March quarter. Of that amount $119 million related to properties held for development and $56 million related to land held for sale. Impairments reported on our held for development inventory resulted from continuing deterioration in the market. Most impairments were incurred in the West and Mid-Atlantic regions. March quarter impairments represented 3,534 lots in 85 communities. In addition, we incurred lot option abandonment charges totaling $13 million in the March…

Ian J. McCarthy

Management

As I said at the beginning of this call we are pleased to now be current in our financial reporting with the filings we have made this week and look forward to returning to our customary pattern of releasing quarterly financial results. Allan and I would now be glad to answer your questions and I would ask the Operator to give instructions for registering your questions.

Operator

Operator

(Operator Instructions) Your first question comes from David Goldberg – UBS.

David Goldberg - UBS

Analyst

The first question is actually on the expected net proceeds from the pending asset sales that Allan mentioned. I was wondering if you can give us an idea on what the thought process is and how you kind of determined which assets would go into that. Are they just kind of non-core assets? Are they in non-core markets? And maybe how you decided upon that number?

Allan P. Merrill

Management

There are two kinds of categories within that. The first are from our exit markets and we have many of the assets in the markets that we had previously decided to exit under contract but there are also a couple of larger assets, in particularly what was going to be a condominium project in the Mid-Atlantic that we have sold to an apartment owner who is going to lease it out rather than to sell it as condos. That was quite a large asset so the combination of the exit markets and a couple of what I would call lumpy assets really drove the thought process.

David Goldberg - UBS

Analyst

Do you think you're going to be kind of moving away from that condo base business as you look forward? Is that kind of going away?

Allan P. Merrill

Management

Well, I think when we get into significant high-rise type construction, and that's never been a big part of the business and I don't expect in the current environment that it will be a significant part of the business, we have a couple of multi-family projects underway, but this was a particularly large and kind of middle to upper middle end project that had an estimated sell-out of over several years and ultimately the ability to recoup a significant amount of cash for redeployment or for just strengthening the balance sheet made sense to us.

David Goldberg - UBS

Analyst

And then if I could just get a follow up, I'm wondering if you guys are feeling pressure from foreclosures in terms of home prices and how intense that pressure is now from a competitive standpoint and where you think that's going to be in the future?

Ian J. McCarthy

Management

David, I would say obviously we have to be aware of the fact there are foreclosures out there yet that you can see it in our average price coming down, we're having to compete with those markets, our average price in the second quarter was down to $255, in backlog it's about $257, which has come down depreciably over the last year and I think that's probably driven by the markets being driven down a lot by the foreclosures. So we certainly are impacted by that. We would try to differentiate our homes and what we're doing in terms of our marketing is differentiating, adding value where we can, not just cutting costs. We want to present our homes as a better asset than necessarily a foreclosed asset so it's certainly something we have to be aware of and we've got to move this inventory through the pipeline as an industry before we can see any kind of stabilization in price and any potential raising of prices.

Operator

Operator

Your next question comes from Michael Rehaut - JPMorgan Chase. Michael Rehaut – JPMorgan Chase: First question just on orders and average order price trends in the second quarter relevant to the first quarter, I was wondering if you could give us a feel for if you felt certain markets slowed materially during the quarter? And you know what was going on with the average reorder price recalculated at being up sequentially pretty nicely and just if that had anything to do with the greater decline or if that greater order decline was more just a function of exiting those couple of projects and the tougher comp?

Ian J. McCarthy

Management

I would say in general most markets are pretty tough so we haven't got markets that we're saying have got really any real improvement. I would say that a couple of markets that stand out against a bad picture which would be Texas still holding up reasonably well even thought down somewhat compared to last year less than the decline we've seen across the board. I'd say Indianapolis is a strong position for us and again only slightly down over the last year. Another one which is somewhat out of character is Sacramento which I think we've seen through pricing initiatives there we've seen some stabilization there. So I think those are the markets that in a new order sense are somewhat stabilizing. In terms of average sales price, as I just said that our average sales price across the country in backlog today is about $257, very comparable to where we closed in the March quarter, so that might show some stability sequentially. Obviously it's considerably down compared to last year. Year-over-year our average price in the March quarter was down about 9%. So we've certainly got to take that into account and I think we're still seeing pricing pressure out there and I think for the foreseeable future we're still going to see it. Now you also have to take into account the exit markets which are somewhat impacting us because you know we're coming out of five markets and we're not getting full price for those homes. Totally understandable, we factored that in to the decision to come out of those markets so even thought that's not a very large percentage, you've got to factor that in because we're taking some very substantial discounts to clean the inventory out of those markets and get the cash back in. Michael Rehaut – JPMorgan Chase: I guess the next question is just on the geographic focus, as it continues to shift - and obviously also as the market continues to contract significantly, where do you see yourselves two or three years ago? Do you want to just concentrate on like five to 10 markets or do you want to try and keep as broad of a national scope even with the exit of certain markets you're still in a lot across different regions? Any particular geographies that you want to focus on more than others?

Ian J. McCarthy

Management

You've obviously seen us announce the withdrawal of the markets in the Midwest and in particular in Charlotte for specific reasons. The fact now is that we have to continually look at this. This is something that is an ongoing process as the market declines, as we have to take impairments, as we reduce our equity base, we've got to be very cognizant of the resources that we have. So what we're doing is continually looking at the strategic plan that we've put in the place over the last couple of years and not only saying which markets do we want to be in but what do we want to be in those markets, what's the right position for us to be. And as you know we have a range of product whether it's from economy value style or even active adults in limited markets so I think in each of the geographic markets that we're in, what we're currently doing is really establishing exactly what we're going to deliver in those markets, partly based on the land position we have today because we're not effectively not buying new land today but also based on the supply and demand equation in each of those markets. So it's something that's fluid. We're going to be moving through the land that we have and I think as we do get to the point where we can buy new land that is I think when we really have to make the decision, do we buy that and what land do we buy in each of the markets we're in. So it's a fluid situation, it's evolving, and again we have to be aware of what's happening in the market and our position within that because at the moment it is very tough.

Michael Rehaut - JPMorgan

Analyst

One last question if I could, just on the accounting of some of the restatements. I was wondering if you could just kind of review the issue with the model home accounting and how you had accounted for it before and how you do it today, and also how that compares to the rest of the industry?

Allan P. Merrill

Management

The last part of your question I couldn't possibly answer, Michael, in terms of what others do. But I'll tell you in our specific situation the issue was that we had not properly documented all of the elements of the sale leaseback transaction. And we determined, actually the Audit Committee determined in their investigation, that there was a contingent and continuing interest in the resale of the model homes that was conditioned upon lots of things happening but there was the possibility that was never realized that the company would have a sharing in profits from the sale of models once the counterparty to the transaction sold the homes at the end of the lease period. Had that been properly and fully documented it would not have qualified under FAS 98 for sale treatment and it would have been treated as a financing transaction. Now the fact is in the restatement we treat it as a financing transaction so you see a liability on the books. That liability doesn't represent actual new debt, it's essentially like deferred revenue. We will be, as we terminate each of the individual leases, we will be able to bring that back into revenue and into income in exactly the same dollar amount that we had historically recognized. So through in the notes we showed the difference through fiscal year end 2006 about a $21 million difference in income, that entire $21 million will come back into income as we terminate the leases related to the sale leaseback. I mean it turns out to be a very technical issue but this notion of continuing interest in any form has the capacity to spoil the sale treatment and I think when all of the details of the transaction were well understood we decided that it had not been correctly accounted for.

Operator

Operator

Your next question comes from Dennis McGill - Zelman & Associates. Dennis McGill - Zelman & Associates: My first question just has to do with the capital structure that sits today. You guys are in pretty good shape from a liquidity standpoint and obviously hopeful to get current again. When you think about the next couple of years and you’re shrinking your geographic footprint and downsizing the size of the Company, what's the longer term plan to get the asset level, particularly the inventory level, back in line with appropriate levels over the next couple of years?

Allan P. Merrill

Management

I would say that over the last nine months or so we have really been focused on a couple of things: one, obviously getting the financials restated; and tow through, as Ian talked about, our strategic review of markets what I would kind of call in simple terms the left side of the balance sheet, what level of investment and which markets we want to have. I would tell you that now with our filing completed we are absolutely starting to look at the right side of the balance sheet and how that ought to be positioned in the near term and longer term. We haven't made any particular determinations about that to this point but I would certainly say we're mindful of what's happening in the marketplace, we're mindful of the continuing profitability pressures that we face, we're mindful of continuing risks in further impairments, so it's something that we're very focused on and I suspect that over time we will take some actions. But at this point we don’t' have any current plans. Dennis McGill - Zelman & Associates: And I guess within that one of the options you would consider would be raising additional equity?

Allan P. Merrill

Management

I think we have to look at the debt to cap over time for sure. I mean you can see companies operate in bands of 30%, 40% of debt to cap up to 50%, 60%, in the 60s but I think depending on where you are within that, what the term structure of your debt is, whether or not you're in an investment or harvesting mode, you have to be careful not to get caught at the high end of the leverage ratios with near term maturities when you should be investing. And as you said in the preface to your question, we're in a very good position from a liquidity standpoint, we're in a very good position from a term structure maturity standpoint, so we probably have somewhat less concern about the leverage ratio currently but it's a mix of all of those items that you have to look at together. Dennis McGill - Zelman & Associates: If we look on the option side of the business, it looks like there was a pick up on both the deposits as well as the takedown value. Were there new option contracts signed in the quarter?

Allan P. Merrill

Management

Interesting question. I suspect in the ordinary course we would have new options but I'm not sure what number you're looking at because that doesn't -

Leslie H. Kratcoski

Management

We only had $110 million of option deposits as of 3/31 Dennis. Dennis McGill - Zelman & Associates: What was the number again? I'm sorry.

Leslie H. Kratcoski

Management

$110 million. Dennis McGill - Zelman & Associates: And as of December it was $130 million?

Leslie H. Kratcoski

Management

Yes. Dennis McGill - Zelman & Associates: And then just on the last question would be related to the impairments, can you give us some sense Allan what's come back through the income statement through the gross margin line from prior impairments?

Allan P. Merrill

Management

I don't have a quick number for you there. It's very difficult right now to give that kind of detail, in part because we've got so many restatement adjustments. As I'm looking at the numbers that are in here in addition to impairment numbers, I'd be doing you a real disservice to even guess at that. I would say that in general we've been disappointed as I think most builders have been that the impairments don't flow back through very quickly when your prices are falling at the same time. You don't really see a pick up from that because it's offset by subsequent price declines so it has certainly offset a lot of what I think anybody would have hoped would have been a pick up in margin. But there have been a lot of moving parts for us and I think in coming quarters we'll have a better handle on that but right now having just restated the last nine plus years I really don't have a good estimate for you. Dennis McGill - Zelman & Associates: Okay. I'm sorry, one other one. On the balance sheet the income tax receivable you have is about $100 million more than what you received in May. Is that just the expectation, the balance of the expectation of what you'd be able to recoup next year?

Allan P. Merrill

Management

Well, I think as a technical matter our maximum ability to recoup next year can be looked at in the context of the cash taxes that we paid in 2006. We paid $170 million in cash taxes in 2006 and you've seen so far this year a pretty significant increase in that income tax receivable. And I would tell you that I don't know exactly how high it will get but I will tell you that that income tax receivable will get larger and it is possible that our recovery next year will be up to the full amount of the cash taxes that we paid looking back to two years.

Operator

Operator

Your next question comes from Susan Berliner - Bear Stearns.

Susan Berliner - Bear Stearns

Analyst

I apologize, I got on a little late. I just had two questions relating to the bank line, one was I'm assuming that you can't repurchase any bonds on the open market while the negotiation is ongoing? And the second question, if you can just remind us the limitations on secured debt. I think when you did the consent in October was $700 million less the bank lines. If you could just go over that, that would be great.

Allan P. Merrill

Management

Well, you answered your own question. You've got it exactly right. $700 million is the limitation until we're back to a 2 to 1 EBITDA interest coverage for four quarters; the bank line is $500 million so that gives us essentially a basket of $200 million for other secured debt. The first part of your question related to our ability to repurchase bonds, and you would be correct in terms of using capital for restricted payments whether that's repurchasing debt or buying back stock.

Susan Berliner - Bear Stearns

Analyst

And if I could just sneak another question, I guess with you selling assets here just in excess of $100 million coming in the door and then you will also be generating free cash flow in addition to that for this year?

Allan P. Merrill

Management

For the balance of this year, yes.

Susan Berliner - Bear Stearns

Analyst

And did you guys quantify that at all?

Allan P. Merrill

Management

We didn't.

Operator

Operator

Your next question comes from [Alex Bering - Agency Trading Group]. [Alex Bering - Agency Trading Group]: I wanted to ask you what total percentage of all your communities have been impaired at least once?

Allan P. Merrill

Management

I don't know that number off the top of my head. I'm sure that in Florida and California it's quite high but I don't have that number. I apologize. [Alex Bering - Agency Trading Group]: My other question was, I don't believe [inaudible] is your auditor, right?

Allan P. Merrill

Management

No, we have Deloitte. [Alex Bering - Agency Trading Group]: So I was wondering, there's kind of a difference in views about the deferred tax allowance and I'm just kind of wondering what types of discussions you guys are having with them about that issue potentially having to take an allowance?

Allan P. Merrill

Management

There's some language about this in our Qs. We have not at this point reserved against our deferred tax asset which is I think at March 31 about $300 million. There is a point, if losses continue and there is no light at the end of the tunnel in terms of the ability to use that, then I think when we and Deloitte would comes to the conclusion we needed to reserve against that deferred tax asset. That is still possible. It's happened with other builders and it may well happen for us. At this point, it hasn't happened and I think as we look at the next couple of quarters we'll be looking very closely both at the cumulative loss that has occurred over the trailing three and four years as well as the prospective possibility of profits. So I think it's very much an open question whether or not we will need to in subsequent quarters take a reserve against that deferred tax asset, but I have to say that I think it's an excellent question and it warrants attention, something we're paying a lot of attention to for sure. [Alex Bering - Agency Trading Group]: And in terms of just strategy, I guess I've seen some builders that seem to try to get rid of all their standing spec inventory and trying to go back to like a build-to-order model and other guys seem like they're just continuing to kind of spec build and just trying to find the price point I guess that even flow production strategy, so what are you guys kind of trying to do here?

Ian J. McCarthy

Management

Well, we'd like to build-to-order if we can but with cancellation rates reasonably higher this time that generates spec inventory so we're trying to use that as our spec inventory. As we said in the prepared statements, there are certain markets where people are not coming out to buy a new home until they've sold their existing home. So again, they want to move in fairly quickly so we do feel that we need to have some spec inventory. We're not generally putting a lot out there, we're using the cancellation rates that we have to drive some spec inventory and be able to deliver that to people who want to own quickly. So I would say we're more on the build-to-order side but inevitably there's going to be some spec out there.

Operator

Operator

Your next question comes from [Steven Kim - Alpine Wood]. [Steven Kim - Alpine Wood]: I wanted to ask you a question regarding your geographic dispersion of lots that are owned versus lots that are under option and I guess what I'm trying to get at is, is there a different sort of geographic spread between the two?

Ian J. McCarthy

Management

Well, it obviously depends by market and if you looked at West we would tend to have more of an owned position than we have options and I think if you look at the Mid-Atlantic we're fairly well balanced between the two, it's almost equally balanced between owned and options, and West is more than 2 to 1 owned to optioned. And then I think if you look at the Southeast, it's again reasonably well balanced. A market like Texas, it's fairly easy to buy land there so we don’t have to have long options so again we can buy that there. So currently, as we said in the prepared remarks where 63% compared to 36% owned to options at this time. And that's gone up because we've taken so many options out of the equation.

Allan P. Merrill

Management

One other point I would make, Steven, is that in the exit markets we were almost exclusively in an owned posture which is factored into the thinking about what the proceeds would be coming out of that, so that's been one of the things that has also kept the owned percentage up and that'll adjust here over the next quarter. [Steven Kim - Alpine Wood]: The second question I had relates to your backlog. Do you have a sense for where the margins currently reside in your backlog relative to what you reported in the March quarter?

Ian J. McCarthy

Management

It's across the board really, Steve. In any one market we've got better assets and not so good assets. What we've been trying to do is individual communities or even markets that we don't feel have got an upturn, have got real underlying profitability in them, we've been driving those for cash. And in other communities we feel have got underlying value we've been less inclined to reduce the margins there. So I would say it really depends on the asset value to the extent in some cases we have actually multiple communities that we think are just too good to burn through at this time at the sales price we see today. So you've got the whole spread and you might even have a whole spread within a market. You may have multiple assets of communities that are delivering certain margins and others that are delivering cash. So there's no uniformity at this time, it's very much community specific. [Steven Kim - Alpine Wood]: And then last question relating to how you compensate your divisional management, sort of operating management in the field. Have you made any adjustments to how you are approaching the issue of compensation for those individuals in any way, whether it be the metrics you used or in terms of any kind of guarantees or anything like that that you can talk about?

Ian J. McCarthy

Management

Obviously over many years we've used value created, an EVA model to drive the business and drive compensation. In this type of environment, that doesn't work. The compensation committee of the board is well aware of that and the last year had a discretionary plan in place and underneath that were some sub-metrics the comp committee looked at to define how a discretionary plan is paid. And again the same this year, we have that as well. I don't want to go into the various metrics but obviously you can understand it's whether we're looking at unit delivery, whether it's profitability, whether it's cash, I mean those are obviously fundamental operating metrics that we're going to look at to determine how we use the discretionary plan. I think it's something that we are overall looking at right now in terms of compensation and how we retain the managers that we want to retain within the company in these tough times. So it's something the comp committee has authorized a study at this time and that we're looking at for long-term compensation whether it's through cash payments or salary, cash payments in terms of bonus, and then potentially long term equity enhancements. So we're going to do a study of that right now, but it's a difficult time to come up with a solid fixed plan. We have to be fairly fluid in terms of market by market.

Operator

Operator

Our next question comes from Joel Locker – FTN Securities.

Joel Locker - FTN Securities

Analyst

Just wanted to know on just your SG&A is still around $74 million and obviously revenue isn't coming down a lot faster than SG&A. I just wanted to get your take on what you can do, lower overhead or anything else to bring that dollar number down?

Allan P. Merrill

Management

As we talked about in the fall we had a consolidation of 31 accounting centers down to six. We have reduced that down to five actually just since the beginning of this calendar year so we are very focused on that regional class divisional infrastructure. At the corporate side we acknowledged $14 million in the first half in investigation expenses, $17 million which were basically almost exclusively in the third and fourth quarter of last fiscal year, so a little over $30 million in investigation expenses on a trailing 12-month basis. I've said to the team they're a bit like the federal budget in the sense that those are like the interest payments that's the non-discretionary part of the cost structure. We believe that with the investigation over and despite our continuing cooperation in the external investigations that that dollar amount will be able to come down significantly over the coming year and probably represents the single biggest opportunity for cost reduction amongst the fixed elements of G&A.

Joel Locker - FTN Securities

Analyst

And on your gross margins also, it had been hovering around between 12% and 15% for around four quarters and then just dropped 520 bips sequentially from the December to March quarter. I just kind of wanted to know if there was any kind of one-time charges or if that was just price degradation?

Allan P. Merrill

Management

I think we broke out the impairments.

Joel Locker - FTN Securities

Analyst

That's excluding impairments. That went from 12.5% to 7.2% or something like that, 12.3% to 7.1%.

Allan P. Merrill

Management

You know that sounds to me like a bit of an anomaly because I don't think it's totally price degradation. It must be a mixed issue and it's a very small base of closings in that quarter so I think let's look at that over a couple of quarters. I think in one quarter off of a small base you're mostly seeing seasonality effecting deliveries and potentially lower price markets that are in the South as opposed to the Midwest or the North and there are a lot of things that that could be. I would caution against jumping to the connection that there is a dollar-for-dollar margin for dollar connection there.

Ian J. McCarthy

Management

Plus we have markets which have a finite life. When we are clearing out of that inventory there there's substantially reduced margins which are not going to trail into future quarters.

Joel Locker - FTN Securities

Analyst

So your margins and backlog and gross margins at last are higher than what they were reported in the second quarter, is that a fair assumption?

Allan P. Merrill

Management

It is.

Operator

Operator

Your last question comes from Timothy Jones – Wasserman & Associates. Timothy Jones - Wasserman & Associates: First of all, the $55 million you talked about available, is that basically your borrowing base?

Allan P. Merrill

Management

It is. We have an opt-in structure where we decide how many assets we want to put into the borrowing base. We put in enough to cover the LCs that we have issued; we've put in additional assets to get access to that $55 million. We are in the process of pushing additional assets in to increase that availability above the $55 million. But given the cash position, the cash tax refund, and the asset sales, the time spent to perfect the liens and all the work necessary to collateralize that asset, it just hasn't been a top priority to push that number up. But we do have intent and in fact are working on putting additional collateral in there so that availability expands over the coming quarter or two. Timothy Jones - Wasserman & Associates: So your new borrowings will be secured?

Allan P. Merrill

Management

The whole $500 million line is secured. Timothy Jones - Wasserman & Associates: You still didn't really talk about the deterioration in your orders between the first and second quarter, one was down like 30% and then 53%. Somebody asked you the question but I didn't quite understand your answer.

Ian J. McCarthy

Management

One of the issues there, Tim, is that it's difficult to sell week in, week out to the customer in an environment like this. So we've been quite promotional in terms of how we sell. We have two major promotions every year, one in the March quarter and one in the June quarter and I would say the March quarter promotion this year was not nearly as successful as it was last year. So the comp we had in the March 2007 promotion was substantially higher. We do have another promotion coming up in June. We need to do that to keep the sales moving, the new orders moving, but it is a very tough time at this time and we're certainly aware of the fact that orders are down. It's a reasonably tough comp in that March quarter because of the big promotion last year. Timothy Jones - Wasserman & Associates: Last one, just a housekeeping question. If you have to write down, let's say you continue to have losses and do have to write-down a portion or all of the $300 million deferred taxes, most builders especially the ones using Ernst & Young rather than Deloitte, the builders are adding back that charge to the tangible net worth covenant. Would you expect that to happen for you?

Allan P. Merrill

Management

Yes.

Ian J. McCarthy

Management

Operator, any more questions?

Operator

Operator

Mr. McCarthy, we have no further questions.

Ian J. McCarthy

Management

I'd like to take this opportunity to thank all of you for joining us today and to remind you a recording of this conference call with the slide presentation will be available this afternoon in the Investor Relations section of our web site Beazer.com. Thanks very much.