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Standard Pacific Corp. (SPF)

Q3 2008 Earnings Call

October 30, 2008 11:00 am ET

Executives

Lloyd McKibbin – Senior Vice President and Treasurer

Jeffrey V. Peterson - Chairman, President & Chief Executive Officer

Andrew H. Parnes - Chief Financial Officer & Executive Vice President, Finance

Analysts

Ivy Zelman - Zelman & Associates

Michael Rehaut - JP Morgan

Dave Goldberg - UBS

Susan Berliner - JP Morgan

Larry Taylor - Credit Suisse

James Wilson - JMP Securities

Alex Barron - Agency Trading Group

Joel Locker - FTN Securities

John Sykes - Nomura

Tom Koch – Turnaround Capital

Operator

Good day, ladies and gentlemen and welcome to the Standard Pacific Homes third quarter earnings conference call. One note, that today’s conference is being recorded. I would like to turn this call over to Mr. Lloyd McKibbin, SVP and Treasurer. Please go ahead.

Lloyd McKibbin

Thank you and good morning. Our formal presentation today will be followed by a question and answer period. Out of respect for your time, we will ask that each caller be limited to one question and one follow up. We will also limit the entire call time to one hour. Now I’m going to read a notice regarding forward looking statements.

This conference call and the accompanying slide presentation contain forward looking statements. Such forward looking statements may include but are not limited to statements about our outlook, markets, orders and backlog, a continuation of challenging market conditions, the ability to incur further debt and make restrictive payment, a sufficiency of funds in our unrestricted subsidiaries to cover joint venture capital needs , potential joint bench or re-margin obligations and unwinds, control of specular starts and homes, expense reduction initiatives including costs of sales, sales and marketing and G&A, cash flow generation going forward in the sufficiency of our cash position and balance sheet.

In general, any statements contained in these materials that are not statements of historical facts should be considered forward looking statements. We assume no obligation to update these or any other forward looking statements. We caution you that forward looking statements involve risks and uncertainties and there are a number of factors that could cause the actual results to differ materially from those that are contained in or implied by these statements.

These statures include but are not limited to local and general economic market conditions including consumer confidence, employment rate, interest rates, the availability of mortgage financing ,and the supply of homes for sale on the market. These and other risks are discussed in our press release of October 29, 2008. We refer you to this press release and our most recent annual report on form 10-K and quarterly report form 10-Q for further information.

Copies of these documents are provided on our website at www.standardpacifichomes.com or from the company upon request. We suggest that you click on these links after you have reviewed the slides and listened to the audio portion of our conference call today. Clicking on the links on the slideshow during the conference call may cause you to miss a portion of the slideshow or call. The recorded presentation will be available for replay an hour after this call ends and will continue to be available until November 30, 2008. The audio portion may also be replayed by dialing 888-203-1112 and entering pass code number 3541387.

Our presenters this morning are Jeff Peterson, Chairman, President and CEO, and Andy Parnes, Executive Vice President and CFO. I will now turn the call over to Jeff.

Jeffrey V. Peterson

Thank you, Lloyd and good morning to everyone. While we continue to endure what appears to be one of the worst economic and housing environments the country has faced in recent memory, we’re please to have closed the final phase of the Matlin-Paterson equity recapitalization through a $153 million rights offering.

The additional equity in cash liquidity has helped to fortify our balance sheet for these challenging times which are expected to persist for the foreseeable future. We ended the quarter with $712 million of cash on our balance sheet and we generated nearly $32 million of cash flow from operating activities for the quarter. Housing market conditions have deteriorated further during the quarter as the growing level of foreclosure inventory combined with the tumultuous global financial markets, worsening economic conditions and a record low in consumer confidence, further undermine the already weak housing market. It does not appear at this time that the earlier efforts by the federal government to stabilize the housing market across the country have had any meaningful impact.

As you may be aware, most of the major public home builders are proposing that congress must adopt a viable solution to arrest the crisis in housing. This proposal includes two components; a true tax credit, and a mortgage rate subsidy similar to those implemented in the early 1970’s to address the housing market at that time.

The further decline in new home demand is in evidence by our slower work trends which were off 32% year over year and further price reductions which resulted in impairment charges aggregating $368 million for the quarter. In all, our home building segment lost $388 million pre-tax for the quarter which contributed to a consolidated net loss of $369 million or $2.53 a share.

As I mentioned earlier, in September we completed a $50 million share rights offering which resulted in an additional equity infusion of $153 million. Our existing shareholders acquired 27.2 million shares while Matlin-Paterson acquired 22.8 million common equivalent shares pursuant to their back stop of the rights offering.

As previously announced on August 18, 2008 our shareholders approved the conversion of Matlin-Paterson’s senior preferred into junior preferred stock. The issuance of junior preferred stock upon the warrant exercise, and the issuance of common stock upon the conversion of the junior preferred.

At this time I’d like to turn the presentation over to Andy for review of our third quarter results.

Andrew H. Parnes

Thanks, Jeff. Please join me on slide number 5. For the 2008 third quarter, the company generated a net loss of $369 million or $2.53 per share versus a net loss of $120 million or $1.66 per share last year.

The year-over-year decline was driven by the following factors from continuing operations; 38% decrease in home building revenues, a negative home building gross margin of 56%, primarily from the $267 million of inventory and impairment charges, a $134 million net increase in our deferred tax asset reserve, a $4.6 million increase in other expense which includes an $8.9 million deposit write off charge, $3.9 million of interest expense, and a $53.5 million increase in our home building joint venture loss which reflects $92 million of JB inventory and impairment charges; all of which were partially offset by a $16.7 million increase in our SG&A expenses.

Excluding the impairment and tax reserve charges, we would have lost $9.7 million or $0.07 per share in the third quarter. Please refer to the exhibit at the end of the presentation for a reconciliation of the net loss before and after the impairment and other charges.

Slide number 6 provides more detail on the impairment charges recorded during the third quarter. We continue to review every project each quarter for impairments including projects not yet open. The vast majority of impairments recorded in the quarter were triggered by continued housing price erosion and slower absorption rates. The impairment charges related to current and future projects covered approximately 4,200 lots representing 66 projects and the joint venture impairments related to 1,200 lots representing 6 projects.

The impairment charges were most significant in California, Florida and Nevada. As we continue to review our project portfolio in light of current and anticipated market conditions, we have decided to put a number of projects on hold in certain of our markets. In these instances, we feel a higher home value will accrue over the long term in these well located communities.

Turning to slide 7, a 38% decrease in third quarter home building revenues to $400 million was primarily attributable to a 24% decrease in new home deliveries combined with a 12% decrease in our consolidated average home price. In addition, land sale revenues decline from $49 million last year to $5 million this year.

Our backlog conversion rate for this quarter was 78% and reflected the presence for shorter escrow periods by buyers and our focus on selling standing and nearly completed spec homes.

Our next slide, slide 8 shows deliveries by state. New home deliveries for the quarter exclusive of joint ventures and discontinued operations decreased 24% year over year. Deliveries were often all of the markets reflecting the continued slow down in and order activity driven by weaker housing demand across all of our markets and a decrease in our backlog levels.

Moving to slide 9, the company’s negative gross margin percentage from its home building segment was driven primarily by the $267 million of inventory impairment charges as well as continued margin pressures from increased levels of incentives, discounts and price reductions needed to sell homes. Excluding the impact of land sales and inventory impairment charges, the home sales gross sales margin would have been 14.3% versus 20.3% last year. These were per the exhibit at the end of the presentation which reconciles a gross margin percentage for the home building segment to that excluding land sales and impairment charges.

The company’s higher SG&A rate for the quarter was driven primarily by the company’s lower revenue base. With that being said our absolute level of SG&A spends for the quarter was done meaningfully for the last year. Our reduced overhead structure is a result of division consolidations, market exits and intense focus on spending in our efforts for right sizing the organization. Jeff will comment further on these efforts in his closing remarks.

On slide 10, I’d like to direct your attention to the left hand side of the slide. You will see that we generated nearly $32 million of cash from our operating activities during the third quarter. We used $11 million of cash during the quarter for investing activities which primarily represented the unwind of a few joint ventures which we will discuss later. Cash flows generated from finance activities were presented the equity rates from the rights offering net of debtly payments during the quarter. EBITDA was $11.3 million for the third quarter while we generated $71.8 million of LTM EBITDA compared to $386 million a year ago.

Please refer to the next slide for a definition of EBITDA and a reconciliation of EBITDA to GAAP offered in cash flows. As you can see on slide 12, our quarter end adjusted net home building debt to capital ratio stood at 52.7% up from 50.4% at the end of the second quarter. Our total debt to capital ratio which includes indebtedness of our financial services subsidiary and FIN 46 liabilities was 67.7% compared to 61.9% last quarter.

The higher leverage levels reflect the impact of the current quarter losses offset in part by the equity from the rights offering. Please refer to the exhibit at the end of the presentation for a reconciliation of total debt to adjusted net home building debt.

As mentioned last quarter, the financial covenants contained in the revolver and term loan A credit facilities were modified to eliminate consolidated tangible net worth, leverage, unsold land and minimum interest coverage covenants. Borrowing base and limitations on joint venture investments were also eliminated. The amended credit facilities contained a new liquidity test requiring the company to maintain [inaudible] minimum, ratio of cash flow from operations to consolidated home building interest incurred or a minimum liquidity reserve, and also prohibit, subject to various exceptions, a repurchase of capital stock, payment of dividends in the incurrence and early repayment of debt.

At September 30, 2008, we had utilized $93 million of capacity under our $392 million revolving credit facility including $40.8 million for letters of credit. We have included for your reference the calculated and required cash flow coverage ratios under the bank facilities and the maximum and actual debt to equity ratios under the company’s public notes. As you can see we are close to the public note leverage limit. If that limit is exceeded then we will have limitations to our ability to incur additional indebtedness. In addition, we will be prohibited from making restrictive payments from funds other than those residing in unrestricted subsidiaries. In the event we exceed the leverage limit, we believe we would have sufficient liquidity in those unrestricted subsidiaries to cover our joint venture capital needs.

The purpose of slide 14 is to provide you with an updated schedule of our JV portfolio including additional detail on our ten largest building and land development joint ventures. All of this information will be included in our third quarter 10-Q. These ten ventures represent over 90% of the total combined JV assets in debt. The total leverage of these then ventures is 56% while the leverage for all of our JVs is 57%. Total level of joint venture debt has decreased meaningfully. At the end of 2006 it was over $1.3 billion, at the end of 2007 it was $771 million, and at the end of the third quarter, the total JV debt has been reduced to $512 million.

Moving to the next slide, additional JV developments and activity during the third quarter included the following: JV re-margin payments of $4.2 million for one Southern California venture. There were no JVs consolidated during the third quarter. We exited two California JVs through an aggregate cash payment of $3.3 million. There are also a number of other joint ventures that we are carefully watching that are likely to require additional re-margin payments as well as others that may need to be unwound, including buy outs or walk aways by our partners. Some of these situations would likely consume a portion of the company’s cash resources and result in the assumption of project debt.

On slide 16 we have included certain data including loans originated by our mortgage subsidiary for the current and year earlier periods. As you can see the vast majority of our loan originations consist of agency or government product. In addition the credit scores of our buyers continue to remain high while they are also averaging down payments in excess of 15%.

On slide 17 we see that net new orders company wide excluding joint ventures and discontinued operations for the quarter decreased 32% to 921 new homes. The company’s consolidated cancellation rate for the company’s third quarter was 26% compared to 35% in the 2007 third quarter and 25% in the 2008 second quarter. The company’s cancellation rate is a percentage of beginning backlog for the quarter was 22% compared to 28% in the year earlier period. Orders thus far in October have been off even more. It appears that all of the recent negative headlines on the financial crisis and the economy have been weighing heavily on the consumer particularly as it relates to demand for new housing.

Moving to slide 18, our level of spec homes peaked at 12.9 homes per community at the end of June 2006 and has been steadily decreasing since to its current level of 8.5. In the past several quarters we intensified our review of spec starts in an effort to balance our corporate inventory objectives with our division’s requirements to maintain an appropriate level of homes that can be sold and closed in a relatively short period of time which most buyers prefer today. We will continue to carefully monitor our level of spec starts in an attempt to control the number of completed spec homes company wide and we feel that the current level of around 400 completed and unsold homes is at our comfort level. Jeff.

Jeffrey V. Peterson

Thank you, Andy. In closing, while we feel it’s difficult to drive much of an improvement in our top line, in the face of today’s difficult housing market, we can have a great deal of influence over our expenses. In that regard, we have dedicated the entire Standard Pacific organization towards that end.

Specifically we are focused in the following areas; first, cost of sales. With labor and materials making up the majority of this cost category, we have intensified our efforts in our once standard team to [inaudible] and create cost savings in this area. We have been very successful to date and see even more meaningful opportunities ahead. The second area is sales and marketing. While we recognize the need to drive traffic and sales is vital during these challenging times, we are evaluating our spends and every line item in this category. Our efforts in this area are beginning to bear fruit. The third, SG&A; we are stepping back and rethinking how we operate and manage our business with goal of operating in a leaner and more efficient fashion.

We also remain focused on cash and inventory management. Inventory levels continue to decline, however with delivery volume shrinking and the challenges that we will likely face with some of our joint ventures, it will become increasingly difficult for the company to generate positive cash flow going forward. With that being said, we have a strong cash position today and a much improved balance sheet as compared to earlier this year. That closes our formal presentation. Thank you for your time today.

We will now open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ivy Zelman - Zelman & Associates

Ivy Zelman - Zelman & Associates

You had mentioned you were working hard in the marketing efforts and evaluating your costs there, I was just curious, it’s an easy question and hopefully it’s okay to ask another because it’s easy. Are you cutting back? Are the realtors that you work with to sell new homes, are they willing to cut back on commissions and has that been a recent trend or is it been the case the last several months and most of the year?

Andrew H. Parnes

Well, our efforts in focusing on sales and marketing are much broader than that. Clearly there are some markets where we’re more heavily reliant on the brochure community and there are some markets where more traditional kind of sales and marketing and advertising methods are more effective so we’re trying to find the right balance. We are rethinking how we utilize the brokerage community in some of our markets, but they have been very effective in a number of our markets and we want to make sure we are very thoughtful in what we do there because a substantial majority of all our sales today are coming through that network. We just want to make sure we’re paying an appropriate level. I don’t think it’s a matter of moving away from that source, particularly in the markets where they are important. Yes, you can ask another question.

Ivy Zelman - Zelman & Associates

Just a quicky on that; so they’re an important part of generating sales, but are you going up or down to help stimulate their interest? Up or down on the commissions?

Andrew H. Parnes

We’re managing that on kind of a market by market basis. There’s not a blanket approach we’re taking to it. Again, some markets, they’re 80% of our sales, so we have to be careful how we approach their compensation structure. In markets where they’re less significant we can be more aggressive and perhaps reduce the commission structure.

Operator

Your next question comes from Michael Rehaut – JP Morgan.

Michael Rehaut - JP Morgan

First question just on the restricted payments if you come up against the leverage ratio, I believe, in your notes. What cash would you have available today at your disposal that is unrestricted that would allow you to continue to make margin payments on the JV’s and if necessary, if you have a quarter 2 cash flow negative, what’s available to you?

Andrew H. Parnes

We have set aside over $500 million of cash in the unrestricted subsidiaries and we did that prior to the end of the quarter. That number is clearly in excess of what we would anticipate using. We just wanted to set aside as much as we could. If we don’t need that money for JV needs, we have full access to that for other corporate needs as well.

Michael Rehaut - JP Morgan

Are you kind of approaching at all any of your senior bond holders in terms of making any amendments on their covenants?

Andrew H. Parnes

We don’t see the need to do that at this time.

Operator

Your next question comes from Dave Goldberg - UBS.

Dave Goldberg - UBS

The first question, it really goes back to the comment about the government bail out and the chance that there’s going to be a government stimulus package as we move forward and I’m trying to understand; given you guys have a decent amount of drive power to look for opportunities to buy land, what do you think that the government taking more action maybe to bail some of the banks out or potentially help support home prices; what do you think that does to the opportunities in the land market?

Jeffrey V. Peterson

First, the most important issue here is bringing stability to pricing in the housing market, let’s start with that. In land, certainly as you start seeing stability in the markets and you start seeing a lot of this inventory burn through, if we see demand, I say demand, but I mean at the bottom, we find the bottom of this market; I suspect over time you would see a stability in the land prices as well. I certainly don’t see anything near term that says land prices are going to spike at all. I think it’s more trying to put a floor on that as opposed to stimulating a price increase.

Andrew H. Parnes

Yeah, David, in past cycles when we’ve analyzed this very carefully, land priced bottoms usually lad home priced bottoms and then the land prices have typically stayed low for a period of time even when home prices have begun to improve. I don’t think we need to necessarily feel anxious about missing out on opportunities.

Operator

Your next question comes from Susan Berliner - JP Morgan.

Susan Berliner - JP Morgan

I just wanted to follow up on Mike’s question in regards to; can you borrow from the bank line going forward if you hit that leverage covenant in the bond indentures?

Andrew H. Parnes

We can, there’s actually a carve out in the public notes that allows us to incur up to $550 million of new bank debt and we have borrowing capacity under the revolver today. It’s not $550 million, but we have a few hundred million of borrowing capacity under the current revolver structure that would fit within that carve out into the public notes.

Susan Berliner - JP Morgan

Okay. Just to follow up on your cash flow, I think you said you’re going to be generating cash to kind of cover the October bond maturity and I know the market is a lot slower. I was wondering if you could comment on that and in terms of your land spend, you had given an update last quarter, I was wondering if you could do the same for this quarter?

Andrew H. Parnes

We’re probably going to wind up a year or somewhere around $170 million for land spends and I can’t recall what we had mentioned last quarter but that’s probably about the same number, maybe a little lower. Your question regarding cash flow in the fourth quarter, it’s becoming much more difficult to project cash flows based on the uncertainty in the market and also with us we have the unknown regarding some of these joint ventures that are kind of on our watch list and some of those could manifest themselves into unwinds in the fourth quarter which may consume cash so it’s tough for us to definitively say we’re going to be cash flow positive in the fourth quarter.

Operator

Your next question comes from Ivy Zelman - Zelman & Associates.

Ivy Zelman - Zelman & Associates

The finished lot supply you have, can you tell us of your total owned land, how much is finished and then looking at your expectations, you mentioned mothballing your community count, what are your anticipation, what are you expecting community count to be roughly in 2008 relative to 2007 and then maybe to 2009 in community count?

Jeffrey V. Peterson

Okay, of the 20,000 lots that we own, about two-thirds of those are finished lots and the rest would either be raw or under development. Now, many of the lots that would be kind of categorized as raw we have held for sale. We do have some land parcels that we’ve targeted for sale. Some of those projects are also ones we’ve put on hold so the amount of raw land that we have is not necessarily being targeted for near term development, so we don’t perceive a meaningful amount of cash flow is going to be devoted to developing land in the near term.

Ivy Zelman - Zelman & Associates

The development cost that you said $170 million I think that you expect to spend, how much of that would just be mandatory spend because it’s HOA fees and other costs that you can’t avoid incurring?

Andrew H. Parnes

The $170 million is purely the land purchases. That doesn’t include further development costs or permits and fees. Of the $170 million a good portion of those are just lot option take downs which; and take downs from joint ventures, so on top of the $170 million, we’ll probably spent $175million to $200 million of land development this year. Again that would include fees and things like that.

Jeffrey V. Peterson

And mothballs from community count.

Andrew H. Parnes

Community count, we ended the quarter at $179 million and going forward with the very limited number of new community openings, that number should continue to decline. We really have very little in the way of new communities year marked for opening, so the $179 million end of next should continue to decrease next year and regarding the mothball projects, a good number of those mothball projects are projects that we haven’t even opened yet and we concluded that now is not an appropriate time to commit further dollars into developing those lots and we also feel that many of those projects are well located and we think that being patient and waiting for a better window in the market would make a lot of sense. I’m not sure I mentioned the amount of projects we’ve mothballed about 30 to 40 projects.

Operator

Your next question comes from Larry Taylor - Credit Suisse.

Larry Taylor - Credit Suisse

I wonder Andy if you could comment on the impact of down payment assistance during the quarter if at all and whether or not that pulls any demand forward and maybe how things are shaping up in the fourth quarter?

Andrew H. Parnes

You know, we were surprised. We tried to take advantage of the down payment assistance program going away. We tried some advertising campaigns to get people off the fence and take advantage of it before it went away, and we just saw no response to that. In the past, I think through the first six months of our year 12% of our deliveries were through down payment assistance programs. My guess is in the third quarter it was not that much different. For us, the use of down payment assistance programs has been relatively modest I think relative to other competitors. Our buyers on average put over 15% down so that’s historically, has been more of a first time buyer program and we’re a little bit more oriented towards the move up so it’s been less significant.

Operator

Your next question comes from James Wilson - JMP Securities.

James Wilson - JMP Securities

My question is related to joint ventures. The first one is if Andy could give a little color on, since you only have really 10 or 12 left to speak of, where you have private partners left or are most of them still structured with other public companies? The second one is specific to the 2005 land deal in Las Vegas, what share of that; I know you’ve got the consolidated number, what share of that is actually your debt and equity and kind of what are the conditions of that one?

Andrew H. Parnes

Well, we have a 25% interest in that joint venture. The debt is non-recourse; it doesn’t have a completion guarantee, it doesn’t have a bad boy provision. While that’s our largest JV from a debt perspective, it is a non-recourse debt structure. We do have an obligation to take lots down beginning this quarter through the end of the second quarter and that aggregates $21 million dollars. With respect to the make up of our partner base today, a number of the JVs we’ve unwound to this point include some of the larger privates. I would say it’s kind of a mixed bag today, private builders, financial institutions; it’s not as heavily weighted towards the large publics as it was a few years ago.

Operator

Your next question comes from Alex Barron - Agency Trading Group.

Alex Barron - Agency Trading Group

I have two questions. The first had to do with I guess, the treatment of the equity, the common equity versus the Matlin-Paterson preferred equity. It seems in the financial way you guys stated you combined the capital, but I guess it’s my impression that those two are not one in the same, so I was trying to see if you could help us understand when and if those are going to convert, and if they’re not going to convert, how should we think about the difference between the two?

Andrew H. Parnes

Well, on the balance sheet we’re showing preferred equity and that basically represents the par value of the preferred equity, so the bulk of their equity really shows up as additional paid in capital and that gets blended in with the additional paid in capital in our common shares, so you only reflect under the preferred line item if it’s a penny par value times the 450,000 shares that are outstanding to get you to $5,000 so it’s just a diminimous amount that shows up on that line item.

Alex Barron - Agency Trading Group

Are you thinking of them as two totally separate types of equity or are they going to convert to common equity at some point?

Andrew H. Parnes

They can convert to common equity at a later date or they could just keep it in the junior preferred structure and then it would convert to common equity when they ultimately sell it.

Operator

Your next question comes from Dave Goldberg - UBS.

Dave Goldberg - UBS

Can you guys walk us through the reversal of the FAS 109 charges? The FAS 109 allowance and the decision before you got the private letter ruling that some of the $60.6 million from last quarter would actually be able to be realized and how that reversed?

Jeffrey V. Peterson

David, we still haven’t received the private letter ruling, so the reversal that took place during the quarter was about $20 million and that had to do with just a true up on our 2007 tax return. We actually got a greater refund on our 2007 carried back to 2005 and 2006 and 2006 of $20 million, so that’s what the reversal was during the quarter. We would still have about $40 million and change that is still subject to reversal pending the outcome of that private letter ruling.

Operator

Your next question comes from Michael Rehaut - JP Morgan.

Michael Rehaut - JP Morgan

I guess I wanted to be clear guys on the spends this year and how that might change as a result of the mothballing of 30 to 40 communities that were in the pipeline, so in total, between the land spend and the land development and fees, you’re looking at roughly $350 million to $400 million this year? Is that right?

Andrew H. Parnes

That’s correct.

Michael Rehaut - JP Morgan

And, obviously there’s a lot that can change in terms of 2009 but if current conditions persist and also taking into account the projects that are on hold, what could that number be in 2009?

Andrew H. Parnes

It should be substantially less. Now again, that would exclude anything that, strategic opportunity that we may decide to pursue, but what’s on our current pipeline for land take downs, it’s going to be comfortably below the $170 million and then the land development spends could be maybe not quite half of what we spent this year, so we’ll see some pretty healthy drops in some of those line items.

Michael Rehaut - JP Morgan

One last thing on the JVs, do you have an idea what in the next quarter to what incremental debt assumption or re-margin expenditures you might have if you have any additional JVs that are kind of on the border that you might want to take action on?

Andrew H. Parnes

Well, probably the only thing I can see is there will be some. How much it’s going to be a function of how our partners respond, business conditions, there’s a lot of moving parts to those specific JVs and the others, there are a handful of those that kind of fit into that group so this is really hard. We don’t even have a number internally that we can kind of circle and say here it is let alone talk about it publicly. We feel there will be some, but circling a number is just tough at this point.

Operator

Let’s go back to Ivy Zelman.

Ivy Zelman - Zelman & Associates

Sorry I keep bothering you guys, but one more question as it relates to absorption. We realize the market is in an unprecedented low right now in respect o absorptions in October and let’s all hope that it doesn’t stay that way, but I imagine you have to run sensitivities and understand scenarios like we’re seeing today, what it would mean for your ability to continue to function in terms of cash flow that you’re generating per home. If you X’d out, Andy, understanding the re-margin call and you just looked at strictly your operations as you’re selling units today, are you generating cash flow overall on the homes you’re selling and what type of sensitivity in terms of sales would you likely see that you no longer would generate enough cash per unit because the G&A is no longer getting the leverage you might have had even prior to the October lows and realizing that brings you down another notch; if you understand the question.

Andrew H. Parnes

I think I do. We are still generating cash at the home level. If we’re just at the project level it’s not cash flow positive, it makes no sense to move forward with that. You’ve essentially got a negative land value. I would say virtually every project if not all of our projects that we’re selling and delivering today, we are generating a positive cash flow and it’s a matter of covering the SG&A and on top of that the debt maturities that we have coming up and also taking care of the additional land commitments. I think if you back out the land purchases and you back out the debt maturities we would be generating positive cash flow. Again, backing out the JV wild card as well.

Ivy Zelman - Zelman & Associates

I guess the question is under what absorptions could you go as low as; yesterday [Sentech] said that if you cut their orders closing by 50% and they were delivering half of what they’re delivering now, they would still be cash flow positive, again even borrowing, even including SG&A and I’m wondering if you’ve done the same type of sensitivities?

Andrew H. Parnes

You know, we’ve run a number of different sensitivities to that and I’d say we could absorb lower volume levels and still be cash flow positive where the breaking point is. I think that probably gets to be difficult to estimate. We would likely cut back on land spends, renegotiate land take downs and the number that we have in our cash forecast for land take downs right now really is based upon contractual take downs. We’re renegotiating just about every take down that we have right now and either pushing take downs out or renegotiating the price, so we have some flexibility to push that down and also adjust the land development spends. I’m probably not comfortable giving you an exact number where the cut off is. I’m sure we could absorb some deterioration in volume and still be cash flow positive excluding those various items. 50%, that would be a rather dramatic decline.

Operator

We’ll go back to Alex Barron.

Alex Barron - Agency Trading Group

Thank you. My other question had to do with the fact that you, maybe I misheard you, you said that you guys were putting some projects on hold and I was trying to understand are those currently active selling projects or are they the mothball projects you referred to?

Andrew H. Parnes

I’m sorry, Alex, can you repeat the question?

Alex Barron - Agency Trading Group

In the commentary earlier, you guys said that we’re putting some projects on hold. I was trying to understand are those projects currently open for sale and you guys are choosing to stop building or are the mothball projects haven’t even started?

Andrew H. Parnes

It’s mixed. I would say I don’t have the exact breakdown but it’s, there’s a fair number of both. I think I mentioned earlier for some of the projects that haven’t opened yet, there are still some dollars that need to be invested in site development costs and we’ve looked at the magnitude of that investment and projected absorption rates if we opened it in a near term and just concluded it is not worth the investment right now. With that being said, these are well located projects and we think that values will improve in these projects and it makes sense for us to wait.

There are some projects that are ongoing and we’ve made the same determination that we think these are well located enough projects. We found that in some markets, demand is no longer elastic, that we keep cutting price and the amount of volume generating is just negligible and we felt the best course of action would be to button up the project and wait for a better day and we feel these are the locations, when the markets recover, are going to come back sooner.

Alex Barron - Agency Trading Group

On those kinds of projects, would you be able to give us some kind of idea of location or you just basically in the meantime, until demand comes back, you basically just put the, close down the sales office for a while and then how is that going to work out?

Andrew H. Parnes

Absolutely. We’re not going to be selling; mothball means we’re going to stop selling. Some of the projects there is a transition period where we want to finish out a neighborhood so we’re not leaving kind of half completed neighborhoods. There is a transition period. Again, without getting into specific projects, I would say that most of our mothballed projects would be in A locations in particular markets. The projects that have been more challenging for us or were more remote locations, those were many of the projects that we just sold out of our position earlier on in the downturn. I think our move to sell land in those markets early on even though the recoveries were modest, I think were wise decisions in hindsight.

Operator

Your next question comes from Joel Locker - FTN Securities.

Joel Locker - FTN Securities

Just, did you have a number for impairment reversals in the third quarter?

Andrew H. Parnes

It was $73 million.

Joel Locker - FTN Securities

$73 million, and do you have another number for customer deposits versus your back log?

Andrew H. Parnes

Our customer deposit number I don’t have in front of me. It is very, very small. Again, I don’t have that. I’m not even sure we disclose that on our financials because it’s a pretty nominal number. Deposit just, because of the market we’re in today have gone down. I would say a couple percent is probably the average deposit today.

Operator

We’ll go back to Michael Rehaut - JP Morgan.

Michael Rehaut – JP Morgan

Hi, just a couple more questions. On the, you had a pretty sizable order ESP decline this quarter and I’m sure some of that was, I guess, one, how much of that do you believe is due to; I know it’s probably tough given the different communities and regions but, do you have a sense of what that was in terms of mix versus price and given your comments about how in some ways demand is becoming inelastic, yet we still obviously see home prices coming down and I just wanted to know your thoughts around how many other builders in a given market where you have seen the price declines are starting to also, in effect, pull up stakes and not play the game or are there just a lot of builders out there that just continue to try and to lower price to generate sales?

Andrew H. Parnes

I think the approach to put projects on hold is not just a Standard Pacific phenomenon. We’re seeing that in most of the other builders if not all the other builders are doing that. So, if you look at the new housing starts, that number continues to drop. I think the large builder community has done a good job of managing supply and not overdoing it; not unnecessarily flooding the market. Part of that process is mothballing projects.

Michael Rehaut – JP Morgan

Would you consider that statement to apply to the smaller privates as well?

Andrew H. Parnes

I would say yes. I think they’re doing that. It’s probably harder to get that information; I cant read their earnings transcripts or press releases so I would say they probably are but I don’t know how that would compare to the public’s. The first part of your question was the drop in our average sales price, how was that made up between kind of discounting price reduction versus mix. Clearly most of that is just the impact of the market. There is an element of mix that influences our average price, we could have a higher percentage of deliveries out of California one quarter versus the next and that could impact that comparison, but clearly what’s happening to our sales price is mostly to do with what’s happening in the market.

Operator

Your next question comes from Alex Barron - Agency Trading Group.

Alex Barron - Agency Trading Group

Hey, Andy, I had another question in regards to impairments. I was wondering how do the impairments work in terms of timing. If you guys for example, cut prices on a project near the end of the quarter, do those get reflected in the same quarter or do those most likely show up in the next quarter once those homes start selling at that reduced price?

Andrew H. Parnes

No, when we go through our budget process every quarter, we’re looking at what we’re currently selling homes for and this we do at the end of the quarter and the budget process kind of leaps into the early part of the next quarter so if we’re experiencing changes in pricing, those do get reflected in our business plan and in our impairment analysis and today our divisions are being realistic in our impairment analysis and in their business plan. They’re not just taking today’s pricing and in most cases are taking anticipated future prices well that reflect some level of further price deterioration.

Alex Barron - Agency Trading Group

In terms of sales pace, how do you guys model that? Do you use anticipated or is it your latest quarter type of experience going forward?

Andrew H. Parnes

It’s a combination of both. It’s hard to take your fourth quarter sales pace and then extrapolate that into the first and second quarter because of the seasonal nature of our business. There is some seasonal aspect to it but as sales absorption rates continue to drop you have to take that into consideration when you’re projecting the future.

Operator

Your next question comes from John Sykes - Nomura.

John Sykes - Nomura

Hi. Just really trying to take a step back here, but in terms of total liquidity that’s available to you as you move through 2009, can you summarize that again for me?

Andrew H. Parnes

Well, we had $712 million of cash at the end of the quarter. We did retire the October 1 maturing notes on October 1 so that was a little over $100 million so that came out of that $712 million cash balance. We have that cash available to us, we do have, as I mentioned earlier, around a couple hundred million available under the revolver if we needed to borrow money, but we feel that our substantial cash balance, if we needed the liquidity, we’d use that first.

John Sykes - Nomura

Okay, and that $200 million, that couple of hundred million is through any restrictions you would have on the revolver, right?

Andrew H. Parnes

Yes, that’s the newly amended structure that we negotiated with our bank group at the end of June.

Operator

Your next question comes from Michael Rehaut - JP Morgan.

Michael Rehaut - JP Morgan

I guess I just had one last one that was cut off before. One of the things that Jeff focused on in the prepared remarks were greater intensity on cost reduction and kind of heard qualitatively areas that would include, I was wondering if you could kind of give us an idea roughly speaking of on a dollar basis, what you are looking at. The SG&A on a percent ratio is around 20% so far in the last couple quarters; either a goal on what that ratio might come down to and I know it’s not just SG&A but also cost of sales so any type of number or goal that you guys are putting together?

Andrew H. Parnes

That’s something that we’re working on. I don’t think we’re in a position to get too specific on that. I think some of the programs we have been focused on have already been bearing fruit as Jeff mentioned; particularly in the cost of sales area, we’ve had a very vigorous reengineering program and we’re constantly focused on rebidding the trades to make sure we’re taking advantage of what the current market environment will give us from an input perspective. You have seen that our absolute level of sales and marketing in G&A has come down. Head count is less than half of what it was at the peak so we think we’ve been very responsive in that regard but we think there is a lot more available to us than just head count alone. Those are some of the things we are in the midst of evaluating right now. We still think there’s more we can generate from the cost of sales side too.

Operator

We’ll take a follow up from John Sykes.

John Sykes – Nomura

I look you’re not providing a lot of forward guidance here but I’m trying to get just a little bit more of a sense in terms of what you think the cash drain will be in 2009. It sounds like what you were saying is you don’t think you’re going to generate a lot of free cash flow in 2009 but that would imply that you would generate some or break even in 2009. Can you, I know it’s hard, I know the environment is difficult, I know there is a lot of unpredictability out there in terms of where the housing market is headed, but can you give me some kind of sense given cost cutting initiatives where you think things will come out cash flow wise?

Andrew H. Parnes

I appreciate your frustration in wanting to get more clarity on that if you could appreciate there’s just too many moving targets right now to get more specific; the JVs being one, and as we were talking about with respect to Ivy’s question, what’s the right unit assumption for next year? That’s tough right now to project where unit volumes are going to come in at. There’s some things we have some clarity on but I’ll tell you there’s many items where we don’t and that’s why it’s just tough to say with certainty what the number is let alone if it’s going to be positive or negative.

John Sykes – Nomura

Let me ask this; it seems to me you feel comfortable with the liquidity that you have relative to the balance sheet cash and the RCF availability. Is that safe to say?

Andrew H. Parnes

Yes.

Operator

Your next question comes from Tom Koch – Turnaround Capital.

Tom Koch – Turnaround Capital

I just had a follow up question regarding the revolver availability. Are there no restrictions on that? It was unclear to me when you said you had an amended structure. Could you articulate if there are restrictions what they are?

Andrew H. Parnes

Well any new borrowings under the revolver would be secured so they’re subject to available collateral. The amount we can borrow is limited to collateral pools like models and finished lots and finished homes. Based on that available collateral pool, we feel right now that we could borrow around $200 million so that’s the restriction would really be the amount of collateral available.

Tom Koch – Turnaround Capital

Okay, so there’s no restrictions on earnings, cash flows, leverage or any of that stuff?

Andrew H. Parnes

No, the only covenant we have on that stuff is a cash flow coverage or a liquidity convenant.

Operator

Mr. Peterson, there are no further questions at this time. I will turn the call back over to you for any additional or closing comments.

Jeffrey V. Peterson

Thank you all very much for your time today. Our Q will be filed next week and we appreciate your interest and support. Thank you again.

Operator

Ladies and gentlemen that does conclude today’s conference. We thank you for your participation. Have a great rest of your day.

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Source: Standard Pacific Corp. Q3 2008 Earnings Call Transcript
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