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Executives

Jeffrey Orleans - Chairman and CEO

Garry Herdler - CFO

Analysts

Carl Reichardt - Wachovia Capital Markets

Jim Wilson - JMP Securities

Alex Barron - Agency Trading

Orleans Homebuilders Inc. (OHB) F2Q08 (Qtr End 12/31/07) Earnings Call February 1, 2008 10:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the second quarter 2008 Orleans Homebuilders Earnings Call.

Except from this historical information, the statements made in this presentation are forward-looking statements involving significant risks and uncertainties. These risks and uncertainties, including those related to the Company's future results, levels of activity, liquidity, cash, anticipated debt replacement, future tax valuation allowance, debt covenants, performance or achievements, among other things, are detailed in the Company's filings with the Securities and Exchange Commission

The presentation contains non-GAAP measures, including earnings and other items adjustments to include certain amounts. These measures are commonly used to compare operating results between periods or companies, but are not Generally Accepted Accounting Principles. Definitions and discussions of these measures can be found in our most recent earnings release for the second quarter 2008, a copy of which is available under the investor relations at www.orleanshomes.com.

I would now like to turn your call over to your host for today, Mr. Jeffrey Orleans, Chairman and CEO.

Jeffrey Orleans

Good morning. Welcome to our fiscal 2008 second quarter earnings call. Thank you for joining us. Joining me this morning is Garry Herdler, our Chief Financial Officer.

The homebuilding market has continued to its downturn and we still believe that economic conditions will remain difficult. There is turmoil and mortgage lending, mortgage insurance in the financial service industries today. Oil prices also remain high. In general our buyers should not be as affected because they have very strong credit scores in the useless leverage in the average new home buyer.

Obtaining mortgage is really not that bigger problem. However, other industries issues do affect our buyers. There was excess home inventory in numerous markets, but each market is different. The biggest problem in our markets continues to be negative publicity and the lack of consumer confidence.

I think that the Federal Reserve's aggressive action will certainly help. Our community chap was exceptionally slow in the middle of December to the beginning of January. Nationally December sales were disaster. The homebuyer psyche has certainly improved in the last week or two. Our traffic this past weekend was actually very good. Lower interest rates have always helped in the past. The Fed and the Government was both remain supportive. We will continue to remain focused and we will continue to proceed cautiously.

Turn to slide 4. We show that we completed our portfolio optimization strategy, it is do to suppose of 1400 lots in nine separate transactions. Most of what we saw where our weaker performing communities, focused on Florida, Arizona and Chicago area. These nine land sales generated aggregate cash proceeds of approximately $33 million, plus an additional $3 million on a sale of 19 lots they closed this week. In addition the company currently anticipates that we will receive before June 30th year end at least $25 million of federal tax refunds. Combined this is approximately $16 million. We will generally use these dollars for debt reduction.

And the next slide -- in next slide I will discuss our strategy. We have repositioned our company, so that 88% of our remaining owned lots are in the Northeast and the Carolinas. These areas are more stable and these are our primary markets. We have taken significant actions over the past few quarters to address our balance sheet, including inventory and work in progress. The October 1, 2007, we hold in 2008, we hold only 270 price spec that is of any stage of completion. We count permits expects in some cases. This is 2.7 specs per community. This is down 234 units or 46% since the opening of last year's second quarter.

The lower year-over-year spec levels across all regions and did contribute significantly to our current quarter's lower net year-over-year activity. This trend of lower spec sales will continue to the spring. Our spec count is approximately 238 units at December 31st. We are currently building a few more over spring in summer delivery, but we are monitoring our spec count closely.

In our September 30th quarter, our first fiscal quarter we reported our third consecutive quarter of year-over-year net new order growth, both in terms of units and in dollars. This past quarter, our second fiscal quarter, the trend unfortunately ended, as our net new orders were down 25% year-over-year. As we have discussed this is primarily due to our inventory being lower than last year's and the December month. The month December was not good.

Our pre-sales have been up this year versus last year in both October and November. Early January is always slow, but we expect traffic to continue to improve with the Fed actions as it does generally did last weekend. I have personally visited approximately 45 of our jobs in the past two weeks. Our sales people are optimistic and believe the business is improving. The move swings since the beginning of January is encouraging, but one or two weeks is not a whole year.

Our cancellation rate was 26% in the second and fiscal quarter, which is elevated on a historically basis. This is down from 31% in the prior year's quarter, but up from 21% in the first fiscal quarter of 2008. This increase is due primarily to Chicago and Florida as the north and southern regions have remained relatively more stable.

We see continued nationwide discounting, particularly by some of the largest companies in our industry. We must remain competitive, which will continue to affect our 2008 margins. We have a flexible capital spending plan to reflect current market conditions. As a result, we significantly limited the amount of site acquisition and site improvement spending in fiscal 2008 to this date. We will continue to be cautious on dollar spend for land and improvements.

We focused on our sales and marketing efforts and we reduced our cost structure again in January with approximately 14% headcount reduction. The stay of reduction was higher than the range that we had presented to our banks. On 8th December, we amendment our credit facility to provide flexibility to complete our portfolio optimization plan. We achieved our objectives and we appreciate our banks' continued support.

Turning to page 5. The company completed a set of nine different dispositions with nine different buyers. We sold 14,000 lots in five states in the final days of our December 31 taxation year. This portfolio optimization was a positive strategic event for the company. Approximately 94% of the lots disposed out were in Florida, Illinois and Arizona. Our company separately executed option agreements to buyback approximately 350 lots in two communities. This is a net decrease in our owned and controlled lot count of approximately1050 lots.

Our team really did a great job identifying and executing the strategy. We deliberately do not saw any significant position in North and the South. Approximately 88% of our remaining owned and controlled lot count is located in these two regions. We will reduce financial exposure to both Florida and Chicago even though both will remain important in the future. These regions are now count for approximately 12% of our total owned and controlled lots.

In Florida we believe that our market conditions do finally improve we are now better positions, since we have eliminated our positions of both Palm Coast and Palm Bay. We have a few lots to work through in the land, but our focus today is in the primary homebuyer market in Orlando. The sale of lots in Arizona represented over the company's assets in this region. Leaving Arizona was a difficult decision, as we do believe in this market long-term. However, it is almost 3000 miles away and it was more important to us to reduce risk in this environment.

Our asset base is both diversified and relatively less capital intensive in some of the orders. We do not own golf courses. We do not build high-rises and we have minimal capital invested in large community amenity programs. We managed are approximately 96 communities individually and we are focused on providing the maximum value in today's environment. We continue to be focused on the basics, community by community and lot by lot. While we are pleased with our progress, we must remain focused on our balance sheet.

Turning to slide 6, the slide shows a year-to-date home building operations. We have fiscal year 2008 year-to-date total revenue of $278 million including $264 million of home building revenue compared to $315 million of home building revenue for the prior year. Our year-to-date new orders were 247 or 587 units was a decrease of 8% from the prior years net new orders.

Turning to slide 7. We had home building revenue of $145 million for the second fiscal 2008, which represents a 6% decrease from the $153 million that we delivered in the second quarter of last year. Unfortunately we do not continue our streak with three consecutive quarters, with net new order growth. The major reason was a reduction in our spec count. Orders for the second quarter were $115 million or 284 homes, which is a decrease of $38 million from the prior year.

Our backlog increased in the second quarter in the prior year to $301 million on 610 units. This represents an increase of 4% dollars versus a prior year quarter and a decrease of 9% in dollars sequentially, since September 30th.

Please turn to slide 8. Actually Garry Herdler will now provide you with an overview of regional operations and our financial results. I will join Garry for questions and answers.

Garry Herdler

Thank you, Jeffrey. I would like to begin my presentation on slide 9 on a quarterly net order trends. I would like to begin my presentation, as Jeffrey mentioned, you will notice that our three consecutive quarters of year-over-year growth in new orders ended in the second quarter of fiscal 2008. The reasons for this is twofold, while the overall continued decline in the housing market negatively impacted our sales, we believe that the biggest contributor is in the spec home sales that we generated in the second quarter of the prior fiscal year.

Simply put, we undertook efforts to reduce our spec inventory count, which was at 509 homes on October 1, 2006. Comparatively we had only 275 spec inventory homes at the start of the fiscal year 2008 second quarter. Over the last four quarters, we had $608 million of net new orders consisting of 1,352 units at an average order price of approximately $449,000.

This represents a 1% increase in dollars over the same four quarters of the prior year. The Northern and Southern regions remain our largest markets comprising nearly 84% of our total new orders during the second quarter of fiscal 2008. This is up from 69% of our total new orders during the second quarter of fiscal 2007.

Turning to slide 10, we provide a breakout of the second quarter new orders by region. All of the regions were impacted with fewer inventory units to open the quarter. New orders are down less than $2 million were 4% in the Northern region. Despite the declines in dollars, we actually experienced an increase in the number of new orders during the period.

Average sales price decline 15% to 421,000 during the second quarter of fiscal 2008. This decline is primarily the result of product mix as well as sub sales incentives offered to increase orders.

The Southern region experienced the 13% decline in net new orders, despite the fact that the number of units remains relatively stable. This decrease is attributable to a 12% decline in average sales price resulting from increased incentives as well as mix. Within the Southern region the Charlotte's division net orders were down both in dollars and units. We experienced increases in new orders in both Richmond and Greensboro markets. Our Raleigh market experienced a slight decline during the quarter driven primarily by decrease in average sales price.

We experienced a biggest drop off in new orders in our Midwestern region, which decline $16 million or 55% from the prior year. The Midwestern market has been particularly affected by deteriorating economic conditions, decreased inventory as well as increased cancellations. The Florida regions net new orders have decreased by $12 million or 71% form the prior year. This decline is represented of the housing market region the fact that Florida had 94 extra specs to open the second quarter of 2007 versus 2008 due to the summer of 2006 cancellations as well as our shrinking community count there.

On slide 11, we provide a detail of the second quarter residential revenues by region. Approximately 82% of our second quarter revenues were derived from the more stable Northern and Southern regions. As you can see our residential revenues in the Northern and Southern regions actually increased over the prior year period. The Northern region increased 22% from $47 million to $57 million, despite the incentives noted in our new order trends earlier. We have actually noticed an increase in the averaged price of closed homes. The Midwestern region decreased $7 million from $23 million to $16 million. The Florida region was off by over $12 million from $22 million to $10 million.

Looking ahead to slide 12, we provided a breakout of the backlog by region at December 31, 2007 and December 31, 2006. Our backlog in the Northern region is up $28 million of 26% to $136 million compared to $108 million in the prior year. The Southern region backlog is also up $5 million or 4% to $129 million compared to $124 million in the prior year. The number of units in backlog also increased in each of these two regions. The average sales price in backlog increased in Northern region, while decreased in the Southern region.

Combined these two regions backlog increased $23 million year-over-year and they comprised 88% of our total backlog. We expect that our backlog will continue to remain heavily concentrated in the Northern and Southern regions. Our backlog in the Midwest is down over $13 million and $8 million in Florida.

Continuing to slide 13, we have provided a look at our consolidated gross profit trends. This gross profit excludes the effect of pre-tax inventory impairments, which was approximately $22.9 in the second quarter. We believe this adjusted gross profit provides a cleaner look at our operating performance, on a consolidated basis. You can see that our adjusted gross profits have decreased slightly since the first quarter of the current fiscal year. We are up more significantly from the weaker second, third and fourth quarter gross margins over the last fiscal year.

Our margins remain lower in the current fiscal year, including approximately 7% lower in the first quarter of fiscal 2007. The margin compression though through last March quarter -- last year was due to pricing and incentive pressure to reduce excess spec inventory. The Northern and Southern regions continue to significantly outperform the Midwestern and Florida regions in terms of gross margin percentage.

Looking to Slide 14, you'll find cancellation rates by region for the last five fiscal quarters. Our consolidated cancellation rate is up 5% sequentially. Our cancellation rate remains higher than we would like, but we believe it compares favorably to the national trends, particularly in our most stable Northern and Southern regions, where it is hovered in around at the 20% or 21% range.

The cancellation rates in the Midwestern and Florida regions increased significantly. The significant portion of this rate increase is driven by an overall decrease in gross new orders. However, we continue to monitor the overall number of cancellations as well.

Slide 15, provides some detail on our mortgage operations and loan data. I want to point out that [Alambre] is a mortgage broker and agent and no loans are warehoused in our company. You can see that we tend to have a higher credit quality customer, as our average FICO score for the second quarter was 731 and the average combined loan-to-value for that period was only 72%.

Our pipeline of mortgage customers at December 31 had similar credit data with an average FICO score of 732 and average combined loan-to-value of 72%. 89% of our loans in pipeline are prime loans and 11% are Alt-A loans of those prime loans, 91% are conforming loans. We again have no sub-prime loans in backlog at December 31, 2007.

Additionally, our capture rate, which is based on our total non-cash closings, has proved considerably in the second quarter of fiscal 2008 as compared to the same period in the prior year. The next several slides will demonstrate some of the success, we have achieved in improving our key focus areas, liquidity, capital structure, balance sheet, and cost structure.

The slide 16, provide some spec on trends for last six quarters. We took significant actions in the past few quarters to address our inventory and work in progress. From September 2006 to December 31, 2007 we have decreased our total spec home inventory in progress, but available for sale by 261 units or 51% with the relatively flat community account. In addition, our quick delivery spec count, which is generally deliverable within four weeks, but is not necessarily a completed home, decreased by 229 units or 74% over the same period. The year complete stage 12 homes, a one-third of spec units are approximately 82 homes at December 31, '07 versus 63% or 232 homes at December 31, 2006.

Slide 17, provides regional spec trends in the first half of '08 versus '07. These spec improvements have been across all regions. For instance, the net reduction during the second quarter of fiscal 2007 was 140 units of spec versus a net reduction of spec in the second quarter of fiscal 2008 of only 27 units.

We anticipate this inventory related spec in order trend should likely continue through the spring. The total October 1st year-over-year spec -- opening spec count was down in each region. The opening spec count decreased by 96 units in Florida, 72 units in the South, 47 units in the Midwest and 21 units in the North. At December 31st we have 248 specs and on average only 2.6 specs per community versus 509 or 5.2 specs per community at September 30, 2006. We started building some spec in our regions in January for spring summer delivery including some townhomes.

Page 18 provides an overview of our successful portfolio optimization strategy. Our portfolio optimization strategy had two key objectives to it. One was cash to repay bank debt and the second was operational cost reductions. These dispositions also provided significant Federal tax refunds -- will provide those refunds.

We closed the 1400 lots in nine deals with nine buyers in five states, which was approximately 19% of our owned lot count. These were some of the worse performing communities in the entire company. The magic and challenge of these transactions was that we identified the right properties to sell, we actually found the right buyer for each of these deals. Approximately 94% of lots we sold were Florida approximately 561 lots, Illinois 480 lots and Arizona 267 lots.

We have a better overall capital allocation in cost structure in this challenging environment and in my view we are better position to come out of the cycle eventually, because do not have to work out these problem communities anymore. We have planned to staff cost -- staffing cost reduction once does settle on these deals. It's unfortunate, but necessary in today's environment. We completed this reduction in the second week of January. We reduced headcount by a little over 14%, for anticipated savings of approximately $4 million a year.

These amounts are bubble. We indicated to our banking group might occur. In addition we've booked a $0.5 million severance charges for this in Q2. The $33 million of proceeds to split into three categories under GAAP, the first is $8.2 million of land sale revenue, the second is $13.4 million of GAAP liability, and the third is $11.3 million of proceeds for discontinued operations. We also paid a few hundred thousand dollars for the option rates.

The $13 million of GAAP liability related to the fact that there is a continuing involvement by either separate option rate, which is not an obligation and we can walk away at anytime without significant penalty, for the 350 lots we option back. And impairment was booked on each sale prior to the closing for an aggregate of $57 million of pre-tax or $34 million after-tax, so there was no gain or loss on sale.

We expect to receive federal tax refunds related to these transactions of at least approximately $25 million by June 30th, which is a little earlier than we said before. We also closed our tenth deal for $2 million for 19 lots last week. Our aggregate optimization sales proceeds received today plus future tax refunds should exceed $60 million.

Slide 19 provides an owned and controlled lot trends. We have taken significant steps to reduce our total owned and controlled lot count. This is down approximately 50% in lots, since the peak. Since December 31, 2006, we have decreased our total lot count by approximately 4,600 lots or 35% including portfolio optimization in our previous dispositions as well as abandoned lot options.

Our owned lots have decreased by 2006 -- by over 2,650 lots or 31%, since December 31, 2006. Our owned control mix is still high at 70%, but we see this decreasing over time either through working through our balance sheet or eventually seeing opportunities through efficient options not yet though.

Page 20, provides a summary of Q2 impairments. Aside from the land sale impairment we discussed, we impaired inventory owned at December 31, 2007 by $22.9 million in all regions in 17 communities. We impaired the Midwest by approximately $10 million, Florida by $2.4 million, the North by $5.6 million and the South by $5.2 million.

Besides the usual net realizable value of a specific community, we looked at other analysis including updating our 2005, '06 vintage purchase analysis. The majority of our impairments and our asset sales as well where from this bucket. Although there is a fair amount of other buckets as well.

We also looked at our remaining capital allocated by region pre and post impairments from the last several quarters. We took a charge for the write-off of a pre-acquisitions cost of $0.5 million in the quarter. As of December 31, 2007 we have a deferred tax asset balance of $34 million as well as separate federal income tax receivable of a little and excess of $25 million.

We have not yet completed our December 31st tax return, but we are trying to get this completed as soon as possible. We triggered the three year cumulative loss position test under FAS 109 on accounting for income taxes that requires further valuation on recoverability of the deferred tax assets.

We conducted a fairly comprehensive valuation of the recoverability of this deferred tax assets. We concluded that as of December 31st, we did not need a tax valuation allowance as we believe the tax asset is recoverable. This conclusion is obviously based on assumptions and there is no certainty that this condition will remain in future quarters.

Slide 21 provides some selected financial information. Our total GAAP revenue for the fiscal 2008 second quarter was $155 million, which is down from a $157 million for the same period in the prior year. Total year-to-date revenue for fiscal 2008 was $278 million, which is down from $322 million in the prior year. We already discussed the residential revenues, land sales and impairment charges.

The increase in SG&A in the second quarter of fiscal 2008 is compared to the same period in the prior year is partially the resulted cost recorded during the period as it relate to legal fees and consulting fees. The prior year expense also includes a credit for the reversal of a bonus expense for the former president of a division. This increase in the miscellaneous general and administrative cost was partially offset by a reduction of cost associated with advertising. Additionally, we recorded additional non-cash stock comp expenses there are more people in the plans versus the prior year.

The decrease in SG&A for the year-to-date period is primarily driven by decreases in commission costs, which is direct resulted decrease residential revenue for the period as well as the advertising savings noted previously. These savings were partially offset by the effects of general and administrative cost just mentioned.

We have realized a net loss of $51 million or $2.78 per share for the second quarter of fiscal 2008, compared to a net loss of $8 million or $0.41 per share for the same period in the prior year. Excluding losses from the Arizona discontinued operations and other one-time charges, our fiscal 2008 second quarter net loss would have been $2 million or $0.11 per share.

Excluding losses from the Arizona discontinued operations and other one-time charges we would had net income of $3 million or $0.15 per share in the second quarter fiscal 2007. We have realized a net loss of $53 million or $2.89 per share for fiscal 2008 year-to-date compared to a net loss of $4 million or $0.20 per share for the same period in the prior year.

Excluding net losses from discontinued operations and one-time charges for fiscal 2008, year-to-date net loss would have been $3 million or $0.17 per share. Excluding losses from discontinued operations and one-time charges, we would have net income of $10 million or $0.53 per share for fiscal 2007 year-to-date.

One-time charges include inventory impairments, land sale impairments, charges for abandoned projects and other pre-acquisition costs and severance charges. Please see our 8-K in press release for reconciliation of net loss to adjusted net loss.

Slide 22, provides some selected balance sheet metrics. In addition to our $33 million of assets disposition proceeds during the quarter we received approximately $18 million of income tax refunds for prior years early in Q2. These tax refunds do not include our $25 million of anticipated future refunds by June 30th that we previously mentioned. These items received to our combined $51 million, we also reduced certain land and other expenditures.

In late December we paid down our credit facility by $75 million. Cash and cash in transit of approximately $41 million at December 31st was fairly constant with the September 30th balance, down $2.3 million. So net debt decreased by $72.7 million. We had net borrowing base availability at December 31st of approximately $19.5 million as well. We are extremely cautious with this combined December 31st liquidity, as we are in our seasonal building cycle currently, so it changes.

Our inventory decreased by $122 million due to asset sales, impairments and lower expenditures. The VIE increased by $6 million due to a deal that was an older deal that now met the criteria for variable interest entity. The $13.4 million other asset the amount of the two options deals we mentioned as part of portfolio of optimization.

Slide 23 describes our December bank amendment. This amendment gave us the flexibility to complete our portfolio optimization strategy and we filed it as an 8-K on December 28th. Generally network was amendment for after tax impairments in December 2007 and March 2008 up to a maximum of $62 million of after-tax impairments, that's the covenant that was reduced by that.

There is no interest coverage tax in March quarter and future ratios are lowered. The maximum leverage ratio was increased and a net debt concept was added. Certain point based limitation factors were temporarily modified for improvement and we have a new interest pricing grid. We are in compliance with all financial covenants at December 31st.

I will now turn the call over to Jeffrey for a wrap up.

Jeffrey Orleans

Thank you very much, Garry. In this typical environment we have continued to significantly improve our balance sheet. Our portfolio optimization strategy was successful. We identified and sold our weaker performing assets. The paid cash to repay the banks, reduced our operational costs, and we will receive significant federal tax refunds. We have worked in difficult times before and the progress that we are making will ensure a brighter future.

Thank you. I would now like to turn is over to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line Carl Reichardt. Please proceed.

Carl Reichardt - Wachovia Capital Markets

Good morning, guys. How are you?

Jeffrey Orleans

Hi Carl, how are you.

Carl Reichardt - Wachovia Capital Markets

Fine, thank you. I have a few a questions, a couple of clean ups on the numbers. Garry, the impairment that was included in the Arizona discontinued operation is somewhere around $20 million. I think we backed into that's about right.

Garry Herdler

That's about right.

Carl Reichardt - Wachovia Capital Markets

Oh 20, okay. And then the GAAP liability associated with the land sale with the option take backwards kind of like a FIN 46 type of minority interest with…

Garry Herdler

I think of it exactly the same way as you do, although it's works slightly to the opposite. It's the proceeds you received on those two deals get booked rather than 1046 you put a 100% which you would actually owe. As lots are taking down, you sort of theoretically accrete some interest, it's not really interest, but it a from a GAAP perspective, but this looks, smells and tastes like a regular option contract. The issue is that under FAS 66 this is a continuing involvement, because when you sold that you still had an option.

Carl Reichardt - Wachovia Capital Markets

Still the option? Okay.

Garry Herdler

So that number we will separately have an asset liability that separately booked on the balance sheet.

Carl Reichardt - Wachovia Capital Markets

Okay. All right, great. And then a couple of other…

Garry Herdler

And that liability is not included as a liability for our bank covenants.

Carl Reichardt - Wachovia Capital Markets

Yeah, I figured as much, and it's broken out some of that jacks, figured that. There a couple of questions on then just sort of a broader trend. Jeff you had mentioned that, you felt that traffic over the last weekend had been, that you call it just very good. Can you give me a little more detail on that? Obviously, we'd normally see a seasonal pick up, and I want to know by your conversion rate as well, has it just been traffic or have the orders also improved?

Jeffrey Orleans

Right from the middle of December to the beginning of January things don't get worse in that cost. So let's start to worry about them and then work our way up to -- last weekend we -- over 200 account for our Northern division in traffic is good. We were 240. We were running around 150, 160 which is really very bad. So, trafficwise, now conversionwise we took deposit, we really can't give our sales accounts for January yet, but the first couple of weeks and the last couple of weeks, we had a 30 day drought there that was getting pretty divesting.

The difference is, I went to North Carolina. I was in Charlotte, Raleigh. I went to Richmond, Virginia. I was over a bunch of our jobs, and we have really seen the sales people 95% are most optimistic, they are all working with people. So the conversion rates I can't give you, but very positive signs. Lower interest rates have helped in the past and I expect them to help this time.

Carl Reichardt - Wachovia Capital Markets

Okay. I appreciate that. And one last question. I think Garry, you had mentioned that a portion of the impairments plus some of the lands sales themselves which are connected were more of a pull out in ’05, land bucket. Can you give me a sense as to whether or not there is a significant difference among the northern and southern region of the vintage of the land buckets? I am particularly interested in the vintage of the northern region lands.

Garry Herdler

We can't disclose publicly or we won’t disclose publicly what our vintages by region. I don't know any builder that will. I know everyone asks the question. I can tell you that it's obvious that if you looked at how are our business works, we tend to get more of our land entitled ourselves in the north. We don't own it until it is entitled. So, on the margin you would maybe have something that would probably take a little longer to get it through the cycle in the north than other regions.

And in the south we have more, on balance we have more options. We've looked at that by region and we have impairments both in those vintages as well as other vintages. So it's not, just in either anyone of them.

Carl Reichardt - Wachovia Capital Markets

Okay. All right. I appreciate that guys, I will let someone else go. Thanks so much.

Garry Herdler

Thank you.

Operator

Your next question comes from the line of Jim Wilson of JMP Securities. Please proceed.

Jim Wilson - JMP Securities

Good morning guys.

Jeffrey Orleans

Hi, Jim.

Garry Herdler

Good morning.

Jim Wilson - JMP Securities

I guess just two questions. One, Garry can you give a little color on the what the margins look like by region, I was just craving to get it on a pre-impairment basis, it's great to see the total, just wondering how much they are different by regions?

Garry Herdler

What you see is, the margins would be definitely higher than those in both the North and the South.

Jeffrey Orleans

They are running close.

Garry Herdler

They are running close, the North is a little higher than the South but those are definitely higher than those, in both the north and the south, but those are definitely Florida both still look very good that's why you saw the impairment in the current quarter this on the Midwest. The impairments are down in Florida because the assets are down because we only have a couple open communities there right now.

Jeffrey Orleans

Florida and the Midwest the margins are non-existent really.

Jim Wilson - JMP Securities

Right.

Garry Herdler

The strategy in those areas is to be relatively cash neutral and because they are important regions for us for the longer term.

Jim Wilson - JMP Securities

Okay, and I guess maybe the trend a little bit in the North and South almost, obviously all your inventory left is, are in those regions. I suppose they're basically the only places that matter. But trend of late, I am just doing again trying to factor in how much Florida and Midwest have negatively impacted the trend the last few quarters?

Garry Herdler

We have seen margin improvement in the Northern region based on closings. We have seen the south kind of hang in there and we maintained relatively flat.

Jeffrey Orleans

The next 60 days is going to be an important part of future trending, Jim. I mean, we react community by community, week by week. If things do peak up like I believe, things get better quickly. Not 10% better but a couple of percent better. Things get worse, so traffic in sales really determined how we do.

Garry Herdler

I want to caution one week doesn’t make a season firstly, but, and the other thing is the margins in both Florida and the Midwest are consistently not great.

Jim Wilson - JMP Securities

Okay. And then what was actual cash flow for Q3, I can sense the EBITDA on the cash movement, but, you know that…

Garry Herdler

Well, the easiest way to look at it is that we paid down $75 million of debt in the quarter and we had an $18 million tax refund and $33 million of proceeds.

Jim Wilson - JMP Securities

That makes it up. Okay.

Jeffrey Orleans

And our biggest quarter is always our fourth quarter, I guess as everybody else, but ours is in June. So that’s where the cash flow comes.

Jim Wilson - JMP Securities

Okay, very good. That’s good ever, thanks guys.

Garry Herdler

Thank you.

Operator

(Operator Instructions) And your next question comes from the line of Alex Barron of Agency Trading. Please proceed.

Alex Barron - Agency Trading

Hi, good morning guys.

Jeffrey Orleans

Good morning Alex.

Alex Barron - Agency Trading

I wanted to ask you in general you went into January, are you seeing any signs of price stabilization by yourselves or your competitors or are you still having to lower prices somewhat compared to December?

Jeffrey Orleans

I believe right now, particularly in the north, that we are stabilizing, in the south also. I think that we are seeing reduced -- a number of things we've done, we repositioned some of job, put in some smaller products, have new opening sales prices, and I think in general the builders are reducing discounts which enables us to do the same. But that's today.

Three weeks ago if you would ask me the question, I would have given you help. There is nobody out there, what can we do to make a sale. So, the good and the bad of it, December sales were bad, so therefore the end of December sales will have bigger discount and certainly that what we are expecting at the end of January and February.

Alex Barron - Agency Trading

But you haven’t seen like, or you haven’t needed to resort to by seeing your other competitors just come out and slash prices to try to get the bails going in January?

Jeffrey Orleans

Yeah, but I think right now we have seen on down south we saw John, we wouldn’t come out with a big price slashing, I mean, we have seen builders do it but its, its really month by month, week by week.

Alex Barron - Agency Trading

Okay, that is helpful. My second question relates to the lots that you sold, just trying to get a sense of who bought these lots, was it other public builders, was it private builders, was it opportunity land funds, can you give us some sense of that?

Garry Herdler

Well, when we try to give some indication that is in our press release, let’s just say if it was, these were local developers that this was an important market to each one of those buyers, that’s why it was nine deals with nine buyers. The magic of it was finding the right buyer. There is obviously those land funds there are out there and I have seen other builders do those transactions and I think that was a good trade for them.

The difference for us, those funds would have wanted to stuff we wouldn’t want to sell and we wouldn’t have had the cost reductions that we would have been able to achieve. And so, it wouldn’t have met what our view of the three things per portfolio optimization needed to be.

Alex Barron - Agency Trading

Got it. Now, where these lots already some of them, somewhat previously impaired? And if so how much?

Garry Herdler

Yes, these lots were impaired. We'll try to get to the actual number. Let's just say these were a significant amount of the previous impairments that we recovered.

Alex Barron - Agency Trading

Okay.

Garry Herdler

If you look at it, by definition they had to be because these were some of the worst performing communities in our company.

Alex Barron - Agency Trading

Okay. Yeah, I am just trying to get a sense of what the difference might have been from the realized value versus I guess the original.

Garry Herdler

It's hard to look at it that way because you have got original cost and then you have got some slight improvements and things like that. And the reality is, you look at your value of each community in the company every quarter, you impair it down to what the realizable value is on that. You don't write up to good ones, only the bad ones get written down. And then you got assess it at that. So we like in the value was more of the aggregate proceeds of all proceeds related to each property.

Alex Barron - Agency Trading

Thanks. My last question is, on SG&A, I noticed that it crept up a little bit relative to last quarter. So I am trying to understand how should I think of what portion is fixed versus what portion is going to be variable with your revenues?

Garry Herdler

We have obviously had a busy time recently with some of the other things we've had going on. I am not sure we're ready to sort of come out with fixed versus variable. You will see in the queue, and I think you will see it broken out in more detail there, let's just say we're always looking very closely at our costs and we are going to continue to do so.

Alex Barron - Agency Trading

Okay.

Jeffrey Orleans

We expect our SG&A to be inline percentagewise we had some significant additions in the second quarter?

Garry Herdler

Yes, and some other things in the second quarter while there are not classified necessarily as one-time items, they would more likely viewed is one-time items for some of the consulting fees and things like that.

Alex Barron - Agency Trading

Okay. And you reduced that count by how much from the peak?

Garry Herdler

I believe the number is -- just one second. The number is probably between 40% and 45%.

Alex Barron - Agency Trading

Okay. Great, thanks a lot.

Garry Herdler

Thank you.

Operator

And that does conclude the question-and-answer session. I will now turn it back to management for closing remarks.

Jeffrey Orleans

Again, thank you for joining us. If there is any additional information you need, you can please contact our office. Thank you for your time.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Have a good day.

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Source: Orleans Homebuilders F2Q08 (Qtr End 12/31/07) Earnings Call Transcript
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