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Executives

Drew Mackintosh - Vice President, Investor Relations

Chad Dreier - Chairman, President, and Chief Executive Officer

Larry T. Nicholson - Chief Operating Officer

Gordon Milne - Executive Vice President, Chief Financial Officer

Dave Fristoe - Senior Vice President, Controller

Analysts

David Goldberg - UBS

Michael Rehaut - J.P. Morgan

Nishu Sood - Deutsche Bank

Megan McGrath - Lehman Brothers

Duffy Fischer - ClearBridge Advisors

James Mccanless - Ftn Midwest Securities Corp.

Joshua Pollack - Goldman Sachs

Alan Ratner - Zelman & Associates

Steve Surrell - Conning Asset Management

Buck Horne - Raymond James

Timothy Jones - Wasserman & Associates

Ryland Group, Inc. (RYL) Q1 2008 Earnings Call April 24, 2008 12:00 PM ET

Operator

Good morning, ladies and gentlemen, and thank you for participating in the Ryland Group 2008 first quarter results conference call. The company will first share its prepared comments, followed by a question-and-answer session. (Operator Instructions)

At this time we would like to turn the call over to Mr. Drew Mackintosh, Vice President, Investor Relations. Mr. Mackintosh, you may begin.

Drew Mackintosh

Thanks, and good morning and welcome to Ryland's first quarter 2008 earnings conference call. Today's call is being transmitted live over the Internet and can be accessed through Ryland's Investor Relations section of the website at www.ryland.com.

In a moment, I'll be turning over the conference call to Chad Dreier, Ryland's Chairman, President, and Chief Executive Officer. Also joining us today are Larry Nicholson, Executive Vice President and Chief Operating Officer, Gordon Milne, Executive Vice President and Chief Financial Officer, and Dave Fristoe, Senior Vice President and Controller.

Before we begin, please be aware that certain statements in this conference call are forward-looking statements based on assumptions and uncertainties that include the completion and profitability of sales, changes in economic conditions and interest rates, consumer confidence, and general economic business and competitive factors. These factors and others may cause actual results to differ from the statements made in this conference call.

With that out of the way I will now turn the call over to Chad Dreier.

Chad Dreier

Okay. Thanks, Drew. Good morning to everybody and thank you for joining us today.

The first quarter of 2008 turned out to be another challenging quarter for the homebuilding industry and for the Ryland Group. We had a few bright spots in the quarter in terms of growth in unit sales and increases to backlog in some markets, however in general business conditions have not improved. As a result, earnings per share came in at a loss of $0.69 per share.

With fewer mortgage options, a weak resale market, and an uncertain economic outlook, potential homebuyers are cautious in today's market. Our challenge is to find the right product offering and price point to capture a higher percentage of the buyers that are out there. As we achieve that goal, however, it can reduce our profitability.

Let me start off with the numbers for the quarter.

In the Homebuilding segment, first quarter revenues were $400 million, a 42% decrease from the first quarter 2007. This decline was due to a 33% drop in closings and a 14% reduction in average closing price.

Gross profit margins averaged just 5% in the quarter. Excluding inventory valuation adjustments and write-offs, gross margins would have been 11.9%.

SG&A for the Homebuilding segment was lower by $32 million compared to last year, however this decline did not keep pace with the decline in revenues. As a result, SG&A as a percent of sales increased 210 basis points from the first quarter of 2007 to 16.1%.

We generated 2,159 net new sales in the quarter, 28% less than the same period last year. The Southeast of the country fared relatively better than the rest of the country, with our Tampa and Charleston divisions posting positive year-over-year sales.

We were determined to get our cancellation rate down to a more manageable level after experiencing a 46% cancellation rate in the fourth quarter of 2007. Our divisions did a better job of screening potential buyers for credit problems or house to sell issues this quarter. This resulted in a much lower cancellation rate of 27%. Hopefully cancellations will be less of an issue for us in 2008 than they were in 2007.

Turning to the balance sheet, we continue to be in the enviable position of having low leverage, lots of liquidity and a debt maturities schedule that provides financing over an extended period.

At the end of March our debt-to-capital ratio stood at 36%, with $839 million in debt and $213 million in cash on hand. Total recurring interest incurred was $12 million, and capitalized interest amortized to cost of sales was $6 million.

In February we received an amendment to our $750 million revolving credit facility that reduced our minimum tangible net worth requirement to $850 million and increased our borrowing base by adding unrestricted cash up to $300 million. We are not borrowing against this line of credit and have no plans to do so for the remainder of the year.

Total inventory stood at $1.7 billion at the end of the period. We took $20 million in charges for inventory valuation adjustments, option deposits, and feasibility write-offs in the quarter, as well as a $7 million charge for joint venture impairments, which is the smallest amount of charges we've taken over the last year and a half. I cannot predict how the housing market will fare in 2008, but I do not think we will see the level of land impairments that were taken in 2007.

At the end of the first quarter, our lot counts stood at 38,180, with a breakdown of 25,814 owned lots and 12,366 option lots. This represents a 35% decline compared to the first quarter of 2007.

Land expenditures in the first quarter, including acquisition and development, dropped 63% to just about $63 million. Instead of the usual seasonal uptick in speculative inventory that comes with the spring selling season, we actually reduced our total spec count from 823 units at year end to 686 units at the end of the first quarter of 2008. More importantly, homes over 120 days from start without a contract dropped by 253 units, or 40% sequentially, to 373 units, allowing us to take $54 million out of finished speculative inventory.

As we anticipate market conditions, we are striving to position ourselves as a profitable successful homebuilder in a tough marketplace. That means continuing to deliver the same high quality product while stripping out direct and indirect costs.

On the direct cost front we have managed to achieve further reductions in both labor and materials. Our divisions in the Southeast, for example, have been able to reduce direct construction costs by almost $10,000 a house on an average of a 2,000 square foot home over the last 12 months. This is in addition to the savings we had already realized at the beginning of 2007. We have achieved these cost savings without sacrificing quality or customer satisfaction. Warranty costs are actually down year-over-year as a percent of revenues.

We're taking steps to reduce overhead as well. Headcount at the end of the first quarter was down 42% from the peak, and earlier this month we consolidated our four regions into two. The Texas and Southeast regions will make up one region, while the North and the West regions will constitute the second. These actions, along with the normal seasonality of the business, should bring SG&A down to the 11% or 12% range in the back half of 2006 of the year.

We have asked all of our employees to pull together and do more with less, and I want to thank them personally for their perseverance during these difficult times.

Our Financial Services segment, which provides mortgage, title, escrow and insurance services, contributed $7 million in pre-tax profits in the quarter. Thirty-six percent of the mortgages we originated were government-insured loans, and 64% were prime loans. The average FICO score was 708, and the average cumulative loantovalue was 90%. The capture rate for our mortgage company increased to 82% in the period compared to 79% in the first quarter of last year.

In January of 2008 we entered into a mortgage warehouse line of credit agreement with the guarantee bank which provides for revolving borrowings of up to $40 million in funding for mortgage loan originations. While we still sell the majority of our mortgages to Countrywide, the guarantee bank relationship will give us additional flexibility in providing funding for our homebuyers.

In conclusion, it is difficult to predict when things will turn around in the housing market. We are doing everything we can to remain competitive while maintaining our strength to capitalize on the eventual recovery of the housing market. There are still buyers out there who are recently married or starting a family or just want to move to a new home in a nice new neighborhood. These qualified buyers view a home as a place to raise a family rather than a short-term investment. Ryland is positioned to reach those buyers and capture those sales.

Our sales numbers are down, but they are not down as dramatically as some of our competitors. I'm encouraged by the fact that our backlog increased 21% on a unit basis from the end of 2007 and 17% on a dollar basis. Thanks to this sequential increase in backlog and a reduction in spec units, sold inventory at the end of the first quarter represented 24% of total inventory compared to 21% in the fourth quarter of 2007.

We are taking aggressive steps to reposition the company with respect to changes that are within our control so that we are better able to deal with the market conditions that we can't control. I expect that we have experienced the worst of the price cuts and the impairments as an industry, which will help us return to a more normalized sales pace.

As we move through this housing cycle, we will continue to execute on our conservative risk-adverse business model while adapting to the realities of today's market. Eventually things will turn. In every housing cycle there are winners and losers, and I believe Ryland is positioned to be one of those winners.

That concludes my prepared remarks, and we'd now be happy to take questions. Thank you.

Questions-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question or comment comes from the line of David Goldberg with UBS. Your line is open, sir.

David Goldberg - UBS

Thanks. Good morning.

Chad Dreier

Hey, how are you?

David Goldberg - UBS

Good.

Chad Dreier

Good.

David Goldberg - UBS

The first question is actually, Chad, your comments on reduction in cancellation rates.

Chad Dreier

Yeah.

David Goldberg - UBS

That was pretty interesting about how you were talking about your ability to weed out people who can't necessarily qualify for mortgages and the increased diligence you're doing - due diligence you're doing - at the community level, and I was wondering if you could give us some more details about that. How many people, potential buyers, are being turned away? What's the quality of traffic? Are you finding a lot of people that just can't qualify? And what do you think would have to change, I guess, to get those people to be able to qualify in terms of underwriting standards?

Chad Dreier

Okay. That's kind of a long question. You know, part of it is we decided, I don't know, six months or so that people that had houses to sell was just not a great place to be in for the obvious reason that if they can't sell their house they're not going to be able to close on a Ryland house. So part of that is we've kind of re-engineered, for lack of a better word. We're going to more of an entry level buyer than a move-up buyer. And in the West, for example, I think last year you could say two-thirds of our buyers were move-up, and now this year three-quarters or twothirds would be entry level. So that's a shift. Now, you know, on every coin there's two sides. As we go to more entry level buyers, they have a more difficult time coming up with the down payment. That's their issue as opposed to the issue of having a house to sell, and I think that was the second half of your question.

I think the traffic, you know, anybody that's out in the traffic that wants to buy a house, they obviously know what the mortgage market is and I think we do a much better job of educating the people before we sign a contract. And as I said, I think our FICO score was just over 700. That's still pretty good credit. And if somebody comes in with a 550 FICO score, we just say hey, that's not going to work.

I think it's been helpful that the courts ruled that the down payment assistance is legal, and we're doing some of that stuff. So I think it's, you know, every buyer's different and every situation is different, but basically we're going to more of an entry level, which I think reflects some of the decrease in the average price. And we'll keep our fingers crossed for the rest of the year.

David Goldberg - UBS

And then a quick follow up - and I appreciate the amount of information on the first question - a quick follow up, though, about foreclosures and how much you feel like foreclosures are impacting your prices and your ability to attract customers as a competitive product.

Chad Dreier

Well, you know, boy, that's one of those - there's a macro answer and a micro. In general, most new homebuyers don't go to the foreclosure market. By definition foreclosures, nobody's lived in it for six months and it's been trashed. And to buy a foreclosure you've got to spend a lot of money to put it back together.

Now, the other hand of that is you can get a great deal once the banks figure out they've got to move them.

So there is an element of people that would do that, and that's a be - you know, there have been foreclosures in new communities across the country, and that's a problem. So it is certainly wind to our face and not to our back on the foreclosures. And I would like to think as we get through the year as an industry that will help resolve itself.

And third - and, you know, I am not a politician - but sooner or later Congress will pass some kind of housing legislation and that will probably help make it be so that there are less foreclosures, which would be better for us.

David Goldberg - UBS

Great. Thank you.

Chad Dreier

Okay.

Operator

Thank you. Our next question or comment comes from the line of Michael Rehaut with J.P. Morgan. Your line is open.

Michael Rehaut - J.P. Morgan

Hi. Good afternoon, or good morning on the West Coast.

Chad Dreier

It's a pretty morning on the West Coast.

Michael Rehaut - J.P. Morgan

The first question just is on your comments with regards to pricing. You said that you felt that the worst of the pricing declines are behind you. We just got off the Pulte call earlier today and they were a bit more negative, I think, on pricing trends. Particularly given your order ASP continues to be down actually at an increasing negative rate year-over-year, I was just wondering can you break down those comments on perhaps a more regional level, where you're seeing maybe within your own business some glimmers of hope in terms of price or how that foots with the order ASP numbers?

Chad Dreier

Okay. Well, in general I think I did say we thought sales were up in Tampa and Charleston, so I would feel a little better about that. Actually, in Las Vegas, I mean, we have backlog increases compared to the first quarter of 2007 in Vegas, Northern California, Phoenix, Virginia, Ohio Valley and Indianapolis.

So some of that is, I think - and this is pretty self-serving, but it's our call - I think we recognized some of our problems earlier than some of the other colleagues and dealt with some of those issues, like Vegas and Northern California, closer - earlier in 2006 and 2007. So now that we're selling houses, we end up with some slightly better comparisons.

The second thing, I think some of the average sales price is our incentives are bigger. Somebody will ask so I'll just say, we had 16% incentives in the first quarter. That's obviously a couple, three points - what did we say in the fourth quarter?

Unidentified Company Representative

Thirteen.

Chad Dreier

Thirteen in the fourth quarter, so three points higher.

Some of that was to move out some of the spec inventory, you know, something's over 120 days old, you've got to be a little more aggressive, and we moved out a lot of that. So that would help - or not help, but that would help explain some of the lower average selling price.

We think our prices and backlog as we go to the second half of the year are a little better than they were on a 257.

So a combination of three or four of those things.

Michael Rehaut - J.P. Morgan

Okay. Thank you. The second thing, just more of an accounting. You'd been good enough to share with us last quarter that the benefit from prior quarters impairment flowing through, I think it was - what do I have here - it was about a 330 basis point benefit to gross margins. I was wondering if you could give us the number this quarter.

Unidentified Company Representative

It was about a $20 million turn.

Michael Rehaut - J.P. Morgan

Great. Thanks very much, guys.

Chad Dreier

Okay. Talk to you later.

Operator

Thank you, sir. Our next question or comment comes from the line of [Eric Brass] with MFS Investment Management. Your line is open.

Chad Dreier

Hello?

Operator

Mr. Brass, your line is open, sir. Please proceed with your question.

Chad Dreier

Well, let's go to the next guy.

Operator

Yes, sir.

Chad Dreier

Okay.

Operator

Our next question or comment is from the line of Sood Nishu (sic) with Deutsche Bank. Your line is open.

Nishu Sood - Deutsche Bank

Thanks. Good morning, everyone.

Chad Dreier

Hey, how are you?

Nishu Sood - Deutsche Bank

Chad, you were mentioning the amount of the discounts up from 13% to 16%. I was wondering if you could help us understand whether or not the types of incentives you're offering now as opposed to, let's say, a year ago have changed. For example, are you using less on the half-off, let's say, upgrades or something like that, more on the financing side now? How have you changed in your kind of sales and marketing efforts in terms of your discounts?

Chad Dreier

I would say proportionately they have not changed. They're just instead of $10,000, you're doing $12,000, or, I guess instead of doing $40,000, we did $50,000. So I wouldn't say, you know, it's still a buyerbybuyer deal. You know, Larry Nicholson wants more options and Gordon wants a bigger interest subsidiary.

I wouldn't say there's any substantial marketing shift or sales shift in how we apply discounts.

Nishu Sood - Deutsche Bank

Okay. And the second question, you mentioned this spring selling season managing your specs a lot better and that's certainly good from a cash flow perspective. Has there been any negative aspect of that in that, you know, typically that's going to help drive some sales during the spring selling season?

Chad Dreier

Well, you know, I mean, that's always, you know, everything has two sides to every coin. So hey, we've got less specs going into the spring selling season. I'd rather be in that position than I would be having more. So, I mean, you know, hey, if we had 1,000 specs it'd be easier to sell some in the second quarter. I'd rather have 600 and whatever I said, so that's a pretty easy decision from my point of view.

Nishu Sood - Deutsche Bank

Okay. And final quick question, just on the corporate expenses, your SG&A has come down not as much as your closing revenues but pretty closely in alignment. Your corporate expenses on the other hand haven't, so I was just wondering what we can expect in the future on that, whether those are going to begin to come down as well.

Chad Dreier

I'm going to differ to Dave Fristoe on that.

Dave Fristoe

Well, in this quarter he had partly to do - a couple of million of those corporate expenses related to changes in investment values for some of our benefit plans. So those can ebb and flow with the market, so they could give us better numbers later.

But in general, corporate expenses are declining and have declined, so I think you can expect more of that through the year.

Nishu Sood - Deutsche Bank

Okay. Thanks a lot.

Chad Dreier

Great. Thanks.

Operator

Thank you, sir. Our next question or comment is from the line of Megan McGrath with Lehman Brothers. Your line is open.

Megan McGrath - Lehman Brothers

Hi. Thanks.

Chad Dreier

Hi.

Megan McGrath - Lehman Brothers

I wanted to follow up a little bit on the spec issue. You did a good job in terms of bringing that number down but I was wondering if you could give us any more color in terms of where you've had more success in selling specs and where it's been tougher, either geographically or at different price points or types of housing?

Chad Dreier

Well, you know, I mean, we've gone from 1,800 to 600 so that - in like a year - so that's 1,200. And I wouldn't say, you know, Texas is better than Florida or Florida is better than California. I mean, frankly, we have 20 or 21 divisions. I wouldn't say there's any significant difference from a statistical or analytical point of view that would help you come to some conclusions.

I mean, the problems in Tampa are the same as the problems in Sacramento or Chicago or Virginia or Phoenix on specs. So I would say we don't treat them any differently and there hasn't been any statistical difference.

Megan McGrath - Lehman Brothers

Okay. And then in terms of geography, you had shared with us last quarter I believe that your highest level of inventory in terms of years of supply was in the Chicago market, so just curious how that market is doing for you.

Chad Dreier

Well, Chicago, you know, is a great part of the country. It's the capital of the center of the country. We have our most inventory there and, you know, if we sell a few more houses, it'll be less in terms of years supply, so I wouldn't say there's any significant difference since year end.

Megan McGrath - Lehman Brothers

Okay, thanks. And just one quick follow up - sorry if I missed this - did you say what your cash flow from ops was in the quarter?

Chad Dreier

I didn't say.

Unidentified Company Representative

It's negative 40 - 24.

Chad Dreier

Negative $24 million.

Megan McGrath - Lehman Brothers

Negative 24. Okay, thank you very much.

Chad Dreier

Okay.

Operator

Thank you, ma'am. Our next question or comment comes from the line of Duffy Fischer with ClearBridge Advisors. Your line is open.

Duffy Fischer - ClearBridge Advisors

Yes. You threw out a number of cost savings of $10,000 for kind of a group of houses, I think you said in the Southeast. I'd be interested, you know, how much of that came from OSB and lumber prices just coming down, and then kind of what were the other big buckets of that $10,000?

Chad Dreier

Okay, we're going to let Larry Nicholson respond to that.

Larry T. Nicholson

Yeah. I would tell you there is a large percentage of lumber. But on the labor side I would tell you we had great gains, both on like rough carpentry, drywall. So, I mean, it's pretty well spread across the board on the labor side. The materials side slowed down midyear, but the labor side really picked up the second half.

Duffy Fischer - ClearBridge Advisors

Okay, thank you.

Chad Dreier

Okay.

Operator

Thank you, sir. Our next question or comment comes from the line of Jay Mccanless with Ftn Midwest. Your line is open.

James Mccanless - Ftn Midwest Securities Corp.

Hi. Good morning.

Chad Dreier

Hi.

James Mccanless - Ftn Midwest Securities Corp.

I wanted to ask on deferred taxes and fourth quarter I know you all took a valuation allowance but we didn't see one this quarter. Could you just talk about what the rules are behind that and whether we will see those going forward?

Chad Dreier

Well, you know, I took my tax class in 1969, so Dave and Gordon have told me I'm sort of out of the loop on deferred taxes. So I'm going to let Dave or Gordon respond to that.

Dave Fristoe

We went through a similar analysis at year end and determined that there was no additional allowance required this quarter. We did walk through some of those dynamics last quarter so we probably wouldn't want to do it again, but nothing's changed that would cause us to take an additional hit.

James Mccanless - Ftn Midwest Securities Corp.

Okay. Should we read into that that you have a higher expectation of future profitability than you maybe did at the end of the fourth quarter or would that be incorrect?

Dave Fristoe

That would not be the reason why we didn't take a hit.

James Mccanless - Ftn Midwest Securities Corp.

Okay. And then I also wanted to ask on the JVs, I saw that $7 million of the impairment this quarter was for JV impairment. What is the status of the Las Vegas JV? Can you give us an update there, and what should we expect going forward?

Chad Dreier

Well, the $7 million did relate to Ryland's investment in that Las Vegas - Kyle Canyon - and since we have 3% of that, we would not feel comfortable speaking on behalf of the venture.

James Mccanless - Ftn Midwest Securities Corp.

Okay. Thank you.

Operator

Thank you. Our next question or comment comes from the line of Joshua Pollack with Goldman Sachs. Your line is open.

Joshua Pollack - Goldman Sachs

Hi. My question is on option land. We've seen Ryland and other builders take limited deposit write-downs. Should we assume here that land sellers are finally pricing their land properly?

Chad Dreier

Well, you know, from a homebuilder point of view, I can't speak for the home sellers. I think we're starting to see land sellers be a little more realistic, and I think you're starting to see a few more land sale transactions, which I think would indicate that buyers and sellers, on the price, everyone says they're getting closer in alignment.

Joshua Pollack - Goldman Sachs

You feel like that's happening across every region or is there a specific region where you feel -

Chad Dreier

You know, it's always hard to talk about - I mean, it's a big country and really Baltimore is different from Virginia, you know, and it's only 50 miles away. So I would say, I mean, in general Texas had the least amount of price runup so we're probably in closer alignment in Texas. California probably had the most challenging problems, so there's still a pretty big gap there. I don't think we've seen many transactions in California. Florida's closer to California on that issue than Texas. And the Midwest, I don't think there's much of a challenge. And in the Mid-Atlantic, you know, like I say, I think Virginia is still got a further gap than Maryland.

Joshua Pollack - Goldman Sachs

Okay. And last quick follow up, you guys spent $63 million in land expenditures.

Chad Dreier

Yeah.

Joshua Pollack - Goldman Sachs

Where do you guys expect that to be by the end of the year?

Chad Dreier

Oh, I'd say $300 to $325, something like that.

Joshua Pollack - Goldman Sachs

Thanks a lot, guys.

Chad Dreier

Okay.

Operator

Thank you. Our next question or comment comes from the line of Ivy Zelman with Zelman & Associates. Your line is open.

Alan Ratner - Zelman & Associates

Good morning, guys. It's actually on for Ivy. My first question was a follow on regarding your average order price. It was, in fact, down at a greater clip than in 4Q, but I'm showing it was up about 5% sequentially. I was just wondering if that's primarily mix driven or if there are any markets where you're actually raising prices versus 4Q?

Chad Dreier

I would, boy, I'll defer to Larry, but I don't think we've had price increases anywhere.

Larry T. Nicholson

No, it's more of a mix issue.

Alan Ratner - Zelman & Associates

Okay, great. And my second question kind of relates to the impairments, and understanding the (cliff) tests and how each one is on a community-by-community basis, is there a point where you think the auditors would look at your results and if you're still showing negative EBIT margin excluding impairments that they would start to question some of your assumptions, whether it's pricing or absorptions?

Chad Dreier

You mean that we're being too aggressive or not aggressive enough?

Alan Ratner - Zelman & Associates

Not aggressive enough, meaning if you're losing money pre-impairments, which I believe you did his quarter -

Chad Dreier

Well, you know, I think this quarter's the first time we did it and it's a relatively small number. And, you know, I've been in homebuilding 30 years and the first quarter's always your lousiest quarter. But the answer to the question, I don't think, I mean, we use E&Y and I think most of the big builders use E&Y, and there's been no change in any of the assumptions or how they pursue that. So you ought to call E&Y but, I mean, I don't think that's an issue.

Alan Ratner - Zelman & Associates

Okay, great. Thanks a lot.

Chad Dreier

Okay.

Operator

Thank you. (Operator Instructions) Our next question or comment comes from the line of Steve Surrell with Conning Asset Management. Your line is open.

Steve Surrell - Conning Asset Management

Hi.

Chad Dreier

Hey.

Steve Surrell - Conning Asset Management

Your cash flow from operations is always very positive in the fourth quarter, but in the second and third quarters some years it is positive, some years it's negative. Any flavor for what you think you may see in the second and third quarters this year?

Chad Dreier

Well, we definitely expect to see positive cash flow for the full year, largely weighted, as you said, towards the fourth quarter again. But, you know, I would think we're positive in the second and the third quarters.

Steve Surrell - Conning Asset Management

Okay. Were there any share repurchases in the quarter?

Chad Dreier

Nope.

Steve Surrell - Conning Asset Management

And you mentioned you're going to combine your segments from four into two. Are you still going to report four segments in your segment reporting?

Chad Dreier

Yeah, I think we are. It's more of how we manage it, I think, but we'll still account for it in the four separate regions.

Steve Surrell - Conning Asset Management

Yeah, that would be helpful from our standpoint just to give a little more clarity.

Chad Dreier

Yes, we'll continue that.

Steve Surrell - Conning Asset Management

Okay. Thank you.

Chad Dreier

Okay.

Operator

Thank you, sir. Our next question or comment comes from the line of Buck Horne with Raymond James. Your line is open.

Buck Horne - Raymond James

Hi. Good morning.

Chad Dreier

Hi.

Buck Horne - Raymond James

You mentioned Texas being in a little bit closer alignment in terms of maybe market expectations. I was wondering if you could just drill down and give us some color on what's happening right now in terms of just sales and pricing and demand and also what kind of percentage of your land inventory is in Texas?

Chad Dreier

Okay, well, my comment, I think, was in response to impairments, and the comment was something like hey, you know, we don't have many impairments because we didn't have many price increases. Second Texas, for Ryland, I think I said we have $1.7 billion in inventory and about 18% of our inventory is in Texas. And so I guess you can just do the arithmetic on that. And I forget the third -

Buck Horne - Raymond James

Price declines were about what?

Chad Dreier

We're about flat on average prices.

Buck Horne - Raymond James

Okay, great. And just looking for a little opinion here, any views on the housing legislation being debated and what might help the most and if there's anything you think that might be detrimental to the market?

Chad Dreier

Wow. You know, boy, that is a complicated question. And I'm not a politician, and I'm not a lobbyist.

First of all, I think in general any legislation is probably good. I mean, I think if there's legislation to help people who are delinquent, hey, the fewer foreclosures there are in America is probably better for homebuilders and homebuyers and people who live in houses.

Second, you know, I think a lot of the things, if there's down payment assistance or things like that that helps buyers, hey, anything that helps buyers is probably good for homebuilders.

And basically, I mean, if housing is such a big part of the American economy - you know, we didn't get much of the credit when it was doing good, but we're sure getting all the blame for when it's doing bad.

But basically anything that's good for housing will be good for America, and if that's true that's good for homebuilders, public and private.

So, I mean, I hope they come to some conclusion and relatively soon. The sooner it happens, the better it'll be for all of us.

Buck Horne - Raymond James

Thank you very much.

Chad Dreier

Okay.

Operator

Thank you. Our next question or comment comes from the line of Michael Rehaut. Your line is open once again, sir.

Michael Rehaut - J.P. Morgan

Thanks. Just a follow up, I guess, on the charges, and I think this was hit on by an earlier question but, you know, certainly the $25 million was well below our estimate and I think most people's estimates. Looking at the inventory that remains I was wondering if you could give us a sense of what percent is related to the tougher, harder-hit markets, i.e., California, Vegas, et cetera, and what you think the - to the extent that home prices continue to fall here - what the susceptibility is to future impairments?

Chad Dreier

Yeah. Well, I'll give you some general numbers - or a general comment - and then I guess, you know, you guys always want to drill down to the lot.

But if you say - I think we said earlier - or later - in 2007, you know, Northern California, Southern California, Las Vegas, Phoenix and Fort Myers, at least for Ryland, were the five most difficult markets. And our inventory at December 31, 2006 was about $750 million in those five markets. You know, more in California than Fort Myers but you get the point.

Well, at December 31, 2007 our inventory in the same five markets is only $250 million. And actually at the end of the first quarter, it's $250 million. So we've gone down by $500 million or two-thirds, and if you think about that, I mean, that's an average. We've only got $60 to $70 million in Vegas, Northern California, Southern California. We're down to $25 in Phoenix, and we don't have much left in Fort Myers.

So basically in those five most challenged markets, we took our medicine in 2007. And, you know, one of the things people forget, in 2004 and 2005, Ryland was highly criticized for not being more aggressive in California and Arizona and Las Vegas. We never had as much inventory in those markets as some of our colleagues.

So I think we took our medicine earlier, and we just don't have much there now. And so when we go through the day to day - or not the day - the end of the quarter analysis by [end line] we had $1 million in Phoenix and $4 million in Southern California.

So we just don't have much left in those troubled markets.

Buck Horne - Raymond James

Can you give us a sense of your other top two or three markets by inventory, even if they're not, I mean, you mentioned Texas was 18%.

Chad Dreier

We took nothing in Texas. One of your colleagues said earlier, Chicago has our biggest inventory. We took nothing there. We took $6 million in Baltimore on two projects. And what am I missing? And we took $5 million in Virginia on a project - was that one or two projects, Virginia?

Buck Horne - Raymond James

But, so -

Chad Dreier

So, you know, the Mid-Atlantic took $10 million and California took $4 million and Phoenix took $1 million.

Buck Horne - Raymond James

And just aside from the charges, though, looking at the inventory, Chad, you'd mentioned Texas is about 18% of your inventory dollars today?

Chad Dreier

Yeah.

Buck Horne - Raymond James

And what are the other couple of top markets?

Chad Dreier

Well, we have 19% in Florida. In the Southeast, which would be the Carolinas and Georgia - right - we have 14%. The Midwest, which is Minneapolis, Indianapolis, Chicago and Cincinnati, we have 20%. The Mid-Atlantic, which is Maryland and Virginia and Delaware, we have 13%. Eight percent in California, and 8% in Denver, Phoenix and Nevada.

Buck Horne - Raymond James

Excellent.

Chad Dreier

Hopefully that adds to 100.

Buck Horne - Raymond James

Excellent. Thanks a lot, I appreciate it.

Chad Dreier

Okay.

Operator

Thank you. Our next question or comment is from the line of Timothy Jones with Wasserman & Associates. Your line is open.

Timothy Jones - Wasserman & Associates

Hi, Chad.

Chad Dreier

Hey, how are you?

Timothy Jones - Wasserman & Associates

I'm fine, and hi, Gordon.

Gordon Milne

Hey.

Timothy Jones - Wasserman & Associates

That one answer that you just made about the $250 million, I just want a clarification. That is your total inventory, your land inventory, what?

Chad Dreier

Oh, in total inventory - models, specs, land, housing, backlog.

Timothy Jones - Wasserman & Associates

Do you have the percentage for Northern and Southern California?

Chad Dreier

I said 8%, so if you take $1.7 billion times 8%.

Timothy Jones - Wasserman & Associates

I can do it.

Chad Dreier

Oh, the split - oh, half in Northern, half in Southern.

Timothy Jones - Wasserman & Associates

Okay, great.

Chad Dreier

We're an equal opportunity landowner in California.

Timothy Jones - Wasserman & Associates

The most important thing I think you've said on the conference. But the other thing that I want to get into really is the incentives, you said, were 16% versus 13% but what were they versus a year ago?

Chad Dreier

Well, I think a year ago they were 10%, so 6 points higher now.

Timothy Jones - Wasserman & Associates

Okay. So that's part of - that's pretty much the difference in the decrease in your gross margins, then?

Chad Dreier

Correct.

Timothy Jones - Wasserman & Associates

Okay. And the second question is, you said your headcount was down like 46% or something, but -

Chad Dreier

Yeah, 42.

Timothy Jones - Wasserman & Associates

The actual number?

Chad Dreier

Oh, I think - well, I'm going to say 1,800, 1860. And I think we were like at 3,000 so, you know, 40% of 3,000 is 1,200, so 3,000 minus 1,200 gets you to 1,800.

Timothy Jones - Wasserman & Associates

Oh, good. I think that's - are you getting any benefits from this change from - one thing you didn't mention through a question was, they were talking about the legislation coming up. You failed to mention about these tax breaks. Wouldn't that be a nice one for you?

Chad Dreier

It would be. You know, in response to somebody else's question, I think in the fourth quarter we took a reserve of $75 million. If they pass the tax legislation kind of the way the Senate had it we would probably reverse that $75 back in the second quarter, whenever they did the legislation. But it wouldn't have any impact on our cash flows.

Timothy Jones - Wasserman & Associates

Why not?

Chad Dreier

Well, because, you know, we had operating earnings throughout all of 2007, so we don't have the same kind of fact situation that some of the other guys are. You know, a lot of the other guys were losing money before impairments. We were making money before impairments.

So it wouldn't help us much in 2008 because we were profitable in 2006. It would help us if we had tax losses in 2009.

Timothy Jones - Wasserman & Associates

Real quickly, why did Tampa turn around? Was it very depressed last year or have you actually seen some real improvements?

Chad Dreier

It was very depressed last year, and I wouldn't say there are many significant improvements in Tampa.

Timothy Jones - Wasserman & Associates

That's my thought. Thank you.

Chad Dreier

Okay.

Operator

Thank you. Sir, there are no further questions in queue at this time. I'd like to turn the presentation back over to you.

Drew Mackintosh

Great. Thanks for joining us, and we'll speak to you next quarter.

Operator

Ladies and gentlemen, this does conclude today's conference. We again thank you for your participation. You may all disconnect.

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Source: Ryland Group, Inc. Q1 2008 Earnings Call Transcript
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