Executives
Carlos J. Moctezuma - Director, IR
Gerardo de Nicolás Gutiérrez - CEO
Alan Castellanos Carmona - CFO
Analysts
Jorge Kury - Morgan Stanley
Carlos Peyrelongue - Merrill Lynch
Vanessa Quiroga - Credit Suisse
Jamie Nicholson - Credit Suisse
Iván Barona - GMB
Daniel J. McGoey - Deutsche Bank - IXE
Vivian Solomon - Santander
Francisco Chavez - BBVA Bancomer
Adrian Huerta - J.P. Morgan
Mary Austin - Pax World Fund
Erik McKee - Lazard Asset Management
Cecilia del Castillo - Citigroup
Gordon Lee - UBS
Desarrolladora Homex SA de CV (HXM) Q3 2007 Earnings Call October 24, 2007 ET
Operator
Good morning and welcome to the Desarrolladora Homex Third Quarter 2007 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. I would now like to turn the conference call over to Mr. Carlos Moctezuma, Head of Investor Relations at Homex. Sir, you may begin.
Carlos J. Moctezuma - Director, Investor Relations
Thank you and good morning and welcome to the Homex third quarter 2007 earnings conference call. Before we start, I would like to remind you that certain statements made during the course of this conference call about future events and financial results constitute forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties. Discussion of factors that may affect future results are contained in our filings with the Securities and Exchange Commission. We undertake no obligation to correct or update any forward-looking statements provided as a result of new information, future events or even changes in our expectations.
With us on the call today are Gerardo de Nicolás, Chief Executive Officer; and Alan Castellanos, Chief Financial Officer. I would like now to turn the call over to Gerardo.
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Thank you, Carlos. Good morning and thank you all for joining us today. Out third quarter came as strong again in line with our expectation and consistent with our overall strategy and annual growth guidance. Housing revenues in the quarter recorded were up 18% over the year ago period and 20% for the first nine months of 2007.
Our EBITDA increased 16.7% in the quarter and 26.6% in the nine months period while EBITDA margin reached 23.7% in the quarter rising to 25.2% in the period from January to September including the other income line.
During the third quarter, we sold over 13,000 home of which 92% continued to be affordable entry-level home. Sales of affordable entry-level and middle income unit increased 18.3% and 29.1% respectively.
INFONAVIT continues to be a key source of financing for Homex client, driving affordable entry-level sales. Third quarter 2007 is historical for our company. We accelerated our expansion strategy initiating 11 new projects, a record for Homex. Expansion includes the starting operations in two newer states Queretaro and Kintanaron [ph] and three new cities, Queretaro and Cancun focus on offering affordable entry development and Rosarito, Baja California Norte offering middle income.
We also launched seven new affordable entry-level developments in natural cities, Culiacán, Monterrey, Mexico City, Guadalajara, Laredo, Xalapa, and Leon.
In the middle income segment, we also launched a new project in Acapulco but we were aim to capture the vacation home for the Mexico City market. Overall, we are pleased with Homex performance for the quarter. We were able to meet our goals and the results are on track to achieve our full year expectations.
With that, I will now turn the call over to Alan to discuss the financials.
Alan Castellanos Carmona - Chief Financial Officer
Thank you, Gerardo. Good morning all. I will give today our financial review with the top line. Homex reported total revenues of 3.9 billion pesos for the third quarter of 2007, an increase of 18.4% over the same quarter last year. Year-to-date, Homex reported revenue growth of 19.4%. We sold 13,239 homes, an increase of 19% over the same quarter in 2006.
Affordable entry-level homes accounted for 92% of total homes sold. Our middle income presence also continued to expand. We sold 29.1% more middle income homes than we did last year. Total year-to-date volume of homes sold reached 35,000 to 1079 homes.
Looking at the revenue contributions from our segment, affordable entry-level revenue increased 12.1% while middle income revenues grew 46.7%. On an accumulated basis, affordable entry level represented 78% of the total housing revenues while middle income accounted for 22%. Our strategic initiatives related to construction technology, and the creation of a corporate procurement department, are beginning to deliver efficiency in our growth margin.
Gross margin was 33.1%, an improvement of almost 100 basis points mainly driven by the progressive use of aluminum moulds in some of the projects coupled with a better supply control.
Year-to-date, gross margin was 32.3%. Driven by the record expansion of the third quarter, selling and administrative expenses as 10 pesos [ph] of revenues increased to 10.8% from 9.2% in the third quarter of 2006. Without percentage and the amortization of Beta trademark, year-to-date SG&A as a percentage of revenues increased slightly to 9.8% from 9.4%.
Operating margin was 21.8% in the third quarter. Excluding the Beta trademark amortization, operating margin would have been 22.4%.
Net comprehensive financing cost decreased 37.2% to 41.8 million pesos in the third quarter or 1.1% of revenue. The main driver of this change was depreciation of the Mexican pesos against the U.S. dollar.
Net income in the third quarter of 550 million pesos is 14.6% above the 480 million pesos reported in the same 2006 quarter. Earnings per share also increased 1.64 pesos in the quarter from 1.43 pesos in the last quarter ... in the last year.
For the nine months, net income grew 33%. The underlying performance of the company on an EBITDA basis was also positive. EBITDA margin was 23.7% slightly below 24% recorded in the third quarter of 2006.
For the year-to-date procedure as of September 2007, Homex reported an EBITDA growth of 18.8%. We have 23.7% margin.
Turning now to the balance sheet, account receivable were 6 billion pesos at the end of the third quarter. As a percentage of the last 12 months revenue, accounts receivable were 14.6% compared to 43.8%.
As we have previously stated, we focused our resources to improve efficiencies in our construction and collection processes. This improvement reduced accounts receivables turnover to 146 days from 158 days in the same 2006 period.
Inventory turnover without land was 63 days compared with 51 days in 2006. Including land, inventory turnover was 331 days compared to 254 days. As of September 30th, the company reported a land bank of approximately 242,000 lots, which represents approximately 3 years of future sales. In addition, Homex maintains approximately three years of additional sales in optioned land.
Homex maintain a comfortable cash position of 2.1 billion pesos with a neutral operating cash flow. The operating resources were invested in land acquisition, aluminum mould, information technology and increased complete plants capacity.
As a result, for the three months ended September 30, 2007, the company registered a negative free cash flow in demand of 261 million pesos. Accumulated for a nine months period, the free cash flow was negative by 526 million pesos. Net debt to EBITDA ratio reached 0.49 times and the company's net interest coverage was 7.46% times.
Even though there are still details to be precise, we estimate that because of our land acquisition policy that is based mainly on cash payments or short-term bender financing and because of the reason of our labor acts of the company, the cash impact of that reform could be in the range of 50 to 100 basis point of revenue.
Now, I will turn the call to Gerardo.
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Thank you, Alan. We are committed to execute on our strategy than even results in line with our expectations and forecast for 2007. We continue to believe that the housing market conditions in Mexico will remain strong in the fourth quarter.
Beyond 2007, we foresee great opportunities to expand and consolidate our growth in the cities where we operate and in order to... where we exploring new developments. These opportunities are supported by an economic outlook that continues to be positive in terms of inflation rate, lower foreign exchange fluctuations and a stable interest rate.
Demand is also driven by our potential clients increasing number, our purchasing power. Former employment in cities grew over the last 12 months at a tunnel rate of 5.75%, equivalent to 788,000 new jobs. Unemployment dropped by 37 basis points to 3.6% and GDP in the first half of the year reached 2.8%.
The innovative mortgage problems and initiatives like the subsidy program designed to attend worker turning less than fourth times the minimal wage salary, the federal government and its mortgage agencies INFONAVIT for NSHF [ph] are committed to increase housing opportunities and improve the quality of life of the Mexican families.
INFONAVIT is on track with its total mortgage lending program, and recently completed their 2007 mortgage-backed securities program of 9.8 billion pesos, reflecting the market confidence towards INFONAVIT's execution. The banks have also being playing an important role for mortgage financing, launching innovative programs to target both affordable entry and middle income market. Because of the potential of the Mexican housing market, we are undertaking the strong investments in our footprint expansion, technology and brand positioning to leverage on the greater opportunities ahead.
The company will announce guidance for 2008 on the first half of December, as is now our income on fact [ph]. We appreciate your continued support, and thank you for your time today. Operator, we are now ready for questions.
Question And Answer
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions]. We have a question from Jorge Kury with Morgan Stanley. Go ahead, Jorge.
Jorge Kury - Morgan Stanley
Hi, good morning. Two quick questions, the first one, operating expenses were up 36% year-on-year, you mentioned that it was due to the opening of new branches and projects. Can you quantify exactly what amount of the 383 million pesos you reported in operating expenses were related to this opening and what do you expect expenses over the next quarter to be? Are we still going to see higher expenses due to more openings? And the second question is Alan, you mentioned, sorry if I don't remember correctly, something about 100 basis points of sales as an impact of the new tax reform. Can you be a bit more specific? Where do you expect those... that impact to be and why is it measured as basis points of sales? Thanks.
Alan Castellanos Carmona - Chief Financial Officer
Yes Jorge, thank you very much. Well, talking about the operating expenses, we are almost in line with our expansion program. As we have commented in the past, we were going to open six series in the year, we have already opened five. We're accelerating the investments and I should say that for us, opening offices is an investment. It is really not an expense for us. That's under control. Operating expenses on an accumulated basis are 9.8 and they are going to be labor as... as soon as the project begins to sell houses, okay.
Related to the tax reform as I said there are still precisions to be made with authorities. It is really a new tax. The basic impact for the segment have to do with the way you buy land because they yet to reach a tax... is a cash based tax and we really don't use that kind of mechanism to buy land with most of the land we pay, it on cash or the vendor gives us a short-term financing. So basically, we don't have an effect on that. And we are discussing some... the interest paid is non-deductible in the year too, but as we are reasonably leveraged, our debt is low. There is really not an impact. 50 to 100 basis points, it's a marginal impact for us. Of course there is work to do to compensate that and we are doing that work.
Jorge Kury - Morgan Stanley
Thanks. The 50 to 100 basis points is of what? I don't understand?
Alan Castellanos Carmona - Chief Financial Officer
It's on the total revenue base.
Jorge Kury - Morgan Stanley
So the tax reform is going to lower revenue.
Alan Castellanos Carmona - Chief Financial Officer
No. it's going to cost us a 100 basis points.
Jorge Kury - Morgan Stanley
And it... okay. So it's a direct impact on the bottom line.
Alan Castellanos Carmona - Chief Financial Officer
Yes.
Jorge Kury - Morgan Stanley
Okay, great. And then now back to the first question, sorry. So my question was of the 383 million pesos in operating expenses you booked this quarter, how much of that was due to the opening of the new branches and projects I want to understand exactly what the underlying organic growth is and how much is for these preliminary items?
Alan Castellanos Carmona - Chief Financial Officer
Well, I can send you that target. We're... most of this because of the open of the new CD, but when you have the new project and the new CD sold, but it's... most of the increase on the expense on a percentage basis has to do with that.
Jorge Kury - Morgan Stanley
So if you can share those numbers with us at some time.
Alan Castellanos Carmona - Chief Financial Officer
Yes, we will of course.
Jorge Kury - Morgan Stanley
Thanks a lot.
Alan Castellanos Carmona - Chief Financial Officer
Yes.
Operator
Our next question comes from Carlos Peyrelongue from Merrill Lynch.
Carlos Peyrelongue - Merrill Lynch
Thank you. Good morning gentlemen. Congratulations on the strong results. My question is related to working capital. You improved both on accounts receivable and accounts payable turnover, however on inventory without land, you had an increase on the turnover. Could you provide more visibility as to what occurred? Why it's an increase? I guess it is work in process but I would like to know more of the reason behind the increase in the inventory turnover without land? Thank you.
Alan Castellanos Carmona - Chief Financial Officer
Thank you, Carlos. As you mentioned the impact on the inventory without land, it's is mainly by the unit by working progress and the main factors are the 11 new projects that we have signed, and the projects on middle income where we need to make a higher investment at the beginning in terms of amenities, to deliver the first home. As we mentioned during the call, we can... we have increased our middle income mix. But at the same time, we have been able to keep the accounts receivable on a low level. We are working on doing the same on the inventory without land, as we mentioned.
Carlos Peyrelongue - Merrill Lynch
Understood. So it is fair to say that next year once the 11 projects mature that we are likely to see a decrease in the inventory turnover in '08?
Alan Castellanos Carmona - Chief Financial Officer
Yes, and... but you need to take into consideration the growth on the middle income segment because of our footprint expansion, you need to consider the number of projects running at the same time.
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
This will be maybe on a small very small increase because there on all the working capital cycle, the impact of inventory without land is small.
Carlos Peyrelongue - Merrill Lynch
Understood. And on the guidance you going to provide in December, you would also provide guidance for turnover ratios?
Alan Castellanos Carmona - Chief Financial Officer
No. We're going to provide guidance in revenues and EBITDA margins in the first half of December for 2008.
Carlos Peyrelongue - Merrill Lynch
All right. Thank you.
Alan Castellanos Carmona - Chief Financial Officer
Thank you, Carlos.
Operator
Our next question comes from Vanessa Quiroga from Credit Suisse. Vanessa?
Vanessa Quiroga - Credit Suisse
Yes. Thank you. My question is regarding the sales mix strategy that you're following. It becomes very clear that you are going to the lower side of the affordable segment probably units that are targeting these subsidies market, and in the middle income segment you've been increasing... you've been improving the sales mix within this segment. So can you explain us better in the typical portable, how low could price go? I mean, what would be your target number of economic units within your affordable segment and in the middle income segment, could you give us some color on what product is performing better with which price and which average prices do you see in the medium to long-term? Thank you.
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Thank you, Vanessa. As you have noticed, we are following the demographics of the country and we are listening carefully to the INFONAVIT initiatives of wishing a broader market going down to economic housing and supporting these initiatives with the subsidy program that this year we'll be enough to help 215,000 families in Mexico. And at the same time, we are increasing our middle income average price because now co-financing and INFONAVIT have increased their limits. Now there is more people who can have co-financing mortgage or an upper INFONAVIT mortgage. We are working on both sides on broadening our markets but on the overall, we are following the demographics of Mexico and that's why we are opening new projects on these new segments and we feel comfortable with our mix at this time.
Vanessa Quiroga - Credit Suisse
Do you have a guidance of the average price for both segments in '07 or in the medium term?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
No. As you may recall in our guidance for the year was only on revenue, EBITDA margin and free cash flow and we will continue with a similar policy for the next year.
Vanessa Quiroga - Credit Suisse
Okay. Thanks.
Operator
Our next question comes from Jamie Nicholson from Credit Suisse.
Jamie Nicholson - Credit Suisse
Hi, thank you very much for the call. I have two questions. My first question follows a little bit along Vanessa's regarding the financing. I noticed that INFONAVIT forces of mortgage have been stronger than the banks. Is that a factor of your product mix or are you noticing... does it relate to any reluctant fund bank to land or any slowdown in their lending? I know Gerardo, you mentioned banks are continuing to lend, but can you just elaborate a little bit on the mortgage financing forces and the growth prospects there?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Thanks Jamie. As I mentioned, we are working on all mortgage sources, mainly in INFONAVIT and we have seen the improvements in terms of efficiency, in terms of changes in the policies to be more aggressive and to address a broader market. And at the same time we are working with INFONAVIT with easy check [ph] found with the commercial bank. At this time as I mentioned, we have not seen any reduction on the bank perspective or any slow down in terms of the mortgage being offered by the bank, nor we are seeing better problems to our customers and we will continue to work on all the sources of mortgages in our segment.
Jamie Nicholson - Credit Suisse
Okay, great. Thanks for the clarification. And my second question relates also to the tax reform, do you expect any impact on your inventories or sales in the fourth quarter and first quarter, basically your working capital uses with the fiscal reform coming into place in January, so in other words are you going to be working down some of your inventories in anticipation of that or are you going to wait to see how the government responds to the inventory taxation? Can you just comment a little bit on the potential impact on working capital needs as we transition into the first quarter next year?
Alan Castellanos Carmona - Chief Financial Officer
Well, we... we are really not foreseeing any change in our inventory policy. As you know they are yet... it's a complimentary start, so for this year we need to comply also with ISR. We've had a tax planning for ISR, so we don't foresee anything. And as I mentioned because of our policy and the way we do things, we are not expecting a major impact.
Jamie Nicholson - Credit Suisse
Okay, great. Thanks very much.
Alan Castellanos Carmona - Chief Financial Officer
Thank you.
Operator
: Our next question comes from Iván Barona from GBM. Ivan?
Iván Barona - GMB
Hi, good morning everyone. My question comes regarding the working capital during the third quarter. We witnessed a sequential reduction in accounts payable and I was wondering what was in the back of this reduction?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Yes, Iván. Well, that's... we think this is a way we do business with our suppliers. As you know we are a creating a corporate procurement program that is making a lot of efficiencies in the way we manage procurement. We believe that's the main reason.
Iván Barona - GMB
All right. And regarding free cash flow expectation during '07, we have witnessed on cumulative basis that you are on negative ground. Are you expecting to reach a neutral to positive by the year-end?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
We are... we believe that could be... I need to say that our main focus is not free cash flow, our main focus is growth. So if we foresee an opportunity to accelerate more our growth, our expansion program, perhaps we would be prefer to use cash than to use debt.
Iván Barona - GMB
All right. Thank you very much.
Operator
Our next question comes from Dan McGoey from Deutsche Bank.
Daniel J. McGoey - Deutsche Bank - IXE
Good morning, gentlemen. My question is regarding the middle income business. It looks like you are on track with your little over 4000 units in middle income this year. I am wondering if you can talk a little bit about how many developments that's spread across in terms of the number of projects and how many you are expecting to open for next year. And also a little bit about the geographic split between, which regions and states. I know you just opened the one in Acapulco, if you can talk a little bit about how that breaks down geographically?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Yes. Thank you, Dan. As you mentioned, we are going to increase our middle income presence and to reach closer to the level of forms that you mentioned. We have at this time 19 projects, middle income projects in 16 cities mainly in the largest cities of Mexico. It is not dependable on the... we are not growing this segment based on geographic, but mainly on the sizes of the cities. The Acapulco project it's a new one for us because we have the sales office or most of that sales office in Mexico City. This project is composed by 477 homes, the average price is 1.4 million pesos and this is a perfect example of how can we offer a middle income project, a vacation home for executives that are paying, contributing to INFONAVIT. And as you may know at this time, there are 1.1 million workers earning more than 7 minimum wages that are contributing to INFONAVIT and we're addressing that market with this type of problems.
Daniel J. McGoey - Deutsche Bank - IXE
Okay. And just a follow-up, I guess you said I think 19 projects. Would you expect or I guess you're planning for an increase in the number of projects for the middle income segment for next year or do you have sufficient inventory in projects underway to drive growth from, I guess, existing projects for next year if that market remains strong?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
We have enough land or lots available in the actual projects. We are foreseeing an increase in the number of projects of middle income for the next year. The number is not specified but we will have an increase in the number of middle income projects for the next year.
Daniel J. McGoey - Deutsche Bank - IXE
Okay. Thank you.
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Thank you.
Operator
Our next question comes from Vivian Solomon from Santander.
Vivian Solomon - Santander
Thank you. My question has been answered.
Operator
Our next question comes from Francisco Chavez, Bancomer.
Francisco Chavez - BBVA Bancomer
Yes, hello, good morning. In your report, you have mentioned that you are starting to see the benefits of the aluminum moulds on the gross margin. And my question is, when can we expect to see the full benefit of the moulds and also can you give us an idea of how many basis points of improvement in gross margin can we see as service also is construction system?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Thank you, Francisco. The full impact will be... will be seen on the third quarter or fourth quarter of 2008, and as you may notice the impact in the gross margin will be reflective in our 2008 guidance. We are very optimistic about these technology because we are increasing our production capacity. We are reducing our cost. We are improving our quality and we are reducing the time of construction. We are certain that we may derive a decision in terms of technology to support our growth in the future.
Francisco Chavez - BBVA Bancomer
Okay, thank you.
Operator
Our next question comes from Pedro Latorre [ph] from Santander.
Unidentified Analyst
Hi, good morning and congratulations on the results. My question is regarding free cash flow but first we can go over working capital. I saw that the inventory would land a basic 254 to 231 which I guess that the company approached quite a lot of land, and I guess the main question is to know what kind of drivers can lead to free cash flow negative and it does... keep the same way, and therefore what might be the guidance for free cash flow for next year although I know that the focus is growth? Thank you very much.
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Thank you, Pedro. Talking of our working capital, we changed our investment policy or our land policy in the end of last year. We moved from 2 years to 3 years more or less. That's the main impact on the inventory because we believe that we have opportunity to have a strategic land reserves, and we went for them. And talking about the free cash flow as I stated, our priority is growth. We are pursuing to keep on delivering growth in the long-term. The main drivers of the cash were land... the main explanation of the free cash flow is just land. We bought a lot of land, and we also have a very intense capital expense. We are preparing the company to grow. We are implementing our concrete capacities. We are investing a lot in IT and so these will prepare the company for growth.
Operator
Our next question comes from Brian Straley, Inca Investments [ph].
Unidentified Analyst
Hello, good morning. My question has to do with Homex's exposure with the State of Mexico. I understand that you a few developments in Mexico City, which I believe is different from... that you have not considered part of the State of Mexico. So what is Homex exposure actually in the State of Mexico? And are you seeing any permitting problems with those... that land back?
Alan Castellanos Carmona - Chief Financial Officer
Thank you, Brian. The Homex exposure to the State of Mexico is close to 18% to 20% of our revenue it's in line with the national contribution of the State of Mexico to the housing industry is... and we feel comfortable with that presence. We have seen delays in any given city but those delays are typical in the sector, but we have seen in the State of Mexico in particular is the strong support of the state government to promote CDs. We are taking care of those initiatives and trying to put developments, new developments in that municipality to take initiative of the state government, and to continue with our growth on that market. As you may know, we acquired Queretaro to increase or to significantly increase our presence in that market. As you mentioned in [indiscernible] we have only one project. It is a very successful project and where we are delivering the first home in this quarter.
Unidentified Analyst
Do you have developments that still need permitting outside of the license New York cities [ph]?
Alan Castellanos Carmona - Chief Financial Officer
It's hard. I don't have the right answer for you but in our point of view, it's easier to work with the government on the growth of the State of Mexico in particular. It is easier to listen to their initiatives and they are doing these initiatives. They are choosing these municipalities because of the infrastructure and the future growth of the State of Mexico. As you may know, it's the largest state in the country and they need to spend a lot of resources on the future planning in the State of Mexico.
Unidentified Analyst
Okay. I just have one other quick question. You mentioned that there is new limit for the co-financing with INFONAVIT. What is the limit? I think before it was up to 1 million pesos and is that... what is it now?
Alan Castellanos Carmona - Chief Financial Officer
Okay. Formally it was 585,000 pesos, then they move it up to 1 million pesos and now they don't have limits.
Unidentified Analyst
Okay, great. Thank you.
Alan Castellanos Carmona - Chief Financial Officer
That's why we are increasing our offer to that segment.
Unidentified Analyst
Okay, great. Thank you very much.
Alan Castellanos Carmona - Chief Financial Officer
Thank you, Brian.
Operator
Our next question comes from Adrian Huerta from J.P. Morgan.
Adrian Huerta - J.P. Morgan
Hi, everyone. Alan could please elaborate a little more on the impact from the new tax reform. I just don't understand what you were talking about there? Thanks.
Alan Castellanos Carmona - Chief Financial Officer
Yes, of course Adrian. Let me say again that there are still details that we are précising with authorities. So we will have the complete impact by the end of the year. But in general term and if wouldn't have picked us with our land policy because of the way we buy land and because we are regionally leveraged and interest paid is non-deductible, and yet we will have a marginal impact on that. The overall effect for us would be as I said from 50 to 100 basis points of total revenue, which is for us, is very good news again.
Adrian Huerta - J.P. Morgan
So when you say the 100... let's say a 100 basis point of revenues, I mean last year, most of your taxes were deferred taxes. You didn't say any cash taxes. What you were saying is that you will be paying in 2008 like 1% of revenues in cash taxes?
Alan Castellanos Carmona - Chief Financial Officer
1% more.
Adrian Huerta - J.P. Morgan
1% more of revenues in '08 in cash taxes and what you paid in 2007. How much are you expecting to pay in cash taxes in 2007?
Alan Castellanos Carmona - Chief Financial Officer
I do not know but it would be $5 million or $8 million more. It's really a marginal impact for us.
Adrian Huerta - J.P. Morgan
So just to get to... how much of your taxes in '07, what percentage should be cash taxes and what percentage should be deferred?
Carlos J. Moctezuma - Director, Investor Relations
Adrian, it's Carlos. Out of the taxable of the income... free income tax, about 4% is cash taxes. What we are saying is that the impact of the new tax reform base based on our analysis of 2006, I should say, represents about 100 basis points more of revenue, the impact will. And increasing your cash back payment.
Alan Castellanos Carmona - Chief Financial Officer
Adrian, we need to end the year first.
Adrian Huerta - J.P. Morgan
I just wanted to have an idea how much you were expecting to pay in terms of cash taxes in 2007. Just kind of understand how much more would be expected for 2008, so it seems like you are expecting still to pay... to have a lot of deferred tax in 2008?
Alan Castellanos Carmona - Chief Financial Officer
Yes.
Adrian Huerta - J.P. Morgan
Okay. Thank you, Alan.
Alan Castellanos Carmona - Chief Financial Officer
Thanks.
Adrian Huerta - J.P. Morgan
Thank you, Carlos.
Operator
: Our next question comes from Mary Austin, Pax World Fund.
Mary Austin - Pax World Fund
Hi. Yes, I was wondering just how much the slow down in the U.S. economy especially in the construction industry is affecting... affecting your income of Mexicans in general. I know there is just a lot of people that work over here and send money home and I am just wondering if your seeing that or is there a way to measure that?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Yes, Mary. First of all, I should say that the market is in very different stages in the United States and down in Mexico. The Mexican market it's the refugee parallel market. The New York Homes is the main [ph]. We are not foreseeing any impact in the dynamics of the market and that's a reason why are going so aggressively. And remedy and testing [ph] our case and in our segment really have nothing to do, as we stated INFONAVIT for this city and the banks are the main mortgage distributors of our products. They don't... they are targeting the formal markets and where meet answers [ph] are in the informal market and the way INFONAVIT works is that the mortgage is granted according to the formal salary, so we have really no impact. On the contrary we relieved as the government is being very aggressive with the housing policy and we want to take advantage of that.
Mary Austin - Pax World Fund
Okay. And you did say your unemployment rate was 3.6%? I didn't catch the number earlier. I believe you said --
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Yes. That's the unemployment rate, 3.6%.
Mary Austin - Pax World Fund
And what was that versus just to give me some knowledge of numbers, what was that versus last quarter of last year?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
It went down 37 basis points in the last quarter.
Mary Austin - Pax World Fund
Okay.
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
As you've told.
Mary Austin - Pax World Fund
Okay. Thanks very much.
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Thank you.
Operator
Our next question comes from Erik McKee, Lazard Asset Management.
Erik McKee - Lazard Asset Management
Hi, good morning. I was wondering some of your competitors have been having issues getting permits and financing and reported some ugly numbers. Can you talk to us why you think that may remain out of effect to your business? It feels like this quarter was a lot better than some of the competitors, but can you talk to us a bit about why you may or may not suffer from the same issues?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Yes. Thank you, Eric. We feel very comfortable with our strategy in terms of wider national footprints as we can reduce the risk of any delay in permits or any weather conditions at given city. If we consider our affordable entry level branches and our middle income branches, we have at this time more than 50 branches nationwide. For us we feel comfortable with these footprints to reduce the risk at any given region. We have seen delays and we have seen weather problems in some regions as any given year, but we will continue to deliver our results in the future.
Erik McKee - Lazard Asset Management
Okay. Thank you.
Operator
Our next question comes from Cecilia del Castillo from Citigroup.
Cecilia del Castillo - Citigroup
Hello. Good afternoon. I have a couple of questions. One on CapEx, for the first quarter I don't know if you can give us a little bit more color on what your plan... what are your plans from land acquisitions, moulds acquisitions likely investments. And I know you don't have a number for 2008 but just on the standpoint would be the focus on or what are the needs for the future growth? Second question will be more general on sector. What are your assessments or your assessments on competition? We have heard from banks that they are, how do you say, supporting or looking to give more credit to small and medium companies, so I don't know if you can comment on regional competition and how do you think the trends in that respect?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Thank you, Cecilia. As you had noticed, our CapEx in this year have been strong, mainly driven by our investments in moulds, in aluminum moulds. We believe that our investment in moulds for the next year will be much lower than this, but we have made another type of investment in IT, in the IT platform and on our concrete plan and those investments will continue in the future maybe at the same rate that we have in this year, up for aluminum moulds.
In terms of competition what we have seen is in the last year is our reduction in the number of home builder to compete and the economic housing unit volumes, and that's why there is moulds home builder... what we have seen is that they are moving to residential and only the medium and large home builders are competing in economic housing and in affordable entry-level in general. We believe this trend will continue in the future and we will be able to take market share on this market that is expanding annually.
Cecilia del Castillo - Citigroup
Thank you.
Operator
Our next question comes from Armando Dorbecker, Endorsa [ph].
Unidentified Analyst
Good morning, everyone. All my questions have been answered. Thank you.
Operator
The next question comes from Yashwant Horkier, Urtha [ph].
Unidentified Analyst
Hi, sorry. Thank you for taking the question and congratulations on a good quarter. My question is actually twofold. First, just in terms of you said that you had a certain percentage of revenues that you can not attribute to the State of Mexico, but in terms of your land bank, can you give us an understanding of what percentage of your existing land bank is in the State of Mexico?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
It's almost in the same percentage, is close to 18% to 20%.
Unidentified Analyst
18 to 20%, okay. And just in terms of the sort of infrastructure that exist around your land bank, is most of that already in the ground in terms of the utilities, electricity, the water, the sewage, etcetera, in the State of Mexico specifically?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Specifically on every piece of land but in most of the land we work together with the municipal and the state authorities to provide infrastructure in terms of water, water treatment and electricity to be able to develop these land bank in the future. When we delivered their first home, we include another type of infrastructure internally like school or baker standard [ph] and most of these schools and baker standard are donated to the state authorities.
Unidentified Analyst
Sure. But in terms of the sort more municipality based infrastructure just the water and the electricity, if you were going to say percentage of completion on your existing land bank in the State of Mexico, what would that be roughly?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
I don't have the number right now in front of me but it's an on going process of putting the infrastructure for the new phases. We are the largest development in the State of Mexico basically in Veracruz [ph]. At this time we are starting the 8th phase of the development and we are operating the infrastructure for... to be able to deliver those homes in the beginning of the next year.
Unidentified Analyst
Understood. So that... you're not seeing permitting issues on the back of any infrastructure build out delayed?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Yes.
Unidentified Analyst
Okay. And my second question was just in terms of the minority income in the quarter, it was up substantially from 5.6 million pesos in third quarter of '06 to 32 million pesos this quarter. Could you just give us a little bit of understanding about what was driving that?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Yes. The reason of the increase in the minority interest is because we have two projects where we have partners. These are Banús and Mocejoe [ph] and they are beginning to deliver the growth.
Unidentified Analyst
So are we to look at that as an ongoing trend?
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
It could be. Most of the developments are fully owned by Homex and thus the normal way of doing business both in these two cases, we have partners and there are successful projects, so there could be a marginal increase in the minority interest in the short-term. It's really marginal, I mean it's less than 1% of the revenue even though they present us... measure the total of revenues is just 1%.
Unidentified Analyst
Sure. Okay. Thank you very much.
Alan Castellanos Carmona - Chief Financial Officer
Thank you.
Operator
Our next question comes from Gordon Lee from UBS.
Gordon Lee - UBS
Hi, good morning guys. Just a couple of questions. First on... a general question for Gerardo on INFONAVIT [ph]. It looks like for a number of different reasons they are going to fall short of their yearly targets this year. And I guess I was wondering looking into next year based on your conversation with them and just what you are seeing, is there a risk that you might have similar issues that might prevent INFONAVIT from reading their numbers next year or that could change sort of the long-term growth and their base outlook in your opinion? And the second question just has to do with the international side, are you still considering options from best abroad, previously or have those been put to rest for now? Thank you.
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Thank you, Gordon. What we seen in INFONAVIT is an improvement on their efficiencies and that they have taken important step to broaden their markets and we believe that now as they start working with municipality too improve the permitting process, we will be able to have more homes or the homes on a faster pace to help INFONAVIT to reach their goal. It is not an issue on the market. It's an issue under the liberty of home, in my perspective and I believe that they have proven the last seven years they will deliver more than the outlook that they provide for 2006 to 2010, and they are the most important institution to support the President on housing initiatives of delivering 6 million homes in these six years. We feel comfortable with INFONAVIT as we have filled the strong support of INFONAVIT too for the market. On the second question about international expansion, we have been doing research in some developing countries around the world with mortgage and market conditions, similar to Mexico. And we are still doing that research. We believe that we will find opportunities outside and when we have the opportunities already done, we will announce it to the market.
Gordon Lee - UBS
Perfect. Thank you very much.
Operator
Our next question comes from Vanessa Quiroga from Credit Suisse.
Vanessa Quiroga - Credit Suisse
Yes. A follow up on the improvement in cost, you mentioned that you have been lowering the cost of licensing. Could you just explain how you are achieving these and also if you have a target of the construction that will be done with mould as price of which of that total construction? Thank you.
Alan Castellanos Carmona - Chief Financial Officer
Thank you, Vanessa. What we have seen in terms of licensing is that we have on a strong department for licensing with engineers and now with lawyers to work with the municipalities and to enroll them on providing benefit or reducing the taxes to allow more economic housing in their municipalities, to follow the demographic need and this is the result of those conversations. In terms of the aluminum mould for the third quarter of 2008, there will be maybe more than 60% of our homes will be built with aluminum moulds.
Vanessa Quiroga - Credit Suisse
Great. Thank you.
Alan Castellanos Carmona - Chief Financial Officer
Thank you, Vanessa.
Operator
Our next question comes from Joe Wery, Hunter Global [ph].
Unidentified Analyst
Hi. Thank you for taking the question. I have three questions. One, I wanted to ask you about SG&A leverage. You have positive gross margin leverage, your SG&A leverage is negative. Are you growth plans going to keep things that way or do you expect positive SG&A leverage going forward? That's the first question.
Alan Castellanos Carmona - Chief Financial Officer
Yes, Joe. Well, as we spoken the reason of the SG&A increase has to do with the opening... this historical opening or record opening of projects and that will on a 9 month basis is really marginal, I should say and that will be leveraged as soon as the project begins to deliver.
Unidentified Analyst
Okay. Second, I know the tax question has been brought up a lot but very simply is this increase in taxes going to hit the cash flow statement or the income statement?
Alan Castellanos Carmona - Chief Financial Officer
It's going to hit the cash flow statement, hit the cash.
Unidentified Analyst
Okay.
Alan Castellanos Carmona - Chief Financial Officer
And bring the cash base back.
Unidentified Analyst
I just wanted to confirm that. Lastly, I know historically the policy of the company was to run free cash flow say neutral or slightly negative with your investments and growth. Has that philosophy changed or do you expect to be close to breakeven going forward?
Alan Castellanos Carmona - Chief Financial Officer
We are working to be neutral to slightly negative, but I need to say again that our priority is growth, and so we are going to work a lot on that. But if we see an investment opportunity in the last quarter of the year, we will go for it and we perhaps will adjust our cash instead of getting additional debt.
Unidentified Analyst
Are you talking about an opportunity in terms of land or --?
Alan Castellanos Carmona - Chief Financial Officer
Yes.
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Yes, in terms of land.
Alan Castellanos Carmona - Chief Financial Officer
Specifically on land.
Unidentified Analyst
Okay, great. That's all I had. Thank you and nice quarter.
Alan Castellanos Carmona - Chief Financial Officer
Thank you.
Operator
[Operator Instructions]. Our next question comes from Eduardo Cortes, FLW Brokerage Firm [ph].
Unidentified Analyst
Thank you and congratulations for the third year results. All of my questions were answered. Again, thank you and congratulations for the results.
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Thank you.
Carlos J. Moctezuma - Director, Investor Relations
Hello, operator.
Unidentified Analyst
My questions were all answered.
Gerardo de Nicolás Gutiérrez - Chief Executive Officer
Thank you.
Operator
There are no further questions at this time.
Carlos J. Moctezuma - Director, Investor Relations
I would like to thank you again all for your time today and just to remind you, a playback of this call will be available starting later today. We got the numbers on our website on our IR website. And an archive updation will be also available for you through that same source. Please feel free to contact me as usual with any further questions you may have. Thank you all.
Operator
Thank you for participating in today's conference call.
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