Centex Corp. F4Q08 (Qtr. End 03/31/08) Earnings Call Transcript

Centex Corporation (CTX)

Q4 FY08 Earnings Call

May 1, 2008, 10:00 AM ET

Executives

Timothy R. Eller - Chairman and CEO

Cathy R. Smith - EVP and CFO

Analysts

Nishu Sood - Deutsche Bank

Stephen East - Pali Capital

Carl Reichardt - Wachovia Securities

David Goldberg - UBS Securities

Megan McGrath - Lehman Brothers

Mike Rehaut - J.P. Morgan

Jim Wilson - Jolson Merchant Partners LLC

Presentation

Operator

Good morning and welcome to the Centex Corporation Fiscal Year 2008 Fourth Quarter Earnings Conference Call with senior management. Today's call will be recorded and transcribed. Today's call will also be simultaneously webcast at ir.centex.com. A copy of today's presentation was filed last night with the SEC on Form 8-K. A link to that document is now available on their website.

Centex wishes to emphasize to everyone listening on the call and via the internet that certain statements made during the course of this call are forward-looking. These statements are not guarantees of future performance and are subject to significant risks and uncertainties that could cause actual results to differ materially from those discussed during the call.

For further information regarding these risks and uncertainties in Centex's forward-looking statements, please refer to the forward-looking statements disclosure in the presentation into Centex reports on Forms 10-K and 10-Q filed with the SEC.

All participants will be in a listen-only mode. There will be a question-and-answer session after management's remarks. [Operation's instructions].

In the interest of time, we will limit each question... each person to one question and one follow-up question. If you have additional question following today's call, please contact Matt Moyer, Vice President of Investor Relations at 214-981-5000.

I would now turn the call over to Tim Eller, Chairman and CEO. Please go ahead sir

Timothy R. Eller - Chairman and Chief Executive Officer

Thank you, Janice. Good morning, everyone. Thanks for joining us for our fiscal year 2008 fourth quarter conference call. With me today is Cathy Smith, our Chief Financial Officer; Mark Kemp, our Chief Accounting Officer and Matt Moyer, Head of Investor Relations.

I'll start the call today with some introductory comments on the quarter and the past year as well as a few thoughts about the months ahead. Next, Cathy will provide details about our financial performance for the quarter and year, then I'll offer some closing comments and we'll take your questions.

Turning to slide 3 on the webcast, we accomplished important goals and fulfilled key commitments in what's turning out to be the worst housing market in decades. Our teams in the field worked hard to accelerate sales and reduce inventory levels ahead of foreclosures.

We sold nearly 6,700 homes in the quarter, down 15% from a year ago but down only 5% per neighborhood which is noteworthy in this environment. These sales efforts, coupled with our transition back to our model of selling homes before we build them, led to a reduction in unsold inventory of 64% from last year to less then three homes per neighborhood.

To some extent this inventory reduction was achieved at the expense of margins. However, we believe this was a prudent decision considering the foreclosures that are now hitting the existing home resale market nationwide and the weakening economy.

We also took significant steps to improve our balance sheet. We generated more than $775 million in cash flow from home building operations in the quarter. We further strengthened our cash position by selling non core land and neighborhood assets. In doing so we shortened our total lot position by 45% from last year and by 70% from our peak supply of land just two years ago.

We also sold a non-core business, HomeTeam Pest Defense for $135 million and we reduced our home building debt obligations by almost $800 million during the year and had no borrowings on our revolving credit line at March 31st.

Our operating earnings deteriorated throughout the year. We believe these actions positioned us to continue to build at even stronger cash position and to restore profitability in the future.

Continuing on slide 4, we expect the housing market to remain weak. Foreclosures hitting the existing home resale market will likely get worse. This will keep the existing home inventory high and continue to pressure on home prices.

Economic conditions and employment growth are both weakening. Buyer confidence is low and credit underwriting standards continue to tighten. But, affordability is improving and dramatically so in some markets. At Centex we are continuing to underwrite more of our home buyers with FHA loans, and to increase mortgage limits for FHA should provide a positive boost for the industry.

Turning to slide 5. In this environment, we are working to aggressively build a better Centex. Restoring profitability is our top priority; our divisions are committed to achieving profitability, neighborhood by neighborhood, market by market.

Each quarter Cathy and I, along with our market leaders, review the financial performance of each of our neighborhoods to determine the best approach for every asset. With foreclosures rising and a weaker economy, all markets are effected now to one degree or another. However, having just completed the reviews, our sense is there is probably more in home price declines behind us, at least for Centex and ahead of us.

Further, the incentives in discount that were necessary for us to clear inventory this quarter should diminish due to the stabilizing effect of transparent pricing and selling to a backlog.

We are also concentrating our focus on and within core markets. Our neighborhood footprint will concentrate in markets that provide the best future returns, which are defined by the most profitable consumer segments, products and geographies that fit our presale and production model. This concentration was accelerated through the sale of the number of land and neighborhood properties which we previously announced.

We expect our total neighborhood account to continue to fall in fiscal '09 as we build through existing assets and await the correction in the land market. We expect strong cash flow generation again in fiscal 2009 which will further strengthen our cash position. By the end of June we expect cash on hand to exceed $1 billion, due in part to a tax refund and the proceeds from the sale of HomeTeam Pest Defense which closed in early April.

Turning to slide 6, we are also working aggressively to build a better Centex for the long-term. During the quarter we essentially completed our transition to a company focused on home building. Centex is well positioned to take advantage of the considerable opportunities that will be created in this cycle and to emerge in a stronger competitive position.

We intend to achieve higher asset efficiency in the future through a more flexible land position. We are working quickly to improve our core business processes of selling and building homes. And we are increasing our relative share and strength in the markets that offer the best returns. We are confident that these efforts will result in sustainable cost reductions in higher and more consistent returns in the future.

In fiscal 2008, we accomplished important goals in a difficult operating environment. We fully expect this housing correction to continue through fiscal 2009. But we are intent on restoring profitability. We are working aggressively everyday to build a better Centex both in the current environment and for the long term.

With that, I will turn it over to Cathy to take us through some of the specifics for the quarter.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Thanks Tim and good morning everyone. Turning to slide 7. For the fiscal year, we delivered on key commitments. We generated more than 550 million of home building operating cash flow. On a total company basis, including financial services, we generated closer to $1.5 billion. It was our second straight year of positive operating cash flow.

We aggressively sold homes throughout the year. We sold nearly 25,000 homes averaging over 2,000 sales per month. We made the decision to reduce our unsold inventory, get ahead of foreclosures and generate cash.

Sequentially from December to March, we reduced our unsold inventory by 59% to less than three per neighborhood. This year we've made huge strides towards a more asset like business model resulting in a reduction of more than 70,000 owned lots.

We now own 70,000 lots and have 18,000 lots controlled. Sequentially, our total lot position is down by nearly 25%. We accomplished this large reduction in a couple of ways. We aggressively sold inventory and we sold non-core land.

While we delivered on key commitments, we were not profitable but we've made progress to close the gap. We now have fewer employees per closing than at any point in the past nine years. Our overheads per closing fell another 9% year-over-year and we continue to work hard with our partner vendors to reduce cost and increase efficiency.

We know we are achieving solid reductions in our direct construction costs. On a per closing basis, direct construction cost did come down again this quarter. However the more significant reductions we're realizing on new start didn't fully show up in the Q4's closed units.

A large portion of the closings in the quarter had been started and completed in earlier periods. We've made a lot of progress and are doing much more to improve profitability. I am confident our efforts on business process improvements will produce a lower sustainable cost structure. I'm also confident these efforts will begin to result in higher margins and faster asset churns in fiscal 2009 and beyond.

Slide 8, provides the details around the home building operations for the fourth quarter. We closed 7,100 homes in the quarter, 33% lower than last year. The average price of homes closed in the quarter declined 15% to $268,000.

This is a direct result of our focus on addressing affordability and our aggressive reduction in unsold inventory. With that largely behind us, and our transition to a transparent pricing strategy, I expect our sales incentives and discounts to moderate in the coming fiscal year.

This quarter our sales and discounts incentives were 14.2% of the average selling price, down from 15.2% last year... last quarter. Marking the first sequential decrease in over three years. In the quarter, our gross margin was 7.7% down 1000 basis points. We sold and closed more than 2,500 homes that were standing inventory at the beginning of the quarter.

Many of these homes had old material and labor costs. Today I'm seeing evidence that if we sell homes before construction starts, they have materially higher gross margins. This gives me confidence that as we move to a presale model, margins should improve. I know we were making solid progress on the cost front, as pricing pressure abates we will return to profitability as soon as possible.

Our intensity and urgency remained high on this front. On a pretax basis we recorded $333 million in impairments and optional walk-away costs this quarter. We recorded JV impairments of $12 million and a goodwill impairment of $17 million.

The impairments were concentrated in California and Florida. We also recognized a loss of $395 million related to the previously announced large land sale completed in the quarter. We impaired 94 neighborhoods this quarter, 47 of which had been previously impaired. This brings our total impaired neighborhood count to about a third of our active and inactive neighborhood.

We take a consistent, methodical approach to land valuation. We recognize this is a dynamic environment. We continue to take the same disciplined approach to valuing our asset each quarter. Along with the impairment analysis, it is essential to assess each neighborhood for positive incremental cash flow.

We evaluate every asset, every quarter to make sure we have the right strategy for that particular asset. We assess whether the highest return is to sell, build through or hold. We are still finding that the best answer most of the time is to continue to build through our asset. More importantly this will leave us with a lean balance sheet and an opportunity to add faster churning, higher producing assets in the future.

Turning to backlog; our backlog of home sold now stands at 7,746 units with a total value of $2 billion. Year-over-year our backlog was down 27% on a unit basis. The right level of backlog will be increasingly important to us, creating a sold backlog allows us to build to a cadence.

Building to cadence, using standardized business processes, yield operating efficiencies and more predictable results and pre-selling a backlog is essential to our asset like business model. We are moving rapidly in this direction. With a unit, with our spec unit reduction largely complete and as we transition to a pre-sold model we expect lower backlog conversion over the next couple of quarters.

Let me take a few minutes to review the regional results. Slide 9 details sales and closings by region. In the quarter we sold 6,693 homes down 5% on a per neighborhood basis. This is an annual rate of 43 per neighborhood above our goal of 36 per neighborhood per year.

Our cancellation rate continues to fall at 29%, its the lowest in over a year. As to regional color, let me sum it up in five words. There are no markets improving. In our East region sales were down 4%, sales per neighborhood were up 6%, Charlotte and Raleigh-Durham were the lone bright spots, while our DC metro appears to have slowed again.

Our sales in the Southeast were up 5% and up 6% on a per neighborhood basis as our transparent pricing strategy produced good sales volume on a relatively easy year-over-year comparison. Texas has definitely cooled off, although our central Texas operations are still doing relatively well.

The south west region, including Phoenix, Las Vegas and Inland Empire are the markets impacted the hardest by foreclosures and sales reflect that. Our Northwest region experienced a 6% gain in sales per neighborhood lead by Seattle and Sacramento. Year-over-year closings were down across the board reflecting the soft market environment and the reductions in neighborhood.

Moving to slide 10, through out the fiscal year we strengthened our cash position and we lowered home building debt, both senior notes and joint venture debt by almost 800 million. At 3-31 we had only 13 JVs with debts totaling less than $200 million.

On the cash front we generated positive home building operating cash flow this quarter an excess of $775 million. We now expect our total cash balance to exceed $1 billion by the end of the June quarter. The increase is largely due to our anticipated $600 million tax refund and the proceeds from the sale of our Pest Defense business.

We have no debt maturities this quarter. Additionally we amended our credit agreement and we don't expect to have any borrowings against our credit facility this year. Furthermore we expect the home building operations to be roughly cash neutral in the June quarter for the first time in over a decade.

This would represent an improvement of over 600 million in operating cash flow compared to the same period last year. A smoother, more predictable cash flow stream is another benefit to our sell and build model. We are not giving guidance, however I can say that our total land spend, including acquisitions, development and JV commitments, in fiscal 2009 will be less than half of last year's 1.7 billion given current market conditions.

I'm confident we should be operational by cash flow positive for the third straight fiscal year in 2009. Also in the quarter we recorded $330 million increase to our valuation allowance related to our differed tax assets in accordance with FAS 109 accounting for income taxes.

Our total valuation allowance is now $830 million. It's important to note there is still a lot predictability in the industry right now. In our financial services segment we recorded a $54 million provision for losses on our portfolio of discontinued loans. The portfolio now has a reserve balance of 55% of net book value, which is approximately $150 million.

In all, we did what we needed to do in the fourth quarter and fiscal year. We sold homes, generated cash and structured for profitability. We remained focused on these near term goals while positioning Centex to take advantage of future opportunities.

Turning to slide 11, I'll comment on what we are doing to restore operational profitability. Selling a home and then building it is key to restoring profitability. We benefit with lower material and labor costs and improved employee productivity.

Gross margins tend to be significantly higher and cancellation rates lower when we sell a home before construction is started. At this point we have 72% of our September quarter projected closings already in backlog versus 53% at the same time last year. This should result in lower costs, better predictability and better asset utilization.

Additionally, as we improve all of Centex's core business processes, our operating margins will increase. We've made substantial progress this past year on this front and expect to make more meaningful progress in fiscal 2009.

We remain highly focused on overhead cost reductions. We were down 12% per closing in 2008 and we expect to be down again in fiscal 2009. We continue to concentrate our neighborhood footprint. We are exiting some markets, making some divisions, satellites of others and rapidly moving out of underperforming assets.

Our average neighborhood count was down 10% in fiscal 2008 and are expected to shrink again this year. Another key to achieving normalized margins will be reinvesting in land assets with better economics. We've positioned ourselves to take advantage of land and lot opportunities on an asset-light basis, when the land markets adjust. We're doing much inside our company today, to ensure we have a leading cost structure now and even more importantly in the future.

I'll now turn the call back over to Tim for his concluding remarks.

Timothy R. Eller - Chairman and Chief Executive Officer

Thanks Cathy. Centex has accomplished important goals for fiscal 2008. We accelerated our sales of homes ahead of foreclosures and significantly reduced our unsold inventory.

We generated strong cash flow from home building operations. We lowered our debt obligations and substantially shortened our land position. I'd like to thank and congratulate the hard working employees of Centex for their focus and diligence throughout a very tough fiscal 2008.

We expect this correction to continue this next fiscal year. Foreclosures will continue to pressure most markets. Economic conditions are weakening. In this difficult environment, we're continuing to execute our plan for aggressively building a better Centex, restoring profitability is a top priority.

Looking ahead, we're also building a better Centex for long term by focusing on asset efficiency and a more flexible land position. Internally, we are improving our core Centex business processes. We're gaining relative share and strength in important markets. Together, we believe all of these actions will result in sustainable cost reductions that yield higher more consistent returns.

Now Janice let's address the questions.

Question And Answer

Operator

At this time we will begin taking questions. [Operator Instructions]. Our first question comes from the line of Nishu Sood with Deutsche Bank.

Nishu Sood - Deutsche Bank

Thanks and good morning everyone.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Good morning, Nishu.

Unidentified Company Representative

Good morning.

Nishu Sood - Deutsche Bank

First of all impressive job on the cash flow generation.

Unidentified Company Representative

Thank you.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Thank you.

Nishu Sood - Deutsche Bank

First question I wanted to ask was, you continued to exit markets I think Michigan was a most recent, but with the strong cash position you've built up clearing out your spec inventories, kind of beginning to look ahead to... when markets do ultimately began to recover. I just wanted to get your sense of what that might look like. Is that going to be revisiting markets that you have been exiting over the last few quarters or is that going to be focused on building more relative share in the markets that you are now left in?

Timothy R. Eller - Chairman and Chief Executive Officer

Thank you Nishu, good question and it's absolutely focused on building relative share in our... what we're defining is our core markets. So we will not be revisiting the markets we've exited. We will be focusing on the markets for the future.

Nishu Sood - Deutsche Bank

Okay and second question I just wanted to ask was on the mortgage write-downs. Couple of quarters ago obviously you started off with a substantial write-down in that construction to current portfolio. And would have thought that, that would have been the end of it but we've seen a couple more charges there. So I just wanted to understand fundamentally what's going on, that is causing you to continually reevaluate and rewrite-down that portfolio?

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Hi Nishu, it's Cathy. We are now reserved at 55% of the net book value of all of the discontinued loans. So we are... I would say obviously adequately reserve there. As we've watched those launch, remember that they are construction loan that we started beginning at the build of that home, really need product and then we modified at the end. So as we time take... it takes time for those to continue to modify out and as we do refining, there is not a market for that loan product, then we have to fit it into our product that's there or we we're seeing that there was a good consolidation in California and Florida, those assets still aren't... those markets aren't performing well. But again we're adequately reserved at 55% of that total net book value and the total net book value is 150. So it's, I think it's bounded.

Nishu Sood - Deutsche Bank

Okay so we're probably seeing the end of that?

Cathy R. Smith - Executive Vice President and Chief Financial Officer

I can never say that we are at the end, but what I would say is that again at 55% of the total book... of the net book value and the total of net book value is 150. I think we can fairly well bound it.

Nishu Sood - Deutsche Bank

Okay. I'll get back in the queue again and thanks.

Operator

Your next question comes from the line of Stephen East with Pali Capital.

Stephen East - Pali Capital

Hi, good morning everybody.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Good morning.

Timothy R. Eller - Chairman and Chief Executive Officer

Hi Steve.

Stephen East - Pali Capital

If... first question synergies around the specs in the order rates, about one-third of your orders were specks in this quarter. If we look at what the gross margin would be factoring those out, how much did that impact your gross margin and how should we look at specks as a percentage of closings over the next quarter or two?

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Specks will continue to come down as we move transition, our model to that sells in build model. So the only thing we shouldn't be left with in the future and with regard to speck inventory would be really only cancellations. We also know cancellation rates tend to be much lower on a presold home before we build it. So speck units will continue to come down and as you know we're now at the lowest level that we've seen in a long, long time at less than three per neighborhood. And with regards to gross margins, many of those 2,500 homes that we sold... sold this last quarter were completed in previous quarters and they did have older material and labor cost included in them. So gross margins will improve.

Stephen East - Pali Capital

Okay and then if you just look at your cash flow expectations as we move throughout the year and I know you are not giving an actual forecast but it sounds like, if you are positive in the June quarter, you are probably be at least moderately positive, virtually all the quarters?

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Yes. So as we said, we expect to be roughly cash neutral on the June quarter from operations which is substantially improved over our past several years. And for the whole year we don't ever expect to be in our credit facility.

Stephen East - Pali Capital

Okay, thanks.

Operator

Your next question comes from the line of Carl Reichardt with Wachovia.

Carl Reichardt - Wachovia Securities

Good morning guys, how are you?

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Good morning, Carl.

Timothy R. Eller - Chairman and Chief Executive Officer

Hi, Carl.

Carl Reichardt - Wachovia Securities

On the 70,000 lot that you owned and I can't recall it, I think you guys don't include homes in the year in that 70,000 lots. I think that's right?

Timothy R. Eller - Chairman and Chief Executive Officer

Correct.

Carl Reichardt - Wachovia Securities

Okay. What percentage of the 70,000 lots would you say are finished lots as opposed to requiring additional development dollars?

Cathy R. Smith - Executive Vice President and Chief Financial Officer

About 50% are finished.

Carl Reichardt - Wachovia Securities

Okay about 50 finished. Okay, great. And then could you give a little more color on the metro market shrinkage. Nishu [ph] mentioned Michigan we know about that one, but what's your metro count now as you look at it and where can we expect that to go. What are the markets you are planning on concentrating and can you give us a little more color there?

Timothy R. Eller - Chairman and Chief Executive Officer

We have announced that we are exiting Jacksonville, Columbus and Detroit. We are continuing to valuate a number of other markets. But really there... the markets we are going to focus on as I always are going to have the best dynamics for us... for economic growth and for our business model for the future. And that means that a ready predictable supply of land. Certainly plan to go and a ready predicable supply of land that we can execute a presale model on and asset efficient and like way. So there we believe certainly there is 30 markets available for us to do that.

Carl Reichardt - Wachovia Securities

Okay, that's help a lot. I'll get back in queue. Thanks so much.

Timothy R. Eller - Chairman and Chief Executive Officer

Okay.

Operator

Your next question comes from the line of David Goldberg with UBS.

David Goldberg - UBS Securities

Thanks, good morning.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Good morning.

Timothy R. Eller - Chairman and Chief Executive Officer

Hi, David.

David Goldberg - UBS Securities

I was wondering, kind of bigger of picture as you guys go to the asset light model and you think about that. In the near term, are you going to buy more finished lots, how long is it going to take you... to take us in those lots and actually make them build them more? Is there a delay, to final permitting on this stuff? And then I guess with that when you think longer term who is going to be owning the land and going be delivering the land here and what kind of returns are they going to require on that land and do you think as a sustainable model in, let's say 50%, 70%, 80% of your markets or some thing like that?

Timothy R. Eller - Chairman and Chief Executive Officer

Those are good questions and they don't have finite answers right at the moment. The land has not corrected yet. The land is largely in the hands of private developers and those private developers have bank borrowings against that land and we are finding now that the land in the lots are going back to banks. There's thousands and thousands of developed lots and virtually market. The highest being Atlanta at about 145,000 vacant developed lots, phoenix has nearly 90,000... 60,000 vacant developed lots even that sort what has, maybe as many as 90,000 vacant developed lot. So the supply will be there for some time to come. We believe that needs to go back to the banks. We are already beginning to work with banks on securing some land positions for the future but of course that's going to be a process that takes some time and we expect the latter half of this year. Longer term but we find is there is a lot of capital still private capital mostly that is looking to provide development services for the industry so time will tell whether or not that capital will actually be put to work in that in that endeavor but we are finding those two opportunities for the future.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Hey to answer your question David about how quickly we can put a home on a finished developed plot it will vary but you can do it... and some them truly contemplate the finish and some of them require a little bit of effort but they can be very, very short term on some of the finished developed plots. And then your other question about how many of market would have access to the... they can develop or finished develop plots not all of our markets will be able to have data and access long term however it seems that almost all the markets have some now.

Unidentified Analyst

Is it save to say then that its going to be acquiring more and a smaller communities maybe 50,00 lots at a time versus their communities moving forward because that's going be well above the opportunities come from bank.

Unidentified Company Representative

Well the banks have a variety of land positions up from small to large and I think the beauty of our business model that we are moving towards would allow us to participate in both.

Unidentified Analyst

And if I can just get a follow-up Cathy something that you said about the amount of discounts and incentives that are being offered and that coming down I think you said 14.2% or 15.2%.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Right.

Unidentified Analyst

Was that a conscious choice I mean if you would have been at 15.2 kind a help steady the amount of discounting that you were doing. Do you think you would have achieved the different sales rate and I guess with that how does transparent pricing play into that?

Cathy R. Smith - Executive Vice President and Chief Financial Officer

The end of your question is really the answer. It's a conscious decision and a part of our plan as we move to transparent pricing and transparent pricing is essential as we wanted to start moving towards selling to a backlog so that we can built to a cadence so we can get those production efficiencies. It's all part of our plan so the majority of our market have been able to achieve transparent pricing and as we have explained that helps on how we get to transparent pricing is we do a lot of work around what the buyers can afford by mortgage ways they can qualify and how much the market needed to adjust and we set a base price with very limited discounts and incentives and yes and then we could stick to that price and more successfully sell to a backlog.

We had to do couple of things to accomplish that which was getting through a large number of our spec units which we did this last quarter and then transition our market so we have done that very successfully now. So, discount should continue to come down remember we saw in this last quarter whether close units which as we talked about many of those were filed in clothes in previous quarters as well.

Unidentified Analyst

So, it's fair to say that the sequential decline has as much to do with the denominator going down as it does in numerator may be going up.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Yes.

Unidentified Analyst

Great thanks so much.

Operator

Next question comes from the line of IB [ph] Zellman with Zellman and Associates [ph].

Unidentified Analyst

Good morning guys its actually Allen on for IV. I have a question that when I am looking at your upcoming debt maturities over the next few years you have about 675 million of public debt coming to you over the next three years and really a pretty steady flow of maturity over the next years eight years or so. And I believe last quarter you indicated you are planning on paying down about 200 million of J.B debt as well on top of that.

So, my question is wit all of these maturities coming to you would you consider raising additional equity in order to you optimistically take advantage of some of these land deals that you foresee coming to the market in the next few quarters or couple of years even?

Unidentified Company Representative

Let me just respond to how we might take advantage of the land deals and what we are seeing and believe will happen for quite some time is the ability to do with in a very soft, very structured take down manner so we won't need to commit a lot of capital to acquire a lot of land. This is very typical in these cycles and coming of the last cycle it was very typical. And so we are fairly very confident that we will be able to preserve a lot of our cash and still take advantage of the land market.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Yes.

Unidentified Analyst

So you expect to at least looking forward over the next couple of years to be able to fund the maturities with cash on hand plus on the cash you generate from the operations.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

That's exactly right.

Unidentified Analyst

Okay, great and can I just get an update on the steps of your J.B debt I think last quarter cant be you gave some good color on how much debt was outstanding in the debentures and how much you expected to repay.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Yeah, by now we have... we did some great work this last quarter and throughout the last year we reduced $209 million of J.B debt we are now down to less than... we are 13 JV's with debt and they have get of less than 200 million. Over the course the next 12 months, about a half of that natural immature and then their remainder goes into 10 and 11.

Unidentified Analyst

Okay, great and if I can sneak in one follow-up back to the paying down the debt question have you received any feedback or in terms of maybe steel industry in general what is the ability to tap your revolver in order to pay down public debt we have heard some conflicting messages there whether it is that something that the banks would agreeable to or give any issue to?

Cathy R. Smith - Executive Vice President and Chief Financial Officer

I can't really respond on that, we don't intent... we wont need to do that we don't intent to have to use our revolver all this year and we should be out of our revolver given our significant cash position and the continued cash that we are going to generate.

Unidentified Analyst

Okay, great thanks a lot guys.

Operator

Your next question comes from the line of Megan McGrath with Lehman Brothers.

Megan McGrath - Lehman Brothers

Hi, good morning.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Good morning.

Unidentified Company Representative

Good morning.

Megan McGrath - Lehman Brothers

You talked a lot in your initial comment about on the impact before closure in the particular market, won't you see follow-up on the other side of things and talk about the sort of opportunities or difficulties presented when smaller private builders they are actually starting to go bankrupt.

Unidentified Company Representative

Actually, what we are finding is occurring with ever increasing frequency and in many markets certainly most if not all of the markets that were early into cycle we are seeing that. Consequence for us is that it reduces capacity, reduces active neighborhoods it makes the market feel better for us it makes all the market our numbers may not be increasing that feels like it is for us or our sales has actually improved, pricing power is supported better but we don't out it this way we don't have the negative pricing pressure, we actually have we are able to sustain prices in that environment. We see that happening more and more and more we see its going to take again sometime for the banks to take these assets and give them back into the market. But its overall a positive situation for us.

Megan McGrath - Lehman Brothers

Does this not out any increments on pricing pressure in the market say a community is sort of half finished and they try to finish it up to generate that cash?

Unidentified Company Representative

There is still very little inventory of they can develop houses that would cause that issue, the... and the lots will go back to the bank and it is remains to be seen how the banks will actually deal with that land that they will take back, but we are hearing more and more is that they will tend to try to work it out or rater they will shrug the market with lots either way it works to our benefits.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Megan generally the privates don't have a lot of standing inventory because the banks wont loan against prom their direct construction cost, they were usually against the land only. So that won't impact us as much either.

Megan McGrath - Lehman Brothers

Okay, great that's great color and just one quick follow-up you mentioned that you bought majority as AFP declines were behind you. We heard a lot of comments from some of your competitors over the past couple of weeks around whether write downs are the majority is behind you and if you want to care to comment and way in our map.

Unidentified Company Representative

Well the prices the one of the biggest determines in terms of impairments so we'd be hopeful that the book of that is behind of us as well.

Megan McGrath - Lehman Brothers

Great thank you.

Operator

Your next question comes from the line of Michael Rehaut with J. P. Morgan.

Mike Rehaut - J.P. Morgan

Hi, thanks good morning.

Unidentified Analyst

Good morning.

Mike Rehaut - J.P. Morgan

First question just and the transparent pricing and you had mentioned that no market right now are showing signs of improving. You did however, you were able to get what I would called corporate average orders in the east and the south east and you know you had mentioned that part of that was due to implementing the transparent pricing so the question I have is A; can you give us the sense when you put that transparent pricing mechanisms into place because I thing you had also said that you really weren't able to do and until you flushed out a lot of bit the specs in those, markets that's my first question.

Unidentified Company Representative

For the most part we transition to transparent pricing at the of calendar year. Some division were earlier in that some divisions were bit later than that nut roughly that's the point so we will being to see those closings comes through starting with those first quarter and then really mostly in the second quarter or second fiscal quarter.

Mike Rehaut - J.P. Morgan

Okay. And I guess the question is then to that point if you switched to the transparent pricing which I guess would have necessitated a more of a drop on the nominally a steep price versus and trying to reduce the level of incentives. We have heard that pricing has come down in just about all markets across the board in reaction to perhaps other more aggressive builders, earlier in the quarter or in the fourth quarter and so you still have this kind of almost marry go around cycle and it seems that you are able to get some good order flow in relative markets because of that how has the quarter played out as you have seen... prices fall and people kind of react to maybe your pricing strategy and if prices continue to fall at what point are you going to react to that in further lower your own price.

Unidentified Company Representative

What we're finding is as we've done our neighborhood review is that more and more competitors are moving to a transparent pricing which is how the businesses is normally run in normal times and so it's a natural progression as a part of the recovery and so we would expect that to continue and frankly we are finding as we have done in the past started back in August when the mortgage liquidity crisis really start to hit we are really just focused on pricing to the levels that our customers can afford.

So it's a pretty scientific approach and we tend not to react to what somebody else may do because we know we should price them.

Mike Rehaut - J.P. Morgan

Okay. And just one more question the, I think it was brought up earlier but I thought if we get some more clarity, the impact of the 2500 Speck homes sold in close during the quarter can you give us a rough idea of what that had as an impact to the gross margins?

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Yeah, roughly I can give you kind of rough ball park at somewhere in that probably 300 to 400 basis point range.

Mike Rehaut - J.P. Morgan

Okay, and that's very helpful I appreciate that Cathy and was wondering if can also give us a sense of what the benefit from homes that were sold in the quarter that were previously impaired that some people caught it like a reversal but from prior impairments what that contributed to the gross margin?

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Yeah, let me get Matt's going to grab you that number we don't... we can give you the number of closing its really the best we can do any more its kind of becoming more and more difficult to say what the reversals were.

Unidentified Company Representative

We had 2300 in 5 homes that were closed this quarter from previously impaired neighborhoods.

Operator

Your next question comes from the line of Alex Barring with Agency Trading [ph].

Unidentified Analyst

Yeah thanks good morning

Unidentified Company Representative

Good morning.

Unidentified Analyst

I guess I wanted to focus a little bit on your strategy I mean I guess you guys are moving more towards this built to order model I am just kind of wondering how are you finding it as far as competing against the other builders who continue to spec built and I guess, what's the competitive value that... or what's the value I guess that a buyer gets from waiting 4 to 6 months for a home versus buying one that's off the shelve from somebody else?

Unidentified Company Representative

There are some buyers that are bargain hunters that are looking for a deal and they can go find those deal I am sure somewhere. But what we are offering is a experience of building a home and we find that generally has greater value for us, higher margins for us more satisfied customers for us so those are the buyers we choose to what to focus on.

Unidentified Analyst

Okay, I got it, now as far as I was trying to also understand your comment about the cash neutral and how that relates back to your margins at the moment. So, your margins I guess were fairly low and I guess some of that came from the impact of selling the specs so going forward I guess its sounds like you guys are expecting the margins to trend backup is that kind of mix quarter to or we are talking like year from now. When would you say that you expect the margins to start improving?

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Throughout the course of the year you will see margins to trend up and as I talked about we are doing a lot to improve our profitability and we have them for some time make great progress on that, but we are still doing tremendous amount try this company with our business process improvement moving to a pre-sold model continuing to distress our reductions and overhead. All of those things will continue to show dividends this next year.

Unidentified Company Representative

So, Alex [ph] should continue to go down what really unknown is the sales prices, we are not trying to compete and don't try to compete with for closures. Credit markets are continuing to tighten, credit underwriting standards are continuing to tighten so as we focus on what's necessary to qualify our buyers there may still continue to be pressure on the prices from just a credit side. Again I think we believe most of that's behind us and much less in front of us.

Unidentified Analyst

One last question, what was the larger gain on the sale of the pest control.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

I am just saying Mark do you?

Unidentified Company Representative

On a net of tax basis it would be in the $30 million to $35 million range.

Unidentified Analyst

Okay, thanks again.

Unidentified Company Representative

Yeah.

Operator

Your next question comes from the line of Susan Berliner [ph], with Bear Sterns.

Unidentified Analyst

Hi, good morning, Cathy I was wondering if you could help us with the 1 billion of cash as of the end of June period considering that it's going to be a cash from neutral quarter if you can just walk us out through the how you get to the just over 1 billion.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

It's really you take our cash balance at the end of the year at the end of fiscal year 331 and we have a substantial tax refund expected this quarter which is 600 million we've the proceeds of our pest events business and then the difference in that verses we said we should exceed a $1 billion is just given the uncertainty in this environment.

Unidentified Analyst

Okay, so could be closer to 1Q then the 1 billion.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

It's possible.

Unidentified Analyst

Okay, and then secondly on the share of the joint venture data it looks like it went down about over 62 million this quarter can you say I guess which component of the joint venture that one down meaning completion guarantees on maintenance etcetera.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Just I can ask Matt to look foe you there but as you know we can focus on trying to reduce our exposure although its not very large in J.B.

Unidentified Company Representative

So it will be in the K which we will be filing soon but the biggest reduction was in limited maintenance guarantee, they was actually increase in no reports or guarantee but all the numbers changed to little bit back and forth.

Operator

Your next question comes from the line of Timothy Jones with Wasman and Associates [ph].

Unidentified Analyst

Good morning.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Good morning.

Unidentified Analyst

Two questions. First question is you talked about debt hasn't the best closing through employee for the nine years. I would like to get your total employees for this year versus last year and the proportion and the number that were related to home building.

Unidentified Company Representative

Again Matt's is looking it up but we're down in home building about 50% from the peak and the total is less relevant because we have sold so many businesses.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

We are really focused on house building.

Unidentified Analyst

Home building for sure?

Unidentified Company Representative

Well they are looking that up so what's second question.

Unidentified Analyst

In case I don't think of gave the exact numbers for homes under construction for this year and last year and the proportion of a unspent, unfinished tax and finished tax.

Unidentified Company Representative

I would get that Tim. Homes under construction right now are including model homes are 7,324, its down from 13,301 a year ago. We have a 17,054 total unsold units of which is 668 are over 180 days old. For your employees at Centex Homes were 39/10 versus 61/64 a year ago.

Unidentified Company Representative

And peak was over 8000.

Unidentified Company Representative

Right. Close to 600.

Operator

Your next question comes from the line of James Mccanless with FTN Midwest.

Unidentified Analyst

Hey good morning.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Good morning.

Unidentified Analyst

Sticking with the gross margin questions could you all give me what the x impairment gross margin would've been this quarter.

Unidentified Company Representative

Well the impairment is not in that... in that number so 7 is the number.

Unidentified Analyst

Okay and then that 300 to 400 basis points you were talking about on the Spec that was so basically you are getting back to 11 to 12% gross margin on non-spec units.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Again remember that a large portion of those homes closed in our fourth quarter also had older material on labor cost included in them?

Unidentified Analyst

Okay, and then sticking on the gross margin for a minute kind of a two part more question. First are you including any estimate of increased raw materials cost in building materials cost and sort of I thing your positive outlook for '09 gross margins and then also how do I square your positive outlook I think for the gross margins versus what I think is a much more conservative approach to future profitability that I think we are seeing in the evaluation allowance on the deferred taxes. If you could square those twp up for me I would certainly appreciate it.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Yes I am not sure if I get your comment on the evaluation allowance. So right now may be I can half explain we set up deferred tax assets and we would recognize that deferred tax asset as we on transacts the land or the lot that's associated with that when we have an impairment that's largely the book of that. So right now because of the uncertainty and lack of visibility in the industry we have chosen to reserve 830 million of that deferred tax asset.

As we turned to profitability and see a good when we start having seeing stability on front of us we would expect that to come back to our income. But I'm not sure that I'm answering your question.

Unidentified Company Representative

Let me just comment on the construction cost what we're seeing is continued reduction in overall direct construction cost we certainly do have some materials that are going up but overall direct construction cost are continuing to come down on per house basis. And we are finding that our mix of houses is changing a bit to generally the more affordable house types.

Operator

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

Jim Wilson - Jolson Merchant Partners LLC

Thanks. Good morning. I guess the two question one is... and maybe I missed it earlier I missed first couple minutes of the call but cash flow components and it was at mostly... more significantly image part reduction versus one of your breakdown the cash flow components for the quarter and the second one is... really it relates to kind of sales space per community and I know we don't... we have community accounts rights now but was wondering if you could... I don't know at least color it how would it look differently by region or anything I know you want a express about the various market out there on a sub-division basis.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Yeah the biggest element on the cash flow generation is that... is the reduction in working capital, reduction in inventories and then with regards to... I'm sorry the latter part of your question.

Unidentified Company Representative

Sales per neighborhood.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Yes we were at 43 per neighborhood this last year which was really much better than kind of a minimum level threshold we set for our self at 36 sales per neighborhood per year which would have been about 3 sales per neighborhood per month and so we did exceed that the last year at 43.

Unidentified Analyst

I differentiated recent trends in the quarter and if you could differentiate how you want to do by number... good, better, worst or something by region.

Unidentified Company Representative

Cathy did cover that in her comments on the regional color but not just kind of give you my flavor for the... most negatively impacted markets today from a closure standpoint are the southwest which are England empire, Los Vegas and Phoenix so those are feeling really tense pressure from plot foreclosures second of course would be Florida particularly southeast Florida are feeling the pressures from plot closures into some extent Orlando.

Interestingly and Tampa, interestingly we had very good sales on a relative basis in South West Florida particularly in the Naples that's a very discretionary buyer they don't really they don't need to qualify for loan because they have international empire it's a second home buyer typically so, the combination of the rough winter in the North and buyers sensing that, perhaps we are close to the bottom at least in that market. Allow this to have very good sales success there. Also interestingly Indianapolis was a very good market for us for sales. Largely because there is so little competition left, to previous question about the market isn't improving necessarily.

There is just a lot less capacity of to our sales that we pre sold most of our houses in Indianapolis last quarter.

Unidentified Company Representative

And throughout the quarter it was pretty steady. Every, month had more sales per month so, no real trend to decide through the quarter.

Unidentified Analyst

Okay, great, thanks.

Operator

Your next question comes from line of Randy Racemen with Dorm Asset [ph].

Unidentified Analyst

Hey, how you doing? Just a few quick questions first just was wondering where you are relative to the minimum tangible network covenant now under the revised terms and then just a couple of follow-ups after that.

Cathy R. Smith - Executive Vice President and Chief Financial Officer

We are... we did revise our credit agreement this last quarter and now we do have sufficient room there.

Unidentified Analyst

How big is the accretion now?

Cathy R. Smith - Executive Vice President and Chief Financial Officer

Its north of 600 million, 700 million.

Unidentified Analyst

Okay, and then the other question was just getting back to comments you guys made earlier about being in a position to buy land later in the year from banks, just want kind of understand what type of pricing and valuation assumption you make in your just given how much cheaper do you think the land gets versus were you are relativity to the transaction you guys just completed or so many other transaction you are seeing in the market now.

Unidentified Company Representative

Well land is the residual of the sales price so we just start with our sales price of the home subtract our cost determine our hurdle rates in terms profitability and what's left is what we can pay for the lot or the land. So that's the process it's always been the process. So land has correct... will need to correct considerably and that's the issue right now, it's not that we are not in a position to buy. We are in a position to buy today. In fact there are some transactions today and we are acquiring land and lot positions strictly lot positions stay a lots on structure take downs really.

But there this isn't very much supply in the market because it's locked up in the bank's or will be locked up in the banks. So, when I said last half of this year I think that's when the bank's will begin to put the land to the market and it's happening already in some places but the valuations aren't yet there and so the process is... the banks will put the properties to the market and over time they will find the right valuations.

Unidentified Analyst

So if land values flow off of prices how we are reconcile further price reduction than versus your commentary that you think that the price reductions are behind you and that the margins are going to go up just doesn't add up.

Unidentified Company Representative

Well I said was I think the book of the price is behind there could still be pricing pressure in the future particularly if credit continues to tighten in... on mortgage products and so that's been the issue for us is to be able to qualify our customers and so we will continue to watch that. But we are not going to chase for closures and the other part of your question was?

Unidentified Analyst

Just how that reconcile with the margin going up.

Unidentified Company Representative

Well two things, so Cathy mentioned that we have higher margin on pre sold houses, we don't have to discount on pre sold houses, in fact that moved to transparent pricing to pre sold houses so part of it is price we are finally in our direct construction cost are continuing to go down so as we look out into to future, we will have a lower cost base and we are focusing on reducing and continuing to reduce our SG&A so its a combination of moving to a pre sold model as well as realizing cost reduction in the future.

Unidentified Analyst

Yeah, thank you.

Unidentified Company Representative

Yeah the caveat is that we don't convenient to half piece decline but, we could, certainly could in the future as well.

Unidentified Analyst

Great, thanks.

Operator

We have reached the end our allotted time for questions; I will now turn the call over to Tim Eller for his closing remark.

Timothy R. Eller - Chairman and Chief Executive Officer

Thanks Janice and I want to thank all of you for joining us today we look forward to discussing our progress during our first quarter conference call later this summer.

Operator

This concludes Centex fiscal year 2008 fourth quarter earning conference call, thank you for your participation.

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