Gleanings From Centex Homes FQ1'09 Conference Call

From Seeking Alpha's Centex Corp. F1Q09 (Qtr. End 06/30/08) Earnings Call:

Outlook:

Timothy Eller – Chairman, CEO: “Conditions in the housing market worsened in the quarter and we don’t see any improvements in market conditions for remainder of this fiscal year. Foreclosures are arising dramatically in most markets, employment growth is slowing. Mortgage rates are on the rise and we’re seeing stricter mortgage qualification requirements for home buyers. Energy costs have increased substantially for our subcontractors, suppliers and customers… [We saw] diminished traffic and sales volumes, compared to last quarter and a year ago.”

On debt:

TE: “We had $1.24 billion in cash on hand at June 30th… and we're expecting to further improve our cash position at fiscal year end, and reduce outstanding debt by another $250 million. I'm comfortable that we have enough cash to manage our medium term debt maturities… We are actively evaluating every internal opportunity to bolster our capital position… including our dividend. Cathy R. Smith, EVP, CFO: During the quarter, we proactively bought back nearly $70M of senior notes in the open market at a discount at par and reduced our ongoing interest expense. In Q2, we will retire another $150M of senior notes at maturity, and expect to reduce our joint venture debt for an additional $70M. Assuming this happens as planned, our share of joint venture debt will fall to approximately $90M by September 30th. At June 30th, we had only 11 JVs with the leverage, with our share of bad debt totaling about $166M… We expect our share of joint venture debt to be about $30M by fiscal year end… As a result of our strong cash position, we significantly increased the availability of our bank revolver and we don't have plans to use the revolver at any point this year.”

On the environment and affordability:

TE: “We recently announced the Centex Energy Advantage… This suite of energy saving features will be standard in all new homes starting in January 2009. Affordability is an issue for home buyers today and energy costs directly impact affordability… New homes equipped with Centex Energy Advantage features will be up to 22% more energy efficient than comparable new homes built to the current energy and crude [ph] requirements and up to 40% more efficient than a typical ten year-old home.”

On incentives and new business models:

CS: “Experience shows that the build-to-order business model results in higher margins. We'll have to sacrifice some sales in the near term… as we transition to a build-to-order production model. In the quarter just ended, our gross margins of 11.8% improved 410 basis points sequentially. Our discount and incentives came down again this quarter. Specifically, our sales discounts and incentives were 10.5% of the average selling price, down from 14.3% last quarter, marking the second consecutive sequential decrease.” TE: “We price to the affordability levels of our customers. And so as the affordability level changes for those customers, that could impact price. We do offer some small discounts in addition to that, but it's primarily around financing incentives and that kind of thing, generally less than 5% of revenue on discounts.”

On mortgages and financing:

CS: “By winding down our retail mortgage operations, CTX Mortgage will be solely focused on Centex home buyers. Having a dedicated mortgage operations where we control the loan approval and underwriting process enables us to sell homes to a backlog… 25% of our closing this quarter used a down payment assistance program. We know that some portion of these buyers don't need it, but make use of a DPA simply because it's available. We're preparing for DPAs to come to an end and frankly it's probably a good thing over the long term... The new tax credit for the first time home buyers may help with the transition.”  TE: “Our FHA utilization has gone up steadily for the past 18 months. So it generally runs about a third to a half of the FHA loans that we originate.”

On land writedowns:

CS: “We've done a great job reducing our total lot position. We now own 66,766 lots and control just 14,550 lots. This is less than four year supply of total lots. One of the best positions in the industry… On a pre-tax basis this quarter, we recorded a total of $80 million in land related charges, including $50M in land impairments, $10M in option walk-away costs and $20M of JV impairments. We impaired 36 neighborhoods this quarter, bringing the total to 384 neighborhoods that we've impaired at least once.”

On future land purchases:

CS: “In all our markets, we are actively assessing and cataloging future potential land. For this acquisition model to be effective, we're establishing important relationships now both with developers and capital sources… We are in the market right now. We're actively seeking developed lots in many of our markets where we are in shorter lot positions... We haven't really seen bulk sales of land by banks yet. We're working with other partners and teaming up with other providers and developers… The land market… won't materialize until… 2009.”

On how different markets are faring:

CS: “Our cancellation rate was similar to last quarter at 30%. In our East region, sales were down 21%. While Raleigh-Durham and DC Metro achieved higher sales per neighborhood, Charlotte and Forum, [ph] Virginia were down. Texas is slowing, although our Central Texas operations are still doing well with a 10% increase in total sales and a 26% increase in sales per neighborhood. The Southwest market including Phoenix, Las Vegas and Inland Empire are impacted the hardest by foreclosures and sales reflect that. Our Northwest region reversed last quarter's gain with sales down 35%, illustrating the volatility that happens at the bottom of the cycle. The Bay area saw sales down almost 50%, but most of that was due to a big decrease in neighborhoods. Sales per neighborhood in that division in fact were up 20%. Year-over-year closings were down across the board pretty consistently, reflecting the soft market environment and the reductions in neighborhoods.” Matthew Moyer – VP, Investor Relations: “Our dominant market share position throughout North and South Carolina has probably grown nicely.”

Perspective on land spend:

CS: “Our land spend… peaked at around $4.5 billion, down to $3.5B-$3.2B, down to $1.7B last year, down to roughly $0.5B this year… Not too much really going in to new lots and new lands. And it's entirely possible that we'll come in less than $500 million to if the market continues to deteriorate.”

 

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