Centex F2Q08 (Qtr End 9/30/07) Earnings Call Transcript

| About: Centex Corp. (CTX)
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Centex Corporation (CTX) F2Q08 (Qtr End 9/30/07) EarningsCall October 24, 2007 10:00 AM ET

Executives

Tim Aller - Chairman and CEO

Cathy Smith - CFO

Mark Kemp - CAO

Matt Moyer - Head of IR

Analysts

Ivy Zelman - Zelman &Associates

David Goldberg - UBS

Nishu Sood - Deutsche Bank

Michael Rehaut - J.P. Morgan

Stephen East - Pali Capital

Stephen Kim - Citigroup

Carl Reichardt - WachoviaSecurities

Dan Oppenheim - Bank of AmericaSecurities.

Ken Zener - Merrill Lynch

Timothy Jones - Wasserman andAssociates

Stuart Hosansky - Vanguard

Susan Berliner - Bear Stearns

Alex Barron - Agency TradingGroup

Chris Brown - Banc of AmericaSecurities

Jim Wilson - JMP Securities

Keith Willey - Goldman Sachs

Michael Mogavero - Atlantic AssetManagement

Randy Weisman - Burm AssetManagement

Nelson Yeman - Greenlight

Jamie Canlith - Southside Analyst

Operator

Good morning, and welcome to theCentex Corporation Fiscal Year 2008 Second Quarter Earning Conference Call withSenior Management. Today's call will be recorded and transcribed. Today's callwill also be simultaneously webcast at IR.centex.com. A copy of today'spresentation was filed last night with the SEC on Form 8-K. A link to thatdocument is now available on that website.

Centex wishes to emphasize toeveryone listening on the call and via the Internet that certain statementsmade during the course of this call are forward-looking. These statements arenot guarantees of future performance, and are subject to significant risks anduncertainties that that could cause actual results to differ materially fromthose discussed during the call. For further information regarding these risksand uncertainties, and Centex' forward-looking statements, please refer to theforward-looking statements disclosure in the presentation, and to Centex'reports on Forms 10-K and 10-Q, filed with the SEC.

All participants will be in alisten-only mode. There will be a question-and-answer session after management'sremarks. (Operator Instructions).

In the interest of time, we willlimit each person to one question and one follow-up question. If you haveadditional questions following today’s call, please contact Matt Moyer, VicePresident of Investor Relations at 214-981-5000.

I will now turn the call over toTim Aller, Chairman and CEO. Please go ahead, sir.

Tim Eller

Thank you, Lorain. Good morning, everyone. Thanks forjoining us for our fiscal year 2008 second quarter conference call. With metoday is Cathy Smith, our Chief Financial Officer; Mark Kemp, our ChiefAccounting Officer; and Matt Moyer, Head of Investor Relations. I'll start thecall this morning with introductory comments on the quarter and some thoughtsabout the months ahead. Cathy will provide details on our financial performanceand then I'll offer closing comments before we take questions.

Moving to slide 3, the housingmarket continues to be extremely difficult as was evident with the furtherdeterioration of pricing, traffic, and sales orders for the quarter. Rapid andunprecedented changes in mortgage liquidity over the last few months havecreated new challenges and affordability for homebuyers.

In August and September, we andthe industry experienced a complete resetting of the mortgage productsavailable to borrowers. Not only that many of the loan products are buyers andbacklog had qualified for simply sees to exist during August, interest ratesand qualifying standards and anything other than agency products became muchmore difficult. We responded quickly by adjusting home prices in many of ourneighborhoods to levels that would enable buyers to qualify for Fannie Mae,Freddie Mac and in a number of cases, FHA mortgages.

The disruptions affected nearlyevery region including the relatively affordable Texas markets. We have seen this more conservativelending environment reduced the number of buyers that previously could qualifyfor a home mortgage. The mortgage credit issues will persist for some time tocome, suppressing demand and exacerbating the current housing oversupplyconditions.

But our strategy remainsconsistent. A balanced approach to selling homes, aggressively attacking andreducing cost, and generating cash to further strength our balance sheet.Centex also has experienced management, who know how to react in a changingenvironment, while also positioning the company for the future opportunities,which will inevitably come from the cycle.

I believe that we are taking theright actions in this environment. Our actions are directly aligned with ourstrategies for managing this business cycle. Unsold inventories in virtuallyall markets remain extremely high. But this quarter’s results show that we aresuccessfully selling homes and minimizing inventories. Our net sales are down13%. Year-over-year monthly net sales were fairly consistent to the quarter at justunder 2000 homes per month. The number of finished unsold homes declined bynearly 40%, quarter-over-quarter.

We are structuring our operationsfor profitability. We reduced our workforce by more than 40% from the peak ofthis cycle, and nearly 20% in the last six months. Profit overhead is down 23%year-over-year. We are also aggressively attacking construction costs seekingand getting cost reductions that will be reflected in future closings. Inaddition, we are reducing our land position. This quarter, we further reducedboth the number of lots we own and the number we have under option.Year-over-year, our owned lots are down 16% and options are down 70%.

We are achieving positive cash flowfrom operations and enhancing balance-sheet flexibility. I believe that ournear-term actions in this environment will further our long-term vision. Weintend to gain strength and share in the markets that offer the bestopportunities for future returns, and fit with our business model. We arefocused on turning assets faster.

This approach will generate freecash and higher returns more consistently. We are progressing toward our goalof applying world class manufacturing disciplines to the business of buildinghigh quality homes, and we intend to emerge from this business cycle with asustainably lower cost structure.

Before passing the discussion toCathy, I would like to note that J.D. Power and Associates recently recognizedCentex, with its Platinum Award, for excellence in customer satisfaction, theonly builder to receive the award. This is the special honor for our teams inthe field, who maintained their focus on serving our customers, even in adifficult business environment. This is another example our focus on thefundamentals of home building.

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

Cathy Smith

Thank you, Tim and Good morningeveryone. I'll offer my perspective and commentary on our fiscal secondquarter. First, let me reiterate that our goals and our focus remainconsistent. Sell home generated cash and structure for profitability. In thequarter we did just that. We generated positive operating cash flow, reducedour inventory of unsold homes and reduced our SG&A cost significantly.

I am especially pleased with the37% reduction in our unsold finished homes. The market remains difficult andresults remained inconsistent. I was somewhat optimistic last quarter becausecancellation rates have come down two quarters in a row, and two-thirds of ourneighborhoods have found a predictable sales pace.

Unfortunately, the world changedquite dramatically the 1st of August. As Tim said, this quarter was marked bysignificant change in the mortgage market. High LTV, no-doc- dated income andlower FICO products essentially went away overnight.

With the loss of non-traditionalmortgage products, the most effective way to achieve an affordable payment isto reduce prices. We acted quickly in doing that. In many markets, we reducedprices to FHA limits, and in others to Fannie Mae limits.

This allows more borrowers toqualify for mortgages. With these decisive actions, we continue to sell homes.Continuing to sell homes is key to our strategy of reducing our inventory andour lot supply areas in which we again made solid progress. Total unsoldinventory is down 28%, year-over-year. Completed homes are down 50% on a perneighborhood basis.

On the land front, we furtherreduced our owned and controlled position. Owned lots are down 16%,year-over-year, to approximately 92,000 lots. Options lots now stand at about39,500, down 70% year-over-year and 27% sequentially. We continue toaggressively reduce our optioned and owned lots, and expect our total lotposition to continue to fall throughout this fiscal year.

Our cancellation rate at 35.4%increased from the June quarter but it was down year-over-year. Cleary, thispast quarter’s mortgage market disruption drove the higher cancellation rate.But our sales and mortgage professionals did a good job in minimizing theincrease.

Another important goal isremaining operationally profitable through the trough of the cycle. Home-buildingis less profitable this quarter before impairments and other land-related costs.Of the $26 million in earnings from housing operations, about $20 million isfrom closings and previously impaired neighborhoods.

To remain profitable, we continueto aggressively adjust our cost structure. In the last two quarters, we have realizeddirect construction cost reductions between 5% and 10%. This is an addition tothe approximate 10% reductions we achieved in FY '07.

Further as Tim mentioned, we havemade good progress in keeping our organization size to the business reality.Headcount was down 14% sequentially this quarter. We still have work to do interms of restoring growth our gross margins to more normal levels and reducingour overhead expenses even further.

Now, I will provide more color onthe home building and mortgage operation. Slide 7 provides the operationalhighlight of the second quarter. We closed 7,350 homes in the quarter, 14%lower than last year. The average sales price declined about 8% to [$280,800].

Discounts higher than normal hadimpacted record levels. They are the primary reasons for the weaker marginperformance. Discounts and incentives totaled 11% of housing revenues, up 4 percentagepoints year-over-year, and up 220 basis points sequentially.

The increase is tied directly tothe daily efforts needed to find affordable prices. At every neighborhood wedrive for three sales per month. Once a neighborhood finds a predicable pace,we can then set a cost structure to be profitable of that pace.

On a year-over-year basis ourbacklog of houses sold was down 38% on a unit basis and 47% on a dollar basis.We sold 5,953 homes, down 13% year-over-year. Our backlog now stands at 9,633units with the total value of $2.7 billion.

Unfortunately, the land relatedcharges in the quarter were significant as a direct result of the new pricereality. On a pretax basis, we had $983 million in impairments and other land-relatedcosts. The total breakdown: $847 million for impairments, and write-offs ofoption deposits and pre-acquisition costs were $38 million. We took a goodwillimpairment of $61 million and JV impairments were $37 million.

The impairments were concentratedin California, Arizona,Nevada, and Florida, markets where we experienceddramatic additional price declines and one of disclosures [around the rise].These are the areas where affordability remains a huge issue, and we were hithardest by the mortgage product changes.

As I said last quarter, we take amethodical approach to these adjustments, looking at all neighborhoods activeand inactive under current business conditions, our assets are appropriatelyvalued. We recognized this is a dynamic environment. We will continue to take avery consistent disciplined approach to valuing our assets.

Let’s now take a few minutes toreview the regional results. Slide 8 details sales and closings by region. Inthe quarter, we sold 5953 homes, representing a lot of hard work by the men andwomen in the field. Our shelf space in the Southwest is a direct result ofaggressive pricing in the Inland Empire, where sales were up 22%, and in Las Vegas, where saleswere up 30%.

Unlike in previous quarters, our Texas results were weak, as areas like Houston, in particular, were especially hardhit by the disruption in the mortgage market. Conversely, our DC metro divisionremains on a recovery path posting a solid increase in sales, and asubstantially lower cancellation rate. However, most of our markets remainchallenged by affordability and oversupply condition, and could get worse withforeclosures and adjustable rate mortgage resets and buildings.

Turning to slide 9, I’ll commenton cost reductions and cash flow. It’s never easy to reduce overhead, but ouroperators are demonstrating impressive progress in getting our organization tothe right cost structure. We achieved a 21% reduction in SG&A expenses,year-over-year. Even better, we saw a 17% decrease on a per unit basis inoverhead and an 8% per unit decrease in total homebuilding SG&A. No costshave gone unquestioned.

We are encouraged by thisprogress and are confident that we will continue to report positive results onthis front. We continue to make progress on standardizing and centralizing ourfinance and accounting functions. This is just one example of how we arepursuing a sustainably lower cost structure.

We are addressing our G&Acost aggressively and structurally. We will realize some benefits in fiscal2008, but results will be even more meaningful beyond that. Consistent withmanagement’s expectations we produced a positive operating cash flow this period.In the quarter, we generated about $220 million of cash from operations. We arebuying very little land, other than from previous commitments.

We used some of the cash to makea $200 million investment in our financial services business to simplify thefunding structure. We still expect to generate healthy cash flows this year andpay down our debt maturities out of operating cash. We are entering ourseasonal strong period for cash generation and expect to generate approximately$5 million in cash from operations this fiscal year.

Turning to slide 10, I willcomment on our financial services business in light of the past quarter’schallenges. First and foremost, we are responding to the market and simplifyingour product offerings. 95% of our loans in our warehouse have a fullydocumented income, and have an average cycle of 735. Our combined loan tovalues are trending down.

As I mentioned earlier, we arealso simplifying our funding structure. We are now utilizing an industrystandard warehouse line and in the process of closing our old funding structure,Howard Street.Our new warehouses are of adequate size to serve the homebuilding business.

Additionally, just like in ourhomebuilding business, we are focused on restoring profitability of CTX mortgage.We increased our reserves and response to the loss of mortgage liquidity. Thereserves increase is for the potential future losses on mortgages currently inour warehouse on products, which we stopped writing.

We do not anticipate materialincreases in early payment default obligation. As I mentioned earlier, ourmortgage company’s early identification of tightened credit markets has helpedto keep our cancellation rate reasonable. CTX mortgage is an important part ofthe home-selling process.

We remain focused on sellinghomes, generating cash and structuring for profitability. We will continue tostrengthen our balance sheet and aggressively attack costs, and will never loseout on the customer. Achieving these kinds of goals differentiate greatcompanies.

I will now turn the call backover to Tim for his concluding remarks.

Tim Eller

Thanks, Cathy. I will emphasizeonce again that the market remains extremely difficult. But at Centex, we areresolute in our approach to these challenges. The market deteriorated furtherover the quarter and mortgage market transformation has created significantchallenges and affordability for homebuyers, with resulting pricing pressure onhousing.

With all that, we have beenconsistent in our strategy throughout the cycle. For the strong balance sheetand experienced leadership team, we are executing our game plan, focused on thefundamentals of homebuilding, selling homes and minimizing our inventories, andreducing our land position and structuring operations for profitability. We aregenerating cash for balance sheet flexibility, aggressively attacking costacross the organization, and staying focused on our excellent customer service.

Our actions today will furtherour long-term vision. We are positioned now to gain strength, share in themarkets that fit our business model, and provide the best opportunities for thehighest future returns.

We intend to turn assets faster,which will allow us to generate cash and higher returns more consistently. Weare bringing world class manufacturing disciplines to the business of homebuilding. And we will emerge from the current cycle with the sustainably lowercost structure.

With that we will be glad to takeyour questions, Moyer.

Question-and-Answer Session

Operator

(Operator Instructions) Yourfirst question comes from Ivy Zelman with Zelman & Associates.

Ivy Zelman - Zelman & Associates

Hey, guys, good morning.

Tim Eller

Good morning, Ivy.

Ivy Zelman - Zelman & Associates

Do I think the prices with bettercash flow number for the quarter and give us your guidance seems relativelyconservative going to $500 million and I know that you’ve done a great job ofreducing on what owned lots you have. I’d assume that's going to continue, giveus some framework of hope you can back in maybe calendar '08 or your fiscal '09or what kind of image for reduction you setting for and what that can hopefullytranslate into very strong cash flow?

Cathy Smith

Yeah. So Ivy as you said, ourgoals are, our objective right now is $500 million in cash from operations forthe year. And it is predicated the variable will be how much inventory we cancontinue to reduce and obviously our land spend. As you know, we probably overthe hump on the land spend it is decreasing, it has been sequentially actuallyevery year in the last three. But, we were really not prepared to get guidancebecause there still is no [significant] pattern out there.

Tim Eller

Let me add to that, Ivy and justsay that where we’ve reduced prices. We are very transparently price that is,our incentives are modest.

Our prices reflect kind of thetrue value in the market. We are pre-selling homes. When we price right we areable to pre-sell homes and generate a backlog. And I see as do in more and moreof that through the course of this year and next year and moving more and moretowards our pre-sale model and further way from building inventory to sell.

We find our discounts are lower.Our business more predictable and it sings up nicely with the manufacturingdisciplines we are trying to, we are in progress of implementing.

Ivy Zelman - Zelman & Associates

Thanks for that, Tim. I guess ona follow-up on cash flow many analysts is trying to understand is, builders areloosing money on a pre-unit basis on some of the break. Builders will get cashobviously on a gap basis it would reflective real cash. If you look at therevenues, what should we be the think is 20% to 25% a fair number assuming youare not making funny on the (inaudible)?

Cathy Smith

20% to 25% of cash that wasyou’re asking I’m sorry.

Tim Eller

Cash flow closing.

Ivy Zelman - Zelman & Associates

25% per unit on revenue for cash,assuming no cash margins in (inaudible).

Cathy Smith

No, it’s going to depend. As youcan imagine in some areas where very low thinner and that’s part of theevaluation we do on a asset by asset basis, do we want to sell, build out orhold and as its get closer to being incrementally the cash not returning yourincremental investment we were obviously choose then towards the later of thatevaluation, which should be hold.

So my point of saying that, isreally does depend some will be up to where you said and some will be littleless.

Tim Eller

Hey Ivy, if you think about ourlot costs beaten by 25% of the total revenue, that’s about right to the extendwe have to develop lots in order to work out of a line position and it will belittle bit less than that.

Ivy Zelman - Zelman & Associates

And just one final question,separate subject SG&A with job relative to your peers that improving withheadcount reduction and you are also moving to your centralized operations [asit was] structured as. When can we really start to see efforts that usingobviously coactively doing configuration in a bigger way. Do you expect thatwill become prevalent in more fiscal ’09 first half or where we see thatsooner?

Cathy Smith

Yeah. No, you are exactly right.So, we’re seeing some results today and as we’ve always said with our costreduction efforts, you will see some near term, but the more sustainable ones,which is all of the structural changes, we are making right now really come outin 12 to 18 months. And what again back towards our goal of having asustainably lower cost structure, you will see at end of ’08 and into ’09.

Operator

Your next question comes fromDavid Goldberg with UBS.

David Goldberg - UBS

Good morning, thank you.

Tim Eller

Good morning, David.

David Goldberg - UBS

My first question is, Cathy,could you give us an idea what the range on the discounts, I know, it’s about11% incentives and discounts. But how it ranges and maybe an idea of if you areseeing any markets, where there is basically no bid kind of matter, what youare doing on the price side and if so maybe where are those markets are?

Cathy Smith

Yeah. So, the range really is allover the board. And it really as a matter of to Tim’s earlier point, if we’vebeen able to get the transparent pricing because that you can actually reset tothose affordability levels you bring the discounts way down. And so, in somemarkets, where we’ve been able to achieve kind of more transparent pricing, thediscounts are really actually pretty low. And the markets, where we’re still onthat transition there the higher one. So, it’s really is all over the board.

David Goldberg - UBS

And as far as where there is a nobid if you will, you are going to find that, it’s in the fringed locations --were the fringed locations or just they shutdown, there is not a price at whichthey sell? And we had during the cycle a real focus on staying in A locations.So, for the most part we don’t have any of those. We’ve deferred development ofsome neighborhoods simply because there is no reason to add to an oversupplysituation already existing in a market, but we are buy and large not in thefringe.

David Goldberg - UBS

Okay. And then the follow-upquestion would be about the new financing structure for the mortgage businessand how that’s affecting your ability to originate loans especially on theretail side? Are there any constraints given the change?

Cathy Smith

Yes. The only constraints arereally more market constraints right now, which are very traditional conformingtype loans and jumbo loans that are conforming in nature with the terms butthey are in larger in size. That’s the only real constraint.

Operator

Your next question comes fromNishu Sood with Deutsche Bank.

Nishu Sood - Deutsche Bank

Thanks, good morning.

Tim Eller

Good morning.

Cathy Smith

Good morning.

Nishu Sood - Deutsche Bank

I also wanted to ask about thecash flow forecast the reduction from $750 to $500. If I look at the importantdrivers of your cash flows, you had pretty good orders relative to you peers,some strong backlog conversion this quarter obviously specs are down 40%. So, I’mjust wondering, what's the major delta from last quarter that’s driven such adecrease in the cash flow? Is it just pricing or there is also something on thedevelopment cost side that drove that decrease?

Cathy Smith

No, big question issue. It’sreally all pricing that what you’ve seen from our last outlook of $750 down tothis one is really all the reduction in sales prices that’s driving that. Ourland development spend hasn’t changed appreciably. It’s gone down a little bitfrom last quarter’s expectations.

Nishu Sood - Deutsche Bank

Okay, great. And one concept I’vediscussed with you folks in the past is just the idea of the land that you’vein the pipeline at the moment, you are kind of budget for developing that areor just building that after completion. I was just wondering, if you could giveus an update on your thoughts on that at what stage is your current pipelinefully developed and we really begin to see the true cash flow generationcapability?

Cathy Smith

Yeah. It's obviously later or nowas we move to the cycle where much more developed through all of that. And soyou will start seeing a much more sustainable cash generation of this businessas part of our goals our cash flow positive this quarter and expect to be fromthis point. So you should start seeing that big turn. I can't tell you off thetop of my head, what percentage of our lots are actually all developed or not.

Operator

Your next question comes fromMichael Rehaut with J.P. Morgan.

Michael Rehaut - J.P. Morgan

Hi, thanks. Good morning.

Tim Eller

Good morning, Michael.

Cathy Smith

Good morning.

Michael Rehaut - J.P. Morgan

First question just if you gointo little bit more detail about even the Centex Mortgage business and withthe $200 million investment, if you could explain exactly what that does foryou and if you anticipate any further cash investment since that business in.

Now that you are moving away fromthe Harwood financing vehicles to I guess more just the conventional way isthat is the builders are financing mortgages or making mortgages available.What that does for your company for me liability standpoint and mortgagescoming back because I think that’s part of the issue in terms of the reservesthat you have been taking.

Cathy Smith

Yeah. So first we do CTXmortgages critical to the selling process. So, they are a critical element andhaving mortgages really important to build us a home. So they start there. Toyour question on the $200 million investment in equity it's really a portion ofthe warehouse line and from the products that we’ve through there that we hadto put a little bit more equity and that they wouldn’t funded at a 100% or even90%.

So, that's really the function ofthe equity investment. It will go up slightly and then it will start to comedown. And it’s really associated with a specific line of products. I know thatlittle longer life construction to firm products that we had longer term that’syour question on a funding structure and our ability. Right now, we’ve outlinedour [attraction] for home building business, and so it should be transparent tothe rest of the world to the consumer.

Michael Rehaut - J.P. Morgan

But does it change from aliability standpoint in terms of from the Harwood Street and you are on warehouseline versus, I guess having joining on external warehouse lines..

Cathy Smith

Yeah.

Michael Rehaut - J.P. Morgan

In to the reserve that you tookin and how you think about that going forward?

Cathy Smith

Yeah. There are actually twodifferent issues, so you understand that. Liability go forward is no differentthan it really has been in the past. We have early payment default liabilityand normal reps and warranties and that's we’ve always said. The reserves wetook were really around the bulk of those were for construction to prime loans.They are currently in our warehouse. These are loans; the products that we’reno longer writing. And so, they will continue to manage. So, there are actuallytwo different issues.

Operator

Your next question comes fromStephen East with Pali Capital.

Stephen East - Pali Capital

Good morning.

Cathy Smith

Good morning, Stephen.

Stephen East - Pali Capital

First question on the specs wellthey are down nicely year-over-year, quarter-by-quarter they were only down it looklike a couple of percent about 100 units or so. What’s going on there andshould we see significant movement over the next couple of quarters on that?

Cathy Smith

Yes. You are absolutely right. Intotal down a couple of percent, but the aged inventory or the finished unsoldswere down 37%, which is really important. So in this part of the cycle anenvironment really not quality at the age that we need to watch and so we aregoing to have to start specs unsold. We just want to finish them unsold and that’sour goal.

Stephen East - Pali Capital

Okay. And then just going backone more time to the cash flow issue, I think there was an issue that has thequestion. Your land and units was down pretty nicely quarter-over-quarter, ifthe dollars still were, as we look at that in that type of metric when do youthink that starts to crossover, in other words dollars maybe potentiallydropping faster than units?

Cathy Smith

It’s really probably from aboutthis point now on forward because we tried to come through that. Typically inthe past seasonally in Q2 we would have been cash negative. We’ve put a prettygood rain on our land development spend were gotten through the bulk of that sowe can continue to monetize the assets.

Tim Eller

I’m talking about previousquestion. We generally have about a year develop lots out in front of us. SoI’d just if you talked about quantifying that it would probably be about thesame. So about third of our land our lot inventory today is probably developed.

Operator

Your next question comes fromStephen Kim with Citigroup.

Stephen Kim - Citigroup

Thanks very much. I was wonderingif you could comment on your breakout of inventory the way you calculate, theway you talked about direct construction inventory, land under development,land held for development in sale. Do you have those numbers?

Cathy Smith

Let see what the guys can, Mark.

Mark Kemp

Yes, we have at September 30,direct construction is 2.96, land under development 4.2.

Stephen Kim - Citigroup

4.20?

Mark Kemp

Yes.

Stephen Kim - Citigroup

Okay. That included development,held for development in sale?

Mark Kemp

That’s just under development.

Stephen Kim - Citigroup

Okay. What about the held fordevelopment and sale?

Tim Eller

Held for development is $429.$429 million, Steve.

Stephen Kim - Citigroup

And can I just for comparablepurposes, can I get those numbers for 4Q '07 or 1Q '08 which ever one you havehandy?

Tim Eller

Sure. March 31 '07 it was $3.041billion of direct construction, $5.434 of land under development and $158.2million for land held.

Operator

Your next question comes fromCarl Reichardt with Wachovia Securities.

Carl Reichardt - Wachovia Securities

Good morning guys. How are you?

Cathy Smith

Good morning.

Tim Eller

Good morning, Carl.

Carl Reichardt - Wachovia Securities

You've talked, Tim and Cathyabout this been a three month bogie from a sales pace perspective. I mean, youare running that now. Can give me a sense maybe on how many communities you’vegot percentage wise that are substantially exceeding that average bogie and howmany are below it?

Cathy Smith

Yeah. About half of ourneighborhoods have achieved that pace. But you’ve to recognize, Carl you findthat pace then you might lose it next week and you’ve to go find it again. So,about half have achieved that pace and then the other half, haven’t. And sothat kind of gives you that sense on they are the ones they have or the onesthey achievers at this point.

Carl Reichardt - Wachovia Securities

Okay. And then as you guys lookout at store count over the course of the next couple of three quarters justlooking at how many lots you have left for store and at current paces, let’ssay you continue to find price or looked at prices the way to maintain that pace.What's your sense of where your store count ought to be by the end of thefiscal year?

Tim Eller

Well, it’s going to be steadilydeclining. A lot of it’s going to be just based on sales pace. But we wouldexpect it to be somewhere between 600 and 630.

Operator

Your next question comes from DanOppenheim with Bank of America Securities.

Dan Oppenheim - Bank of AmericaSecurities.

Thanks very much. I was wonderingif you can talk about the folks on cash flow as relates it pricing that weheard comments in terms of finding the pace on sales the folks that in terms ofjust maintaining sales per community, the expensive pricing. If you are doingthat what are you then doing on the impairment side and think about any futureprice declines or using today’s current price, as you think about impairments?

Cathy Smith

Yeah, good question. You can’treally predict the future, but with regards to impairments, what I can tell youis that we have to take into account current and future market condition to thebest of indicators we can look at.

Dan Oppenheim - Bank of AmericaSecurities.

Okay, thanks. Then just wonderingin terms of the some comments about deferring some neighborhood in terms ofopening those up and general strategy how you looking that in terms ofdeveloping now versus deferring those, what (Inaudible).

Cathy Smith

It’s really a math exercise atsome point. So we evaluate every asset under our sales strategy, a build outstrategy and a whole strategy and obviously there is a set of assumptions aroundthose and then probability waiting. In most cases the economic, which shouldstill tell you build through and so that's what we are doing in a couple ofcases, that’s not the case. So we’ve actually chosen to postpone thedevelopment and not add this by.

Operator

Your next question comes fromStephen Kim with Citigroup.

Stephen Kim - Citigroup.

Okay, sorry about that. And Iwant to just follow-up on the inventory breakout. It looks to me like you had apretty significant ramp in your land house of development in sale componentseven from the June quarter. And I was wondering if you could comment on sort ofwhere that is, it was a particular thought process that when into allocating alot more in that category?

Cathy Smith

Yeah. You’re absolutely right.And see we first of all or slightly cut you off, if we did that. We are alsoshowing development and not adding to the oversupply in some areas, as yousaid. And it’s really around our evaluation again at every asset level of sellbuild out of hold. And as you can imagine, when you, as Tim mentioned, we stuckto A locations in almost all areas and on occasion that’s not the case and wehad to do that evaluation.

Stephen Kim - Citigroup

And as a follow-up, I guess, I’mcurious as to where amd how you perceive the appetite for buyers, and that landwhether it would be an A location or non A location? Do you get the sense butthere is any reason for optimism that land held for development and sale mayactually resolve culminating some cash coming in the door here over the nextquarter or two?

Tim Eller

Not likely. There is very littlein the way of land transactions happening now, Stephen. And although, we arecontinuing to sell land every quarter, but it’s not in any significantquantities. The whole question about when the land pipeline start to breakclose and what values are still really have to be determined. So, I think,we’ve got it for a while and that’s our intent to develop out of these at theappropriate time.

Operator

Your next question comes from KenZener with Merrill Lynch.

Ken Zener - Merrill Lynch

Good morning.

Cathy Smith

Good morning.

Tim Eller

Good morning, Ken.

Ken Zener - Merrill Lynch

I was just wondering theimpairment benefit that you got in this quarter or they are benefits you gotfrom past impairment. Can you detail that?

Cathy Smith

Yeah. I mean, detail wise it’sabout little over 600 at actual closing and then spread, we’ve impaired a totalof 300 neighborhood. So, obviously it’s spread in those neighborhoods.

Ken Zener - Merrill Lynch

What was the dollar value?

Cathy Smith

$20 million.

Ken Zener - Merrill Lynch

$20 million. So I guess with yourgross margin is down how should we think about your incentives – you’ve hadincentives increased about 200 basis points year-over-year, your gross marginis I think were down about 90 bucks. Is that how much of benefit is occurringfrom the impairment benefit rolling through and is that $220 million kind ofcould be accelerating.

Cathy Smith

Yeah it will be accelerating.

Ken Zener - Merrill Lynch

To that degree.

Cathy Smith

Yeah, it will be accelerating.It’s again out of the 300 neighborhoods in total that we have impaired you aregoing to see those continue with closings. And as I said we had about 600 orclosings come through that had than previously impaired. So, yes it willcontinue to accelerate to some degree, but then and again it was about 20million bucks.

Operator

Your next question comes fromTimothy Jones with Wasserman and Associates.

Timothy Jones - Wasserman and Associates

Good morning.

Cathy Smith

Good morning.

Timothy Jones - Wasserman and Associates

First question is, can you tellme the number of employees you have now both in the home building operation andthe finance sub, and what were the numbers at the peak and when was that?

Cathy Smith

Yeah. In total were, I will giveyou that just a second here. For home building we are now a little over 5000employees.

Timothy Jones - Wasserman and Associates

Good.

Cathy Smith

And the peak would have been alittle over [8500] employees.

Timothy Jones - Wasserman and Associates

And how about the in financialservices?

Cathy Smith

I’m getting you that right now.We don’t have it. Okay, we have to get that back and Matt can give you that detail?

Timothy Jones - Wasserman and Associates

I have to hear them on that.Thank you. When was that peak by the way?

Cathy Smith

About fourth quarter of '06.

Timothy Jones - Wasserman and Associates

Okay. Second question I’m notquite sure of this $200 million in financial service in business. Has this todo with the changing over from your prior warehousing facility to the currentonce with the banks, I don’t. But could you give me a more light on the termsstill not quite sure what’s going on there?

Cathy Smith

No, that exactly becausetransitioning out of our previous asset-backed securities funding structure Harwood Street andinto more conventional warehouse line and in combination with the changes inthe mortgage market that we couldn’t fund those at 100%. So, we’ve to keepstill on the balance sheet. So, that's different, you got it.

Operator

Your next question comes fromStuart Hosansky with Vanguard.

Stuart Hosansky - Vanguard

Yes, good morning.

Cathy Smith

Good morning.

Stuart Hosansky - Vanguard

A quick question for you. On yourimpairments, how many lots that you actually impair?

Cathy Smith

Well, this quarter about a 140not of lots in the neighborhood. I don’t think I have a lot count.

Stuart Hosansky - Vanguard

And do you provide the number oflots that you impaired?

Cathy Smith

No. It could be, the answer isno. We don’t typically look at that way. I look at them by neighborhood.

Stuart Hosansky - Vanguard

All right. Thank you.

Operator

Your next question comes from SusanBerliner with Bear Stearns.

Susan Berliner - Bear Stearns

Cathy, I’m sorry, I’m still notunderstanding the cash flow because it just seems like it typically in thefourth quarter is obviously when you generate a lot of cash. So, if yougenerate $220 this quarter, I might missing something that we should add back200 for the contribution to the financial services or how do I look at that?

Cathy Smith

Yeah. First of all, good morning,Susan.

Susan Berliner - Bear Stearns

Good morning.

Cathy Smith

It’s that the change is reallyyou’re right that typically we’ll continue to generate from this point forward.But the change really is just loss of revenue from the sales price reduction.

Susan Berliner - Bear Stearns

So, I guess why would it be so muchhigher this quarter than it would be in the fourth quarter?

Cathy Smith

Yeah.

Tim Eller

No, no. It’s not going to behigher. It will be higher in the fourth quarter than this quarter because…

Cathy Smith

Remember we are negative fromcash from opts in the first quarter.

Susan Berliner - Bear Stearns

Okay. Remind me what that numberwas?

Cathy Smith

Oh, Gosh.

Tim Eller

It was about minus 500.

Cathy Smith

I think it 5 or 6.

Susan Berliner - Bear Stearns

Okay.

Tim Eller

So, we are talking cash flow.Remember we are talking on the cash flow statement, cash flow from operations.

Susan Berliner - Bear Stearns

Okay.

Tim Eller

That improved by about 220 andshould finish a positive 500 by 331.

Susan Berliner - Bear Stearns

Okay. That’s helpful. And mysecond question is I’m just curious in Californiawhat kind of mortgages are you using now to sell homes?

Cathy Smith

Pretty conventional that we arewriting through CTX Mortgage just little fashion, Fannie Mae, Freddie Mac, typeGSC type loan. We are finding though that we can local broker with somealternatives still. So there are some local brokered opportunities that we canfind that we are using in Californiastill.

Tim Eller

And Jumbo are still available tohigh quality buyers with down payments and good FICO scores.

Operator

Your next question comes from AlexBarron with Agency Trading Group

Alex Barron - Agency Trading Group

Good morning.

Tim Eller

Good morning, Alex.

Alex Barron - Agency Trading Group

I was hoping you could go throughthe impairments a little bit more, like how many dollars per region and I justwanted to go over the community count a little bit again on how many communitydo you impaired there?

Cathy Smith

Yes. So kind of one of theattachment we gave you with our 8-K has the profitability were regions thatwill help you understand, where the impairments are. As I said in the earlycomments, the really some of the West California, Arizonaand Nevada were hit and Florida.

We really the dominant regionsfor those impairments and again as about a 140 neighborhoods impaired thisquarter. We actually detailed that pretty extensively in the Q, which will befiling here shortly.

Alex Barron - Agency Trading Group

Oh okay. Yes, I guess lastquarter that you guys impaired about 29 and about 83 and pervious fiscal year.So, I was just trying out get through the 300 you mentioned?

Cathy Smith

Yeah. So all the up through thislast quarter, we had impaired about 160 neighborhoods. In this last quarter, weimpaired another 140. So, this last quarter was almost equal to everythingwe've done in the previous quarter and in previous quarters.

Alex Barron - Agency Trading Group

Okay and thanks. Can you justtalk about going forward as you do look at the impairments or may be just thecompany overall. How do you view sort of the sales pace and prices sort ofplaying out, I guess over the next few years?

Tim Eller

It’s hard, impossible todetermine how that’s all going to play out here, Alex. But we feel good aboutwhere we are priced now. We’ve literally looked at what buyers can afford onneighborhood-by-neighborhood and adjusted our prices to the mortgage productsthat are available, and their ability to afford the houses with those mortgageproducts. So, I feel very good about our pricing right now.

Operator

Your next question comes fromChris Brown with Banc of America Securities.

Chris Brown - Banc of AmericaSecurities

Thank you. I know your ratingscredit ratings were recently lowered and you renegotiate your bank alliance.Can you just talk generally about where you stand versus some of the bankcovenants because I know in particular some of them depending on interestcoverage, where your kind of overall leverage caps are?

Cathy Smith

Yeah. Obviously [tangible andthat work] is the one covenant to be mindful of and we are. But we still havequite of room under that covenant.

Chris Brown - Banc of AmericaSecurities

All right. And then when you,Duke, start generating some cash flow about $300 million in maturities over thenext couple of months. The excess cash is there any thoughts of use of thatyet?

Cathy Smith

Yeah, right now it's just prudentto hold the cash. So, generate it first and then let’s hold, as you did saywe’ve $300 million in maturities at January, I believe.

Operator

Your next question comes from JimWilson with JMP Securities.

Jim Wilson - JMP Securities

Thanks. Good morning. Could youdescribe a little bit of I know you’ve talked a lot about price Tim. But whenit starts to drive the sales particularly where you mentioned, they were prettystrong in Inland Empire, and Las Vegas it’s like give or take, what it took,what you think price gets more from three or four months ago.

And the second question is couldyou give a little more color on the other regions in the Southwest, whereobviously in total you were up, but other parts of California may be Phoenixwhat sales may look like for you, they are during the quarter?

Cathy Smith

Yeah. So in order to move or theprice cuts that we took it, to your question really about 15% to 20% pricingreductions in some areas. And that's what it took to find that affordabilitylevel and to get two mortgages will buyers and qualify.

Tim Eller

The same that we are able to dowas, move very fast on that again we had the data. We knew what our buyerscould qualify for. Once the mortgage products we set, we are able move veryquickly and adjust prices very quickly, which we did.

Operator

Your next question comes [KeithWilley with Goldman Sachs]

Keith Willey - Goldman Sachs

Yes, I’m just trying tounderstand the cash implications of the reduction of the loan held for sale andthe debt with that business. So is that essentially sold the loans that becauseyou didn’t, you are shrinking your business, used the cash got to paid debt andis that, am I interpreting that right and is that number included in the cashflow.

Cathy Smith

No, that's not. Yeah, you areinterpreting that correctly and I believe that comes from financing business.Yeah, so doesn’t come through in cash from, comes through in the financingline.

Keith Willey - Goldman Sachs

Okay great. And then did youindicate that the investment the $200 million investment in financial servicesthat's going to go up a bit. Is that what you have said and its still, I’m justwondering why, should I think of that as a percentage of the business orpercentage of the first 5% loss on a loan or how should I think about that?

Cathy Smith

Yeah, no, sort of good questionfor clarification. It’s really associated with the amount of money we’ve tocontribute or fund on the construction to prime loans. So, think of it as thereis around $350 million, $400 million of originations there that through theconstruction sites. Well, as those finished then we can protect the loan andmodify it and sell it out.

So, it’s really just goingthrough that pace of that progress right now of those loans it will go up toslightly a little bit more, and then it will start coming down from that pointforward down to eventually zero. But it’s really because it dictated more onthe construction cycle of the home.

Operator

Your next question comes fromMichael Mogavero with Atlantic Asset Management.

Michael Mogavero - Atlantic Asset Management

Hi, just a little more clarificationon the provisions that you took on those mortgage loan originations. Now howmuch in total do you have on the book that is, is it plus 50 million inprovisions?

Cathy Smith

Yes.

Michael Mogavero - Atlantic Asset Management

Correctly? How much is the loanis that balance?

Cathy Smith

Well, you are correct about 50million in provision and is that what you are asking?

Michael Mogavero - Atlantic Asset Management

Well, that, what is the 50million of provisions on what balance of loans. What’s the outstanding?

Cathy Smith

Yeah. The bulk of it’s for theconstruction to prime loans and there is $350 to $400 million in total.

Michael Mogavero - Atlantic Asset Management

At September 30, it was $271million balance of construction loans?

Cathy Smith

Yes.

Michael Mogavero - Atlantic Asset Management

This $271 million balance yes, Iguess, it was 2 points of provisioning for loss and when is this expected to Iguess, go off the books?

Cathy Smith

It will be over the course of thenext year and a half. And to clarify the 271 the current balance that we in ourprovision we did look at total commitments and that’s the 350 to 400 million.

Operator

Your next question comes from[Randy Weisman] with [Burm Asset Management].

Randy Weisman - Burm Asset Management

Hey, just a few questions. One isyou guys are talking about cost savings, and I wanted to get a sense for thecost of sort of materials and labor for building house, just on your averagehouse count. What were the costs of material and labor maybe at the peak whenhome prices were much higher and when things were going very well relative tonow, that sort of how much of they come down?

Cathy Smith

Yeah. So that how much they havecome down about 5% to 10% in brick and water are the direct construction costjust last two quarters and about 10% the previous fiscal year as kind of theefforts there on the SG&A or the overhead costs further we continue to makevery good progress. I couldn’t give you a total reduction to, from peak to now,but every quarter we are getting a good reduction there.

Randy Weisman - Burm Asset Management

How about just in terms ofdollars I mean roughly what are the costs in materials and labor for buildinghome it sells for $280,000 like that your average price for the quarter?

Tim Eller

Well, the way to think about itis roughly 50% of the revenue will be the cost of constructing the house. It’shelp the bricks and water if you will. Another way to think about that is thepeak it was close to 45%. Now today it’s closer to 53% cost lag or sales pricesa bit our cost reductions are going to apply the future closings, but our pricereductions happened today.

Operator

Your next question comes from[Nelson Yeman] with [Greenlight].

Nelson Yeman - Greenlight

I was just wondering from thestatements can you clarify as you went through the quarter, you are required totake some further price increases to move to keep the houses moving, does thatcorrect.

Tim Eller

Price decreases.

Nelson Yeman - Greenlight

Price decreases right. And canyou comment into October you still being forced to do that?

Tim Eller

We’ve made most of our priceadjustments in August and early September. And in fact, most of them in August.

Nelson Yeman - Greenlight

Thank you.

Operator

Your next question comes fromMichael Mogavero with Atlantic Asset Management.

Michael Mogavero - Atlantic Asset Management

Yeah hi, I got cut off, I didn’tget quite a complete answer on the risks that you are retaining on the mortgageloans is that credit risks or interest rate risks that you are provisioningfor. And my understanding that you sold off products and I guess, what was inthe warehouse would be sold off. So, there wouldn’t really be much credit risksthere?

Cathy Smith

Yeah. It’s really a market risk;it’s not credit risk or interest rate risk. It’s really just where can we price(inaudible) and so we obviously saw a disruption in August for that and that’spart of what’s coming through in the financials.

Michael Mogavero - Atlantic Asset Management

And that would be not confirmingproduct or confirming product or?

Cathy Smith

Yeah. So that was previously itwas not more non confirming product. Now, where as I said 95% of the loanswe’re writing are confirming.

Michael Mogavero - Atlantic Asset Management

Okay. Is there, could be acomposition of this somewhere, where we could see what those loans are. Itwould be very instructive to see what the make up of the loans are?

Cathy Smith

Yeah, there will be prettyextensive discussion in our MD&A and our 10-Q, as we filed out.

Michael Mogavero - Atlantic Asset Management

All right. Thank you.

Cathy Smith

Sure.

Operator

Your next question comes from[Jamie Canlith] with [Southside Analyst].

Jamie Canlith - Southside Analyst

Hi good morning. Two quickquestions. I apologize, if you have already addressed this. The decline in theclosings for the Southeast and also for the backlog in the Southeast, can yougive more color on that market?

Cathy Smith

Southeast.

Jamie Canlith - Southside Analyst

Yeah, your segments Southeast areyou talking about?

Tim Eller

Yes.

Jamie Canlith - Southside Analyst

Primarily Florida.

Tim Eller

Is that the reason is it all Florida or is that …

Jamie Canlith - Southside Analyst

Particularly Florida

Tim Eller

Yeah, absolutely.

Jamie Canlith - Southside Analyst

Okay.

Tim Eller

Florida is maybe the hottest hit market inthe country.

Jamie Canlith - Southside Analyst

Okay. And then one other questionI had with the announcement, we have seen in the press about new refinanceprograms, the banks coming out trying to get more aggressive on refinancingsome of their sub-prime customers. Are you seeing any beneficial effects interms of lower existing home inventories in your market as a result of those?

Tim Eller

Yet, in fact we are seeingforeclosures continuing to rise. So hopefully those efforts keep for closuresand check and that would be a big benefit.

Operator

Your next question comes fromMichael Rehaut with J.P. Morgan.

Michael Rehaut - J.P. Morgan

Thanks. A couple of questionshere on the write downs if I could, you had mentioned that in the assumptionsyou were obviously taking to account what you’ve had to do, but also whatfuture conductions might hold. and I’m just wondering if you could reviewwhat's baked in going forward if there is some builders have try to anticipatemaybe pricing falling bit further over the next three to six months and so thewrite-off that you have taken that they assume further price reduction and ifso can you gives us some color on is it on half the communities that youwritten off that maybe that’s case we’ve assume that?

Cathy Smith

Yeah. So it’s really kind of anindependent answer. So we always will evaluate current and future marketcondition in our impairment analysis and we’re trying to base that as best wecan on so some more objective data where we can. But the answer is yes, we doinclude current and future market conditions in our impairment analysis.

Michael Rehaut - J.P. Morgan

And so is it fair to say that insome of those then that you would be assuming further price declines?

Cathy Smith

Yeah, in some markets.

Michael Rehaut - J.P. Morgan

Okay. And of the 140neighborhoods that you impaired this quarter how many of those, were those allfirst time or were some of those second time or even may be third time?

Cathy Smith

Yeah, some are third time. We’veabout 30 in total in this quarter that we’ve reimpaired, a little less than 30that we reimpaired than the 140.

Operator

Your next question comes from DanOppenheim with Banc of America Securities. I am sorry that question has beenwithdrawn. Your next question comes from Ken Zener with Merrill Lynch.

Ken Zener - Merrill Lynch

Okay. I’m trying to understandhow the decline in the units under production to a let’s more normalized levelgiven the depressed housing is going to be kind of a onetime benefits. So, asyou look at the $500 million for this year how much of that is associated withdecline in units under production, if you could give that would be useful. Butfor example, they are going from 25,000 down to 12,000. How much would thataccount to the $500 million?

Tim Eller

Maybe you are talking about justa decline in working process in general, Ken.

Ken Zener - Merrill Lynch

Exactly the vertical because theland is that expires as you sell houses. I think the builders are getting abenefit as the units under production decline, which is an event that’shappening this year, but it won’t be present next year?

Tim Eller

We’ve already had a prettydramatic decrease in number of homes under construction. Again, the focus isreally on how long they are under construction more than before they are soldmore than the actual number. I mean we, I think that Centex and the industry thistime did a really good job reacting to the slowdown and we’ve cut homes underproduction from the peak close to 50%. So, probably it has some room to comedown a little more. But really it’s at a level; it’s getting closer to a levelof more normal amount.

Operator

Your final question comes fromStephen East with Pali Capital.

Stephen East - Pali Capital

If I calculate this way to get to$500 million of free cash flow basically everything that’s coming out ofinventory for the next two quarters on the land side does not get replaced. Inother words, your inventory absent, those costs stay the same. Is that thetrend that will accelerate in the next fiscal year?

Cathy Smith

Yeah. In total, we still havesufficient amount of land to substantiate the business for a while. And ourgoal is to be under a little less than two years of owned land and we’re stillover that, little over three. So, the answer is yeah. We are going to continueto bring that down, don’t need to replenish. When the opportunities start topresent themselves and we will evaluate that on an instrumental basis. But theanswer is, it’s going to continue to come down.

Tim Eller

And Stephen I would add that theland spend and the land development that does occur, although much smaller thanin previous years, usually occurs in the first two quarters for us.

Stephen East - Pali Capital

Yeah.

Tim Eller

So, in the back two quarterscash, every closing is a direct reduction in inventory.

Stephen East - Pali Capital

Okay. All right, that's what Iwas trying to get at. Thanks.

Operator

Mr. Eller, do you have anyclosing remarks.

Tim Eller

Thank you, Lorain. Yes, just very briefly, I want tothank you everyone for joining us today. Well the housing market is extremelydifficult, Centex remain resolute. Our actions align with our near termstrategy of selling homes, generating cash and structuring for profitability.These actions will also further our long-term vision to gain strength and sharein those markets that will provide the highest future returns. We look forwardto showing our third quarter results during our next call in January. Thank youall. And, thank you Lorain.

Operator

This concludes Centex’s fiscalyear 2008 second quarter earnings conference call. Thank you for your participation.

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