Centex Corp. F1Q09 (Qtr. End 06/30/08) Earnings Call

| About: Centex Corp. (CTX)

Centex Corporation (CTX) Q1 FY09 Earnings Call July 30, 2008 10:00 AM ET

Executives

Timothy Eller - Chairman and CEO

Cathy R. Smith - EVP and CFO

Matthew Moyer - VP of IR

Analysts

Ivy Zelman - Zelman & Associates

David Goldberg - UBS Securities

Nishu Sood - Deutsche Bank

Megan McGrath - Lehman Brothers

Susan Berliner - JPMorgan

Michael Rehaut - JPMorgan

Kenneth Zener - Macquarie Research

Stephen East - Pali Research

Carl Reichardt - Wachovia Securities

Chris Hussey - Goldman Sachs & Co.

Gary Gordon - Portales Partners LLC

Operator

Good morning and welcome to the Centex Corporation Fiscal Year 2009 First Quarter Earnings 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 that 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 and Centex's forward-looking statement, please refer to the forward-looking statements disclosure in the presentation and to Centex's 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 managements' remarks. [Operator Instructions]. In the interest of time, we will limit each question to one question and one follow-up question. If you have additional questions following today's call, please contact Matthew Moyer, Vice President of Investor Relations at 214-981-5000.

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

Timothy Eller - Chairman and Chief Executive Officer

Thank you Celeste. Good morning, everyone. Thanks for joining us for our fiscal year 2009 first 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 as well as a few thoughts about the months ahead. Next, Cathy will provide details about our financial performance. Then I'll offer some closing comments and we'll take your questions.

Turning to slide three, 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.

All of these factors are causing consumer confidence to erode further. This uncertainty with the consumers reflected directly in our diminished traffic and sales volumes, compared to last quarter and a year ago. Our sales teams did a great job selling 4,200 homes in the quarter. However, that was a decrease of 35% from the same quarter last year. Closings for the quarter also dropped about 35% to just over 3,900 homes.

Turning to slide four. Despite the economic headwinds, we built a strong cash position in the quarter and we expect to maintain that. We had $1.24 billion in cash on hand at June 30th. We expect positive operating cash flow from homebuilding operations for the full year and we're expecting to further improve our cash position at fiscal year end, are also reducing outstanding debt by another $250 million.

I'm comfortable that we have enough cash to manage our medium term debt maturities and pick advantage of opportunities. And these uncertain conditions, however, maintaining a strong cash position is critical. Accordingly, we are planning to conserve our cash resources for future flexibility. We are actively evaluating every internal opportunity to bolster our capital position in this difficult operating environment, including our dividend. So no decisions have been made at this time.

Turning to slide five. We remain focused on asset efficiency and achieving a more flexible land position. Both our historical and our recent 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 continue the transition to the build-to-order wider asset operating model. Unsold inventory declined again in the quarter, down 23% sequentially and down 72% over last year. We made considerable progress in improving core Centex business processes in purchasing and construction.

Despite rising commodity costs, we systematically achieved overall monthly savings in direct construction costs. Category by category, we're working closely with our trade partners and suppliers to capture savings. For instance, we reduced our overall costs in the Drywall category by more than 5%, despite two announced 10% material price increases the last six months.

Turing to slide six. We recently announced the Centex Energy Advantage. This is a great example for sustainable innovation that builds a better Centex. 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. Centex Energy Advantage takes direct aim in making home ownership more affordable.

Home buyers' budgets are impacted by the operating costs of a home. 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.

The efficiency gains reached 10,000 homes we built will result in nearly 18,000 fewer metric tons of carbon emissions each year. I believe this initiative is positive for our customers, for our employees, for our shareholders and for our environment.

To summarize, market conditions worsened in the quarter as a result of a range of economic factors that have dramatically dampened consumer confidence, which is reflected in our new orders. Still Centex built a strong cash position in the quarter and we expect to improve on that by fiscal year end.

Profitability remains our highest focus and we're taking advantage of the opportunities to build a better Centex for the long-term during this historic housing cycle.

With that, I'll 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. I'm on slide seven. One of the more noteworthy items of our first quarter is our home building operations were cash flow positive, even before the $600 million we received from our tax refund. As far as I can tell, this is the first time we were cash flow positive from homebuilding in our first quarter. And it reflects our keen focus on cash and the change in our business processes.

We strengthened our balance sheet and now have a homebuilding net debt-to-cap ratio above 50%. We continue to generate cash through asset reductions, both working capital and speculative inventory. And more exciting with regards to the longer term implications, we are becoming more asset efficient and more profitable 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.

And although our sales for neighborhood were down, mainly due to lower traffic, the lack of spec sales versus last year, we still reduced our unsold inventory by 23% sequentially. We also made good strides toward achieving operational profitability through overhead cost reductions. We've reduced our homebuilding overhead foreclosing by 19% year-over-year. And actually lowered SG&A as a percent of revenue by 80 basis points. Although our homebuilding SG&A was lower, our corporate G&A increased year-over-year. We've recognized even in these unprecedented times, it's important to continue to invest in the future. We've been doing much to centralize processes and functions as well as standardize and simplify our business.

And some of the associated costs show up in corp G&A. I am confident these investments will enable Centex to have an industry leading cost structure. I was pleased to see impairments in land related charges lower this quarter than the last seven quarters. Sales prices declined only slightly in the quarter and the reductions were largely contemplated in our impairment analysis. Additionally, in the quarter we were profitable in our financial services business. 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. So we can build to a cadence.

Additionally, this structure is one of the keys to our industry leadership position in customer satisfaction. CTX Mortgage has adequate committed warehouse lines and aside from wind-down costs that we are looking to minimize or offset, we expect financial services business to remain operationally profitable.

We've made a lot of progress again this quarter, although the housing environment continues to struggle. We're doing much to optimize our business processes and business models to be more efficient and asset-light. These efforts are starting to show results with improved profitability and asset efficiency and I am confident the results will be more meaningful in the fiscal year and beyond.

Slide eight provides the details around the homebuilding operations for the first quarter. We closed 3,939 homes in the quarter, 35% fewer than last year. The average price of homes closed in the quarter declined 10% to $262,000. This is a lower decline than experienced over the last couple of quarters. We've evidenced a significant decline in the southwest of 36%, while Central U.S. and Texas showed year-over-year average sales price increases. Total units were also down 35% year-over-year. However, on a per neighborhood basis, sales were down 23%.

As Tim said earlier, traffic slowed more this quarter than any quarter in the past several years. Consumer confidence is at the lowest level in over 15 years and is directly affecting volume. Let me also address a question that I know you'll have. 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. Our mortgage and title group has developed a great programs that helps our potential home buyers save the money needed for a down payment.

The new tax credit for the first time home buyers may help with the transition. The end of DPA will probably pressure industry sales in the near term, but over time our buyers and the market will adjust. We continue to believe that a return to a more normal qualification standards is a very good thing long term, even if it caries with it a low short term pain.

Our backlog was actually up from the fourth quarter and now stands at 8,022 units and $2.05 billion. This marks the first quarter in three years where our backlog increased sequentially. The right level of backlog will be increasingly important to us, creating a sales backlog allows us to build a cadence... building to a cadence using standardized business

processes, yield operating efficiencies and more predictable results.

And developing a backlog through pre-sales is essential for our asset-light business model. We are moving rapidly in this direction, with the spec unit reduction largely complete and as we move to the pre-sold model, we expect lower backlog conversion over the next couple of quarters.

Today, I am 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 our a build-to-order models, margins should improve. We've also 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 $50 million in land impairments, $10 million in option walk-away costs and $20 million of JV impairments. We impaired 36 neighborhoods this quarter, bringing the total to 384 neighborhoods that we've impaired at least once. We take a consistent methodical approach to land valuation. We recognize this is a dynamic environment. We'll continue to take the same disciplined approach to valuing our assets each quarter.

Along with impairment analysis, it's 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're still finding that the best answer most of the time is to continue to build through our assets. But you will see that our land held increased this quarter as a result of our evaluation that the best strategy is to hold some land rather than add more to those lots to the already collated supply in some markets.

Continuing to build through our assets will leave us with a leaner balance sheet and an opportunity to add at fast returning, higher producing assets in the future. We also increased our valuation allowance related to our deferred tax asset by $49 million. In total, the balance of our DTA is $1.02 billion with a valuation allowance against it of $879 million or just over $7 per share. This represents over 40% of our current book value.

We will realize this asset when we see stability and improving environment and a return to profitability. Let me take a few minutes to review the regional results. Slide 90 tells sales and closings by region. In the quarter, we sold 4,215 homes, down 22.5% on a per neighborhood basis. This is the first quarter where we fell below our goal of $0.03 per neighborhood per month and we don't expect to achieve that rate this year.

As Tim mentioned, forecloses are still growing and consumer confidence is waning. Our average neighborhoods were down 16% in the quarter at a rate that will likely accelerate through the year. 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.

Moving to slide 10. In the first quarter, we improved our balance sheet and liquidity. We ended the quarter with a cash balance of $1.24 billion and we are expecting our cash balance to increase by the end of the fiscal year. As I mentioned, our homebuilding operations were cash flow positive in the quarter. And we are focused on continuing that trend for the remainder of the fiscal year. In the second quarter, we expect to be cash neutral from our homebuilding operations.

During the quarter, we proactively bought back nearly $70 million of senior notes in the open market at a discount at par and reduced our ongoing interest expense. In the second quarter, we will retire another $150 million of senior notes at maturity, and expect to reduce our joint venture debt for an additional 70 million. Assuming this happens as planned, our share of joint venture debt will fall to approximately $90 million by September 30th.

At June 30th, we had only 11 JVs with the leverage, with our share of bad debt totaling about $166 million. As we have said before, we are actively reducing our exposure to JVs with debt and expect our share of joint venture debt to be about $30 million 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. With the lack of stability in price and volume, it's prudent to conserve and accumulate cash. Along with restoring profitability this is a company priority. Consistent with these priorities we'll continue to scrutinize all uses of cash.

Historically, one of the bigger uses of cash was land development. Of the active lots we own, approximately 50% are fully developed. Given this, we continue to reduce our development spending to meet the bare minimum of our volume needs and compulsory obligations. Our sell to a backlog, build to a cadence model helps us to better know exactly where and when we need finished lots. Furthermore, we expect to take advantage of the fully and partially developed lots in most markets, using a very cash like model for the foreseeable future.

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've dramatically reduced our land spend budget this year to approximately $400 million for the remainder of the year. This gives us confidence that we will be cash flow positive this fiscal year. Additionally, given what we know today, I am confident that we will remain capital self sufficient and have the necessary cash to service our debt for the foreseeable future.

Turning to slide 11, I'll comment on what we are doing to restore operational profitability. Gross margins tend to be significantly higher, cancellation rates and incentives are lower when we sell a home before construction has started. At this stage we have 92% of our September quarter projected closings already in backlog. This should result in lower costs, lower discounts and incentive, better predictability and better asset utilization.

In the quarter, we closed fewer specs than in the fourth quarter and our gross margin improved sequentially by over 400 basis points. Internal data shows that gross margins on pre-sold homes are on average 500 basis points higher than those on inventory homes.

Our operators and trade partners are working hard to take advantage of the efficiencies gained in our production cadence model. And this is helping us offset the price increases we're seeing due to higher commodity and energy costs. Also contributing to expense reduction this quarter, we've prepaid some senior notes, lower to joint venture debt and eliminated JV's with maintenance guarantees. This will lower our interest expense and capital cost that may come with joint ventures, thus giving us more predictable cash flows.

We remain highly focused on overhead cost reductions. Our home building G&A was down 19% per closing in the first quarter. We expect this trend to continue throughout fiscal year 2009. As mentioned earlier, our corporate G&A line was higher year-over-year. However, we still expect corporate G&A to be lower this year, when compared to last. On a combined basis, SG&A was down 35% year-over-year and our headcount today is lower than anytime in the past seven years.

We'll continue to constitute our neighborhood footprint. We are exiting some markets, combining some divisions where it makes sense and moving out of underperforming assets. These efforts are also part of our pact to profitability. We're doing much inside our company today, to ensure we have a leading cost structure that are sustainable through the cycle.

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

Timothy Eller - Chairman and Chief Executive Officer

Thanks Cathy. As I said earlier, market conditions worsened in the quarter as a result our range of negative economic factors such as higher mortgage interest rates, write-in foreclosures, lower employment growth and higher energy costs. We don't expect these conditions to improve for the rest of this fiscal year.

Consumer confidence has weakened. As a result we experienced diminished traffic and orders for the quarter. However, we achieved a strong cash position of $1.24 billion at quarter's end and we expect to improve on this by year end. Even after we pay another $250 million of debt. We're expecting positive cash flow from home building operations for the fiscal year. At Centex, we intend to be capital self sufficient. Our leadership team at the entire organization are highly focused on profitability. We're adjusting overhead spending by restructuring divisions and winding down our retail mortgage network. Incentives and discounts are diminishing. We're building a better Centex by improving our core business processes. We realize monthly savings in our direct construction cost despite rising commodity prices.

We've maintained our commitment to executing a simple strategy of selling homes, reducing costs and generating cash. And that remains our focus today. And now Celeste, let's address questions.

Question And Answer

Operator

At this time we will begin taking questions. [Operator Instructions]. Thank you. Our first question is from, Ivy Zelman with Zelman.

Ivy Zelman - Zelman & Associates

Good morning everyone.

Timothy Eller - Chairman and Chief Executive Officer

Good morning, Ivy.

Ivy Zelman - Zelman & Associates

And I am glad to see the cash flow better than anticipated. I think people obviously are relieved to see that and Cathy appreciating your comments on the developed land or finished lots being 50% of your total portfolio. If you can help us just sort of paint a picture assuming absorptions continue to be weaker than anticipated and the economy is in a recession, sort of what happens to land spend in total in fiscal '09 or as much color as you can get give us sort of a bare case scenario and why the company will still generate cash or at least find themselves not as many people think going out of business?

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

Yes. Thanks Ivy for the kind words too. If you think about they were 66,000 owned lots, 50% of those are developed. Now, they are not going to be in exact perfect locations, as you can imagine because you can't move finished lots around. But that would be a sufficient amount to accommodate any reasonable sales pace, I suspect. So, we do have sufficient amount of finished developed lots. And then we did say, as I said in the call or in the prepared remarks that we expect to spend about $400 million for the remainder of this year. So... and that's down about half of what we told you last time. But we continue to scrutinize based on the kind of where the volumes are, we'll continue to address that. But right now we expect it to be down around $400 million for the remainder.

Timothy Eller - Chairman and Chief Executive Officer

And if we look out into fiscal year '10, if the conditions continue we wouldn't expect land spend or development spend to be any higher than that, in fact probably could actually be less. So we'll continue to produce our inventories, even as at reduced sales basis.

Ivy Zelman - Zelman & Associates

And do you think that if you're cost initiatives and your to be built more profitable margins that you're generating today, could generate enough sales and in the market environment where sales are getting worse and we clearly have seen your absorptions fall from last quarter. Maybe because you're doing more to be built, I don't know. But what type of absorption pace is in your sort of outlook? Could you actually go down to and still generate cash flow. I mean if you went to three houses a neighborhood you're at today, I don't know if that's the right number, but what happens if it goes to one a neighborhood because you're doing to be builds and you're not specking anymore. Give, just some sensitivities around where cash flow is no longer positive, but you're actually using cash, I think that would be very helpful.

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

Well, I think about it in this way, Ivy. First of all, to address your volume question, as we said we did fall below three sales per neighborhood per month and don't expect to reach that level this year given what we're seeing. And I think we're on an average par closer to 2.5 sales per neighborhood per month this last quarter. So, that will help you then just to kind of average number of neighborhoods and that will kind of help where volumes could possibly be.

To address your question on cash though, we actually as we've done for a number of months and quarters now we look at every single neighborhood every quarter to look at incremental houses built and sold for the cash flow though. So we look for its profitability economics as well its cash flow and if something is not cash flow positive we'll stop building it there, which is what you see as we continue to asses some of our assets each quarter. So, what I guess I'm telling you is that even at comparatively low levels we're having to address overhead by combining divisions, but we should still continue to be cash flow positive from the majority of our homes sold.

Timothy Eller - Chairman and Chief Executive Officer

Another way to think about it too is based on our neighborhood reviews which we do every quarter for every neighborhood, the general market seems to be selling about two homes a month per neighborhood. We've been outselling and outperforming them in many neighborhoods and so, if you just thought that we would drop down to what the markets doing, two per month per neighborhood maybe more practical.

Operator

Your next question is from David Goldberg with UBS.

David Goldberg - UBS Securities

Thanks, good morning.

Timothy Eller - Chairman and Chief Executive Officer

Hi.

David Goldberg - UBS Securities

And, rather [ph] having the tough market.

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

Thank you.

David Goldberg - UBS Securities

I guess the first question is really about the discounts and incentives that you guys are offering and the decline that Tim mentioned. I guess I'm trying to understand if that was a conscious decision and how you think about the level of discounts that you are offering, versus your competitors and what that's doing to the sales base?

Timothy Eller - Chairman and Chief Executive Officer

Well, we... early on if you remember in back even in the March quarter, we talked about transparent pricing which is pricing to what is affordable for our customers. So that's our pricing strategy. 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.

So, I think our transparent pricing allowed us to sell probably outsell the market for the last six months. And at least the earlier part of this year and everybody is starting to do the same. So we are probably becoming more like the market. Affordability is an issue, energy costs are a factor. They may not have baked themselves completely and to the affordability equation yet. We are continuing to look at, in our neighborhood reviews, how we're priced in every neighborhood every quarter.

David Goldberg - UBS Securities

I guess what I am trying to understand is on a like, like basis where are you pricing relative to the competition, do you think, given that you guys maybe have a lower starting price with the transparent pricing with an often less discounts? Do you think it's fairly competitive; you guys are fairly in line?

Timothy Eller - Chairman and Chief Executive Officer

Absolutely, we take all that into consideration. In fact we ran all the discounts. We're not going to try to chase somebody who's generating a lot of sales with the neighborhood or a market wide, say sale over a weekend or something like that and we are not going to try to chase for closures. We're try to take a very thoughtful approach to pricing and focus it on affordability.

Operator

Our next question comes from the line of Nishu Sood with Deutsche Bank.

Nishu Sood - Deutsche Bank

Thanks. Hi, good morning everyone.

Timothy Eller - Chairman and Chief Executive Officer

Good morning, Nishu.

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

Good morning, Nishu.

Nishu Sood - Deutsche Bank

I want a follow up on the land spend issue. The $400 million that you're going to be spending on development this year, obviously down a lot from what you'd said previously. I wanted to dig down. Obviously, in this environment where pricing makes it difficult in many cases to even recover your development costs and in extreme cases, it's tough to even recover any land residual value. Just want to understand that the kind of criteria you're applying as you evaluate your land spend in terms of what's... I think the words you were using was necessary, Cathy. I know that, but let's say if it's in the back end of the subdivision, if it's a later phases. I would imagine you don't want to leave that undeveloped, as opposed to our completely raw piece of dirt, you could easily just padlock it and just take the carrying costs on it. So I want to understand the kind of criteria you're applying there and also a sense of how low could that number go, if you just completely eliminated anything that wasn't necessary operationally?

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

Yes, back to the neighborhood reviews, Tim mentioned that we do every single quarter on every neighborhood. Part of that review that we do is incremental spend. So we look at their finished lot supply and their partially developed lot supply in that neighborhood based on their... in their sales pace and as part of that assessment, we'll say do we... and if they are proposing some additional incremental spend to complete some lots, we'll look at the cash flow criteria the homes sold with that incremental spend included.

So to your point, I think it's a good one that, you have to be very thoughtful about where you want to put additional dollars into development these days because you may not be able to recover it. We think we've got a pretty methodical approach to that and so we're fairly confident that as we put additional dollars into the land we are it's the recoverable and it makes a lot of sense on an earnings and the cash basis. So that's just to help you understand kind of the criteria we use.

And just to be clear on the $400 million that we charge it of remainder of the year, that's acquisition and development. It is primarily development, but there are some acquisitions explained in there too. And then lastly, my only other point would be you have to think about some markets like Texas for example, where we talked about Central Texas having year-over-year increases on a sales per neighborhood basis, what's its price. They're still doing really quite well. It's actually prudent to put some lots on the ground there. So that is also what's contributing because even though we have in raw numbers the absolute number of finished lots is sufficient, it's not the right place as in all cases.

Nishu Sood - Deutsche Bank

Got it. And just a second follow-up question. You'd mention something interesting in your mortgage operation. Obviously, dealing with the loss of the down payment assistance coming up with ways to help people come up with the down payment. You mentioned that the home buyer tax credit. Is there some way that your folks are working on to link the two? Maybe, an advance against some type of refund that they might get to help them with the down payment?

Timothy Eller - Chairman and Chief Executive Officer

We are Nishu. And we don't have a solution to that yet, but we are looking at ways to monetize that tax credit early. And we're hopeful that we will be able to do that certainly as we get closer to the end of the tax year.

Operator

Our next questions is from Dan Oppenheim with Credit Suisse.

Unidentified Analyst

Hi! This is actually Mike on for Dan. Just wondering could you give us some more details on what went into the reserves and restructuring expenses we saw in corporate G&A this quarter and what type of benefit you would expect to come from those actions.

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

Sure. The... our corporate G&A was up about $40 million year-over-year, and it's really kind of equally weighted between three things; some reserves, some costs associated with centralizing functions and then some costs associated with investing kind of into our future as we think about our business process changes. That reserve in these kinds of times with where we are in the housing industry, it's just... we thought it's prudent to make sure we continue to address reserves for possibly unhappy employees and our homeowners or something.

So we took that opportunity to increase reserves a little bit. On the centralizing functions piece, it's really, if you think about it, we've been talking it's smaller but it's a great example. We've been talking about centralizing accounting share services. So went from producing or processing transactions in 45 locations and now they are all centrally located. Those are the kinds of costs that are now starting to show up in our corporate G&A line and so, that's kind of associated with centralizing functions. Then the last one was investing in our future and this was really as largely from third party resources. Really addressing our core Centex business processes to make sure we are optimal. So, those costs are now showing up in corporate G&A as well.

We'll remind you on a combined basis though, if you look at homebuilding and corporate SG&A we were 35% year-over-year. And then finally, corporate G&A is expected to be down year-over-year at the end of the year.

Unidentified Analyst

Okay, okay. Thanks. And then just a follow-up on going off the whole shift to the built-to-order model, as you continue transition. How do you plan on competing with... clearly not all builders are taking the same approach, but how do you compete with spec homes offered by the competitors and how are you viewing that spec inventory that's out there?

Timothy Eller - Chairman and Chief Executive Officer

Well, we will end up with some spec inventory ourselves through cancellations, but it'd be a very manageable amount and we don't look at the... we don't believe that we'll need to incentivize those heavily to get those sold. We find that our homebuyers are continuing to sell, very pleased with the notion and have been in the process of building the home. They are more satisfied. Our margins are higher. We make our money, it's more predictable and we think our costs will be lower overall, as we sell to a backlog and then build to a cadence from that backlog.

So it's really a business model decision that we feel confident we'll be able to execute and we're not going to be able to compete with builders who dump specs on the market. That happens from time to time, but it's largely isolated now. Very few builders are building specs today to drive volume. It's just not a prudent approach.

Operator

Your next question comes from Megan McGrath with Lehman Brothers

Megan McGrath - Lehman Brothers

Hi thanks. I wanted to follow-up on that last point a little bit in terms of the slowdown in your traffic this quarter. Do you think any of that of that is due to the fact that you've reduced your incentives and how are you handling that in terms of marketing your product and getting more people in the door?

Timothy Eller - Chairman and Chief Executive Officer

No we don't think it has anything to do with reduced incentives, because we sold extremely well with that model earlier on. So we think it's just a combination of things. Other builders moving towards that model which is transparent pricing, a combination of consumer confidence erosion and probably the transition to the build-to-order model from a much heavier spec position. So, a combination of things this summer. So we'll see where we settle out in terms of sales pace. As I said, I think the market is selling generally in most places about two homes per month per neighborhood. We're still doing a little bit better than that, but it would... it maybe entirely possible that we are going to sell relative to a market cadence in the future here.

Megan McGrath - Lehman Brothers

Okay, thanks. And then Cathy just a quick follow up on the financial services business, you mentioned exiting the retail arm of that business, can you give us any sense on timing there and any potential costs that might come up from that?

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

It will happen throughout the course of our fiscal year. It will take a little bit of time to wind that down. And then we will provide an estimate of the cost as we are trying to solidify that in our Q most likely. But we are trying to offset and minimize those wind-down costs, the one-time wind-down costs.

Operator

Your next question is from the line Susan Berliner with JP Morgan.

Susan Berliner - JPMorgan

Good morning. Sorry about that. A couple of, I guess housekeeping questions. Can you tell me what your availability is in your bank line?

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

Yes, you know.

Timothy Eller - Chairman and Chief Executive Officer

It will be in a queue.

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

It will be in a queue, where prior to our cash flow detail were fairly significantly available. But they will have to address what the cash flow would be there.

Susan Berliner - JPMorgan

Okay, and then I guess I was a little unclear. The $400 million you're spending, that's not for the year. You spent some this quarter, I'm assuming as well?

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

Right. It was 400 for the remainder of the year.

Susan Berliner - JPMorgan

And can you talk what you spent this past quarter?

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

Just like maths going to matter. Mark should help me with that. I think I know, but I would rather than make sure I'm right.

Timothy Eller - Chairman and Chief Executive Officer

Let's move on to next question and then we'll come back and answer that one.

Operator

[Operator Instructions]. Your next question comes from the line of Mike Rehaut.

Michael Rehaut - JPMorgan

Hi thanks, good morning,.

Timothy Eller - Chairman and Chief Executive Officer

Good morning, Mike.

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

Good morning.

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

Texas.

Michael Rehaut - JPMorgan

The more affordable markets.

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

Las Vegas.

Michael Rehaut - JPMorgan

Do you have any sense. I'm sorry, do you have sense of what that 25% was a quarter ago and a year ago?

Timothy Eller - Chairman and Chief Executive Officer

It's probably less, because it's associated with FHA mortgages. 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.

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

We look at that statistics for like last four years and it was very consistent, the percentage of DPA's of the FHA. The difference is FHA volume has gone up so much, as Tim said.

Timothy Eller - Chairman and Chief Executive Officer

Alright, so you can imagine, several years ago, it was a very small amount. FHA was a very small amount.

Operator

Our next question comes from the line of, Ken Zener with Macquarie Capital.

Kenneth Zener - Macquarie Research

Good morning.

Timothy Eller - Chairman and Chief Executive Officer

Good morning, Ken.

Kenneth Zener - Macquarie Research

I am interested your units, could you give us the number for your units under construction as well as your unsold spec. And I am interested to see how those changes in the absence of large unit declines affected your order rates that you saw in the quarter?

Timothy Eller - Chairman and Chief Executive Officer

Our inventory came in at 1,356 units at the end of the quarter, down from 1,754 at the fourth quarter and 4,850 in a year-ago in the first quarter.

Kenneth Zener - Macquarie Research

Unsold, right?

Timothy Eller - Chairman and Chief Executive Officer

That's unsold inventory. Homes under construction was essentially flat with fourth quarter at 7,349 including the model homes, versus 7,324 in the fourth quarter of '08, and 14,167 a year-ago.

Kenneth Zener - Macquarie Research

So, do you guys think it's a kind of stabilization, which is good of your units under construction which kind of led to the larger decline in orders?

Timothy Eller - Chairman and Chief Executive Officer

Well I think it's a transition. It's... again, we've transited in a number of markets from building specs to pre-selling and so that transition takes a bit of different behaviors. And, but it's happening, and it's manageable, and like I say we also expect that with our pricing strategy, and our pricing model focused on affordability not trying to chase for closures, not trying to chase others who are trying to generate cash out of a particular neighborhoodhas also some impact as well. We... and again just if you look at our sales for past 12 months, we've generally been outselling the market and I think we are probably kind of approaching more market like sales right now.

Operator

Our next question comes from the line of Steven East with Pali Capital.

Stephen East - Pali Research

Good morning.

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

Good morning.

Stephen East - Pali Research

Going back to the cash flow one more Cathy. 50% of your lots are done or finished. If you look at what you expect to deliver in '09, and 2010 fiscal years what percentage would you estimate or actually completed versus where you're going to put money in to?

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

Let me try and understand what you're asking Steven. So, out of our finished lots how many of those are we actually going to utilize based on '09, and '10?

Stephen East - Pali Research

Exactly you made a comment earlier that obviously you can't move some of them around and so you're going to have to invest. I'm just trying to get an idea of, if you look what you have on the board for this year and next?

Timothy Eller - Chairman and Chief Executive Officer

Steven based... as we go through neighborhood we make those determinations in terms of what we're going to invest and when we're going to invest it. And right now we're finding very little additional investment necessary. A lot of what our land development spend is right now is related to the houses that we have under construction. It's completing in side-walks and drive aprons [ph], and final list of streets and that kind of things. So, it is this really kind of part and parcel of completing the infrastructure as we complete the homes.

Stephen East - Pali Research

Okay. And then also staying on that if you look at your cash I know in some markets you are and getting close to cash construction cost, etcetera. If you look across all of your closing. So what type of cash are you generating per household... per homes sold right now?

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

You know it's about... just kind of a adjusted finished lot cost or home side cost and that getting rough averages around $60,000, $65,000 per unit.

Operator

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

Carl Reichardt - Wachovia Securities

Hey guys, how are you.

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

Hi.

Timothy Eller - Chairman and Chief Executive Officer

Hey, Carl.

Carl Reichardt - Wachovia Securities

Just to follow up on Steve's questions, try it a different way [ph]. If 50% of your lots are finished that includes lots where homes are in the air or it doesn't?

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

No, that does not.

Carl Reichardt - Wachovia Securities

Okay, it doesn't. So, what how... what would be the budget to get the lots that aren't finished up to finished whenever you do it, what would be the estimated cost to do that?

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

Oh gosh, Steven, as Tim said our... and Carl sorry, Steven was before you, Carl. The... as we talked about, we expect $400 million of additional spend through the remainder of this year. And as Tim said that's very, much of that cost is really associated with homes that are already kind of under construction with things like HOA deficits spending and stuff.

They are partially developed lots which are another 30% or 35% or so. Have little run out over the course of the next several years, based on the volumes and as Tim said, we could be lower next year in spending than we are this year and volumes stay around where they are. So I guess, not a great answer, but a round about way is, it's going to be decreasing and it's not a large amount dollars in every subsequent year going forward.

Carl Reichardt - Wachovia Securities

Okay, I am just trying to get that number. And then last question is can you give me a sense as may be over the course for last six months or so, maybe a year. The two, maybe two markets where you think you have gained the most share from an MSA perspective and whether or not you've seen any benefits from that over the course of last 6 or 12 most from a cost perspective or some other way.

Timothy Eller - Chairman and Chief Executive Officer

We are seeing the benefits on our cost initiatives more around our processes. Just standardizing our processes and moving towards our build to order model is proving to create a lot of efficiencies in terms of how we schedule or subcontract or suppliers that's what enabled us, for example to lower our overall drywall costs nationwide, despite those two announced price increases. So it's much around processes right now than it is around share.

In terms of share, we're I think it's safe to say we're growing share in most every market that we're focused on and we've determined that we're going to participate in the future.

So, and I'd say probably in our Central Texas and San Antonio markets it's probably where we've increased most shares recently.

Matthew Moyer - Vice President of Investor Relations

Yes, Carl. This is Matt. I would say what comes to my mind is the markets that had sizeable private builders. Certainly, some of the mid-west markets, DC certainly our business in the Carolinas, because of our dominant market share position throughout those North and South Carolina has probably grown nicely.

So Carl, I would characterize without exactly knowing the numbers.

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

Hey, let me answer Su Berliner's question earlier about how land spend that we incurred in the first quarter. We don't have exact numbers in front of us Su, but it's somewhere between $80 million and $100 million. We can give you a better answer later.

Operator

Our next question comes from the line of Bill Locker with FTN Securities [ph].

Unidentified Analyst

Just wanted to talk to you about your backlog conversion a little bit. Just saw it was down, like 6% year-over-year and that's the first decrease in about 10 years, would you expect that would be build-to-order models, going into full implementation, but Just I wanted to see if that was going to be the trend going forward or the same decline year-over-year?

Unidentified Company Representative

This is Joe [ph]. I think it will show some seasonality, but you should continue throughout, certainly throughout this year to see lower backlog conversion because of the lack of.

Unidentified Analyst

It was just the same versus, as the second quarter was 67% last year. You might see another, down 6% there. It was only 60% or 61 or something like that just like you did in the first quarter, versus 57% last year where it came in 51% this year?

Unidentified Company Representative

Well it sounds a tricky way to give me... to tell what closings are going to be in the second quarter. But, I do think it will be down both year-over-year.

It may even be down a little sequentially. At some point we're not going to lower specs much lower than they are. They are, they are already than at any point in on record that I can find and there is some level of spec with cancellations and things. So I would say that lower year-over-year or may be even a little sequentially.

Operator

Our next question comes from the line of Chris Hussey with Goldman Sachs.

Chris Hussey - Goldman Sachs & Co.

Hi guys thanks for taking the call. The question I have, two questions. One is around your land spend, if you spent about $500 million this year how big a company are you. I mean you are running, looks like to me about 16,000 to 20,000 homes a year; we should put that spend to $25,000 to $30,000 per home for land spend.

So how much of that $500 million is new lots for future sales and how much is for these, because that seems like lot of money?

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

Yes, I think about it this way too, our land spend over the course that peaked that around $4.5 billion, down to $3.5 billion, $3.2 billion down to $1.7 billion last year, down to roughly $0.5 billion this year.

It has come down very dramatically and then in terms of just given pace and volume, we could be down even more, again next year. So it has come down dramatically. You also have to remember that although we are trying to time our land development to exactly our lot need, based on our cadence, we are not perfect yet. And we are getting there and so you don't perfectly develop your lot shift in time of need. So some of that development spend is for future lots and some compulsory obligations as well as to complete the existing neighborhoods. So it's... what I am trying to tell you it is not perfectly timed.

Chris Hussey - Goldman Sachs & Co.

I here you. I just sort of try to get around though. We are getting towards a pretty, I would say most of it pretty reasonably bad market for the housing market right now. And so one would expect you guys not to be investing much in land, but when guys say you have 50% of your lots or finished lots, in a finish lot how much investment do you have to make in that lot in order to sell the house?

Unidentified Company Representative

You may have the infrastructure to complete the final of the payment. Perhaps some offset improvements to complete. If we want to release our bonds, so we are cognizant about doing that. Right now it's going to take... we've developed a lot of property over the past five years, a lot of it and for last couple of years and so a lot of it still has bonds associated with it that we want to get released.

So a lot of it is just around getting our previously developed properties released from the bonding, as well as completing the infrastructure for houses in our construction business.

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.

Unidentified Company Representative

And Chris the one thing I would add is that if you remember, last three or four years ago, probably 90% of our lots supply was coming in raw and needed to be fully developed, whereas moving to the asset live model and optioning more finished lots, I would except that number to decrease and so even as we move back to the 20,000, 30,000, 40,000 units that we were doing in the past as we move up to that you should expect much less land spend than we had in the past.

Operator

Our next question comes from Gary Gordon with Portales Partners LLC

Gary Gordon - Portales Partners LLC

Hi, thank you. Two questions, one practical, what was your cancellation rate in the quarter?

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

About the same as last quarter, around 30%.

Gary Gordon - Portales Partners LLC

Okay, thanks. Two on the; your new business model, I would assume and your numbers about the land spend. I would assume you are not really a bidder for bank for closed properties that should be obviously growing in volume.

Is that the case and two, does that... could that potentially put you at competitive risk if some of your peers are much more active buyers of that land?

Timothy Eller - Chairman and Chief Executive Officer

Well, we are bidders. I mean 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. So it's not determined yet how the banks will come up to the market with the properties. We are able to do acquisitions on take downs with terms in some cases.

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 in terms of looking at some properties.

We have our Corona transaction that we did in partnership with Farallon and RSF Partners that is available to us as well to look at the properties. So we think we have right now enough ores in the water, if we will to participate in... and in the market land market which I think for all practical purposes we won't see materialize until next calendar year, calendar year 2009.

Operator

Our next question comes from Andrew Centan [ph] with Cliffwood Partners.

Unidentified Analyst

Good morning, how was traffic in July, versus a year-ago and also versus June?

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

We don't normally comment on beyond the quarter. So we're not going to help with July, but we talked about traffic being down, really in terms of loans levels that we've seen this last quarter.

Unidentified Analyst

In percentage terms, is it 40%, 50%?

Unidentified Company Representative

Quarter-over-quarter it was about 45%.

Timothy Eller - Chairman and Chief Executive Officer

Yes, 40.7% in the quarter.

Unidentified Company Representative

I'm corrected, 40%.

Operator

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

Timothy Eller - Chairman and Chief Executive Officer

Thanks Celeste. And thanks all of you for joining us today. If you have any additional questions please don't hesitate to contact Cathy, Matt or myself.

We look for discussing our progress during our second quarter conference call later this fall.

Operator

This concludes Centex's fiscal year 2009 first quarter earnings conference call. Thank you for your participation.

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