JPM_060308_Transcript

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JPM_060308_Transcript

  1. 1. FINAL TRANSCRIPT CTX - Centex Corporation at JPMorgan Basics & Industrials Conference Event Date/Time: Jun. 03. 2008 / 4:00PM ET www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  2. 2. FINAL TRANSCRIPT Jun. 03. 2008 / 4:00PM, CTX - Centex Corporation at JPMorgan Basics & Industrials Conference CORPORATE PARTICIPANTS Cathy Smith Centex Corporation - CFO Matt Moyer Centex Corporation - IRR CONFERENCE CALL PARTICIPANTS Mike Rehaut JPMorgan Chase & Co. - Analyst PRESENTATION Mike Rehaut - JPMorgan Chase & Co. - Analyst Okay. We're going to start with the last session of the day. Appreciate everyone's patience in sticking with us. We have a nice crowd for our final company with us today. We have a few more tomorrow, by the way. But with us today is -- and right now, is Centex. We have -- I have right behind me standing is Cathy Smith, CFO and seated to my right is Matt Moyer, Director of Investor Relations. My name is Mike Rehaut, for some of the new faces that are in here. I'm the Home Building and Building Products analyst. As you might know, I've stuck with a negative stance on this sector for near a year now, and unfortunately near-term don't seem much in terms of a positive catalyst for the group in fact, maybe a couple of incremental negative ones. So within that though I think the larger companies, and Centex included, have reacted properly in terms of balance sheet, cash flow focus. Centex has embraced that strongly and I think that's appropriate. Also managing the geographic footprint in these tougher markets. With that, I'll just turn it right over to Cathy and we'll, like the other presentations, keep the prepared remarks to 15 minutes or so, give or take, so we have plenty of time for Q&A. And we'll be available afterwards as well. So, Cathy? Cathy Smith - Centex Corporation - CFO Good afternoon, everyone. I have to start with a little bit of a disclosure on forward-looking statements. Certain matters discussed in this presentation are based on management's expectations concerning future events impacting the company. There is no assurance that these expectations will be realized, and for additional information about our forward-looking statements and certain factors that could impact the company's future results, I'd refer you to that slide that has the forward-looking disclosure, as well as the SEC filings, most recently our 10-K. So with that, let's talk a little bit about what's going on at Centex. First I'll do a quick recap of our fiscal year. Our fiscal year just ended in March, and for the fiscal year we delivered on some key commitments. We sold homes, we generated cash, and we are continuing to structure for profitability. We really controlled what we could control this last year and we've now joined -- with the culmination of our last quarter -- we've joined the exclusive ranks of those with lots of cash, short lander -- shorter land supplies and lowest -- low spec counts. We are now poised to take advantage of the opportunities as they arise. They're not showing up just yet, but we're going to start seeing them I think this year. This chart shows you a little bit about our land supply. Oh, for those on the webcast, chart 4 shows a little bit on the land supply and you can see what a dramatic change we've accomplished, our aggressive reductions in our land supply. At the peak our options were 190,000. Today our optioned lots are at 18,000. Our owned lots at the peak were 115,000 and today we're at 70,000 www.streetevents.com Contact Us 1 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  3. 3. FINAL TRANSCRIPT Jun. 03. 2008 / 4:00PM, CTX - Centex Corporation at JPMorgan Basics & Industrials Conference of owned lots. So our goal is about four years of owned and controlled, and we really have met that goal, maybe at not the exact mix we'd like -- want. We'd like a little bit more options, a little less owned, but we're there in aggregate. We've continued to sell homes and we've aggressively priced our homes and moved to transparent pricing. And what that means is really kind of no nonsense pricing. Once we figure out what the right price is based on the affordability, what the consumer can afford in a payment and what they can qualify for a mortgage, we move as quickly as possible to transparent pricing. And then that's helped us to continue to sell these homes. Or you can also see on this chart that our cancellation rates have continued to come down really since the mortgage market disruption that happened last August. Last year we maintained about 3.5 sales per neighborhood per month at that pace, but I would expect that pace to slow down slightly this year. We've continued to sell well compared to our peers as this chart on chart 6 shows you. I think that I would attribute that to a number of things. First is A locations will sell even in tough markets. And then a combination of affordable products and transparent pricing seem to be leading to increased market share and that's evidenced by our continued sales pace. We've made some significant reductions in inventory as chart 7 shows. We have now less inventory than at any point on record that we've had in the past. On a per neighborhood basis, we stand at less than three started, not sold. And of those three started, not sold, less than -- about one would be not -- would be completely finished or completed. I expect this number to continue to come down even beyond the low levels that we've achieved. And what all that means is good strong cash flow. We've lowered our home building debt this last year by $800 million of which about $200 million was JV debt. And you can see that we do expect our cash balance at the end of our June quarter to be over $1 billion. We do have a fairly large tax refund coming this quarter as well that's included in that. In addition, kind of a prospective basis, our land spend, which has been one of the biggest consumers of cash over the past year, year-and-a-half or so -- or I guess for the foreseeable past years -- the land spend should be about half of what it was this last year. So if you think about the ramp that that land spend has come done going back a couple of years, $4.5 billion for land acquisition and land development down to $3.2 billion or so, down to $1.7 billion this last year, and down again half -- half again this next year. So you can see the ramp that that's come down pretty substantially. Restoring profitability is a top priority in our company. We're quickly going to a building to a sold backlog model. And we have strong evidence that when you sell the home first and then build it, you have higher margins. And so we'll see that start to come through. Again, all the things you're seeing come through the financials at this point are -- were homes that were standing inventory, and that means they would have had -- or a good portion of them and they would have had older material and labor contracts. We're improving the core Centex business processes. I can't emphasize enough what a huge impact this is going to have on our company going forward. If you think about kind of the major business model changes we've done with going to more asset -- to stressing asset efficiency and then improving our business processes, this is what's going to give us I think a sustainable -- a competitive advantage in the future is all the work we're doing around our business processes. This is everything from our construction process to our sales process, to the way we support and service the business through like accounting and stuff. There's no process untouched in our company right now that we haven't been working on for a year, year-and-a-half. And those process improvements and standardization and centralization where it makes sense, will start to reap some real benefits in our margin. We remain very -- very, very focused on our overhead. We've continued to bring our overhead down at about the pace of our sales declines. And then we are concentrating our focus in the markets that matter. So you'll see us continue to exit some markets if they can't provide the long-term fundamentals, the scale and the relative market share that's important. And then we're -- today we're even making some division satellites of others. www.streetevents.com Contact Us 2 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  4. 4. FINAL TRANSCRIPT Jun. 03. 2008 / 4:00PM, CTX - Centex Corporation at JPMorgan Basics & Industrials Conference I often get asked -- moving to slide 10 -- I often get asked kind of what are the signs of a housing bottom. And relying on our CEO's 30 plus years of experience in six cycles, this now his sixth cycle, we've kind of come up with this list of things that would maybe suggest that we're -- where a bottom might be. So -- and then I'll kind of walk you through some of this and some future slides. So foreclosures will rise, economy slows, recession's likely, housing starts fall precipitously, new home markets can correct much faster than the existing home markets, land prices begin to soften, and then the home buildings with liquidity start to reinvest. You could argue that -- and the charts will show you here in a minute -- you could argue actually we're -- where four of these have been completed or are occurring now. I think one of the real indications, and we'll see it a little bit in hindsight, one of the real indications will be when you start to see the homebuilders with liquidity start to option land. So when you start seeing our option counts go up, I think that's a good indication that we're finding land at the right economics. And for Centex, you'll see us very much go towards options as we move towards a more asset light model. So let's talk a little bit about some of the other indicators. Foreclose -- foreclosure inventory on -- oops. Did I pass one? Foreclosure inventory on slide 11. Really the best strategy with foreclosures is just don't be where they are. So don't be there to compete with them, because you can't compete with them on price. We have really good data this cycle that we haven't had in the past where we can see where the defaults are and where the potential foreclosures are going to be. We've mapped those, I've shared this with many of you guys in the past. We've mapped all of those defaults against our assets and so we know right where very specifically in the submarket, where we expect that foreclosures are going to be a problem, and they tend to be geographically concentrated. So we've had a strategy now for a number of quarters where we were moving through those assets faster if they looked like they were going to be in a target area of potential foreclosures. And we've largely been very successful because of that. We didn't get completely through all of the assets where foreclosures were showing up. I have a great example in Southern California where we moved very fast through our asset and then now the foreclosures are starting to show up. So the best thing we can do now is just don't try to compete on price, let the volume slow way down, and if you get one or two sales a month, you'll be happy and that's really about it. But the good news is, largely our assets aren't where the foreclosures are. So we're not seeing those as a direct competition to our homes. This chart's a bit busy. It's the ARM reset schedule. The reason why it's important to notice it though, and you can even see where it shows the arrow is that where we are today. Typically a loan will foreclose nine months after the ARM resets if it's going to foreclose. That's been the historical time lag. And you can see that the peak subprime ARM resets, which was that kind of gray bar, really peaked last September. So that's the foreclosures we're starting to see and we're seeing today. You'll see that the ARM resets actually from the subprime business actually reduced or diminished pretty quickly. And this doesn't take into account anything that actually successfully refinances, and we know that there's been a fairly success -- a large amount of the -- those successfully refinancing. So what this might suggest, and then on the next wave, so those that might look at this chart at first say oh gosh, there's two big bubbles, and we're way off to the left, where you see the arrow is for today. But if you think about the ones that could be possibly problematic, the dark gray subprime ones on the left, those have now peaked and should be coming down. In the right hand side, which has the multi colors there, there are really only two in there that could potentially be problematic. And that's that kind of teal one, which would be the option ARMs and possibly the Alt-A ARMS, which is down at the bottom -- that bottom gray piece. The rest of them really aren't potentially a problem. They -- they're -- they typically are a much better borrower in those. Let's talk a little bit about housing starts. Again one of the signs that maybe we'll find a bottom at some point is that the housing starts should precipitously fall. Well, guess what they have. Citing the Joint Center for Housing Studies, normal, single family www.streetevents.com Contact Us 3 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  5. 5. FINAL TRANSCRIPT Jun. 03. 2008 / 4:00PM, CTX - Centex Corporation at JPMorgan Basics & Industrials Conference demand should be about 1.1 million or 1.2 million per year. And you can see if you just draw a line at that 1.1 million, 1.2 million per year and the area above -- or underneath the curve there in '02 through '05, you can see we built about 1.5 million excess homes. And so it's entirely possible that that new homes starts will continue to drop for a little while and a swift correction's actually good. That's a good thing. It'll take some of that supply out. New and existing home inventories. This one's interesting because you can see what's happening now to new home inventories, which is on -- I'm sorry, I'm on slide 14 -- the blue line there. And the existing home market inventory is still rising. That's actually not a problem. I always use the example of Southern California in the 1990s. Early 1990s, Southern California had a pretty significant correction, and by 1994, we were making normalized margins in new home building. But it took until about 1998 before existing homes were actually over -- not under water anymore because they didn't really reduce any existing home prices, they just waited for incomes to rise. So we actually can have a very viable -- a strong viable business in new homes even with existing home inventories rising. And I'll show you a chart in a minute that we're actually priced pretty well below existing homes, which is continuing to help. This chart would suggest that possibly normalized levels is between 0.3 million and 0.4 million in new homes and so it would suggest we've got probably the rest of this year and possibly into next year for that new home inventory to continue to come down. On affordability, if there's any one positive out of this correction, it's affordability. And new homes are far more affordable today than they have been in some markets actually for a decade. So some of like California and some of the more expense markets, they're seeing affordability levels they haven't seen in ten years. Which -- so if there's any positive out of this cycle that would be it. And then I did -- I refer to this chart a little big ago on chart 16. What this shows you -- it's one market, but we have the same graph and it looks almost identical for every market we have. The magnitude of change may be slightly different. What this chart shows you is the blue line is a sale or the existing home projected prices, and the red line is where we are in that market. How we've adjusted our prices. And then the straight line is just drawing a straight-line average for those ten years, but if you drew that same average for 15 years it would look the exact same. So bottom line is what it tells you is if you looked through time, 15 or 10 years, you can see that home prices should appreciate at a reasonable rate every single year, and you can see what happens, and obviously that's what caused where we're at today with the correction. The great news is though, as an existing home builder we've -- or I mean as a new home builder, we have adjusted those prices back down and actually below those long-term 10 and 15 years price trends. And so we've adjusted our prices very, very quickly, which is allowing us to continue to sell our new homes at a fairly good pace. Where the existing home -- and this happens to be -- this is an example for San Bernardino or Inland Empire area -- and you can see the existing homes will take a number of years to correct. And that's all actually okay. We're working right now inside Centex as I talked about a little bit ago, to aggressively build a better company today. We've been working for the last year-and-a-half or two years very aggressively around our business process improvement. We do all of those first things when you have the volume changes of just reducing heads without changing your business processes and going back to your vendors and getting exacting price reductions there. But those aren't sustainable. Those go back as soon as the volume comes back if you don't change your business process. We've been aggressively adjusting our business processes so that we can scale the business much more efficiently and applying a lot of manufacturing disciplines to the industry of home building. And that's what this chart's talking about a little bit is that we've -- we're aggressively building a better Centex now. www.streetevents.com Contact Us 4 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  6. 6. FINAL TRANSCRIPT Jun. 03. 2008 / 4:00PM, CTX - Centex Corporation at JPMorgan Basics & Industrials Conference You also see sales incentives and discounts continue -- should continue to diminish as we move to transparent pricing and we'll start to see that evidence here. Now we talked about the concentrating our focus in the core markets. That'll also continue to drive improved profitability. And then I would expect continued good, strong cash flow generation out of our company. It's important to think about where we allocate our capital. That'll be one of our keys to success. And we know the secret for our success is to concentrate into markets where we can have a high relative market share. I'll actually show you the basis for that on the next chart, why that's so important to us. It's a direct correlation to your return on your investment, and the relative market share. We're going to exit those markets where there are not good long-term fundamentals or we can't get the scale that's needed to be able to get efficiencies as a homebuilder. And will result in a reinvestment strategy that will continue to improve those margins and returns. This chart on chart 19 actually is the basis for why our -- the basis of our strategy. And it -- this is based on some of -- some real data that we collected between 2002 and 2004. And it shows a strong correlation between our return and your relative market share. It's -- kind of the sweet spot for us is between 0.8 and 1.2 relative market share. That means the size we are compared to the next biggest competitor in that market. So I'll close with, and leave you guys with this and then I'll take your questions, that we are aggressively building a better Centex now. We know the keys to our future success. They're focused on asset efficiency and a more flexible land position. We're improving our core business processes, we're increasing our relative share strength in the markets with the best returns, we expect sustainable cost reductions and higher, more consistent future returns, and we'll always continue to exceed our customer expectations. So with that, I'm happy to take your questions and Matt can help field some as well. QUESTIONS AND ANSWERS Mike Rehaut - JPMorgan Chase & Co. - Analyst Great. Any questions? Cathy Smith - Centex Corporation - CFO Yeah. Unidentified Audience Member Can you go back to the chart which the San Bernardino? Cathy Smith - Centex Corporation - CFO Yeah. Possibly. There? Unidentified Audience Member Right. So that would indicate that you should have oh, over a ten-year period you would expect roughly a double in your home price. Is that what that -- that's what that means? And if you extrapolated that back like to the Great Depression, would it -- would you expect to double every ten years or is that --? www.streetevents.com Contact Us 5 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  7. 7. FINAL TRANSCRIPT Jun. 03. 2008 / 4:00PM, CTX - Centex Corporation at JPMorgan Basics & Industrials Conference Cathy Smith - Centex Corporation - CFO Yeah. I don't know -- Matt Moyer - Centex Corporation - IRR In that market that has been -- that's been historic. I think on a nationwide basis you get about 3% to 5% price appreciation a year on average, going back to kind of 1950-ish. Unidentified Audience Member Okay. Matt Moyer - Centex Corporation - IRR San Bernardino's been a better market than that. Even with its cycles, it's been a better market than that. But on a nationwide basis you get about 3% to 5% a year. Unidentified Audience Member Okay. Thanks. Cathy Smith - Centex Corporation - CFO Yeah? Unidentified Audience Member Cathy, you talked about essentially this year taking advantage of opportunities with your cash. I know you talked about the land strategy being on the options. Can you just talk about what those potential opportunities could be? Cathy Smith - Centex Corporation - CFO Yeah. The question was talk a little bit about the potential opportunities and how we'll possibly deploy our cash. The -- first and foremost let me say I think the prudent thing right now until we see some good stability in the market is to sit on the cash. I think that's the right answer. And in all respects, we haven't seen a lot of opportunities show up for great price to land. When we do though, and I'm starting to see it -- I'm in the market fairly regularly, and I'm starting to see it -- the distress in the local regional builders is pretty significant now in some markets. So we'll start to see I think great opportunities. For us though, that won't mean a lot of cash usage, because we are going to -- our goal will be to option a good portion of that if we find some great economics it'll be to option, which means there's going to have to be someone else in the process. Most likely if it ends up going back to the bank, there'll have to be an intermediary. There's lot of capital sources right now that are wanting to do that for -- we may be able to get them straight from whoever currently owns that land at a distressed price, but we're -- our goal will be to option them at that point. www.streetevents.com Contact Us 6 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  8. 8. FINAL TRANSCRIPT Jun. 03. 2008 / 4:00PM, CTX - Centex Corporation at JPMorgan Basics & Industrials Conference So for right now, I'd say opportunities are sit on the cash, because that's I think a prudent thing until we see stability, we'll see some opportunities start to show up and I imagine probably in the foreseeable future. On the land side it'll be requiring less cash because we'll option. And then we can be talking about all of the other wonderful things we'd like to talk about -- what do you -- how do you best deploy that cash and then we'll -- there's a lot of opportunities for that. We can look at share repurchases, debt repurchases. There's a lot of evaluation we could do at that point. Right now I'd hoard the cash. Mike Rehaut - JPMorgan Chase & Co. - Analyst Maybe just to tack onto that cash flow question, Cathy. You guys did a large bulk sale in the past quarter. Any thoughts in terms of how you're thinking about that in terms of your inventory position? Would you still look at those types of larger sales opportunistically over the next couple of quarters or do you feel that you're mostly done in that area? Cathy Smith - Centex Corporation - CFO Yeah. We did achieve a fairly large land sale, and then additionally we achieved some individual one off land sales this last quarter. Those achieved two things for us. They are a time driven event because of some tax recapture that we wanted to do, so that helped. And then secondly that did allow us to exit some non-core land. We largely have accomplished that, so I would not foresee us doing that type of a transaction again. We generally like the land we have. We may be a little longer in a few places than is desirable at this point, but it's all kind of down the fairway of what we want to be doing in product segments in markets, it just may be a little long. So. Yeah. Unidentified Audience Member Cathy, you mentioned you thought that prices could hold up even if existing home prices decline, maybe perhaps another example (inaudible) you said California experienced. I guess I find a little intuitively I'd love to hear more explanation of that because perhaps the location of these new homes tend to be further away from the core and in a high gas environment (inaudible) or otherwise. Just flesh out if you will your thoughts on this. Cathy Smith - Centex Corporation - CFO Yeah. The question was around my comments on pricing and where could pricing go and possibly for new homes relative to possibly existing home stock. I think I captured that. If you think about what we've done with new home pricing, so first in that chart actually, the one that's up is great illustration, which is why we showed it, is we -- back when -- in August when the mortgage market disrupted pretty significantly, we aggressively moved to pricing our homes to where the consumer can afford the payment and can qualify for a mortgage. And so first and foremost. And then we validated that pricing by this, which was long-term pricing trends for every single market. So we know really where should we be from a long-term historic perspective, and it's amazingly clear in hindsight on a long-term historic perspective literally by every market. So you can see where you should have been kind of for affordability and incomes. You can see what your consumers can't afford in payment, and we literally can see the consumer set coming through in their incomes and then the mortgage market. So all of that gave us confidence now for a couple of quarters that our pricing was in the right ballpark. Then the only things we have to deal with are things like irrational competitors or something else that may be going on in the market -- high amount of foreclosures or something like that. And again, if we see -- if it's foreclosures, our answer's really not in irrational competitors, our answer's not to compete at that point. And it's better to let those move through. www.streetevents.com Contact Us 7 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  9. 9. FINAL TRANSCRIPT Jun. 03. 2008 / 4:00PM, CTX - Centex Corporation at JPMorgan Basics & Industrials Conference And so I -- on a kind of a macro basis I feel very good around our pricing that it's really at the right levels within a couple of percentage of wiggle room I think that it should be. And then we'd continue to work on kind of pulling down and changing the mix of the products to where we can become more profitable in those price lines. But I think generally we've addressed new home pricing. So then the only question is how do we compete against existing and right now we're 25% discount existing in some markets. That's not a -- so people -- that's not a competitive equation that they're going to make that choice. So even if it's a little closer for a brand new home, which typically in a normal market would actually have a slight premium to an existing home, they're getting a substantial discount right now. They're going to make that trade. Now, your point's well taken though as we re-up it in land, we're going to see opportunities closer in. So what became possibly a B location at the top of the cycle is now quickly a C location or even worse. We're going to see the opportunity to get land much closer in and that -- that'll be a win-win for everyone. For the consumer we'll continue to sell -- that's a good answer. Yeah. Unidentified Audience Member If you look at the Shiller Index that just came out, it looks like the markets have really (inaudible) down a lot year-over-year with the big home building markets. Do you think the homebuilders' strategy to lower price as quickly as possible kind of spurred (inaudible) actually makes the home situation appear a lot more dire than it is? Cathy Smith - Centex Corporation - CFO The question is -- Unidentified Audience Member (Inaudible) worse. Cathy Smith - Centex Corporation - CFO Yeah. The question is the -- looking at the Case-Shiller Index that just came out and it shows that the bigger declines are in the -- kind of the more prominent home -- new homebuilder markets. Are the new homebuilders causing that to look more dire -- the price declines more dire than maybe the real -- the reality is? Did I get that? Okay. The -- first of all the Case-Shiller Index uses existing homes as well, so you have to think about it like Southern California where a large portion of the existing home sales right now are foreclosures. And so those are going to cause that to sway a little bit more. So in some markets -- and it's a very high percentage. I think it's -- what, 40% or so -- of the new homes being sold -- of the existing homes being sold in Southern California are foreclosures. So that is going to -- stuff like that's going to sway it. In addition, I think we're seeing something a little different this cycle than we have in the past in existing homes. In the past, existing homes -- the market didn't adjust at all, they almost always waited for incomes to rise if they adjusted slightly at all. I think you're seeing a little different perspective this time because people aren't as married to their home. They weren't as invested emotionally and personally in the existing home stock because of at the peak of the market with the investors and stuff. So, Las Vegas, for example, you've seen a fairly significant adjustment in the existing home prices as well -- much faster than we have in any other market -- or any other cycle -- but I think it's because people aren't as emotionally attached to their homes. I think it's a different buyer set in those existing homes. www.streetevents.com Contact Us 8 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  10. 10. FINAL TRANSCRIPT Jun. 03. 2008 / 4:00PM, CTX - Centex Corporation at JPMorgan Basics & Industrials Conference So I think a little bit of that's also causing it. But there's no question, this market is adjusting much faster than the previous cycles have. So there is no question, and that could be that the new homes -- the new homebuilders have adjusted much more quickly, which is true, and that may be helping to realize where the realities are faster. Mike Rehaut - JPMorgan Chase & Co. - Analyst I have -- I'll throw out another question if people get a chance to think of anything else. We put out a note last week about Texas and concerns that we have about that market maybe remaining weak. Even -- despite a relatively good economy, just sort of the over all perhaps consumer psychology malaise or inventories popping up in a few different areas. I was wondering if you could speak to that market what you're seeing -- what your strategy is there. Cathy Smith - Centex Corporation - CFO Yeah. We -- at the end of the last call we just did, we did say that Texas had definitely cooled. It had been a market that had continued to perform relatively well and we even suggested this last call that it had cooled off. And that -- I think that's -- I don't think -- and I also said this on the last call, there's no market untouched right now and it's -- I think that's a fair assessment. Some are in relative terms not as bad as others, but I think I would say that no market is untouched. Yeah. Unidentified Audience Member I know you guys have cut your spec (inaudible) a lot and I guess how do you view additional speculative cuts in response to greater availability in your bank loan? (Inaudible - microphone inaccessible) transforming down, how does that -- how will that further impact your availability on your bank loan? Cathy Smith - Centex Corporation - CFO Yes. The question is we've done a great job on bringing our specs down. It's kind of rephrased a little bit. We've done a great job in bringing our spec count down and inventory and how would that continued direction impact availability of our credit line? I would suspect because of being on a borrowing base now, is that your comment? And the good news is we don't, and we said this, we don't foresee needing our revolver or our bank line this next year. We're substantially into cash now. We expect to continue this substantially be into cash. We have moved to a non-spec builder. We are definitely selling the home first and building it. There are lots of great economics around doing that and most importantly for us for our business model you have to sell to a backlog to be able to build to a cadence, and that's critical for our business model. So if we've successfully made that transition and in our markets and so we will -- won't be relying on specs. Which means that the banks loan less on it for a borrowing base, but we shouldn't need our borrowing base. We shouldn't need our availability. Matt Moyer - Centex Corporation - IRR I would add on that that our land position gets more developed every day as well. Cathy Smith - Centex Corporation - CFO Yeah. www.streetevents.com Contact Us 9 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  11. 11. FINAL TRANSCRIPT Jun. 03. 2008 / 4:00PM, CTX - Centex Corporation at JPMorgan Basics & Industrials Conference Matt Moyer - Centex Corporation - IRR So today we're sitting on probably 50% of our lots are fully developed, whereas at the peak of the cycle it was probably more like 30%, so in the future as -- if and when we do begin reinvesting in land, it'll all be finished lots and so you should see a higher mix of finished lots versus raw land or under development land as we progress through this cycle. Cathy Smith - Centex Corporation - CFO Yeah. Unidentified Audience Member Who's going to put up the capital (inaudible) used to put up to control the land? Who's going to step into (inaudible)? Cathy Smith - Centex Corporation - CFO Great question. The question was who's going to put up the capital to control the land? The ones that the homebuilders used to put up. And/or potentially developers did in the past. And that's -- I think that is the big question right now. The banks won't be there. They are not going to be there I suspect largely funding acquisition development type loans for a long while. So -- and builders like Centex don't want to be there doing that as well. So who's going to be? The great news there is a ton of money, I suspect some of them are in the room right now. There is a ton of money that wants to go to work doing exactly that right now. And there's a full spectrum of those. Some are value add, like they actually see this as an opportunity to get into being an -- acquirer and developer of land and being a lot -- finished lot supplier to the homebuilders. And some are not wanting to do a value add but to basically put their capital to work to get assets at a great price that they can afford to sit on for three, and five, and seven years as necessary and be able to feed to the developers in the future and/or to the homebuilders. And I can't tell you -- there's not a single week that goes by I don't get at least a couple of those phone calls. So there's a lot of people out there trying to figure -- and they're on that whole spectrum of just being purely a capital financial source providing their balance sheet all the way through to a -- they're seeing the opportunity to -- their a capital source, but they're seeing the opportunity to also have some value add in the deal, which would be providing some development or something like that. So I actually -- it's not going to be the traditional sources that we've seen in the past. And it's not going to be the banks for a while. So I think we're going to need this extra -- it's a good thing that they're there. We're going to need this capital source. Matt Moyer - Centex Corporation - IRR I would just add to that we were fortunate to be able to get together a few different interesting people. About a month-and-a-half ago at our private equity -- private builder, private equity conference and I'd certainly concur with Cathy in terms of the amount of money that's on the sidelines right now. Interestingly, some of it had been put aside over the last 12 months, have been even taken back because whoever they were partnering with said we don't see anything yet right now, but still nonetheless there are a lot of people ready to partner and put money to work. So net/net probably still too early. A lot of the people that I speak with still find that there can be further deflation on land prices, but still a lot to be ready to put to work. Cathy Smith - Centex Corporation - CFO Yes. www.streetevents.com Contact Us 10 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  12. 12. FINAL TRANSCRIPT Jun. 03. 2008 / 4:00PM, CTX - Centex Corporation at JPMorgan Basics & Industrials Conference Unidentified Audience Member If the banks aren't there and is that just unlevered equity capital that's going to be (inaudible) on this land or? Cathy Smith - Centex Corporation - CFO Possibly. So the deal -- the land transaction we just accomplished this last quarter was actually -- came off and levered. And that -- and the economics all make sense. So that's possible. Unidentified Audience Member Okay. And that's what you would expect, not just on one off, but just generally? Cathy Smith - Centex Corporation - CFO Right now the debt to fund those kinds of transactions is almost equity-like in rates. So I suspect, and this is my take on the world, it could be -- we could find out that it'll end up being different with an aggressive bank or something. I suspect the banks are going to have a period of time where they're not -- they're going to have been so stung, they don't even know all the outfits their going to be taking back just yet if they haven't and most of them haven't started that realization. I think a lot of the regionals are just now going to start that realization -- the regional banks. I think it's going to be a number of years before we see them wanting to be that space again in any large amount. We may find some that -- I think there's an opportunity for those that want to be. Matt Moyer - Centex Corporation - IRR And that -- that's completely fits with the take aways from that conference as well. Minimal, if any, financing for deals and the banks still -- the regional banks, the community banks still in a state of paralysis. Almost afraid to go forward. They will be forced to over the next 6 to 12 months by their auditors, but a lot of deer in the headlight type cases right now. Cathy Smith - Centex Corporation - CFO Yeah. That's what I'm thinking. Yes. Unidentified Audience Member Cathy, we've seen a lot of the portion of the cash flow generated by yourself and peers is coming from (inaudible) reduction in homes under construction base. As you sort of more to -- it seems to (inaudible) more out flat lining of that where you're at a certain cadence of production. I think it's a fair observation that some of the cash flow from that source will come down and perhaps (inaudible) land sales that would really be the source (inaudible). Cathy Smith - Centex Corporation - CFO Yeah. The question is really where is the source of cash -- cash flow generation kind of in the future? And I mean think long-term when you -- when we get to where our land position's where we want it, so we're a little bit lighter in the loan -- on the owned lot. And our spec inventory is completely gone, so we have no more web. And we have a perfectly efficient production builder, then the only -- then your peer cash source at that point should be pure profits. So kind of see -- it's just depending on how www.streetevents.com Contact Us 11 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  13. 13. FINAL TRANSCRIPT Jun. 03. 2008 / 4:00PM, CTX - Centex Corporation at JPMorgan Basics & Industrials Conference quickly you see us getting there and it's a liquidation until then, so it's a liquidation of that spec web and it's a liquidation of the owned land and that -- so the incremental piece of that is what would be incremental cash, but eventually you get to where most every other business is and that is profits equal cash. Yes. Unidentified Audience Member How much of the old historic profitability was appreciation in the land? Cathy Smith - Centex Corporation - CFO The question was how much of the old profitability was the appreciation in land? And there's a big debate about that. So I'm not going to give you a great answer. It -- because you can in hindsight look to see where home prices appreciated and so you could argue that a good portion of that was the land appreciation. So I don't have a great answer, and we never tracked it that way. I can tell you going forward we actually will. It's one of the changes we've made is we're going to understand the economics for the homebuilder production as well as the economics of the underlying land. I think that is important for our investment decisions. But we didn't necessarily track it that way. Matt? Matt Moyer - Centex Corporation - IRR The only thing I can add is that most deals, depending on the asset turns, are underwritten -- or at the previous cycle were underwritten to about a 12% pretax margin. And there was a time when our pretax margin was in the high teens for a while. So if that answers the question. Cathy Smith - Centex Corporation - CFO Thanks, Matt. Matt Moyer - Centex Corporation - IRR Or adds some color. Cathy Smith - Centex Corporation - CFO Any other questions? Mike Rehaut - JPMorgan Chase & Co. - Analyst All right. Well, I think that does it for today. Thanks very much, Cathy and Matt. Cathy Smith - Centex Corporation - CFO Thank you all very much. Matt Moyer - Centex Corporation - IRR I do have some copies of the presentation if anybody'd like to take it away. www.streetevents.com Contact Us 12 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  14. 14. FINAL TRANSCRIPT Jun. 03. 2008 / 4:00PM, CTX - Centex Corporation at JPMorgan Basics & Industrials Conference DISCLAIMER Thomson Financial reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON FINANCIAL OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. ©2008, Thomson Financial. All Rights Reserved. 1862961-2008-06-04T09:47:13.420 www.streetevents.com Contact Us 13 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.

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