It was like Christmas in July for Technical Olympic USA (TOUSA). By the end of that month, the company achieved a global settlement that put to rest its Transeastern Homes joint venture-turned-imbroglio after months of legal battles with lenders, shareholders, and joint-venture partners. But even with the legal woes of the Transeastern deal behind them, it was clear today at the 2007 Credit Suisse Home Builder Conference that the company still faces significant challenges.
Among them are a highly leveraged balance sheet and negative cash flow, and CFO Steven Wagman's mantra today was monetize assets, generate cash flow, and pay down debt.
Wagman pointed to the company's $56 million sale of its Newmark Homes assets in Dallas as a good example of its new asset management strategy, which also includes continuing renegotiations of roughly $51 million in option contracts related to the Transeastern settlement and an "orderly winding down" of select divisions during the next 24 to 30 months. Those operations will effectively sell through the gradual shutdown, shedding lots until the pipeline is empty. While he did not detail which divisions would be affected, he said that he expected the division closings to generate roughly $200 million in after tax cash proceeds when all is said and done.
For TOUSA, the adage "cash is king" couldn't be more true. In addition to selling off underperforming assets, Wagman said management is hoping to improve cash flow by driving sales velocity and reducing expenses. Integral to that strategy has been a retooling of the company's product offerings through value engineering. CEO Antonio B. Mon said the new designs will mean that homes are "cheaper and better designed with a lower cost to us."
With all those initiatives in place, Wagman said he expected the company to be cash-flow positive by the end of the year.
And with a 70% leverage rate, having cash to pay down debt is the top priority. In the wake of the Transeastern settlement, Wagman said senior management looked to keep the company as liquid and flexible as possible. The team reduced its credit revolver from $800 million to $700 million and secured $500 million in first- and second-term liens. However, he said he expected to pay down the revolver a bit and then get to work on reducing the amount the first-term lien; he penciled out a pay down of $200 million on that lien by the close of 2008.
"We target a debt-to-capitalization of 45% to 55%, and our whole strategy is to get there as quickly and prudently as possible," Wagman said.