Fat with cash and metabolically slower with spend, Centex CEO Tim Eller said Wednesday, Oct. 29, that the company is ready for hibernation.

"We are facing what metaphorically and literally could be a cold, dark winter for home builders," he said. "A spring for the home building market will come eventually, and we are preparing to emerge with strength."

It appears winter has already begun for the builder. Sales fell 54% in its second quarter, and revenue declined by a similar 55%, leading the company to a $1.64 per share loss. Cancellations climbed in the quarter to 40.3%.

Despite that, Eller said he thinks almost all the elements of the bottom of the market are in place.

"We can't predict, however, when we will reach bottom or how long we will bounce," he said. "Conditions are likely to get worse before they get better ? with credit turmoil and job losses."

That said, the company has put itself on a diet that management said will allow it to generate cash even at those lower sales levels.

  • It has whittled down its land to a four-year supply, one of the lowest in the industry, generating cash from sales and tax rebates in the process.
  • Headcount is down to its lowest level in seven years, helping move down combined corporate and home building SG&A by 39% from last year's second quarter, and overhead costs are expected to continue to fall.
  • The company has been able to boost gross margins by 730 basis points in the past six months by holding construction costs down despite commodity price increases and by dropping incentives and discounts to 7.9%, half of its peak levels.
  • The company is winding down its retail mortgage business and has sold its insurance business and its lumber supply company, creating cash and helping it to focus better on its core home building business.
  • Land spending will be only about $300 million this year, and $300 million or less in 2009.
  • $150 million in senior notes were paid off, still leaving the company with a cash balance of $1.3 billion, as of Sept. 30, up $64 million in the quarter.

All of those changes will allow the company to generate cash from every home sale at current sales rates. "And we know we can generate cash, at even lower levels of closings," Eller added.
Just by surviving, the company is gaining market share, Eller said, as other builders leave markets or get out of the business.

Eller has no worries that the company has become too light on land. He said he is confident that there will be plenty of lots for the company to pick up at discounted rates when the market improves and that it has begun forging relationships with developers and investors to make that happen.

That said, Eller still wouldn't mind a little government assistance to help home sales climbing out of the trough. Like other home building CEOs, he said he is lobbying Congress to approve a stronger stimulus package that would do something to handle the remaining two million adjustable rate mortgage resets coming in the next two to three years.

"We have to think about preventing those from going into foreclosure," Eller said.

In addition, he favors tax incentives that are higher and don't require repayment like the $7,500 loan Congress approved for buyers last summer.

"We need a true tax credit for any buyer," he said. "We [home builders] have a package of things we think would have a strong impact."