Takeaways from Centex Corp.'s fiscal fourth quarter earnings call this morning were mixed. Although the company narrowed its quarterly net loss to $402.8 million, or -$3.26 per share, from $910.5 million a year ago, it appeared for every step forward the company made to improve its financial results, it also took one step back.
"Our fourth quarter results have a little something for everyone," company CFO Cathy Smith said during Wednesday morning's earnings call.
She continued: "We saw a nice seasonal pickup in sales activity, but pricing pressures and impairments continued. We improved our gross margins year over year but saw another sequential decrease. We made big strides in reducing our overhead dollars but saw SG&A as a percentage of revenues increase."
Centex's new orders for the quarter, which came in at 2,843 contracts, was more than double the orders for the previous quarter. In fact, CEO Tim Eller noted that, for the first time in a decade, the company sold more homes in April than in March, which historically has been a strong sales month. However, order volume was still down 58% year over year. This volume indicated roughly two sales per community per month, which, in a related research note, UBS analyst David Goldberg indicated was a pace too low to get the company much closer to the break-even threshold.
He wrote: "Until the pace improves, builders will find it challenging to generate the requisite operating leverage to begin rebuilding profitability (we believe this can be achieved at a pace closer to three to four homes a month)."
The average selling price of a Centex home slipped roughly 11% to $238,283, contributing in part to the company's 65% falloff in revenues and gross margin compression during the quarter.
The squeeze is likely to continue on margins given the company's reliance on spec sales versus more profitable dirt sales for volume; roughly half of the company's sales for the quarter were spec sales. However, Eller was quick to point out that the 50-50 split is an improvement from last year. The company had roughly 2.5 specs per neighborhood for a total of 1,258 spec homes, of which about half were completed.
"Frankly, that's a number we'll more than likely maintain," Eller said.
Noting the quarter's uptick in sales activity, analyst Ivy Zelman of Zelman & Associates questioned whether the improvement would be sustainable given the pending expiration of the federal first-time home buyer tax credit in November, as well as some state home buyer tax programs, most notably in California.
"Very few of our sales are utilizing the federal tax credit," Eller said, noting, however, that the California tax program was providing some lift to sales. "I don't expect the expiration of the federal tax credit in November will really impact sales."
Eller went on to say that roughly 50% of the company's sales were to first-time home buyers and another 35% were to first-time move-up buyers.
Despite uncertainty around future demand for new homes and a corporate shift toward an asset-light strategy--the company dropped its controlled lot count to 674,334 lots, down 27% year over year--Centex execs reported that the company was looking into some distressed land deals. Specifically, Eller disclosed that the company had done a few deals of various proportions in both the Carolinas and Texas. As an example, Eller said the company did deals in Dallas for three parcels that ranged from 50 to 150 lots, whereas in the Carolinas, the company did one deal for 650 lots.
"We're finding more [deals], but it's still a moderate stream of opportunity," Eller said. "Maybe a minimal stream," he added, noting that the number of A-grade properties on the market is rather small.
Eller, however, provided little detail on how the operational execution of last month's merger between Pulte Homes and Centex was going. He said management had assembled transition teams and that integration plans were "rigorously under way."