Tim Eller, chairman and CEO of Centex Corp., said at the UBS Building and Building Products 6th Annual CEO Conference that his company is in a strategic position to weather the economic storm, and come out intact with an effective, efficient business model.
The company has consolidated divisions, lowered costs, and shortened its land supply, placing it in a position to take advantage of future cycles, he said.
Living through six housing cycles, Eller said he and his team are building off their knowledge of the past and focusing on the cost structure of the company.
Centex CFO Cathy Smith said the company has set priorities: "accumulate and preserve our cash, continue to strengthen our balance sheet, and improve our profitability."
All of this comes with the company's relentless focus on cost restructuring.
"It has been a non-changing focus of two solid years of continually adjusting our cost structure down to meet the realities of the volume we are seeing," Smith said. "But in addition, all the process improvement is allowing us to have a more efficient cost structure through centralizing, standardizing, and simplifying our business. By doing that, we are going to have a sustainable, very efficient cost structure through the cycles, so as we start to see the ramp up you will see much less of having to involve heads to achieve that volume, and vice versa. We'll be far more scalable, sustainable and efficient in the next cycle."
Smith noted that a solid home building margin and strong asset efficiency was the company's value proposition, adding, "We are not all the way there, but working on it. We have one of the lowest lot positions of our peer group, and we still have room to reduce asset position. They are not all in the right, perfect places, but we are working on that--just at a slower pace today at the volumes we are at."
Getting through this cycle is the first battle, and it is one that, as many have said, has an undetermined up-tick.
"The depth and duration of this financial and housing correction make this a game changer for home builders like no cycle that has come before," said Eller. "And I believe this is going to dramatically change the competitive landscape for home builders for years to come. [This market will] test the best and eliminate the rest.
While he noted that all the elements necessary for housing to reach a bottom are in place, Eller did not predict an end to the downturn. "I do believe things will get worse before they get better," he said. "In 2009, I think that is when land prices will come back to market and buyers will come out."
He added that more foreclosures are are on the horizon and that this coming wave will put additional pressure on builders. Eller's way of dealing with foreclosures: "We let them take the share, we don't compete on price, so our volumes have been declining."
Centex is still witnessing a flow of traffic through its communities, perhaps due to the transparent pricing scale it continually adjusts to the market. But the challenge of converting shoppers to buyers, as Eller sees it, lies in the down payment requirement, limited access to credit, and concerns over job security.
But he has hope for the near future. "Customers are savvy shoppers," Eller said. "They know to buy a home when the market is worse, and home buyer sentiment is trying to break out right now. If we get some good news, you will see it rise and that will develop into home purchases."
He did caution, however, that the market will not see the dramatic uplift in home sales witnessed in previous cycles; it will be a slower, gradual return.