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Desarrolladora Homex, SAB de CV (HXM)

Q1 2013 Earnings Call

April 26, 2013 10:00 am ET

Executives

Vania Fueyo Zarain - Head of Investor Relations and Chairman of Disclosure Committee

Gerardo De Nicolás Gutiérrez - Chief Executive Officer, President, Director, Chairman of Executive Committee, Member of Disclosure Committee, Member of Ethics Committee and Member of Risk Management Committee

Carlos J. Moctezuma Velasco - Chief Financial Officer and Member of Disclosure Committee

Analysts

Jacob A. Steinfeld - JP Morgan Chase & Co, Research Division

Jason B. Mollin - Goldman Sachs Group Inc., Research Division

Daniela Najar - Deutsche Bank AG, Research Division

Jamie Nicholson-Leener - Crédit Suisse AG, Research Division

Rafael C. Pinho - Morgan Stanley, Research Division

Alexander Monroy

Marimar Torreblanca - UBS Investment Bank, Research Division

Aaron Holsberg - Santander, Equity Research

Roy Yackulic - BofA Merrill Lynch, Research Division

Alvaro Gonzalez

James Harper - BCP Securities, LLC, Research Division

Sarah R. Leshner - HSBC, Research Division

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Homex First Quarter 2013 Earnings Results Conference Call. I would now like to pass this call over to your host, Ms. Vania Fueyo.

Vania Fueyo Zarain

Thank you. Good morning, and welcome to the Homex First Quarter 2013 Earnings Call. Before we start, I want to remind you that certain statements made during the course of this conference call about future events and financial results constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties. Discussions of factors that may affect results are contained in our filings with the Securities and Exchange Commission. We undertake no obligation to correct or update any forward-looking statements provided as a result of new information, future events or even changes in our expectations.

On the call with me today are Gerardo De Nicolás, Chief Executive Officer; and Carlos Moctezuma, our Chief Financial Officer. I will now turn the call over to Gerardo.

Gerardo De Nicolás Gutiérrez

Thank you, Vania. Good morning, everyone, and thank you for joining us on today's call. As we anticipated and shared with you in February, during our fourth quarter and full year 2012 earnings call, the first quarter of the year was expected to be very challenging. And of course, this has been reflected in our reported first quarter results and liquidity position, which will be importantly improve to the resources that we will obtain from the sale of the penitentiaries that we just announced last Friday, thus providing us a better outlook for the remainder of the year.

During the first 2 months of the year, collections at our Mexico Division continued to be slow, and it was not until March that we started to experience a more normalized collection rhythm. It was at this time that the disbursement of funds from the 2013 Federal Subsidy program also starts. This month, we have started to see a faster collection rhythm when compared to March.

As you know, collections on delivered homes is a vital source of working capital for our construction in process [ph] , and the low level of collections during the quarter hampered our ability to complete homes under construction. At the same time, it has the companion effect of reducing the velocity of our housing projects, which negatively affects our capacity to restore pipeline of homes to be collected.

This slow rhythm of construction is also reflected in the higher level of inventory in process, as time to complete homes and projects is now determined by the availability of resources, not our construction capacity.

The recent numbers of the RUV for housing starts are dramatic. Housing starts declined to 49,000 as of February 2013 from 331,000 as of the end of 2012. At the same time, the number of homebuilders that have subscribed new projects as of February 2013 decreased to an historic low number of 211 from 1,296 as of December 31, 2012. This is indicative of the financing scarcity in the sector and these most challenging times, where commercial backs have also reduced their overall exposure to the sector. Nonetheless, we believe that if we successfully navigate this period, we will have a great opportunity due to reduced competition in the market.

As per more recent public pronouncements by the federal government, we are certain they remain committed to the housing sector and working hard to accelerate administrative procedures in support of homebuilders. Specific examples of this commitment include: number one, the SHF 30% guarantee program where we were the first company to formalize a bridge loan, which reflects the confidence of financial institutions towards the company and the viability of our projects. To have access to this program requires that projects must receive SHF approval verifying compliance with the standards promoted by SEDATU and CONAVI. Here, we have also subscribed additional projects and we are currently working with other banks complete additional bridge loans under the program.

Number two, high reallocation of resources from the subsidy program towards vertical homes and monthly disbursement of resources from the program.

Number three, the recent announcement made 2 days ago by INFONAVIT in regard to the creation of the Fund in Promotion of Verticality, Fondo de Impulso a la Verticalidad, for MXN 3 billion, where vertical homes with a construction advance of 50% will receive 70% of the total payment in advance. A potential 31% affordability increase to customers that earn more than MXN 5.5 minimum wages, allowing clients to have access to a better home. The incorporation of approximately 33 million potential demand at [ph] the institute, INFONAVIT, will be able to provide a mortgage to every person that in the past was an INFONAVIT subscriber, and therefore, have a housing saving account with the institute. These have been indeed challenging times, and we have been working diligently with authorities, financial institutions, and most importantly, inside the company to successfully navigate during this period.

We continue to be confident in the prospects of the Mexican housing industry as the national housing plan, which is a 6-year plan, denotes the importance of housing in the country and the large number of Mexican families that continue to be unattended. In the short term, the environment will continue to be challenging. Nonetheless, we trust in our experience, quality product offering and in our management team to revamp our operations through the year in our Mexico Division, thus taking advantage of a stronger financial position as a result of the monetization of the prisons and the resources that we will have available to invest in working capital used to complete homes under construction through the rest of the year.

Now at the financial liquidity, as we publicly shared in our press release on April 19, we have signed an agreement with Grupo Financiero Inbursa and Ideal for the sale of our interest in the federal penitentiaries located at Morelos and Chiapas. Through the completion of this transaction, which we expect to happen during the following weeks, we will receive proceeds equivalent to approximately MXN 4 billion, from which approximately MXN 2 billion will be used for working capital purposes at the Homex Mexico Division, while approximately MXN 2 billion will be used to pay down debt, therefore, importantly improving our financial position and leverage. We are very excited by the completion of this transaction, as we believe it demonstrates the success of value creation of our Infrastructure Division that today is already providing important resources that will be used to strengthening our financial position and revamp our operations at our housing division, enabling completion of homes under construction and generating operating cash flow.

As a result of the sale of the assets of both penitentiaries, we will no longer consolidate the projects in our financial statement, as effectively both assets and liabilities associated to the project will be transferred to the acquirer party and no additional capital investment by Homex is required for the penitentiary projects. As part of the agreement, we will continue to have a minority participation in the operation with a predictable annual gain for 20 years. It's important to mention that this income does not consider the modifications at which we continue to work to further improve the value of the Morelos prison project. Through this modification, the income from the operation to Homex could increase. As these modifications continue to be under progress, the projects have received an extension until October to deliver the assets. Therefore, the operation contract will start in 2014.

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