McCormick 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

8% Revenue growth, half driven by acquisition

“We grew sales 8% in local currencies. The incremental impact of WAPC, acquired mid-2013, accounted for about half this increase.”

Spices are on trend

“we’re encouraged by the increasing consumer demand for flavor. Spices, herbs, and seasonings are on trend and a healthy way to add taste, and not for a lot of cost.”

Millennials like to cook

“the majority of Millennials say they love to cook, and the percentage of all consumers that prefer hot or spicy sauces, dips, and condiments is up 8 points in the last two years.”

US is not the growth engine

“In the Americas, sales in local currency were about even with the year ago period. The competitive pressure in the U.S. that we noted in the fourth quarter of 2013 is being addressed with actions to strengthen our brand equity with the consumer and to win at retail.”

Avian flu problems for QSR in China abating

“The improvement in industrial sales in China continued this quarter with a 20% increase in local currencies. This growth rate compares to weak demand from quick service restaurants in the first quarter of 2013 that related to concerns about avian flu and poultry menu items.”

5% EPS growth guidance

“Our earnings per share outlook remains $3.22 to $3.29. This is a year over year increase of 3% to 5% from adjusted 2013 EPS of $3.13.”

Commodity price increases

“The things that we see that are starting to move up are, as you’ve probably seen, corn and wheat and soybeans and dairy are starting to move up a bit. So those impact us more on the industrial side of our business. I wouldn’t say that we have any significant changes on the consumer side.”

How Many Hours of Work Does it Take to Buy a Home?

According to data released today by the Census Bureau the average new home sold for $317,500 in February.  According to the labor department, the average hourly wage is $20.50.  The two statistics imply that it takes the average worker 15,487 hours of work to buy an average home, equivalent to about 7.5 years of work.  To see how this compares to history, below is a chart going back to 1971.

One important caveat: this analysis doesn’t take into account financing costs.  Mortgage rates are just about the lowest that they’ve ever been.  When you take into account the cost of borrowing, low interest rates change the equation.  Although prices appear higher today than in the 70s, the extra hours “spent” on the home itself may balance out when compared to the hours “spent” on the financing back then.  Still, because mortgages can be prepaid, I think I’d rather buy a cheap asset with less financing at a higher rate than an expensive asset with more financing at a lower rate.

Hours Worked to Buy a New Home

Are we Seeing a Rotation from Growth to Value?

In the past few days there’s been an interesting divergence happening in equity markets.  High multiple high growth small cap names have lagged, while low multiple low growth large cap names have done relatively better.  Today, some very high profile momentum names like Tesla, Facebook and Netflix are down a lot.  Meanwhile, stocks like Apple, IBM and AT&T are leading.  These are two very different groups of stocks that are owned by very different types of investors.  The first group tends to attract aggressive faster money types, the second tends to attract more “steady-as-she-goes” personalities.

Three days is not enough to confirm that there is a shift happening, but if market leadership is turning from momentum towards value, it’s an important change.  Both bulls and bears could probably each claim this as a good omen for their particular camp.

Argument for the bulls:

Momentum stocks had a great run and reached unsustainably high valuations.  It’s healthy for the market that these stocks are pulling back.  This is a simple change in leadership and reflects the fact that investors who have sat on the sidelines are refreshed and ready to re-enter the market by purchasing high quality companies which still trade at relatively low multiples.  The Fed remains dovish and will continue to depress interest rates, which means that even though valuations are historically high they can climb higher, because equities still provide the potential for superior returns compared to fixed income.

Argument for the bears:

Momentum stocks’ collapse is a signal that irrational buyers have run out of money to support unreasonable valuations.  This is the first stage of the risk pendulum swinging from positivity to negativity.  Momentum stocks’ weakness will begin to snowball into broader market weakness as complacency turns to fear that spreads to other segments.  The outperformance of low multiple stocks is a sign that big money is trying to position itself more defensively in anticipation of a longer term decline.

Momentum Crash

Company Notes Digest 3.21.14

A digest of some of the top insights that I’ve gathered from this week’s earnings calls. Full notes can be found here.

The Macro Outlook

QE set to end in the fall, but rates wont rise for a while thereafter

“the committee has endorsed the view that it anticipates it will be a considerable period after the asset purchase program ends before it will be appropriate to begin to raise rates. And of course, on our present path, that’s not utterly pre‐set, we would be looking at next ‐‐ next fall. So I think that’s important guidance.” ($FED)

At least 6 months

“the language that we use in this statement is considerable, period. So, I ‐‐ I, you know, this is the kind of term it’s hard to define, but, you know, it probably means something on the order of around six months or that type of thing. But, you know, it depends ‐‐ what the statement is saying is it depends what conditions are like” ($FED)

The Fed still sees slack in the labor markets and no inflation

“inflation is running well below our objective, and by any measure there remains substantial slack in the labor market, so trade‐ offs and worrying about doing more or less because we have conflicting objectives, this really has not been an element in our discussions about how to be conducting policy now” ($FED)

And Yellen seems focused on fighting the ghosts of the financial crisis

“I think the short answer is that we’ve lived through a devastating financial crisis that has taken an exceptional toll on the economy in many different ways…no one wants to live through a financial crisis like the last one. And we want to be extremely cognizant of emerging threats to the financial system.” ($FED)

Monetary policy has tried to do what it can, but Yellen admits the linkages aren’t that strong

“monetary policy has tried to do what we can to offset [tight fiscal policy]. But, you know, the linkages aren’t as strong and aren’t as quick as we might ideally like them to be.” ($FED)

One thing that the Fed can’t control is weather. This was the worst winter ever

“Now as we all know, historically severe winter weather has been a factor in all of our lives these last several months and it has significantly affected our third quarter earnings. In fact, it’s been the toughest winter in which FedEx has ever operated.” ($FDX)

Apparently it can’t control inflation either…still no sign even in food

“For the fourth quarter, we expect input inflation will be well below year ago levels, and that will help drive strong expansion in our underlying gross margin. Our full year estimate for input cost inflation continues to be 3%. That’s despite the higher dairy inflation we’re seeing” ($GIS)

Mortgage markets still tight too

“Mortgage underwriting standards remain tight which does the limit the number of qualified buyers in the market. Meanwhile Dodd-Frank continues to be clarified and adopted and proposals in Congress for GSE reform are creating additional uncertainty for the mortgage industry” ($KBH)

But mortgage conditions are loosening some

“Underwriting does seem to losing up some, FICO scores are coming down and many large lenders have announced that it’s still early in that process but we haven’t seen a material impact with our concerns.” ($KBH)

A full housing recovery depends on getting the traditional buyer back

“In my view in order to have a full sustained typical housing recovery we have to get the traditional buyer back. It will take job growth and it will take fulsome mortgage underwriting, when that occurs if the demand is there and things pencil we can quickly go right back to meeting the demands of that buyer” ($KBH)

Financials

Bulge bracket banks still cautious, not materially investing in growth

“So the sell side is characterized really by two clients, they are the large bulge bracket firms and the middle-market firms. The areas that we are seeing the best growth though by no means spectacular growth is in the middle-market area. In the big firms, they continued to be very cost focused spending lot of effort rationalizing their spend. They have not yet turned into the point where they are investing materially in the business. So we are not seeing any sort of material growth in the bulge bracket firms” ($FDS)

Consumer

E-commerce is back to the future. There have always been catalogues

“you got to remember about e-commerce, in certain ways its back to the future. There was a very large business of catalogue, shopping a long time before there was e-commerce, it’s just the order entry system was a piece of paper or telephone versus a mobile iPhone or a wonderful app or excellent software by an e-commerce provider” ($FDX)

Two big logistical issues for e-commerce delivery

1) Delivering lightweight packages to residences is the postal service’s specialty

“So, the real challenge about the e-commerce role is delivering those lightweight items to residences and Amazon talks about this constantly, the postal services getting a lot of business from various sources because of e-commerce” ($FDX)

2) Volume spikes in the holidays. You can’t build your network for two or three weeks of the year

probably the biggest challenge is the fact that so much of the business comes in such a short period of time. And obviously it is not possible to make these enormous capital investments for two or three weeks out of the year” ($FDX)

At one point, shipping revenue generated income, but not anymore

“if you go back seven, eight years ago, net delivery expense was actually income. And I think those days are essentially gone, as most brands are free over threshold or offer a fair amount of promotion throughout the course of the year.” ($URBN)

Stores are billboards for brands

“We believe our stores are billboards for our brands and that they are the face of our brand and that the great service. And the in-store experience really supports our e-commerce sales and makes our customer confident in ordering from us, because they’ve been to our stores and they see our stores in their mind as they place the goods online, the orders online.” ($WSM)

Digital spending is 1/3 of General Mills’ baking division’s total media spend

“Since 2008, our U.S. media spending has grown nearly 50%, and the mix has changed. TV advertising is still the largest part of our advertising budget, but we’ve significantly increased our use of digital media…our use of digital media is growing at a strong double digit rate, and it now represents more than a third of our total media spending.” ($GIS)

Technology

Nike calls 3D printing a transformative technology

“As we do with all of our innovations, we plan to expand the transformative benefits of 3D printing across multiple areas of our business” ($NKE)

A manufacturing revolution

“this manufacturing revolution is going to be both impactful from a consumer standpoint in terms of the products and innovations we deliver to the market and how responsive we are as well as the cost.” ($NKE)

Enabling breakthroughs in performance innovation

“3D printing as you mentioned, processes that allow us to do things that conventional shoemaking or product manufacturing process won’t allow us to do. So there is breakthroughs in performance innovation that come.” ($NKE)

Oracle’s commodity hardware business has shrunk to almost nothing

“The x86 commodity business which used to be a big business when we bought Sun has now shrunk to almost nothing. So our hardware business has gone through the transition where we got neither the commodity storage business, we got neither the commodity server business and replaced it with computing systems with a lot of our own intellectual property.” ($ORCL)

The big data movement is enabled by new technology which enables huge databases

“The fact that our Exadata Machines have multiple periods of cashing, we now not only have DRAM and rotating storage, we have a lot of flash memory that we have to manage. It allows us to manage huge databases, multi-petabyte databases and deliver very high performance.” ($ORCL)

Example of big data in practice

“So our telecommunications billing systems which has to manage huge amount of transactions with millions and millions of customers, be able to figure out whether to cut-off a phone call when someone exceeds their bill and do all of that real-time. That’s real-time processing of huge amounts of data by a phone company those are the kind of applications we provide that almost no one else can provide” ($ORCL)

Miscellaneous Nuggets of Wisdom

Business is an art and a science, but in the heat of battle it’s an always art

“So, it’s an art, it’s not a science, there is a lot of science built into it but when you actually get into the battle, it becomes an art” ($FDX)

Nike 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

13% revenue growth

“Nike, Inc. revenues grew 13% to $7 billion. Gross margins increased 30 basis points to 44.5%. SG&A rose 16% reflecting strategic investments in our brands and our operations.”

Calls 3D Printing transformative

“we have leveraged Nike’s state-of-the-art 3D printing capabilities to inspire this revolutionary new cleat, which we put on the field in record time for football’s ultimate game. As we do with all of our innovations, we plan to expand the transformative benefits of 3D printing across multiple areas of our business.”

World cup on its way

“he World Cup is now just a few months away and you can expect even more excitement leading up to the opening match in Sao Paulo.”

Emerging markets up 19%. North America revenue up 12%

“First, the emerging markets, this diverse portfolio offers significant growth opportunity today and well into the future. For the quarter, revenue was up 19%”

“In North America, our category offense continues to drive growth across every category with Q3 revenues up 12%.”

“n Greater China, we continue to see encouraging signs as our market reset actions take hold. In Q3, currency neutral revenue grew 7%,”

big headwind from currency

“We estimate changes in currency exchange rates reduced our EPS growth by 6 percentage points for the third quarter and 9 percentage points year-to-date. We expect FX headwinds will continue to reduce our EPS growth rate for Q4 and into fiscal 2015.”

Innovation brings differentiated products to marketplace

“One of the things that our focus on innovation really does is it gives us great credence as we bring more products into the marketplace and have new innovations. You also have the strength of our brand which allows us to command a premium price and so we continue to drive the business from that perspective.”

Manufacturing revolution

” this is manufacturing revolution is going to be both impactful from a consumer standpoint in terms of the products and innovations we deliver to the market and how responsive we are as well as the cost. ”

Chinese more discriminating on product than price

“The Chinese consumer as I will just say as a general point is more and more sophisticated and discriminating in terms of their choice in product and price is not a limiting factor, in the end, the product and the brand are really resonating.”

More on manufacturing revolution

“there is two factors that are really driving a lot of our priorities in this manufacturing revolution space. One is to create the capability to create new innovation and product that the consumers can experience. Flyknit is a great example of a process. And 3D printing as you mentioned, processes that allow us to do things that conventional shoemaking or product manufacturing process won’t allow us to do. So there is breakthroughs in performance innovation that come.”

Oracle 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Revenue growth 6%

“For the company, total revenue for the quarter was $9.3 billion, up 6% from last year, non-GAAP operating income grew $188 million to $4.4 billion, up 6% over last year and the operating margin was 47% again.”

Customers want us to integrate hardware/software for them

“Our engineered systems business is growing rapidly for the same fundamental reasons that our cloud applications business is growing rapidly. In both cases, customers want us to integrate the hardware and software, and make it work together so they don’t have to.”

Re-organized for the cloud. SAP is not

“Eight years ago, we started to rewrite all of our applications for the cloud. Now those Fusion, ERP, HCM and CRM cloud applications are competing effectively with SaaS product specialist like Salesforce and Workday.

SAP has not yet begun to rewrite their ERP, HCM and CRM applications for the cloud. This gives the opportunity to become the leader in cloud applications and replace SAP as the leader in the overall applications in the market place.”

Growth in hardware is because engineered systems reach scale

“engineered systems have been growing rapidly for a long time. We keep talking about it. Now the problem couple of years ago was engineered systems was a small percentage of the total. Now engineered systems has grown up to be over 30% of the total. So it is — and soon it is going to be half of the total.”

No longer commodity hardware business

“The x86 commodity business which used to be a big business when we bought Sun has now shrunk to almost nothing. So our hardware business has gone through the transition where we got neither the commodity storage business, we got neither the commodity server business and replaced it with computing systems with a lot of our own intellectual property.”

Integrated solutions driving better performance at lower cost

“We replaced a system at the — in the world largest cloud company, you guys can figure out who that is. World largest cloud computing, we delivered an Exadata System to them.

They moved their application and got in live in three weeks and experienced 10 times better performance at a fraction of the cost. This is not uncommon. When we installed an Exadata Machine or a SPARC SuperCluster to have a very rapid implementation, delivered terrific performance and at a dramatically lower overall cost because all of the complexity of integration is done by us, not by them.”

Don’t just compete with server vendors

“we just don’t compete with the server vendors. We actually do a lot of other things than just compete with an IBM. We compete with EMC frankly when we get into those environments because we radically change our customer storage requirements.”

Salesforce making 12c central to its infrastructure

“I just recently got a note from Mark Benioff who is excited about bringing in Exadata and 12c and making in at the basis of salesforce.com’s cloud computing infrastructure that they put our application on. So we are seeing adopters with very, very high standards in terms of having to supply millions of users, reliably and cost effectively in the cloud. Talk about moving their entire business to 12c and Exadata. That’s just the tip of the iceberg of these hyperscale companies.”

Key to 12c is memory and multi-tenancy

“we think 12c will be the most rapidly adopted new release in many, many years for those two reasons, in memory and multi-tenancy features.”

Give customers the choice of service in cloud or on premise

“We will give customers a choice, but will offer those data analytics in the cloud, data analytics on premise”

Fusion being deployed in the cloud

“what you asked was the deployment of Fusion on premise versus cloud, I think that’s what you asked and it’s cloud, cloud, cloud. So let me say that one more time cloud, cloud, cloud, it’s generally where Fusion is deployed.”

Platform vs infrastructure as a service sales

“as we roll out platform-as-a-service and infrastructure-as-a-service, we will have specialist selling nothing but platform-as-a-service and nothing but infrastructure-as-a-service…we need specialist sales teams that are used to competing with Amazon, other specialist sales team that are used to competing with IBM pSeries. It’s a different sales, with different customer quite often. So we have, but we are lining up against all of our new competitors and making sure we have sales capacity as well as a competitive product.”

New technology enables huge databases

“The fact that our Exadata Machines have multiple periods of cashing, we now not only have DRAM and rotating storage, we have a lot of flash memory that we have to manage. It allows us to manage huge databases, multi-petabyte databases and deliver very high performance.”

Big data is a set of underlying technologies

“we think that Big Data is an underlying set of technologies. For batch, if you want a Big Data batch process, the open source product Hadoop is a very good product, if you’re doing batch processing. If you’re doing Big Data real-time processing *then we think the Oracle databases by far and away the best managed — best technology for managing real-time processing of Big Data.”

Example of big data in practice

“So our telecommunications billing systems which has to manage huge amount of transactions with millions and millions of customers, be able to figure out whether to cut-off a phone call when someone exceeds their bill and do all of that real-time. That’s real-time processing of huge amounts of data by a phone company those are the kind of applications we provide that almost no one else can provide.”

We’re supplying the arms to our cloud competitors, we can build the infrastructure more competitively

“We think with our engineered systems and our data compression technology, we can deliver the same storage and the same compute capacity of our competitors for a lot less money. I mean, that’s what we’re selling — we’re selling this technology to our customers, that’s our pitch. And we think we can build our own data centers just as efficiently and that’s why, I don’t think you’ll ever see our CapEx approach our infrastructure competitors in the cloud.”

General Mills 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Sales decline profit decline

“In the third quarter, net sales totaled nearly $4.4 billion, 1% below last year. On a constant currency basis, net sales in the quarter matched year ago levels. Adjusted segment operating profit totaled $690 million, 10% below year ago results.”

Weak input inflation

“For the fourth quarter, we expect input inflation will be well below year ago levels, and that will help drive strong expansion in our underlying gross margin. Our full year estimate for input cost inflation continues to be 3%. That’s despite the higher dairy inflation we’re seeing.”

Baking is on trend

“Dessert mixes and refrigerated dough enjoy high household penetration rates, and people shop these categories nearly every month, because baking is on trend.”

Digital an increasing part of ad spend for baking

“Since 2008, our U.S. media spending has grown nearly 50%, and the mix has changed. TV advertising is still the largest part of our advertising budget, but we’ve significantly increased our use of digital media.

Digital media and communication technologies align particularly well on baking businesses. That’s because our consumers have always had an interest in recipes, cookbooks, and sharing food ideas.”

A third of total baking ad spend

“While TV is still a significant part of our budget too, our use of digital media is growing at a strong double digit rate, and it now represents more than a third of our total media spending.”

Focus of digital strategy

“We know consumers are putting their grocery lists on their smartphones. They’re looking online for recipes, and they’re watching cooking videos on YouTube. The goal of our digital initiatives is to be on the right mobile device, at the right time, with the right message, and we have some well-known equities to leverage.”

Weather impact

“Just in terms of the nature of the weather impact, basically, on our side, it really just disrupted plant operations and logistics. So we lost 62 days of production, which would be 3% or 4%, which hasn’t happened in a long time to us, think decades. And that would be the result of people not being able to get into work safely, or not having inputs arrive. And so there was that impact. There’s an even greater logistics impact, as trucks couldn’t move, and the rail system becomes less efficient.”

Driving good returns from digital marketing

“as we go to market digitally, we see strong returns there, and that helps manage our margins as well.”

Slow improvement, emphasis on slow

“I would say that things are slowly improving, and our comment at CAGNY was that for next year, we’re affirming our growth model. But you know, we continue to see slow improvement, with an emphasis on slow. And I think we’ve been saying that consistently, and our predictions have been accurate over the last several years.”

Hard to Find Bargains

There are currently only 17 companies left in the S&P 500 that are trading for the bargain basement price of less than 10x forward earnings.  Of those 17 companies, seven are from the financial sector and six are in the energy sector.

Below is a chart of the number of S&P 500 companies that have traded for <10x forward earnings at any given point in time since the turn of the century.  At the height of the financial crisis, more than half the index had a Forward PE <10x.  In 2007, 12 companies were left in the bargain bin.

The fact that there aren’t many bargains is a sign that there are slim picking for value investors, but it doesn’t necessarily have to be a sign of the peak.  There were very few bargains by this metric in 2004 and 2002, but neither of those dates represented long term peaks.

S&P 500 Trading Less than 10x earnings

FedEx 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Toughest winter ever

“Now as we all know, historically severe winter weather has been a factor in all of our lives these last several months and it has significantly affected our third quarter earnings. In fact, it’s been the toughest winter in which FedEx has ever operated.”

Not seeing a lot of growth in global trade

“we are not seeing a stronger international trade in global growth right now as we had anticipated back in October of 2012. So, we are going to have to continue to work very hard on right sizing our network, which Dave is going to talk to you about here next, to match our new strategy which is to embrace international economy.”

Customers were closed

“we saw more customer closures in the quarter than we have in memory. I mean certainly in my 30 some year career in this business, I have never seen the number of major cities in the mid-west and east entirely shut down for a day due to weather and unfortunately we don’t see that volume come back when things recover.”

E-commerce is back to the future

“you got to remember about e-commerce, in certain ways its back to the future. There was a very large business of catalogue, shopping a long time before there was e-commerce, it’s just the order entry system was a piece of paper or telephone versus a mobile iPhone or a wonderful app or excellent software by an e-commerce provider”

Postal service was main delivery mechanism because of light packages

“the primary delivery mechanism for e-commerce for catalogue delivery was in the past and it will remain for the foreseeable future, the postal services around the world because you are moving mostly lightweight items in the residences and the challenges of moving lightweight items in the residences are very formidable in terms of the cost structure.”

Challenge of e-commerce is lightweight package and seasonality

“So, the real challenge about the e-commerce role is delivering those lightweight items to residences and Amazon talks about this constantly, the postal services getting a lot of business from various sources because of e-commerce and probably the biggest challenge is the fact that so much of the business comes in such a short period of time. And obviously it is not possible to make these enormous capital investments for two or three weeks out of the year.”

There’s got to be some realism injected

“So, I suspect that what you will see on a go forward basis is a bit of realism on the part of consumers and providers as to what the infrastructures can provide even the postal service, because remember, the postal service is not geared up to operate for just those two or three weeks either.”

There will be lots of innovation. Technology is very, very important

“So, there will be lots of innovative solutions in this regard. One thing is very clear and that is the information systems that the consumer driven mobile society have today are very, very important. You can’t just drop a package for an e-commerce shipper into an anonymous hole and they’re going to be satisfied where they are coming out sometime on an indefinite delivery window. They actively want to be a part of that process, they want to know when it shipped, they want to be able to redirect it to a location. This is an incredible capability that we have and UPS also have and it’s going to become a bigger and bigger feature.”

Regional providers will have a role to play but can’t compete on service offerings

“Regarding regional carriers, they have long play to role in this market segment and will continue to do so. Having said that, they do not offer the same feature to service that FedEx offers and certainly the same level of reliability that FedEx offers. And regarding speed, let me just make the point that nobody operates faster networks than FedEx.”

You have to be selective, so that you can handle the volume profitably

“the point that Fred made that its critical for us though is to be selective, you can go after a lot of e-commerce volume and be pretty pleased with your year-over-year growth rates but that doesn’t necessarily mean it’s going to fall out of the bottom line.’

We don’t know what you guys have in your ’15 numbers

“ou’re exactly right, it is too early to talk about FY15. And I really don’t know what you and others have in your FY15 number”

It’s an art and a science. In the heat of battle it’s an art

“we work very closely with our customers, we make firm commitments about the traffic that we’re going to carry for them during peak and then obviously it’s a daily dialogue with these customers during peak season, if we happen to have excess capacity on the next two or three days, we will work with customers and say we can take a little more volume or we’re going to have to stay at their level that we pre-negotiated. So, it’s an art, it’s not a science, there is a lot of science built into it but when you actually get into the battle, it becomes an art and the flexibility in our networks and the outstanding job that our solutions team does in preplanning peak is the strategic advantage for us combined with the different operating networks.”

KB Home 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Innovation in sustainability

“As an example of our continued innovation in the area of sustainability, we recently introduced the first double zero house in Southern California; a home which not only features net zero energy usage, which means it produces as much energy as it uses but also a first of its kind water recycling system that results in zero fresh water usage for landscape irrigation. The California Energy Commissioner attended the grand opening and the event received tremendous positive coverage from the local media and TV networks.

With its advanced water saving features we estimate this home can reduce water usage by up to 70% per year compared to the water usage of an average resale home. This 70% reduction equates to 150,000 gallons, while it helps the environment it will also result in significant cost savings for the home owner. I look forward to sharing additional innovations in energy and water efficiency with you in the months and years ahead.”

Mortgage underwriting standards remain tight

“Mortgage underwriting standards remain tight which does the limit the number of qualified buyers in the market. Meanwhile Dodd-Frank continues to be clarified and adopted and proposals in Congress for GSE reform are creating additional uncertainty for the mortgage industry”

Traffic has been good in their communities

“In our communities traffic and sales have clearly improved over the last few months. January and February sales and traffic were strong, in fact our traffic was up dramatically in February over the prior year, a great indication that the spring selling season is well underway and also a precursor of our future sales.”

FHA loan limit impact

“if you look at the FHA loan limits we’re monitoring it and we haven’t seen a significant impact on our business. I do think in some of the markets that it’s going to have an impact in lower demand submarkets where if prices are above loan limits and FHA was the vehicle for that consumer it could add some pressure there.

So it will be an overall market pressure in the, what I’d call it B minus submarkets and the As and Bs to B plus will continue to perform and at the time the limits went down as I recall our FHA business was 30%, 35% whatever.”

Lending standards are loosening up some

“Underwriting does seem to losing up some, FICO scores are coming down and many large lenders have announced that it’s still early in that process but we haven’t seen a material impact with our concerns.”

It rained a few times in So Cal

“I think it did rained three days in the quarter in South Cal. So we may have lost an hour or two of production but it’s a nice footprint to have when it comes to the winter time of the year.”

We have to get the traditional buyer back

“In my view in order to have a full sustained typical housing recovery we have to get the traditional buyer back. It will take job growth and it will take fulsome mortgage underwriting, when that occurs if the demand is there and things pencil we can quickly go right back to meeting the demands of that buyer while at the same time sustaining the business that we’re now putting together that’s working so well.”