普爾特房屋 (PHM) 2017 Q2 法說會逐字稿

Good day, and welcome to the PulteGroup's Quarter 2 2017 Quarterly Earnings Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Jim Zeumer.

Please go ahead, sir.

Great.

Thank you, Savannah, and good morning.

I'm pleased to welcome all participants to PulteGroup's second quarter earnings call.

Joining me today are Ryan Marshall, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior Vice President, Finance.

A copy of this morning's earnings release and the presentation slide that accompanies today's call have been posted to our corporate website at pultegroupinc.com.

We also post an audio replay of today's call to our website a little later today.

PulteGroup's second quarter earnings were impacted by several significant items, which are noted in our earnings release.

As part of the call, we will be discussing our reported results as well as certain aspects of our business as adjusted to exclude the impact of these significant items.

A reconciliation of these adjusted results to our reported results is included in this morning's release and within the webcast slides accompanying this call.

We encourage you to review these tables to assist in your analysis of our Q2 results.

Before we begin the discussion, I want to alert all participants that today's presentation may include forward-looking statements about PulteGroup's future performance.

Actual results could differ materially from those suggested by our comments made today.

The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides.

These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.

Now let me turn over the call over to Ryan Marshall.

Ryan?

Thanks, Jim, and good morning to everyone on the call.

I'm excited to speak with you today about PulteGroup's second quarter operating and financial results.

Building on the strength and momentum of Q1, the company's results show a continuation of strong demand, and even a slight acceleration in the business.

Starting right at the top, our 12% growth in orders reflects both a strong demand environment and the increased investment we've made in the business.

Given our emphasis on building to order, starting limited stocks and our expanding share among higher price points, being able to accelerate from a year-over-year order increase of 8% in Q1 to 12% in Q2 truly reflects the strength of the underlying business.

We also reported 12% growth in second quarter revenues, which supported an even more significant 27% increase in adjusted earnings of $0.47 per share.

The leverage in earnings per share came in the form of an 80-basis-point improvement in operating margin, coupled with a 10% reduction in share count, resulting from our ongoing repurchase program.

However, it can't just be about driving growth for growth's sake.

We are seeking to grow intelligently, which I believe we are demonstrating as evidenced by the 140-basis-point increase in ROE to 12.8% that we realized for the trailing 12 months.

And with a backlog of $4.5 billion, our highest in a decade, I might add, we are extremely well positioned to continue delivering strong operating and financial performance going forward.

Our Q2 results clearly demonstrate the great progress we're making to grow our business, while delivering value to our shareholders.

As pleased as I am with our growth and the strength of our quarterly results, I actually do want to address the earnings charge that we recorded in Q2 relating to our decision to address specific noncore or underperforming land assets.

I note this charge because the decision to dispose of these assets is representative of positive changes taking place within PulteGroup.

Our long-term focus remains on intelligently growing our business, while delivering high returns over the housing cycle.

In the process, we are taking actions that we believe can allow us to seize on market opportunities, to drive more efficient operations and to reduce risk within the business.

Electing to dispose of these underperforming land assets is a great example of the comprehensive approach we are taking.

After a thorough assessment of our entire land pipeline, we identified these 5,000 lots for disposal.

I would note that all but 80 of these lots were put under control at least 10 years ago.

And while no one likes having to take a charge, eliminating these positions allows us to recoup funds to redeploy into higher returning projects.

At the same time, these decisions will directionally help to accelerate inventory turns and shorten our land pipeline, moving another step closer toward our goal of owning 3 years of land.

Disposing of these lots is in alignment with our returned focus, and that's an important step for us to take.

In a similar vein, we are working with our local operations to ensure they are considering market share opportunities among all buyer segments.

In recent years, our return-based underwriting process has focused our investments towards serving move-up buyers.

This is a market position that's worked well for the business and in turn, our shareholders.

I believe, however, that building a business that is better balanced across the buyer groups can help to generate more growth, create a more diversified and lower risk business and yield greater local market share, each of which are points of emphasis for me.

And while the current housing cycle is advancing to where all buyer groups are more actively involved, we are seeing opportunities to invest in high returning projects across all buyer categories.

It will be a multiyear process to realize the material shift in the mix of our business, but I want to make sure we're assessing all the opportunities to grow and diversify our operations as appropriate, of course, in each of the markets that we serve.

And as our 2017 year-to-date results clearly demonstrate, we are succeeding in our efforts to realize greater leverage of our overhead spend.

Our current results reflect the benefits of actions taken to run a more efficient operation.

We're pleased with the progress made, but I believe there are additional opportunities for us to further leverage our overheads through scale and incremental efficiency.

Finally, looking beyond our company-specific numbers, we continue to see positive buyer sentiment and generally improving demand trends across our markets.

Driven in part by an expansion of the first-time buyer segment, housing demand is supported by a variety of positive factors, including an improving economy with low unemployment, high consumer confidence, low interest rates and supportive demographics.

Given this backdrop, we remain constructive on the market and the potential for several more years of growth in overall housing demand.

Now let me turn the call over to Bob for a more thorough review of our second quarter results.

Thanks, Ryan, and good morning, everyone.

Our second quarter results demonstrate the continued growth and overall strong financial performance of our business.

As reported in this morning's release and mentioned by Jim, our reported Q2 results were impacted by several significant items that were recorded in the period.

We spoke to these items in the release and provided a non-GAAP reconciliation table with the financials.

But I think it will be helpful for me to quickly walk through the items and highlight which income statement lines they impact.

First, our decision to dispose a certain noncore land asset resulted in a charge of approximately $121 million, which breaks down as follows: $31.5 million of land impairment that is reflected in home sale cost of revenues; $81 million of net realizable value adjustments that are reflected in landfill cost of revenues; and $8 million of impairments of land held in a joint venture that is reflected in other expense net.

Second, we recorded a $12.1 million charge to home sale cost of revenues for warranty work associated with a construction claim at a closed community in Florida.

As costs associated with this claim had previously been recorded in our construction defect reserves, we have -- we reversed $19.8 million of reserves that were directly attributable to this claim, including the development of incurred but not reported claim activity.

The benefit of this reversal is reflected as a reduction of SG&A.

And finally, we recorded a net benefit of $23.8 million in our income tax expense line, resulting primarily from tax law changes and a favorable resolution of certain tax matters.

Excluding this benefit, the company's effective tax rate would have been approximately 37%.

I'll note the impact of these items as appropriate over the remainder of my comments.

Let me now begin the review of our Q2 results.

In the second quarter, our net new orders totaled 6,395 homes, which represents a 12% increase over the prior year.

On an absolute basis, orders for the quarter showed gains across all buyer groups as first-time orders were up 6% to 1,929 homes, move-up orders were up 21% to 2,931 homes and active adult orders were up 6% to 1,535 homes.

The growth in Q2 orders is consistent with our view that we continue to operate in a favorable demand environment.

Adjusting for community count, our absorptions were down 2% compared with the last year, but at 2.7 sales per community per month remained at very healthy paces.

Reported absorptions, particularly among our first-time buyers, is being influenced by the 2016 closeout of some high-volume communities, along with the ongoing mix shifts in our business towards higher price points.

Reflecting the strength of our business, we continue to generate significant growth as our second quarter home sale revenues gained 12% over last year to $2 billion.

Higher revenues for the period reflect an increase of 6% or $23,000, an average sale price to $390,000, combined with a 6% increase in closing volume to 5,044 homes.

Total deliveries for the quarter were consistent with our prior guidance.

Looking at 2 -- Q2 closings by buyer group, 29% were first-time, 47% were move-up and 24% were active adult.

This compares to 30% first-time, 43% move-up and 27% active adult last year.

At the end of the second quarter, the company had a total of 9,588 homes under construction, of which we expect to deliver between 5,400 and 5,600 homes in the third quarter.

This would represent closing volume growth of between 8% and 12% over the prior year.

As I indicated, our average sales price for the second quarter was up 6% from last year to $390,000.

The higher closing ASP reflects the ongoing growth of our move-up business, along with higher prices being realized in each buyer group.

For the quarter, average sales prices of first-time buyers increased 11% over the prior year to $291,000, move-up increased 2% to $457,000 and active adult was up 6% to $379,000.

Average sales price and backlog also continues to rise, as backlog ASP gained 8% to $418,000, keeping us on track to achieve our previous guidance of full year ASPs above $400,000.

As I mentioned, the $31.5 million charge for land impairments and a $12.1 million warranty charge were recorded in homebuilding costs of revenues.

Inclusive of these charges, our reported gross margin for the second quarter was 21.1%.

Excluding the impact of these charges, our adjusted gross margin for the second quarter was 23.4%, which is 10 basis points below our guidance range.

Margin performance continues to benefit from higher option revenues and lot premiums, which increased 12% or $8,100 over last year's $75,300 per home.

However, sales discounts in the quarter increased 80 basis points over last year and 20 basis points over Q1 to 3.5% of gross sales price or $14,000 per home.

The increase in discounts primarily reflects actions being taken among the higher price points in select markets, where there's more inventory and consumers have more choices.

We believe it is important that we keep our prices competitive to ensure we are returning our assets sufficiently.

Within this pricing dynamic, we still expect to realize meaningful sequential margin improvement of 20 to 70 basis points and resulting gross margins in the range of 23.6% to 24.1% for both the third and fourth quarters.

Full year gross margin is now expected to be approximately 23.7% for the year.

This guidance excludes the impact of the significant items recognized during the second quarter.

Consistent with our focus on delivering strong operating margins, we continue to make outstanding progress on controlling overhead expenses in the business.

For the quarter, our reported SG&A expend of $216 million, or 11% of home sale revenues, reflects a $19.8 million insurance reserve reversal.

Adjusted SG&A for the quarter was $236 million or 12% of home sale revenues.

Prior year SG&A for the second quarter was $256 million or 14.6% of home sale revenues.

Based on the disciplined execution of our cost-reduction efforts, and our expectations for spending over the balance of the year, we are updating our SG&A guidance and now project that our full year 2017 SG&A will be in the range of 11.7% to 12% of revenues compared with our previous guidance of 12% to 12.5%.

This guidance also excludes the impact of the significant items recognized in the first 2 quarters of this year.

Adjusting for the significant items in the quarter, our operating margin was 11.4%, which represents an 80-basis-point increase compared to last year, as lower SG&A expense more than offset the decline in our margins.

Given expectations for margin performance in the back half of the year, and our project sustained 2017 SG&A leverage, we now expect operating margin for the year to be in the range of 11.7% to 12%.

To ensure we tie out all the adjustments to the quarter, we generated land sale revenues of $8 million and land sale cost of revenues of $87.6 million, which include the $81 million charge related to the land assets we are planning to sell.

Turning to our financial services businesses.

Pretax income for the second quarter was $19 million, an increase of 11% over the second quarter of 2016.

The increase in pretax is primarily the result of higher closing volumes in our homebuilding operations and an increase in the average size of the loans we originated.

Mortgage capture rate for the quarter was 79% compared with 81% last year.

Continuing down the income statement, we recorded other expense totaling $16 million, up from $13 million last year.

The increase is due primarily to the $8 million impairment of land held in a joint venture.

Other expense in Q2 2016 included $15 million of costs related to the termination of certain land transactions and final costs associated with our corporate relocation.

Reported pretax income for the second quarter was $123 million compared with $190 million last year.

Adjusted pretax income for the quarter was $235 million, which represents an increase of 15% from the $204 million of adjusted pretax income last year.

Our reported income tax expense for the quarter was $22 million, which represents an effective tax rate of 17.8%.

Our tax rate for the quarter included the $24 million of tax benefits I noted earlier.

Excluding these items, the company's effective tax rate would have been approximately 37%, which is consistent with our current expectation for the full year.

Reported net income for the second quarter was $101 million, or $0.32 per share, compared with reported net income for the prior year's second quarter of $118 million or $0.34 per share.

On an adjusted basis, net income for the second quarter was $148 million or $0.47 per share, up 27% on a per share basis from adjusted net income of $127 million or $0.37 per share last year.

Our Q2 reported diluted earnings per share was calculated using approximately 314 million shares, which is a decrease of 34 million shares, or 10% from 2016, due primarily to share repurchase activities.

Moving to the balance sheet.

We ended the second quarter with $240 million of cash, after having used $300 million to repurchase 12.8 million common shares during the quarter, at an average price of $23.42 per share.

For the year, the company has repurchased $400 million of common shares and has $600 million remaining on our repurchase authorization.

As always, our decision to repurchase shares is subject to overall business and financial market conditions.

The reduction in equity following our share repurchases in the second quarter increased our debt to capital ratio to 41%, which is just outside our targeted debt to cap range of 30% to 40%.

At present, we anticipate ending 2017 slightly above 40%, but expect that future earnings will list back inside our range.

As noted earlier, we ended the second quarter with 9,588 homes under construction, which is up approximately 900 homes or 10% over last year.

The increase is driven primarily by higher sold backlog units.

Consistent with our focus on controlling our spec production, we ended the quarter with fewer than 500 finished spec homes on the ground.

Community count for the quarter was 803, as the slow closeout of certain communities resulted in elevated community count relative to guidance.

However, we still expect to end 2017 with year-over-year growth in community count in the range of 5% to 10%.

In the second quarter, we invested approximately $236 million for the acquisition of new land positions.

We approved deals representing approximately 7,000 lots in the quarter, of which 33% were optioned.

Average deal size in the quarter was a little bit bigger at 130 -- 150 lots per community, including 1 new Del Webb position.

And finally, we ended Q2 with 89,700 lots owned and 42,500 lots held under option.

This moves the mix of lots controlled via option up to 32%, while lowering our years of owned lots to less than 4.4 years.

Now let me turn the call over to Ryan for some final comments on market conditions.

Thanks, Bob.

With the low interest rate environment helping first time buyer demand, along with supportive economic and demographic trends, we're positive on housing demand over the near and mid-term.

We fully appreciate, however, that economics -- that the economic and housing recoveries are getting long by historic standards, so we remain disciplined in how and where we're investing our capital and how we run our operations day-to-day.

As signups in the quarter and for the first half '17 demonstrate, we continue to operate within favorable demand conditions.

At a high level, the market conditions we experienced during the quarter were as follows: demand in our Northeast, Southeast and Florida markets was strong throughout the quarter, although as I mentioned, higher price points in some markets are increasingly competitive.

Still, we've been very pleased with the traffic and conversion rates in these areas in the first half of the year.

We continue to see very good buyer demand in our Midwest and Texas markets.

Texas, in particular, is doing well, and this includes Houston, which is -- which continues to deliver consistent traffic in the face of volatile conditions for the oil industry.

And out West, demand conditions are still very strong across essentially all of the geographies, with notable strength in Nevada, northern California and Arizona.

Nevada's results include the opening of Reverence, a community of almost 900 home sites in the Summerlin master plan, which experienced exceptional demand when it grand opened in early June.

Looking into the third quarter, demand in the first few weeks of July has demonstrated normal and seasonal patterns consistent with the positive environment we operated in the first and second quarters of 2017.

We've had a great start to the year, and I want to thank our employees who've made that happen.

They've done a superb job in delivering both an exceptional experience to our homebuyers and excellent financial results for our shareholders.

Now let me turn the call back to Jim Zeumer.

Jim?

Great.

Thank you, Ryan.

We will now open the call for questions so that we can speak to as many participants as possible during the remaining time of this call.

(Operator Instructions)

Savannah, if you'll explain the process, we'll get started.

(Operator Instructions) And we will take our first question from Nishu Sood from Deutsche Bank.

So yes, first I just wanted to ask about the gross margins.

They're pretty close to the range in the second quarter, but you mentioned that the trends in the back half might be a little bit lower than you've previously expected.

So if you could just break down the drivers for instance?

Specifically, I was looking for where -- which division has the compression?

Or which brand has the compression come in?

And you mentioned a little bit of a -- the higher price points from some pricing pressures in the second quarter, and maybe if you can tie that as how much that's affecting the second half as well, please?

Yes, Nishu, this is Ryan.

Thanks for the question.

We're really pleased with how the business is performing.

We like the current operating environment that we're in.

As I think Bob noted, we're seeing nice margin improvement as we move throughout the year.

We saw a sequential improvement moving from Q1 to Q2, and we anticipate that to continue into the back half of the year.

So I think that's representative and indicative of the favorable market dynamics that we are currently operating in.

As it relates to some of the margin compression that we alluded to, we saw an incremental amount of discounting as we moved from Q1 to Q2, somewhere in the order of about 20 basis points.

So it was enough to move the needle a bit.

But by no means would I overreact to it.

And it was as far as the brands go, it was in the Pulte brands, which is typically where our higher price points, that's the brand that we house our higher price points in.

It was a few specific communities in a couple of markets within the Southeast part of the United States.

So again, I just reiterate how positive we are in the market and the strength that we are seeing with the overall margin profile of the business.

Got it, got it.

And on absorptions, if your community count had, I think, come in closer to what the expectations had been, and some of those slower sellout communities said that sold out as scheduled, your absorptions would have looked a little bit better than expected, I believe.

And so as -- looking forward, as some of these committees begin to sell out, does that imply maybe the potential for some absorption bump on an overall basis?

Or how should we thinking -- how should we be thinking about that?

Yes, Nishu, this is Ryan again.

Certainly, the numbers that you've got in the numerator and the denominator when it comes to community absorptions, it can really move the numbers.

We have had some slower closeouts of some communities that we thought would have been gone by now.

And we're working to move through those.

And as Bob indicated, our expectation is that they'll be gone by the end of the year, and our community count guide will be in that 5% to 10% range year-over-year that we previously provided.

Just to give you an idea of how sensitive it can be, when I went in and I looked at the detail of what was going on with our committee counts, we had as an example, 4 communities that had a grand total of about 8 signups.

If you took those 4 communities out of the numerator and the denominator, our per community absorptions would have been essentially been flat.

Again, I'd talked about the strength of the overall business.

The 12% order growth that we saw in the second quarter was really strong; we're very pleased with that.

And as Bob noted in his prepared remarks, we had overall community absorptions of 2.7 per community.

We like how the business is running.

And we will take our next question from John Lovallo from Bank of America.

First question, I guess, would be on the SG&A performance in the quarter, which was much better than what we were expecting.

Can you maybe help us think about some of the major kind of drivers in the quarter?

Was there anything quirky in the adjusted SG&A number of $236 million?

And then, I would have thought that maybe there could have been a little bit more upside in the outlook for SG&A.

What's driving kind of the increase in the back half?

Is it just community count?

Or is there anything else going on?

Yes, John, this is Ryan.

I'll give you a -- just a couple of pieces, and then I'll let Bob give you some incremental color on some of the details.

But as far as what was in the adjusted numbers, no, the adjusted numbers there's nothing quirky or unusual.

It's reflective of the changes that we made, really starting in the back half of last year, and it's continued to be a focus for our entire organization to run an efficient shop.

As we move through the back half for the year, the increase will be completely aligned with the new opening of some of our new stores.

We've talked about before, we opened about 250 new home -- new communities a year, and the incremental spend will really be associated with the grand opening type activities that have slightly elevated SG&A onetime expenses that are mashed up with those new communities.

But other than that, we continue to be on the same trend line and the same level of efficiency that we've been on for the previous 3 quarters, and that's reflective of the full year guidance that we've provided.

We had been operating in a 12% to 12.5% target.

We're quite confident in the progress that we're making, and so we've improved and updated what that overall guide is for the full year, to that 11.7% to 12% range.

So I'll ask maybe Bob -- Bob can give you maybe just a tad bit more color on some of the details on the SG&A number.

No, yes, no, I wouldn't add anything.

The only thing, obviously, since we've got commissions there, you've got more seasonal influence on the SG&A, so we'll have more -- as we close more in the back half of the year, you'll have more commission expense, and that's reflected in -- on top of, as Ryan pointed out, the community activity.

Okay.

And then, Ryan, in terms of your comments to making sure the business is addressing kind of all segments, I would assume that this means perhaps moving a little bit more into entry-level.

Is that correct?

And if so, does that mean kind of investing more in Centex?

Or is there another strategy that you guys are thinking about?

Yes.

John, certainly, Centex is a big component of our first-time buyer business, but we've talked for the last several years about really looking at the first-time buyer could include our millennials, which in some cases we market to under our Pulte brand.

So some combination of Centex and Pulte targeted toward the first-time buyer and the entry-level segment.

We are maintaining and sticking true to our underwriting criteria of investing, making investment decisions based on where we can drive the best return on invested capital for our shareholder, while balancing the overall risk profile that we're looking for.

As we entered into the recovery 2 or 3 years ago, as I commented in my prepared remarks, that strategy really led us to more investment in the move-up buyer and, look, I think today's results are reflective of how beneficial that's been to our overall business profile but as we move forward, and today as the market continues to recovery, we are seeing opportunities to serve all buyer groups.

And not only is buyer behavior reflective of that, the returns that we can underwrite to are supportive of that as well.

(Operator Instructions) And we will take our next question from Michael Rehaut from JPMorgan.

First question, going back to the SG&A for the moment -- for a moment.

Continued progress there, and I think second time, you've lowered the range expected for the year.

And I believe, correct me if I'm wrong, but it's on a -- your revenue expectations, broadly speaking, have remained pretty consistent.

So I was hoping to get a little help on just what's driving that incremental efficiency?

Are there just better-than-expected cost takeouts?

Or on a community level, are things a little more efficient?

And where would you see over the next 2 or 3 years that number arriving at?

Mike, it's Ryan.

Thanks for the question.

So it's really in 3 main categories.

We made some changes to the level of personnel that we are running the operation with in the back half of last year.

We've been able to then change some of our processes that have allowed us to run a very efficient business with that level of personnel.

So not a surprise, the majority of our spend is in our people.

So a lot of the savings has come from that.

We've also been able to maintain some nice efficiency at the subdivision level with the amount of money that we spent to run our individual subdivisions.

We had a lot of cost saving measure and process changes directed at that.

And finally, I would tell you, and really give kudos to our marketing team.

Our marketing team has done some really nice things with our digital marketing efforts to drive efficiency of spend there and improve our conversion rate when folks actually cross the threshold of our stores.

We're seeing some nice improvements in overall conversion rates, which has given us great efficiency in the marketing dollars.

So those are the 3 probably big categories that I'd highlight.

Yes, Mike, the only thing that I'd add is in terms of the improvement versus where we had set expectations, we had put these plans in place, but we candidly weren't sure exactly how quickly they would take hold.

And to Ryan's point, we've made outstanding progress.

And so we've been able to tighten the range.

In terms of going forward, we'll give some color on that when we provide guidance for next year.

No, that's helpful.

And I guess just then going back to the gross margin for a moment, I did find it encouraging that you kind of said it was more limited to a few communities and a couple of markets in the Southeast at higher price points.

So from a geographic standpoint, are we to just interpret that?

And I'd be curious if you're able to give us color on which markets those were in the Southeast?

But as a result, you're saying the broad swathe of your remaining geography incentives and pricing patterns were essentially more stable, is that fair to say?

Yes, Mike.

I think that's an appropriate characterization.

The Northeast is an area that remains competitive, where our business is performing essentially in line with our expectations, but it is competitive.

And I would characterize the balance of the country as strong.

I highlighted the Texas markets, I highlighted the Midwest, I highlighted the West, those are awesome places where we're seeing some nice strength.

And then just lastly, real quick.

Sales pace by customer segment, I think it's something you've given out in the past, the change for the quarter?

Yes.

So we were -- absorptions were 3.4 per month at the first-time level, 2.1 for the move-up and 3.5.

So on a comparative basis, down 6 on the first time, up 1 and up 1 on the move-up and active adult, Mike.

And we will take our next question from Mike Dahl from Barclays.

Guys, I know that specs aren't as much of a part of your strategy as for some others, but I was hoping you could give us some color on just how the spec margins looked in this quarter versus third?

And how does that compare to the first quarter and maybe late '16?

Yes, we typically haven't given that level of detail.

We can try and get you some stuff offline.

All right.

I guess what I'm trying to get at is another way of attacking the pricing angle, and maybe back to the prior comment on the balance of the markets being strong.

Would you characterize it as kind of price cost relationship X these couple of markets that you've talked about as being more challenged?

It -- has that relationship improved relative to what you were seeing in the first quarter?

Or is it about the same as far as what you're seeing?

I think and I apologize, Mike, I might be answering the wrong question here.

But our view forward with sequential margin improvement would tell you, I think, that the price to cost profile is pretty favorable right now.

And obviously, the closings that we have in Q3 and Q4 are going to be the sales that we reported in our Q1 and Q2.

And we will take our next question from Robert Wetenhall from RBC Capital Markets.

You're crushing it on the SG&A; it's really nice to see.

Just wanted to ask you, sounds like a lot of operational progress, good visibility, Bob's tightening up the range, which is great to see.

Nobody's talking about your land program of getting down to kind of like 6 years of supply split between options and owned lots.

But I was hoping you'd just spend a minute and go big picture a little bit, and talk about the land strategy at this point in the cycle.

And how you're adapting the strategy to drive return on invested capital.

And if it -- and I was also hoping you give a little bit of view on how your land purchasing is evolving versus some of the long-dated assets you have on the balance sheet.

How should we be thinking about this?

Bob, did I get 3 questions in 1 there?

Got it.

All right.

Well, let me see if I can address all of those.

So we are very focused on improving the efficiency of our land portfolio, and it's something that I outlined in some of my very first commentary once I came into the role in September last year.

We have put the 3 years owned and 3 years optioned target out there, it's something that I think we are continuing to make progress against as indicated by the current land inventory that we have right now.

One of the big things that we did is we took the comprehensive look at our entire land portfolio, and that is part of what drove the actions that we took in the second quarter with the book of assets we intend to move through.

So that certainly was a big step in the right direction to get our land portfolio moving the right way.

The second piece is what are we underwriting at today.

And Bob, I would suggest and share with you that over the last 3 or 4 years under our underwriting criteria, the average size of -- the average lot size of communities that we've been buying has been in the 120 per -- 120 lot per transaction range.

When we're running at about 35 or so absorptions per community per year, that's right about that 3-year average.

And you mix in the options, and some of those kind of things, and we're very much moving in the path of where we want to go.

Now the difference is essentially the long dated or the bigger Del Webb communities that we have that are performing very well, but as we've talked about quite a bit in the past, there's a little bit of more land there.

So we're -- it's going to take some time.

We're -- but we like where we're going, we're at 4.4 today versus 8 years, not too long ago.

So pretty dramatic improvement in a pretty short period of time, and I like the trajectory of where we're going.

That's helpful.

And just -- for my second question, Bob.

Could you maybe talk about inconstant with the land program in place?

You're finishing out your capital spending program on share repurchase for this, for $1.5 billion, just $300 million in buyback, it's pretty solid this quarter.

How should we be thinking and not just this year but for 2018, about capital allocation with any free cash flow?

Thanks, Bob.

Yes, no change on the capital allocation front, candidly.

We've highlighted that we're targeting $1 billion, we've got $600 million left to get there, we've got that authorization in place.

We always think about market conditions when we look at that, but obviously, we bought a pretty big slug of stock in this second quarter, reflective of the cash position and the strength of the balance sheet coming into it.

So really, no change.

In terms of forward capital allocation, I think the process that we laid out back in, gosh, December 2014, remains today the way we look at it.

So as long as we're constructive on the market, I know you've heard me say this before, we're going to invest in the business first and foremost.

We're then going to pay our dividend, then we would look to buy back stock with any excess capital, all subject to that 30% to 40% debt to cap.

We're a little bit outside that range today.

Again, our expectation is that earnings will pull us back inside of that 40% target.

So in that mindset, we'll look at 2018 and beyond.

We planned for multiple years, and we'll look at what the business generates, what we see in terms of opportunities, and you heard Ryan talk about the opportunities we're seeing across demographic and geographic markets.

So we're building our plans now.

And in terms of capital, it means we're refreshing that which we already created.

And we'll give more color on what we think we'll do in '18 as we give our guidance with our fourth quarter earnings release.

And we will take our next question from Stephen Kim from Evercore ISI.

Really a strong quarter on the SG&A, let me just add my congratulations there.

I didn't hear you all mention a land spend number, maybe I missed it, but I was wondering could you give us the acquisition and development spend in the quarter?

Yes, Stephen.

So for the quarter, acquisition was $236 million, development was $373 million, so $609 million in total.

That brings the total for the year to just under $500 million for acq and just under $700 million for development.

Yes.

Okay.

That's a kind of a tight number, which would be consistent with your views.

So okay.

I guess I had a few questions but let me just go ahead and just boil it down to 1. Recently, there's been some action by one of your larger competitors on the land front in terms of getting in front of an approaching constraint in land development as I see it, may be some partners in -- on the land development side and the land financing side.

And was curious as to your thoughts regarding both the impetus for driving interest in something that is well as maybe something about that particular kind of structure as you've looked at that from afar?

And then secondly, another one of your competitors has been pretty active in terms of making investments on the technology front.

And so I was wondering if you could sort of address those 2 areas of strategic thinking and positioning as you look ahead over the next couple of years.

If you can may be address just your -- how you size up the landscape?

And what your response to that is?

Stephen, this is Ryan.

Let me take maybe the first question for -- the first question you asked about a couple of things on the land front that one of our competitors is doing.

I certainly don't have the inside information or baseball.

I've read a lot of the things that are out there about the transaction and I certainly think it's interesting.

Probably tough for me to comment on exactly what their strategy is and what they're trying to accomplish on it.

Land is certainly a challenge that all builders face, and that is essentially the #1 raw material that we need to continue to run our business.

And so we are, like all of our competitors, looking to gain a competitive edge.

And how we acquired, entitle and develop all our lands.

And so time will tell, I think, on how that works out.

We do put a lot of emphasis on acquisition talent.

And specifically entitlement talent, and those are things where we can really add value to the overall land pipeline that we are acquiring.

So I think we've got a really talented land team, and I think we're doing as good a job as any of our competitors when it comes to that front.

As far as technology goes, Stephen, we are making significant investments in technology.

There is a number of things that we are doing with how we run our business, whether it's on the way we market and run our website and the way that we are reaching out to our customers, there are certainly investments in technology that we're making there.

We recently launched a updated new website in the last 6 or so months, and we're happy with how that's performing.

We're doing a number of things in the way that we're building our homes, purchasing systems or things that we're looking to enhance our technology on, all the way down to what are the parts, pieces and components of things that we're putting into our home, making them smarter, making them more digital, allowing homeowners to have kind of control of their home in the same way they have control of many other parts of their digital lifestyle.

So it's a big beast to tackle for certain, but it's something that our entire team is focused on, and we're looking to make as many gains as we possibly can.

And we will take our next question from Alan Ratner from Zelman & Associates.

So I appreciate all the detail on the margin, and discussing what's going on, on the pricing side.

Two questions related to that.

First on the take-up and incentives, I'm curious if that was -- if you kind of think about the handful of communities, it sounds like those occurred in, was that more in response to actions taken by competitors that you kind of had to match in order to maintain a sales pace?

Or is that some actions maybe you're taking proactively to jump-start some activity in maybe some of those underperforming communities?

And then the second follow-up to that, just on the cost side, there wasn't a whole lot of conversation about what you're seeing on cost.

Curious how that's trending, both materials and labor?

And then just broadly in your conversations with the trade, how do you feel the labor environment is situated as we head into the back half of the year?

We had a good selling season obviously.

Do you think the labor -- the trades are really in a good position to get those homes built and delivered before year-end?

Yes, Alan, thanks for the questions.

Let me take the incentive question first.

Not -- I would tell you it's not an overreaction to anything.

We're constantly evaluating the competitive environment that we're in, and the inventory that we have in our pipeline, and we felt like there was an opportunity to be a bit more competitive.

As an aside, you probably noted in some of Bob's comments, our finished inventory came down from prior quarter.

And so certainly, I think some of those incremental incentives helped to move through some finished inventory that we had.

Nothing that we did -- we are looking at -- we're always looking at the competitive environment, including our other competitors, and you've got to be responsive to that.

But not any kind of a significant trend that I would point to.

And then on the cost front, we've previously provided guidance at our cost estimates, we're in the 1.5% to 2% range.

We're still operating within that range.

Labor is the piece that is getting tighter and/or is running a little hotter, which would arguably push us to the higher end of that 1.5 to 2 points, especially as we move into the back half of the year.

As you mentioned, it's been a strong selling season, there's a lot of volume in the system.

While we've seen some nice gains in labor, labor is still the piece that remains tight.

On the commodity side, concrete and lumber are the 2 pieces that I would point to.

Concrete is not something that we can buy at a national level, it's typically something that we're acquiring at a regional level at best.

And then, on the lumber side, we had the Canadian lumber tariff in the first quarter.

And then in current time, there are a number of forest fires in the Canadian province that are creating some logistical challenges with the mills.

Our expectation is that will continue to put some pressure on the back half as well, which will push us to the higher end of that 1.5 to 2 points we've been operating in.

So -- I appreciate that, Ryan.

So just to be clear then, it sounds like at least part of the revised view on the margins is probably somewhat cost-driven as well?

Correct.

And we will take our next question from Stephen East from Wells Fargo.

Ryan, you've been in your job roughly a year give-or-take now and as you look at the company versus maybe your vision, where do you think you stand within?

And then as you look out over the next few years, what are your key objectives of where you want to drive the company?

I mean, you've talked some about the returns and all that, but I was thinking maybe a notch below it.

And what are some of the key drivers you think you need to put in place to move the company to where you want it to go?

Yes, Stephen.

Thanks for the question, and what I would tell you is it's been a great year.

I think we've made tremendous progress.

We've got an unbelievable company with a rich history.

We've got wonderful employees that I think are doing a just a marvelous job executing the strategy that we've laid out.

Some of the tweaks that I articulated, that I wanted to see us modify and change, I wanted to see us own less land and get to a 3-in-3 mix, and I think we're clearly taking some steps in that direction.

We made a giant step with the announcement of the changes that we intended to make to our overall land portfolio, and moving through some long-dated assets that frankly just didn't fit within our portfolio and weren't aligned with our current strategy.

So harvesting that cash and redeploying it into higher returning projects, I think, is going to be a great step for the organization as well.

I'd like to see us be a little more balanced in the consumers that we are serving.

We're making nice progress in that.

I like the traction that we're getting.

We've seen a slight uptick in the number of first-time and entry level projects that we're able to invest in, which are being supported by the returns.

So everything is coming together on that front.

I also really like to focus that our team has put on running a more predictable and efficient operation.

I think as evidenced by 2 really solid quarters of home deliveries, I like the way that our construction operation is building and getting homes closed.

We've had a tremendous focused on quality and taking care of our customer.

And I think that is paying us nice dividends today.

It will pay us huge dividends into the future, as our reputation continues to be enhanced and improved by really taking care of the customer, creating a great customer experience and building a superior quality home, all things that our teams are focused on.

So Stephen, I -- we've got -- we've had great success.

I'm really energized and excited about the trajectory of the company.

I like the land deals that we're buying.

There's a lot of real positive -- positivity happening out there in our field right now, and it's going to be an exciting ride.

All right.

That's great.

That's very helpful for me.

So in you look at -- you've talked about demand quite a bit, and I guess, as you look at the cycle, it sounds like you all see it lasting several more years.

As you look at your split between active adult, entry-level move-up, you want to get it more balanced.

But how long do you think it takes you to get to where you're balanced in that?

And I guess, involved with that has a lot to do with entry-level and how quickly you can drive it?

Are you seeing mostly the biggest chunk of your deals coming at entry-level today?

And is mortgage availability -- I guess the question is, how do you get entry-level to be a more balanced piece of your business, both the mortgage availability, the deals you're doing, the product that you're putting on the ground and the competition that's out there?

Yes, Stephen, it's going to be a multiyear journey.

We're not going to swing the pendulum to the other side overnight, and nor would we want to.

The intent is that we are running a balanced approach every single day, and by doing that, it's going to take time to evolve the entire portfolio.

So I think patience here is truly going to be a virtue.

More so than trying to hit specific metrics in what percentage of a certain buyer group that we have.

We're looking to run the best possible business that we can, drive the best return for our shareholders.

And that's the playbook that I think we are executing quite affectively.

Stephen, the only thing I'd add to that is -- to your question, are we doing more deals?

Yes, we are, actually, and I think if you think of the way we've positioned the way we buy land, we seek return.

The increasing velocity that we are seeing out of that buyer group make some stuff pencil for us that didn't pencil in the past.

So we are certainly seeing some of that activity and to Ryan's point, it will take a while.

Just like it took a while for all that move-up business that we bought back in time to work its way through, and it's a big shift to influence the total for the company, we'll take some time.

But yes, we are seeing activity with that buyer group because they're more active.

Yes.

Got you.

Is mortgage availability improving there?

I don't know that it's improving.

I think you've got plenty of programs out there with low money down type activity.

The QRM rules are what they are.

I would argue that it was never that great a hindrance to that buyer group.

There are -- the people who have said, a lot of them just didn't know they would -- could qualify.

If they went in and asked, they'd find out they could.

So I don't know that it's a big mover one way or the other.

Because I think there is credit available for them when they're shopping.

But price becomes the issue as it always has been for that first-time buyer.

And we will take our next question from Carl Reichardt from BTIG.

I just have 1 question.

I know you've talked a lot about a mix-shift move over time.

When we talk about markets you've obviously -- you've flushed some backwire a lot so it had been sitting for a while, you've exited St.

Louis recently or will be.

Are you thinking, Ryan, in terms of looking at your geographic market locations and beginning to thin some out and reinvest?

And I think that's just tied to the comment you made earlier about leveraging local efficiencies and scale better.

Would there be a chance that you would shrink your market mix and reinvest more heavily in certain markets to grow share?

Yes, Carl, what I would tell you, scale matters.

And we've talked about that for a long time.

And market share matters.

And I think you heard a little bit of it in my prepared remarks that we are working with our local operators to shore up, and make sure that our market share and our scale foundations are solid in every single market that we operate in.

If we find a market where we think we have weakness, we don't have the scale, we don't have the market share that we want, we're putting plans in place to change that.

And in the event that we don't see a path forward, we will make the decision to leave the market.

And I think you -- that was one of the things that we saw in St.

Louis.

We felt that there was more opportunity to take that capital and reinvest it in other locations, but I -- my preference would be to see us operate in as many markets as we possibly can as long as we can have scale and the appropriate market share to drive the efficiencies that we need to make our platform work.

And we will take our next question from Susan Maklari from Crédit Suisse.

I'm wondering if -- you noted that your recent land purchases have risen to about 150 lots per community, and that's a little bit higher than the 120 that you've been targeting over the last 2 years or so.

Can you talk to how you think about that rise relative to your focus on driving returns, focusing on the margin side of things?

And perhaps what does that imply for the sales paces as we think about this looking out over time?

Yes, Susan, I think in a small subset, the numbers can be a little bit, not misleading, but can lead you to odd conclusions.

We noted that there was a Del Webb in there, which is a large lot count relative to the normal deals that we do.

So we put 7,000 lots under control.

A pretty big percentage of that actually came from 1 deal; that influences it.

Similarly, you have heard us say that we have been doing a little bit more in that first-time space with higher velocities.

Typically, if you get in the 3-year deal, you're going to have a little bit larger lot count there.

So I don't think it's anything in terms of -- we haven't changed our underwriting, our return criteria are still the -- is still the same.

It's not a margin equation for us, it's actually return.

And so it's just a mix of assets that we happen to buy in this quarter.

(inaudible)

Okay, all right.

And then just thinking about the 11% increase in the price that you saw in your first-time buyer segments there.

Can you talk to how much of that was mix shift?

And maybe how much pricing power are you actually seeing among that buyer side?

It's hard for us to break that down in real time.

I would tell you that there is pricing power there, but there is mix in that for sure.

And this concludes today's question-and-answer session.

Mr. Zeumer, at this time, I will turn the conference back over to you for any additional or closing remarks.

Great, thank you very much.

We've run out of time for this morning's call.

We will be available for the remainder of the day, if you do have any follow-up questions.

Thank you for your time and we look forward to speaking with you on our Q3 call.

And this concludes today's conference.

Thank you for your participation, and you may now disconnect.