普爾特房屋 (PHM) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2006 Pulte Homes Incorporated earnings call.

My name is Minoshia, and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's call, Mr. Jim Zeumer, VP of Investor and Corporate Communications.

Please proceed, sir.

Thank you very much.

Good morning.

I want to thank everyone for joining us to discuss Pulte Homes financial results for second quarter, ended June 30th, 2006.

Last night's press release detailed Pulte's second quarter operating and financial performance.

On the call to discuss our results are Richard Dugas, President and CEO, Steve Petruska, EVP and COO, Roger Cregg, EVP and CFO, and Vinny Frees, VP and Controller.

For those of you that have access to the Internet, a slide presentation will accompany this discussion.

The presentation will be archived on the site for the next 30 days for those who want to review at a later time.

As with all such calls, I want to alert everyone listening on the call and via the internet that certain statements and comments made during the course of this call must be considered forward-looking as defined by the Securities Litigation Reform Act of 1995.

Pulte Homes believes such statements are based on reasonable assumptions, but there are no assurances that actual outcomes will not be materially different than those discussed today.

All forward-looking statements are based on information available to the Company as of the date of this call, and the Company does not undertake any obligation to publicly update or revise any forward-looking statement as a result of new information in the future.

Participants on today's call should refer to Pulte's annual report and quarterly reports on 10-K and 10-Q for a detailed list of risks and uncertainties associated with the business.

As always, at the end of our prepared comments we'll have time for Q & A. We'll wait until then before opening the queue for potential questioners.

Right now, let me turn the call over to Richard Dugas for a few opening comments.

Richard?

Thank you, Jim, and good morning, everyone.

Before turning over the call to Roger and Steve for detailed analysis on Pulte's second quarter performance I'd like to make a few comments about the housing industry and some actions we are taking in response to the changing operating environment.

As you've heard before, many times, housing is a local business with different supply and demand dynamics in every market and even within the different submarkets in which we operate.

Given the local nature of this business I'm always reluctant to make broad generalizations about the industry because individual markets may behave very differently.

With that said, I know it's only stating the obvious for us to say that the overall U.S. housing industry continues to operate within a much tougher environment than we saw 12 months ago.

Available inventory of existing and new homes is growing in many markets as investor properties continue to layer on top of the day to day supply that we would see under typical conditions.

Sellers in many markets are reluctant to lower asking prices while buyers are fearful of purchasing at a price they no longer perceive as being a value.

The result is a stalemate where fewer transactions happen and any new sellers simply add to the buildup of inventory.

Several years of strong price appreciation combined with higher interest rates have resulted in affordability issues that are making it difficult for some buyers to get into a home.

And, at the same, the biggest issue appears to be that large numbers of potential buyers seem to moving to the sidelines of what they see as a riskier housing market.

They're simply waiting.

For home builders and outsiders alike I think all have been surprised by the speed with which conditions have changed and by the breadth of the slowdown in terms of the number of cities that have been impacted.

What has made the slowdown even more surprising is that the broader economic backdrop is still very positive in terms of employment, the strength of the underlying economy, and the relatively supportive mortgage environment.

If you viewed only the macroeconomic factors would you expect that the U.S. housing industry would be much stronger than what we are experiencing.

Given these conditions, the most common questions we hear are, "How bad will it get," and "How long it will last.?"

Pick up five different reports on the topic and will you get five different theories.

No one can answer these questions with any degree of certainty, and the answers you do get will vary according to the specific market.

The reality is that many markets are still experiencing changes in their local dynamics, and we expect this will continue for some period of time.

We can't know how long housing demand will remain under pressure, but that doesn't mean that we can't take action.

In fact, it's just the opposite.

Given the more challenging operating environment, Pulte must, and is, adjusting many of its business strategies and tactics to drive the best possible financial results.

First, as it relates to land, our strategy going forward is to dramatically scale back planned land investment.

We will continue to allocate needed capital to develop owned land positions but for the foreseeable future, however, we are tempering our plans regarding growth of our land pipeline as demonstrated by our 10% decrease in lots under control since the end of 2005.

We already have a large land investment, and we can capitalize on this position for several years.

Further, as it relates to land under control, all deals currently under option are being reviewed to make sure they still exceed our financial hurdles.

We will continue to pursue deals that can generate acceptable returns and that make bus--good business sense but in the current environment such deals are much tougher to find.

Where pending deals make sense, we are still finding opportunities to successfully negotiate even better terms and longer take-down schedules, which is appropriate in light of the uncertain times in which we're operating.

Where an individual deal may no longer be attractive because of underlying assumptions have changed, we will try to renegotiate to terms that will allow financial success.

Failing this, we are walking away from these transactions, as reflected in the charges taken in the quarter.

We primarily use options to mitigate entitlement risk but the ability to walk away means we are also reducing basic business risk resulting from changing market conditions.

No one wants to sacrifice investment dollars, but it's much better to write off the deposit and any related pre-acquisition costs than to complete a bad deal and live with it for the next three or four years.

Roger will detail the impact of land-related charges in the quarter but I will tell you that this is an ongoing process and one that will likely impact subsequent quarters as well.

With sales paces slowing out in front of us, we are adjusting our business accordingly which includes dramatically lowering the pace of new spec home production.

For much of the past decade our construction philosophy allowed for 25% to 35% of all houses under construction to be started as spec homes.

In today's environment this doesn't make sense, so our operators will significantly reduce the number of spec homes that they start.

Our operators are already implementing this action but given higher cancellation rates the absolute number of spec homes will likely remain elevated over the next couple of quarters.

Our objective is to dramatically reduce the number of specs and restricting the supply of any new spec homes into the pipeline is critical to this effort.

Beyond land and production, we are also having tough conversations with our suppliers and contractors regarding price.

Whereas many key building materials are commodities where pricing is more influenced by global demand than by an individual company or industry, labor is more influenced by local supply and demand dynamics so we can typically get more immediate pricing relief.

As part of our ongoing cost initiatives we continue to pursue our own goals around operational excellence and business simplification.

In conjunction with renegotiating with suppliers this program can help bring costs down in the future.

Finally, we are moving quickly to lower those costs directly within our control, namely overhead expenditures.

We have demonstrated a great track record over the past few years and particularly during the past few quarters with regard to controlling SG&A, and we have done so again this quarter, but we can always do more.

With expectations of lower delivery volumes, we have been aggressively reducing overheads, and we will continue to adjust staffing levels to stay in front of changing market conditions as best we can.

In conclusion, we are taking a balanced approach to running our business.

We are not blindly running to a unit delivery number, building specs and sacrificing margin.

We are aggressively pulling back on planned land investment in new land and significantly scaling back the number of any new spec starts.

We remain financially conservative and will look to use our financial strength as a point of business advantage within a tougher competitive landscape.

We all have our theories, but the reality is that no one knows how long this industry retrenchment will take.

We do know, however, is that the long-term trends in terms of demographics, population, economic strength and other factors supporting demand remain positive.

And further, Pulte is well positioned to survive and thrive as we move through this phase of the cycle.

With over five decades of operating history we have navigated these cycles before.

What we have learned is that smart home building companies can be successful and can position the business to accelerate past the broader industry when business conditions improve.

Thank you for your time.

And, now let me turn the call over to Roger Cregg for a breakdown of Pulte's second quarter financial performance.

Roger?

Thank you Richard and good morning everyone.

The second quarter home building net new unit order rate decreased approximately 30% from the second quarter of last year, and in dollars decreased 29% to approximately $3.1 billion, on an increase in the community count of approximately 11% versus the same quarter last year.

Revenues from home settlements for Pulte home building operations increased approximately 5% over the prior year quarter to approximately $3.3 billion.

Higher revenues for the period were driven primarily by a shift in product mix as unit closings were below prior year by approximately 3%.

The average sales price increased approximately 8% versus the prior year quarter to an average of $335,000.

The increase in the average selling price versus prior year is primarily the result of an overall volume-driven shift in product mix and geographical market mix.

In the second quarter, land sales generated approximately $13 million in total revenues, which is a decrease compared with the previous year's quarter of approximately $44 million.

Home building gross profits from home settlements, including home building interest expense for the quarter, decreased approximately 7% to $697 million, or a decrease of approximately $54 million for the quarter.

Second quarter home building gross margins from home settlements as a percentage of revenues were 21.1% compared with 23.8% in the second quarter of 2005.

The decreased margin conversion of approximately 270 basis points versus the prior year quarter is attributed to an unfavorable product and geographical mix, increased selling incentives, higher material and labor and land, and land development costs.

Additionally, home building interest expense, which represents the amortization of capitalized interest, increased during the quarter to approximately $56 million, versus the approximately 41 million in the prior year.

This increase is a result of additional debt incurred in the business year-over-year and contributed to approximately 39 basis points in the decline of the margin versus the previous year quarter.

Also included in the gross margin for the quarter was a charge related to land and community impairments in the amount of approximately $9 million.

The total gross loss from land sales posted for the quarter was a loss of approximately $19 million.

The gross profit contribution from specific land sales transactions were approximately $3 million for the current quarter versus approximately $4 million in the prior year second quarter.

Land sales transactions during the second quarter included single-family custom lot sales, residential parcels, and several commercial land parcels all in line with our local land acquisition and operating strategy.

In addition, we recognize the fair market value adjustment for land being held for disposition in the current quarter in the amount of approximately $22 million, included in the land cost of sales.

Included in this amount was approximately $15 million related to commercial land held for sale with the remaining $7 million related to residential land held for sale.

SG&A cost as a percentage of home sales for the quarter was approximately 8%, improving approximately 44 basis points over the prior year period.

The conversion improvement versus the prior year quarter was the result of increased average selling prices and our internal initiatives focused on controlling costs in the current business environment.

In the other income and expense category for the quarter, the expense of approximately $31 million is primarily the result of the write-off of land deposits and pre acquisition costs of approximately $31 million, associated with land option contracts that we determine not to exercise.

In addition, joint venture losses generated during the quarter of approximately $1 million, along with the amortization of intangible assets and all other miscellaneous income and expenses from the home building operations all offset for the quarter.

To clarify once again, the components of the $62 million of charges included in the second quarter resulting from adjustments to land inventory and land held for sale and the write-off of deposits and pre-acquisition costs are as follows.

Approximately $9 million is included in the home building gross margins, approximately $22 million is included in the home building category of land cost of sales, and approximately $31 million is included in the home building other income and expense category.

Home building pretax income for the second quarter decreased approximately 24% to approximately $381 million, with pretax margins at approximately 11% on total home building revenues.

This decrease in conversion over the prior year quarter of approximately 430 basis points is mainly the result of the lower gross margin conversion land value adjustments offset by improved SG&A leverage improvements.

At the end of the second quarter our home building operations had a backlog of 19,516 homes valued at approximately $6.9 billion, compared to 23,351 homes valued at $7.8 billion as of the prior year quarter.

The second quarter pretax income from Pulte's financial services operations was approximately $15 million, or relatively even compared with the prior year quarter.

Increased revenues from a favorable product mix shift, plus the increase in capture rate were offset by increased operating expenses versus the prior year quarter.

The level of adjustable rate mortgage products originated during the second quarter of 2006 decreased from approximately 48% of the origination dollars funded from our warehouse line in the second quarter of last year to approximately 33% this quarter.

Pulte Mortgages' capture rate for the current quarter was approximately 91%.

Mortgage origination dollars increased in the quarter approximately $193 million, or 11% when compared to the same period last year.

The increase in originations is a result of higher production volume and an increase in the average loan amount.

The other nonoperating pretax loss category for the second quarter of approximately $8 million includes corporate expenses of approximately 10 million offset by the net of interest income and expense of approximately 2 million.

Income from continuing operations from the second quarter decreased approximately 20% to approximately $244 million, or $0.94 per fully diluted share, as compared to approximately 305 million, or $1.16 per diluted share for the same period last year.

Fully diluted shares were approximately 258.9 million shares for the quarter.

On the balance sheet for the second quarter we ended with a cash balance of approximately $104 million.

House and land inventory ended the quarter at approximately $10.7 billion, for an increase from year end 2005 of approximately 1.9 billion.

Of the 1.9 billion increase, approximately 69%, or $1.3 billion, is related to home construction in progress, to include house and land related to house.

The balance of the increase, or approximately $593 million, is related to land acquired, under development, and held future development.

For the second quarter, the Company set total capitalization ratio was approximately 39.4%, and on a net basis was 38.8%.

During the second quarter we completed issuance of senior notes due in 2046 in the amount of $150 million, and increased our short-term borrowings to approximately $615 million.

Interest incurred amounted to $64 million in the second quarter compared to 60 million for the same period last year.

Pulte Homes' shareholder equity for the quarter increased to approximately $6.4 billion, with a return on average shareholder equity for the latest 12 months of approximately 25%; a decrease of approximately 131 basis points versus the same period last year.

Pulte Homes' return on invested capital for the latest 12 months was approximately 17%, a decline of approximately 6 basis points from the same period last year.

During the second quarter, approximately 1,615,000 shares were repurchased for approximately $50 million, for an average of approximately $30.91 per share.

On a year-to-date basis, we repurchased approximately 2,867,000 shares for approximately $97 million at an average price of $33.94 per share.

The Company has approximately $122 million remaining on its current authorization.

Now looking ahead under the SEC Regulation FD guidelines, we're providing the following guidance on our current expectations for the third quarter of 2006.

Unit settlements in the third quarter of 2006 are projected to be approximately 15% below the same period last year, driven primarily by lower order rates experienced in the second quarter as well as the level of cancellations currently being experienced in most of our markets.

Average selling prices for closings in the third quarter are estimated to be approximately 1% above the second quarter of 2006.

This projection is primarily being driven by product and geographical mix for the homes we project to be delivered during the quarter.

Gross margin performance from home settlements as a percentage of sales for the third quarter are anticipated to be approximately 160 basis points below the second quarter of 2006.

The projection driving the lower gross margins for the quarter primarily reflect pricing strategies in generating sales momentum and a volume mix shift as a result of lower volume and higher margin markets.

We are currently projecting no land sale gains or losses for the third quarter.

As mentioned in the past, land gain may vary significantly from period to period based on the timing of land sales.

As a percentage of sales, SG&A is expected to be in the range of 160 to 170 basis points increase over the third quarter of 2005.

This range is based on the projection of lower revenues in the third quarter associated with lower volume levels.

In the home building other income and expense category for the third quarter, we are projecting an expense of approximately $20 to 30 million, reflecting the potential for additional deposit and pre-acquisition write-offs associated with land options.

These write-offs are dependent on our ability to negotiate terms with the land sellers on specific properties identified by our markets, and they may or may not occur accordingly.

Given no material change from the current and short-term projected interest rate environment or a significant shift in consumer mortgage preference pretax income in our financial services operations is expected to be approximately $12 million to $13 million for the third quarter of 2006.

Total other non-operating expenses are projected to be $18 million to $19 million for the third quarter.

We are projecting the effective income tax rate to be approximately 37.1% for the third quarter of 2006.

Third quarter earnings per share from continuing operations are estimated to be in the range of approximately $0.75 to $0.85 per share.

This earnings per share number is calculated based on approximately 258.5 million fully diluted shares.

We are projecting our earnings target for the full year of 2006 earnings per share from continuing operations at between $4.00 and $4.30 per share, based on approximately 259.1 fully diluted shares.

Again, 259.1 million fully diluted shares.

This range anticipates the annual closings of approximately 42,000 to 43,000 homes for 2006.

Gross margins as a percent of home building revenues are projected to be in the range of 20% to 20.5% for the full year.

With that I will now turn the call over to Steve Petruska for more specific comments on operations.

Steve?

Thanks, Roger, and good morning everyone.

We emphasized in some earlier comments operating dynamics continue to change in many of our markets across the country.

In a reversal of trends we experienced for a number of years, we're seeing housing inventories rise while, for a variety of reasons, buyer demand is waning.

Overall conditions are tough and we expect they will likely get more difficult before finding equilibrium.

One of the challenges in this type of environment is adjusting our operations to effectively match up against demand, demand levels that are still a moving target.

As Richard talked about, however, we're taking steps to better adjust our business to the operating conditions we're seeing and expect to see for at least the next few quarters.

Primarily we're slowing down planned land purchases and expect to keep the brakes on these for an extended period of time.

We are essentially eliminating new spec home starts to help alleviate some of the supply pressures, at least within our own communities.

We are in active discussions with our suppliers and trade partners to find ways to lower prices and drive greater efficiency given the weaker demand environment.

Finally, we're maintaining an aggressive approach to matching overhead to expected production volumes.

I've been in the home building business for over 22 years and I have worked through tougher conditions than what the current environment presents.

I'm confident when I say we understand the actions that need to be implemented and I know our field teams are working to adjust our operations appropriately.

So exactly what are we seeing in the markets?

Well, in the second quarter sign-up dollars totalled roughly $3.1 billion, as average sales prices increased approximately 2% at $330,000.

But unit sign-ups were down 30%.

Consistent with trends we saw in the first quarter, gross sign-ups held up better, and they were down about 17%, but our cancellation rate remains high at 28% for the quarter.

This is up from about 15% last year.

Below the national numbers, I'd like to shed some light on what our operators are facing in their respective markets.

Second quarter sign-ups in the northeast were down about 36%.

The issues here are fairly consistent across the markets in that there is plenty of standing home inventory, primarily existing housing stock, and our potential buyers are having a tough time selling their homes.

Buyers and sellers are at a stalemate on price while some percentage of buyers are electing to step out of the market for now on expectations that pricing will get better in the future.

Entitled lots are difficult to come by in this area, however, so it's critical that we avoid the temptation to slash prices and burn through existing land inventory in an effort to drive short-term sales pace.

Rather, we need to remain balanced in our approach.

In the southeast, which captures the Carolinas, Georgia, Tennessee, and into Florida, sign-ups were down 29%.

Outside of Florida, the rest of the markets have held up well and are actually demonstrating some of the strongest demand in the country.

Florida, on the other hand, remains under pressure with high cancellation rates, lots of houses for sale, new and used, and aggressive incentive programs throughout the state.

The Naples, Ft. Myers, and Orlando market have been particularly hard hit in terms of slowing sign-ups and much higher cancellation rates.

It's important to note that we entered 2006 with a very strong backlog position throughout most of Florida.

Given this position we chose not to be as aggressive on price in order to protect that backlog as much as possible.

In terms of operating environments, the Midwest continues to experience the toughest economic conditions with relatively weak employment and population trends.

This is translated into a slowing housing market, although I think our teams are doing a great job given the difficult conditions.

In total, sign-ups for the quarter were down 35% with metro Detroit and Indianapolis seeing further erosion in demand.

We continue to scale back our operations in both markets as the underlying economic issues are not likely to correct themselves quickly.

Sign-ups in our central region were down 23% for the quarter while Dallas and Houston saw some year-over-year weakness in the quarter caused in part by fewer open communities reduced sign-ups for the quarter is more a tale of smaller declines across all markets.

Traffic is about the same.

Cancellation rates are up a little, but it really feels like people are taking just a little longer to make the purchase decision as there's nothing that is creating a sense of urgency.

Finally, out West to varying degrees all the markets are dealing with increased inventory, affordability issues, and with the difficulty of buyers having to sell an existing home.

That just isn't happening as planned.

The result is, the sign-ups for the quarter were down 32% with cancellation rates almost doubling within each of the markets.

Arizona and Nevada have slowed, but in general are still holding up pretty well for Pulte.

The bigger issue right now is California.

Northern California is certainly slower, but the biggest hurdle we have to overcome is last year's close-out of Sun City Lincoln Hills which accounted for 244 sign-ups in the second quarter of last year but only 14 sign-ups in Q2 of this year.

At the other end of the state, southern California remains under pressure as affordability issues and high cancellation rates continue to take a toll on the region.

California goes through these phases given the high price of housing in the state.

As long as the underlying economy and employment remains solid, however, the housing demand should turn around, although it will likely be 2007 before we see any sort of meaningful improvement.

Just a few more pieces of data before turning the call back over to Jim.

We entered the quarter with roughly 326,0 -- we ended the quarter with roughly 326,000 lots under control, which is down about 10% from year end 2005.

As we have discussed, our plans are to slow down our land investment, so you can expect that number of lots under control will trend down over the remainder of 2006.

Phase 1 of this process involves mostly the lots under option because we can more easily walk away from these pieces compared with having to work through our own lot position.

For the second quarter we operated from 722 communities, which is an increase of 11% over the same period.

The Company-wide cancellation rate for the quarter was just over 28%, which is up about 700 basis points from the first quarter and above our historical range of 20% to 25%.

We got a question on our last call regarding the performance of Del Webb communities relative to traditional.

We don't split out the business this way, but we have done some manual analysis on the projects and they do appear to be holding up a little better.

Cancellation rates in the Del Webb communities are about 400 basis points lower than our traditional business.

Of course, it's a smaller part of the pie but does it support the idea of better stability with this buyer.

We will continue to monitor to see if the trends remain same in the coming quarters.

We have already talked about our go-forward strategy with regard to reducing production of spec homes.

We ended the quarter, however, with a higher finished spec count: roughly 1200 homes in total.

This is primarily driven by continued high cancellation rates.

While this count still represents just over one and a half finished specs per community, it's higher than what we want.

We can work through these units over the next few quarters but continuing to throw a lot more new spec starts into the market just doesn't make sense given the current market conditions.

There's enough inventory in the market and we certainly don't need to add to the problem and put more pressure on our own communities.

Frankly, our customers are a lot more apt to buy in a community where home availability is low.

I have spoken to this point many times as I am meeting with our field operators.

Finally, we all recognize that the business is challenging.

However, there are a number of bright spots in our business including the very successful opening of the new Del Webb communities outside of Atlanta, Raleigh, San Antonio, and two large Del Webb communities outside of Phoenix.

The Del Webb brand is not immune to the broader mark issues but the demographic marches on and we enjoyed an unrivaled position of leadership in serving these buyers.

It is in these more difficult market conditions where we will find out which operating models make the most sense and which companies can execute the best.

Given our market and customer diversity, our strong industry position, and an experienced operating team, I think we can differentiate ourselves over the coming quarters.

With that let me turn the call back over to Jim.

Thank you, Steve.

I want to thank everyone for their time and attention on the call this morning.

As is appropriate, we are now prepared to answer your questions.

So that everyone gets a chance, participants will be limited to one question and a follow-up, and after that they will have to get back in the queue.

At this time we'll open the call to questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Your first question will come from the line of Greg Gieber of A.G. Edwards.

Please proceed.

Good morning, guys.

Good morning, Greg.

You gave lower guidance back at the end of May, and now you've lowered it, taken another step down.

Could you just go over what, just how much deterioration you saw in June?

I mean, to take it down again so fast would suggest that you saw things a lot worse in June than you had anticipated even in May.

Yes, Greg this is Roger.

Certainly coming through the second quarter we continued month on month to see deterioration in overall sign-up rates and increases in our cancellation rates.

So as we came out of June, certainly our guidance we gave on June 2nd was understanding what we saw for the first two months of the quarter, then added on that June and a little bit of what we're seeing in July doesn't give us -- didn't give us the confidence to continue to stay with that guidance that we gave on June 2nd.

Okay.

If I could turn briefly to your spec numbers, could you tell us the absolute -- I don't know if you did, I missed it, the absolute number of inventory?

More important, you said you're taking your spec start rate down from 25 to 30%.

What are you now targeting to have a number of spec starts overall, and at some point, when this market stabilizes, do you plan to take that number back up?

Hey, Greg this is Steve.

You've got about four questions in there, so you beat the system.

I would tell that you right now we are -- our spec starts are going to be below 10%.

And the reason why there would be any at all is because of attached product that has longer building cycle time.

If we're selling in a community at a pace of five a month, let's say, which might be down from ten a year ago, but we've got a ten-month building cycle time on an attached product we may start that building, a 40-unit building, when 20 of the homes are sold and have a period of 10 months to sell the other ten homes.

So our spec starts will be down significantly.

Obviously as market conditions improve we always look at our production paces and times and those type of things, but that's not on our agenda for the next few quarters for sure.

And, your next question will come from the line of Carl Reichardt of Wachovia Securities.

Please proceed.

Morning guys.

How are you?

Morning Carl.

Steve, looking back on it for Webb, do you think that the speculator/investor or demand in that particular product was substantially different than what you saw in the core business?

Really, we don't have any specifics on that, Carl, but I would guess that it probably wasn't significantly different.

Different type of speculator in that they were probably more of a holder than a seller, because we don't see the "for sale" signs in those Webb communities as I drive through them anyway.

But our issues today relative to the core business on the cancellation side is more from the consumer that's buying in there having a house to sell that they're trying toe sell in the same environment that we are, and since it's not an immediate need, they'll take the house off the market and cancel their sale with us.

So we attribute most of our rise in cancellation rate in that business to the inventory issues that are out there in general in the marketplace that they're trying to move their home from.

Okay.

And, last quarter you guys -- or maybe it was two quarters -- talked a little about the importance of getting some new Webb communities open to replace like Sun City Lincoln and I think another in Vegas, if I recall, or maybe it was Phoenix.

How has that proceeded, given that it seems that Webb demand overall and certainly lower can rates are indicating that business is a little bit better there, so if your mix shifts that should help.

How has that proceeded so far for the year?

Carl, it's going pretty well.

I highlighted in my prepared comments our activity in Phoenix, Arizona.

We have got two Webb communities that have opened there.

Certainly Carolina Lakes, which we talked about at our investor day, has remained strong.

We've done well in Raleigh.

Opened our first one in Atlanta.

We have another one that's opening up outside of Tennessee this quarter, and on an overall basis they've been going pretty well.

The problem is, is that in Texas certainly the two that we opened there, Dallas, Frisco Lakes, and San Antonio, Hill Country Retreat, but there's just clearly not enough of them to support the the major decline that we had as these communities matured and were selling in excess of 100 a month in Sun City Grand, those type of things.

So the business is good, the teams are doing a great job of getting the stores opened on time, but it's just not enough of them yet to replace the huge ones that we had acquired in 2001 and were at the end their lives.

And your next question will come from the line of Stephen East of S I G. Please proceed.

Good morning, guys.

On the write-offs and write-downs, could you give a little more color as to where they were occurring, how old they were roughly, some of that type thing?

Yes.

Stephen, this is Roger.

Couple of points.

Number one, on the overall deposits and pre-acts that we wrote off the roughly $31 million, that was pretty much spread across the country in most of all of our markets.

We really targeted to look at pulling back from our aggressive positioning in growing the markets to responding to currently where we are, so the list is rather long and lengthy, and not a significant concentration in any particular area.

They were spread throughout the U.S.

Specifically on the land impairments and the community impairments, there's $9 million that I mentioned.

Particularly those two markets of ours, and quite frankly it's in the Minnesota market and our Kansas City market and basically those were bought back in 2002, 2003 time frame.

They really weren't any indication of what we paid for the land.

Was more indicative of, first of all, the overall development costs were much higher than we anticipated in those markets, and so some of that was self-inflicted on the cost side of that, and then again, current market conditions put more pressure on that as well.

So they were mainly concentrated in those two particular market.

We did talk about the $22 million worth of the fair market value adjustments, and that was in the land cost of sales for about 22 million.

We had one large specific commercial project that we have in the Denver market, and that was about $15 million associated with it.

The balance were a number of projects that we've got land for sale and indications of where current market is, we take a look at that against where those indications are and measure them up against what we have for sale and as we see an opportunity there, or not an opportunity, we take a reserve against that.

So that was about 7 million on the residential, and $15 million on the commercial, rounded out to 22 million.

Okay.

As you cut back your land purchase and you look at your cash flow, what do you expect to generate in '06 and '07, and how do you, on a free cash flow basis, and how do you look to allocate that as far as uses?

Well, I look at '06, a major piece is going to be contingent upon the cancellation rates and how that plays back on spec, of course, and also plays because on pricing and incentives and that type of thing of the ability to move that, but given everything we're looking at today, what I know today sitting here in July, not in December, potentially we can generate what I would consider $500 million of free cash flow by the end of this year.

If you look at the timing of our cash flow it's typically all back ended in the end of the fourth quarter quite frankly.

You look at 2007 and certainly not giving a projection on income, but I'll tell you that, again, with keeping a flat to slightly declining overall investment strategy going forward given the market conditions we could see the entire net income potentially next year being free cash flow, and also anything that we would end up in reduction in our overall focus on the inventories themselves would add to that.

Stephen, this is Richard.

Assuming those numbers play out as Roger indicated, we certainly look to allocate that capital more toward the buyback side versus incremental land investment in this environment.

We think that's the best use.

Gentlemen, your next question will come from the line of Ivy Zelman of Credit Suisse.

Please proceed.

Good morning.

Can you guys with the first question repeat, I guess, pertaining to your scaling back your staffing.

With respect to the magnitude of it.

I understand Reggie, if I'm accurate, has left.

Can you talk about some of the senior departures?

Secondly, realizing the cycle has taken everyone on the downside a lot faster and more serious than they thought, I guess, Richard, given your strategy, with geographic diversification and product diversification, is there anything you would have done differently had you known it was going to come down so fast and thinking now in hindsight?

Ivy, two questions.

On the staffing, Reggie is the only senior person that's left the Company recently.

In terms of looking at the market and how quickly it's happened, I think in hindsight we probably would have pulled back on the land and the spec side a little bit faster, it's hard to know exactly what the market is going to do.

Absent that, the long-term core strategy of the Company, particularly the diversification, or segment diversification, focus on quality, all the core strategies, simplification, Steve mentioned that, we would continue with all of those.

The pace of our investment level on the land side, and then spec over the last few months, we probably would have pulled back sooner had we seen it coming.

Great.

Thank you.

Your next question is from the line of Margaret Whelan of UBS.

Please proceed.

Good morning, guys.

Good morning, Margaret.

Two questions.

First one I guess is, I think, Roger, you said of the 62 million, 31 million was for option deposits and pre-acquisition costs that you walked away from.

Is that right?

That's correct.

What percent is that of your total ops and deposits pre-acs on your balance sheet as of the second quarter?

We'll calculate that real quick here Margaret.

Bear with us.

I guess the option deposit's around 450, 500, something like that?

You've got two things in there.

You've got the pre-acquisition costs, on top of deposits, so I would say probably roughly in the 5% to 7% range overall.

So 5 to 7% of your 13.6 billion in assets is potentially at risk.

Is that the best way to think about?

Yes, we basically -- with that $31 million, we took out roughly about 35,000 lots, and that was purchase price of land close to $1.6 billion.

Now, that land wasn't going to be all purchased this year --

---at the same time, yes.

---it would have been over a number of years.

And that doesn't also speak to the peak level of investment because you have to add development dollars to that as well.

I'm just trying to get a sense for the risk to your asset value.

Could you repeat that please?

I'm trying to get a sense of the risk to your book value.

Assuming you walk away from 100% of your deposits and all of the pre-ac costs, what's that total dollar number?

Again, we talk about $500 million, roughly, give or take in any particular quarter in what our---what we say is our pre-ac dollars.

I'll tell you again.

We're not shutting down our business.

A lot of those are what we're working on today.

There's a number of them out there in years in front of us that we're going to continue to build X number of homes over any given year, so I would tell you that writing off that level of $500 million, roughly, whatever period is not something that is highly probable.

Again, I think indicative of what we see here, what I talked about in the guidance for the third quarter, things were looking out over time.

Certainly market conditions will always change that, but, up, again, we don't think it's going to zero.

Your next question will come from the line of Larry Horrand, Independent Analyst.

Please proceed.

Hi, wanted to ask you quickly about the smaller privately financed builders, those who don't have access to the capital markets.

Are you seeing any trends in them that might lead to you believe that there might be some opportunities to deploy some capital and get some deals?

Larry this is Richard.

I think it's safe to say that everyone's experiencing the declines.

What we've noted in our markets is that the A land positions, the best located pieces, particularly in segments that are underserved, are performing the best.

Having said that I would suspect it's a little too early to say if there would be opportunities in this environment for any M&A, if that's where you're headed with your question.

Well, that or people deciding to exit the business, basically under pressure of their banks.

Obviously this is in the news on a daily basis.

And so -- I'm wondering if you might have reduced competition next year because the trends amongst the private -- those who don't have access to public capital.

We continue to believe that the big builders and strategic financial advantages, diversification and financial strength will play out and we'll end up with a larger share and percentage of the market.

I just think it's going to take a little time for that to manifest itself but wouldn't disagree necessarily with your thesis.

Okay.

Thank you.

Your next question is from the line of Stephen Kim of Citigroup.

Please proceed.

Thanks guys.

Got a couple of questions on the guidance which I thought I heard.

I wanted to go over the volume numbers and the S G -- I'm sorry, pricing numbers.

You said you thought pricing would be up in the third quarter up 1% year-over-year.

Is that right?

I believe I said 1% over the second quarter.

Big difference.

That solves that problem.

The second thing was, your overall outlook for closings this year, I think you indicated it was somewhere in the 42,000 to 43,000 mark, and you pretty much gave us what you thought the third quarter was going to be.

In order to reach that kind of a number of 42,000 to 43,000, it looks like you're either assuming you're going to have a conversion ratio that is quite massive well into the 70% range in the fourth quarter, or it looks as if you are anticipating that your orders in the third quarter are not going to be down nearly as much as they were this quarter.

Could you give us a sense for sort of what your expectations are for those two components?

Yes, I would tell you you're absolute am correct on the conversion rate.

If you look at what Steve had mentioned about the number of homes we've got, basically in backlog and under construction today, our expectation is to deliver those.

I think we talked about earlier this year about the number of new communities that we're opening on the back end, specifically some of the Del Webb projects that we opened late last year, early this year, we've got backlog being delivered in the fourth quarter.

So, you're right on the conversion rate being higher in the fourth quarter.

That's really coming out of backlog.

We're not giving projections on the overall order rates but I would tell you we didn't expect a huge uptick in the order rate in the fourth quarter given what we've seen in lowering guidance, so I think that's indicative of that.

For the full year the 42,000 to 43,000 units I would recommend guidance looking at that on the low end.

And again we're going to have to experience that as we move forward in the third quarter and into the fourth quarter as well, so that's about it.

Okay.

Great.

Thanks.

And your next question will come from Michael Rehaut of J.P. Morgan.

Please proceed.

Hi, good morning.

First question is on the active adult, and I appreciate some of the detail there with the lower can rates relative to the Company, but as you look at the new openings and traffic overall, I was wondering if you could give us some color, if you can, on traffic relative to the rest of the business, if that is also an indication that perhaps this is a segment that still retains some of the more attractive demographic exposure.

Yes, certainly, Mike.

Traffic overall, we do a really good job about kind of generating our own traffic for these openings.

We feather our nest essentially for a period of anywhere from 6 to 12 months prior to the opening.

So when we do open the communities we've seen tremendous response, but I would tell that you that's just because we've done a heck of a good job of getting those people so excited to come out there and see it.

As the community remains open, we're seeing traffic levels on a day to day, week to week basis that aren't truly that much different from what we would see in a similarly sized nonactive adult community.

So the buyer demographic that's shopping it isn't--- has any more propensity, I guess, to come out during certain times of the year than the normal buyer.

So, it's truly a demographic that we think is a little bit better.

It's holding up a little bit better for us during these softer times.

But as we pointed out in our comments, they're not immune to the current situation.

Their problems are just different.

Their problems are being driven around not a lack of desire to buy, but a -- kind of a lack of an ability to get their equity out of their existing home, and that's being caused by the inventory that's in the market where they currently are.

Great.

I appreciate the color there.

Second question is on SG&A.

You had nice leverage this quarter, but then you talked about the third quarter switching back, and you'd be nicely up year-over-year.

I was wondering if you could give some detail in terms of either on a dollars or basis point perspective, what you expect some of the actions that you're taking right now on the overhead side, that might flow through over the next two to four quarters.

Mike this is Roger.

We're not -- we're not giving guidance on specific line items over the time period.

I would tell you that, again, it's reflective in the guidance of what the improvements are.

I would also tell that you, again, when you start to look at the overall conversion ratio on the SG&A it's going to be indicative of the volume certainly.

So if the volume continues to erode over time, we're chasing the SG&A as a percentage.

Certainly from a dollar standpoint we're continuing to drive that, and I think you see that in the numbers overall, that our initiatives are paying off.

Again, it's based on expectation of what's going on in each one of those local markets.

That's all the color I could give on that.

And your next question is from the line of Rob Stevenson of Morgan Stanley.

Good morning, guys. [overlapping speakers] incentives in the second quarter as a percentage of selling price?

What was the questioning again?

I'm sorry.

Incentives as a percentage of revenues or selling price?

Where was it during the second quarter?

Well, this is now not reflected in the second quarter financials, but we're running roughly -- Steve had mentioned before between 3% and 8%.

It is very local.

It's by community.

It's sometimes by house, but on average it's in that range.

It's probably running now towards the higher end of that, as we certainly is have more spec homes because of the cancellation rate, but again, it's specific by market.

Some would be outside of that range, and some would be very much inside the range at the low end.

It just depends on the market and the community.

Okay.

The follow-up question is, what is the sort of minimum hurdle rate that you guys are looking at these days in terms of land purchases?

We have an underwriting criteria of 21%, so we're basically still staying with that.

That has not changed.

We certainly spend more time on the sensitivity analysis but I'll tell you today we're spending less time on the land acquisition side than we had in the past.

Just indicative of our overall approach of pulling back.

More of it is being spent at looking at the options that we have in front of us and negotiating terms and price on those to go forward.

Have you seen increase in land deals coming to you these days?

On an overall basis, Rob, yes, I mean, it's funny.

A lot of the deals that we've actually punted in the last, let's say, 90 days boomeranged back to us with a much better pricing.

Still difficult to make them pencil in today's environment, so it's not like it's anything that we're picking back up, but as Richard has pointed out on many occasions, this country is still very constrained from a land supply basis, and to the extent that the owners are patient individuals that are fairly well capitalized, there's no need for them to put the land back out on the market today and not get the return that they want to get.

They'll just hold on to it, and we're seeing that probably more than what we're seeing that's just deals coming back to us.

Rob, one other clarification.

We are rerunning our financial hurdles on every land deal.

Even if it had been previously approved prior to taking it down to make sure in this environment it still pencils, and in some cases they're not.

So, that's part of the pre-ac and option deposit write-offs.

Thank you.

Your next question, from the line of Kenneth Zener of Merrill Lynch.

Hello.

You guys mentioned your finished spec count of about 1200 units.

What is your guys' total inventory, backlog and unsold homes in total?

Okay.

I may answer the question a little differently by saying that we have 22,500 units under construction, and as Steve had mentioned, the final spec position was about 1200.

The total specs are about 9,000.

Okay.

Thank you.

And following up on -- you guys have the equity exposure, you guys have about 7% of your equity tied up in option deposit.

I think investors are more concerned about is the write-down of land that's on your balance sheet that's occurred in the second quarter so I have two parts.

First, what is the accounting treatment when land is moved from -- to held for sale as opposed to inventory that triggered any of the loss?

And second what comfort can you give that further liabilities don't exist?

This is Roger.

First of all, we constantly monitor this as we run our business month in and month out, looking at what that valuation is.

So, we're constantly looking at each project.

There's a criteria that you would look at when you look for impairments of property that you own and communities that you're running with today.

Indicative of that would be lower negative margins, slow absorption rate, significantly noticeable decreases in the market value of the product, which would be significantly excessive discounts, and certainly what we talked about were the ones we wrote off were cost overruns.

So more inflicted versus buying land that had been excessively higher than what the current market is and not being able to make a profit from it.

So from that perspective we've constantly watched that.

We don't see that as an issue, as a significant issue for us, as having to write off $8 billion worth of land, for instance, because the value is not there, or half of that.

So again we don't see that as a significant risk.

Certainly market conditions change all the time, but that's what we're looking for today is to understand exactly where that's going, but the ones we had were not indicative of significant cost differences from market at that point, other than the self infliction of really development dollars there----

Accounting treatment?

Yes, Ken, I would also give you the comfort to know that it is a routine quarterly work process to review underperforming communities, and impairments are generally the exception rather than the norm.

As Roger mentioned, there are clear signals that would signal an impairment opportunity or something that we've put under an impairment test that would trigger impairment, and Roger went through those.

And we really follow the guidance of FAS 144 in calculating the approach and the dollars related to that impairment reserve.

Your next question is from the line of Dan Oppenheim of Banc of America Securities.

Please proceed.

Thanks very much.

I was wondering on the Dell Webb side, you talked about the lower cancellation rate.

Can you actually give us a sense of what the net orders would be relative to the overall net orders?

Dan I didn't actually break out that specific number.

I think we said last year we were running at about 39% of our business was geared toward the active adult buyer.

That hasn't changed significantly this year, so if you look at the overall business, probably some variation in there based on the new communities and the old ones closing out that we're absorbing a little faster.

Dan, this is Jim.

One of the issues we run into, because the stores are so large, and they're dropping off the one end and coming on at the other end, so we'll see if we can come up with some more data, but most of the questions we had gotten were really around the can rate.

Okay.

Then there's also a comment earlier on about Arizona and Nevada faring relatively well.

Was wondering how that is, what you're seeing in terms of this market here in July.

Yes, Dan.

Our policy is not to talk about July, so while we can't give any specific comments on the month of July and the third quarter at this point.

Your next question is from the line of Steve Fockens of Lehman Brothers.

Hey, good morning guys.

Quick questions on the privates and how they're acting in your markets.

To what extent do you see private builders offering incentives, price cuts, that sort of thing, relative to what your public competitors are doing, and what are you seeing from privates in terms of the land buy side?

Steve -- I'll take this question.

Steve Petruska.

What our operators are telling us, pretty much all builders are behaving the same in the marketplaces, especially where they have speculative inventory.

And everybody is getting speculative inventory rate because the cancellation rate, city-wide, pick your city, right, are about the same.

So, I would tell you what we're seeing on a day-to-day operational basis from the privates versus the publics is about the same as what we're going through.

They're discounting where they need to, to move inventory, and they're being prudent with their business.

I don't think they're getting overly aggressive on the dirt sales out front.

They tend to be a little bit more patient there.

As it pertains to land sales to private currently nothing that we kind of floated out there under land for sale has been bid on by the privates, so I would think that they're not really in a buying mood in particular any more than any of us.

And as a quick follow-up to that, what is the---what can you tell from your markets is the appetite of local lenders to extend favorable terms to privates or, frankly, anybody to actually go out there and continue to acquire land?

Yes, Steven, this is Roger.

The things I've heard out there, there's still a lot of money available, there's a lot of different funds that are now out there looking to be part of that, so I would tell you recently as June being out on the West coast, at the PCBC and having an opportunity with private players, that there are still a lot of opportunities to get funding out there versus the traditional commercial banks.

Thanks.

And your next question is from the line of Tim Jones of Wassermann & Associates.

Please proceed.

Good morning.

Good morning.

Two questions.

First of all, on your 9,000 specs, I trust that starts at slabs all the way to finished, that's 40% of the 22,500, and you said it was 25.

What is the difference?

We said historically it was 25 to 35.

The difference is being caused by the cancellation rate.

Understandable.

And secondly, most of your competitors who have reported have indicated that the vast majority of their write-offs on options were in the state of California like almost 80%, and yet you indicated that yours is pretty much spread around the country.

Could you tell me what have you done differently in your land buying in California to have -- that resulted in this more even distribution?

I'm not sure how we would exactly know what our competitors did but I will point out that our land inventory in California is significantly less than some of our major competitors.

That's probably the big difference.

Newer or older?

I'm sorry?

Say again.

Has it been bought longer time ago, or is it bought recently, or not?

It's been bought over the last several years.

Land entitlement process in California is so long, it's been bought over the last several years.

I think the major difference, as a percentage of our total assets we have quite a distribution and not so much weighted in California.

That probably accounts for the --

---can you give me the percentage of your assets in California?

I don't have that handy, Tim.

Tim, we've put out a map as part of our February investor conference, which will give you some sort of a reference point, so I'll make sure I send a copy of that to you.

Your next question is from the line of Jim Wilson of JMP Securities.

Thanks.

Most of my questions have been asked, but I was going to talk about the supply chain and if you could give a little update on how things are progressing with your vertical integration throughout the Southwest.

I know there's some cost issues up-front, but wanted to see what any current thoughts on how you're managing that, what the opportunities are and any other strategic directions you might take over the next 12 months.

Jim this is Steve.

I'll tell you, it's going very, very well.

Very happy with the way that both the vertical integration of Pratt, which is now Pulte building systems, has gone, as well as how our supply chain initiatives are going.

I would tell you that in the current environment, to be able to offer a home with a higher level of specifications, in a competitive environment is just a better place to be, and we've got operators around the country that are in various stages of integration of our higher spec model that limits options, and they couldn't be happier, quite frankly, based on the way their sales are going.

And any strategic direction, further integration, other markets you're going to roll this out to?

What are your thoughts at this point?

On the vertical integrations, too early to talk about what we might do next.

We had our hands full in both Arizona and Nevada.

But as it pertains to continued deployment of supply chain opportunities, I think we've been telling you for the last two or three years, that's an ongoing process, and as we kind of talk about it even with our operators, it's not a hump, it's a hill, and we're going to be on that hill for the next several years.

And your next question is from the line of Susan Berliner of Bear Stearns.

Hi.

Good morning.

Just a question on debt levels.

I guess if you can tell me what you're going to do with your outstandings on your bank line.

And I know you said you're going to use the majority of your free cash flow for the remainder of '06 and '09 to do share repurchases.

If you can just remind me of your target debt to cap levels and what you have communicated to the rating agencies.

Yes,Sue, this is Roger.

It's been stated year after year our debt to cap goal is 40%, and I would tell you you can see that demonstrated over the number of years, so that's been our commitment.

And that's been committed to the rating agencies as well, so again, that's just something we've been out there for a long time with.

We talked about free cash flow this year.

That would be basically paying off that debt, so I would be looking at the end of the year to be roughly about $3.5 billion roughly in debt.

That's going to be dependent again on the spec inventory level cancellations that.

Could push back on that a little bit.

Indicatively speaking, that probably put us in the mid 30's range, plus or minus on that depending on, again, the level of cancellations of the spec backup and to the finished house inventory.

Okay.

So that means you're also committed to your current debt ratings.

Absolutely.

Great.

Thank you very much.

And your next question is from Alex Barron of JMP Securities.

Great.

Thank you.

Wanted to ask you about your land investment this year versus last year.

Can you talk about how much dollars you guys are buying and putting into land this year versus last year and maybe also number of lots?

Well, we don't really look at so much the lots that we're buying.

That's not something that's really driving us.

It it's more the investment level of what we're putting into the overall inventories.

So from a dollar perspective, last year basically in land coming from '04 to '05 we put it roughly about $1.2 billion in land overall, and this year we're probably looking at---wind up the end of the year roughly around $10 billion, plus or minus, again with the overall view of what happens to the house inventory, so that would be roughly increase year-over-year of close to a billion, 1.5 billion roughly year on year.

Most of that is more in the development this year than it has been in the past.

Again, we've talked about the large communities that we're bringing on, the ones that we rolled off last year and earlier this year.

So more of the dollars from a land perspective are not going into the pure purchase of new ground but are going into the land development side.

That's really indicative of what we're driving here this year.

And, again, as we talked about earlier we're slowing down the overall focus on new land acquisition but still developing the projects that we have on the slate for today.

Alex, just a comment on total lots just to reiterate we had about 362,000 lots as of the end of last year under control.

That's now down to 326.

As Steve indicated, we expect that to trend lower through the year, kind of indicative of our new land purchase philosophy.

I was going to ask what is your goal for the end of the year in terms of lots and owned and optioned percentages?

Again, we're not targeting -- we really manage this from a cash flow perspective, invested capital, which is dollar driven, not lot driven.

So again, our view is from the dollars, not so much from the lots.

The lots wind up to be a derivative of what each project is, so the lots aren't specifically a goal, but the overall invested capital level is and that's what I spoke to at the overall inventory levels.

And your next question is from the line of Gabriel Kim of Basswood Partners.

Hello.

So, I heard what you had to say about closing price guidance for third quarter but my question really is absent mix shifts what is happening to home prices on an apples to apples basis in some of your larger states, and in your opinion, this is the second part, in your opinion based on what you're seeing on the ground is there any reason why you would expect new home prices should be declining more than existing home prices?

Thank you.

On an apples to apples basis, it's -- that's a really hard thing to do, but on a per square foot basis, our average sales prices are probably dropping slightly, but not dramatically, like would you think, and our mix is what's causing the overall sales price to move up.

And, no, I would not think that new home prices would to have drop dramatically relative to resale prices but again it's supply and demand that's in play here, and it's most times an individual seller or even an investor has one or two properties only has a few to sell, and it's based on how much inventory might be out there in the market on the new home side that might drive a steeper decline in the average sales price in new homes.

But historically, that hasn't been the case unless the inventory buildup has been dramatic, and it's not dramatic right now it's just higher than what it was.

And your next question is from Rick Murray of Raymond James.

Good morning, guys.

Hi Rick.

First question is, what percentage of your optioned deals contain specific performance clauses or other similar types of provisions?

Yes, Rick, very few.

We typically don't put those in our options because just like not doing a lot of joint ventures, there are things in there that would indicate that it it's not particularly an option at that point, and it becomes a liability, so if they were in there they would not be an option.

And pretty much we make sure that we write those, that they don't have those type of contingencies in them.

Okay.

Great.

And the other question I had was a follow-up on a previous question with regard to the spec starts.

How many specs did you start in the quarter, and what was the number a year ago?

He's looking that up.

Let's see here.

I don't think I have it for the quarter.

I don't have that level.

Rick, we can try to track it down and get back to you.

If I could sneak one more quick one in since you couldn't answer that one, [laughter] what was the the -- what caused the JV income to generate a loss this quarter?

Yes, basically we had had two large JVs.

Last year, if you recall, one was the Pratt project in the Southwest that we talked about that we acquired that joint venture in January of this year, so that moved it from the the other income category to the -- up to the gross margin category.

Because we own it as part of our cost of sales.

So that eliminated on that line and picked up on the line above.

The other was another project that we had out West in Las Vegas, where land was being sold out of the joint venture and we had the income on that.

Last year we got roughly 10 to 11 million in income that doesn't exist this year.

So if you look at those two items alone, that was roughly about $20 million between the two in the second quarter of last year, and, again, the Pratt moved up into the gross margin line, and quite frankly that was reflected in that line for the quarter, and basically represented roughly about a pick up year-on-year of 44 basis points in the margin.

And your last question is a follow-up from Stephen Kim of Citigroup.

Hi.

Yes, I had a question regarding your SG&A.

I wanted to follow up on that again, sort of following up on Mike's question.

We do analysis where we sort of -- we make an assumption that a certain percent of your SG&A is fixed, then try to impute what your total SG&A would be given your revenue assumptions.

And I'm very surprised at the guidance you've given us, like I think 160 to 170 basis points.

It just seems like there's something unusual or one-time in that number here for the third quarter.

And I was wondering if you could comment on whether that was the case, just to give you a sense of what I'm looking at hear in the third quarter, I mean, it looks to me like the differential between what I would have expected and what you're estimating is almost 130 basis points.

Well Steve, I think we build from the the bottom up, and, you could always take it as a percent of revenue, but you have to be careful about the number of units that are falling out of there again.

So you look at dollars.

You can take a ratio, and that's why I said the conversion ratio will be different based on the volume delivered, and that is based on what is being sold and the communities that we have open, not indicative of what you're closing.

So the sales activity is separate from your closing activity.

So I think that type of analysis probably, if things were running the same all the time, may be warranted, but with a declining units closing number relative to the activity that we still have, number of communities and the operations going on, I think would you see a divergence of a little bit of difference in there than the traditional analysis you might do there.

Steve, this is Richard.

I would also tell you don't mistake that for any lack of effort of on our part to do our best on SG&A.

We're pretty proud of what we've accomplished in that area, one of the bright spots in this environment, and we're going to continue to be extremely diligent on that.

So wanted to add that comment.

And, gentlemen, you have no further questions at this time.

I would like to turn the call over to you for closing remarks.

Thank you, Operator.

Want to thank everybody for your time this morning.

We'll be around over the remainder of the day to answer any follow-up questions.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes your presentation, and you may now disconnect.

Have a wonderful day.