普爾特房屋 (PHM) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pulte Homes second quarter 2007 earnings conference call.

My name is Olnika and I'll be your operator for today.

At this time, all participants are in listen-only mode.

We will conduct a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded for replay purposes.

At this time, I would now like to turn the call over to Mr.

Calvin Boyd, Vice President of Investor and Corporate Communications.

Please proceed, sir.

Thank you, Olnika.

Good morning and thank you for joining us to discuss Pulte Homes financial results for the three and six months ended June 30, 2007.

My name is Calvin Boyd, Vice President of Investor and Corporate Communications.

You've all had a chance to review the press release we issued last night detailing Pulte's second quarter 2007 operating and financial performance.

On the call to discuss these results are Richard Dugas, President and Chief Executive Officer, Steve Petruska, Executive Vice President and Chief Operating Officer, Roger Cregg, Executive Vice President and CFO, and Vinny Frees, Vice President and Controller.

For those of you who have access to the Internet, a slide presentation available at www.pulte.com will accompany this discussion.

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

As with prior conference calls I would alert to 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 statements 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 from those discussed today.

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

Participants in today's calls are referred to Pulte's annual report on Form 10-K for the year ended December 31, 2006 for a detailed list of the risk and uncertainties associated with the business.

As always at the end of our prepared comments we will have time for Q&A.

We will wait until then before opening the queue for potential questioners.

Let me now turn over the call over to Richard Dugas for a few opening comments.

Richard?

Thank you, Calvin, and good morning everyone.

As we announced in our preliminary release last week, the second quarter of 2007 was another challenging operating period.

Among several key industry indicators, the combination of rising new and existing home inventory, competitive pricing pressures, elevated cancellation rates and subprime lending woes continue to shake consumer confidence and lower housing demand.

In addition, impairments in land-related charges continue to have a major impact on operating performance for all major homebuilders.

In fact, Pultes' net loss for the second quarter 2007 was largely the result of impairments, land-related charges and a restructuring charge recorded during the period.

The sizable charge taken was a direct result of the weaker second quarter housing environment and most specifically reduced pricing necessary to sell homes.

Roger will discuss more about these charges during his prepared comments.

With the continuation of these difficult market conditions, our efforts in the second quarter focused on maintaining a healthy balance sheet through managing our land and house inventory and significantly lowering SG&A levels.

I'll take a moment to highlight these efforts.

During our first quarter 2007 earnings call, we stated that we were not getting enough overhead leverage from our core business.

On May 29th we announced a restructuring plan designed to reduce costs and improve operating efficiencies.

These steps, although difficult, were necessary as part of our overall strategy and operating in this challenging environment.

We adjusted SG&A costs dramatically in preparation for a lengthy downturn and took an appropriate charge during the second quarter.

We are pleased with our progress on SG&A and the benefits of this move will be evident in future quarters.

Our immediate goal during this downturn was and is to return our core operations to profitability and as you can see from our press release, we are projecting a modest operating profit in the third quarter, excluding any additional impairments and land related charges.

Roger will have more detail in a moment but this guidance includes 7200 plus closings expected in third quarter along with expected SG&A savings.

Also during the second quarter, we lowered pricing in most of our markets in order though move inventory.

While we still feel that a balanced blend of price and pace is the right way to drive the best results possible, it was increasingly difficult to move inventory during the quarter without price concessions.

During the quarter we once again focused on reducing our spec inventory levels and we were successful in lowering both finished spec levels and total spec levels.

For the foreseeable future we will stick with our tactic of further reducing finished spec inventory by selling these units at a market clearing price and, of course, not starting excess new spec inventory.

Also for the quarter, our total ops on our control continued to decline.

Steve will have more detail on these and other operating metrics during his prepared remarks.

Now allow me to take a few comments about our goals for the second half 2007.

First, we will continue our focus on presales which ultimately close at a better margin versus selling spec units at lower margins.

We modestly grew our backlog in the second quarter and will continue our sales focus in an attempt to keep well ahead of our closings.

We will also begin to realize the benefits of our second quarter restructuring efforts with a leaner overhead structure going into the balance of the year.

Assuming the housing market does not take yet another big step down from here, both of these tactics should help drive better operating results for the last half of 2007.

From a balance sheet perspective, we will continue our efforts to drive down house inventory and curve all unnecessary land spending all in an effort to generate cash.

In this environment, our focus on cash generation to remain flexible is paramount.

The current operating environment continues to be challenging and many industry participants have stopped trying to guess at the timing of a sustainable market recovery.

Regardless of when it occurs, it is imperative that we maintain both our short-term and long-term strategy to navigate through this difficult market and achieve the most consistent results possible over the long-term.

Our short-term tactics remain focused on maintaining a healthy balance sheet through managing land and house inventory levels, keeping SG&A costs down and selling as many homes as we can, all in an effort to generate operating profits.

Although this industry downturn has now been with us for 18 months and has been severe, the long-term aspects of the business are still positive and ultimately will drive housing again.

Demographic trends, household formations, population growth and other factors still paint a bright outlook for the long-term in housing.

Count on Pulte to not lose sight of these long-term facts while we navigate the rough waters of today.

Thank you.

And now let me turn the call over to Roger Cregg.

Roger?

Thank you, Richard, and good morning, everyone.

The second quarter homebuilding net new unit order rate decreased approximately 20% from the second quarter last year, and in dollars, decreased 22% to approximately $2.4 billion on 3% less communities versus the same quarter last year.

Revenues from home settlements for the homebuilding operations decreased approximately 42% from the prior year quarter to approximately $1.9 billion.

Lower revenues for the period were driven primarily by lower unit closings that were below prior year by approximately 40%.

The average sales price decreased 4% versus the prior year quarter to an average of $320,000 per home.

In the second quarter, land sales generated approximately $92 million in total revenues which is an increase versus the previous year's quarter of approximately $79 million.

Homebuilding gross profits from home settlements including homebuilding interest expense for the quarter decreased approximately 151% to a loss of approximately $353 million.

Second quarter homebuilding gross margins from home settlements as a percent of revenues was a minus 18.6% compared with 21.1% in the second quarter of 2006.

The decreased margin conversion versus the prior year quarter is attributed to land and community valuation adjustments and increased selling incentives.

Adjusting the current quarter for land and community valuation charges, the gross margins from home settlements as a percent of revenue was at a run rate of approximately 13.1% for the quarter.

The second quarter benefited from the impact of prior quarters, land and community valuation adjustments, by approximately 80 basis points, or $15 million.

Additionally, homebuilding interest expense increased during the quarter to approximately $96 million versus approximately $56 million in the prior year.

Included in the interest expense of the $96 million is an additional $42 million of expense related to the land and community valuation adjustments taken in the current quarter.

Also included in the gross margin for the quarter was a charge related to land and community valuation adjustments in the amount of approximately $561 million.

For the second quarter, we tested approximately 212 communities for potential impairment and valuation adjustments.

We recorded valuation adjustments on approximately 139 communities for the second quarter.

The total gross loss from land sales posted for the quarter was approximately $27 million.

The loss is mainly attributed to the fair market value adjustment in the current quarter for land being held for disposition in the amount of approximately $34 million which is included in the land cost of sales.

The gross profit contribution from specific land sales transactions were approximately $7 million for the current quarter.

Land sales transactions during the quarter included single-family custom lot sales, residential and commercial land parcels.

SG&A expenses as a percent of home sales for the quarter was approximately 15.5%, an increase of approximately 750 basis points over the prior-year quarter.

SG&A for the current quarter included a restructuring charge related to our announced overhead reduction initiatives of approximately $31 million.

Additionally, the quarter also included an insurance reserve-related charge of approximately $29 million, associated with the development of several general liability product claims.

These additional charges in the second quarter represented approximately 315 basis points in conversion.

In the other income and expense category for the quarter, the expense of approximately 129, excuse me, $128 million is primarily the result of the write-off of land deposits and preacquisition costs of approximately $58 million associated with land option contracts that we determined not to exercise.

Additionally, evaluation adjustment of approximately $54 million related to certain investments in unconsolidated joint ventures, and restructuring charges of approximately $8 million associated with our overhead reduction initiatives, representing lease exit costs and fixed asset write-offs.

For a recap of the components of the $749 million in impairment and land-related charges for the second quarter, we have included in the webcast a slide breaking out the charges by the categories I discussed and by reporting segment.

Additionally in the second quarter, we dropped land options representing approximately 20,000 lots with a purchase price value of approximately $768 million.

The homebuilding pre-tax loss for the second quarter of approximately $803 million resulted in a pre-tax margin of approximately a negative 42% on total homebuilding revenues.

Excluding the charges related to the valuation adjustment and land inventory and investments, land held for sale, the write-off of land deposits, and preacquisition costs, and the restructuring charges, homebuilding pre-tax margins converted at approximately a negative seven-tenths of 1% for the current quarter.

At the end of the second quarter our homebuilding operations had a backlog of 14,928 homes, valued at approximately $5.2 billion compared to 19,516 homes valued at $6.9 billion as of the prior-year quarter.

The second quarter pre-tax income from Pulte's Financial Services operations was approximately $7 million, or a decrease compared with the prior-year quarter of approximately $8 million.

The decrease during the second quarter is mainly attributed to lower revenues from decreased volumes offsetting a favorable product mix shift to higher profit loans and an increase in the capture rate.

The level of adjustable rate mortgage products originated during the second quarter of 2007 decreased from approximately 33% of origination dollars funded from a warehouse line in the second quarter of the previous year to approximately 9% this quarter.

Pulte Mortgage's capture rate for the current quarter was approximately 93%.

Mortgage origination dollars decreased in the quarter approximately $846 million, or 42% when compared to the same period last year.

The decrease is related to the overall volume decrease in the homebuilding closing activity for the quarter.

In an analysis of our loans closed for the second quarter, based on dollars, we estimate that approximately 4% of the loans with an average FICO score of 589 fell into the subprime category.

Additionally, 80% fell into the prime category with an average FICO score of 745, and the remaining 16% in the category of Alt-A product with an average FICO score of 748.

Overall, the average FICO score of our loans closed for the period was 739 with 83% of the loans averaging a FICO score greater than or equal to 681.

This is consistent with our analysis performed during the first quarter of this year and continues to highlight that our buyer profile remains relatively the same.

In the other nonoperating category pre-tax loss for the second quarter, approximately $10 million includes corporate expenses of approximately $9 million, and corporate net interest expense of approximately $1 million.

The net loss for the second quarter was approximately $508 million or a loss of $2.01 per share as compared to net income of approximately $243 million, or $0.94 per diluted share for the same period last year.

The number of shares using the EPS calculation was approximately 252.1 million shares for the quarter.

A review of the balance sheet for the second quarter shows we ended with a cash balance of approximately $75 million.

House and land inventory ended the quarter at approximately $9.1 billion.

Excluding the inventory adjustments for the second quarter, total inventory increased approximately $270 million.

House inventory, excluding land, for the quarter increased approximately $280 million related to the seasonal increase in home construction in progress.

Land inventory during the second quarter remained relatively flat with the first quarter as rolling lot option take-down, land development and land relief offset.

For the second quarter, the Company's gross debt to total capitalization ratio was approximately 37.9% and on a net basis, 37.5% with $173 million in short-term debt outstanding on a revolving credit facility.

Interest incurred amounted to approximately $62 million in the second quarter compared to $64 million for the same period last year.

Pulte Homes' shareholder equity for the second quarter was approximately $6 billion.

We repurchased approximately $61 million of senior unsecured notes on the open market during the quarter, slightly below par for a gain of approximately $500,000.

We repurchased no shares during the second quarter, and the Company has approximately $102 million remaining on its current authorization.

Now, looking ahead, and under the SEC Regulation FD guidelines, we provide the following guidance on our current expectations for the third quarter of 2007.

Third quarter earnings per share are estimated to be in the range of approximately $0.10 to $0.20 per diluted share.

This range does not include the third quarter potential for additional land valuation adjustments and option deposit and land preacquisition cost charges.

Although we may incur additional write-offs, it is uncertain at this time as to the estimate of the amounts.

This earnings per share number is calculated based on approximately 258 million fully diluted shares.

Unit settlements in the third quarter of 2007 are projected to be approximately 21 to 26% above the second quarter of 2007 deliveries.

Average selling prices for closings in the third quarter are estimated to be approximately $331,000.

Projected average selling price is primarily being driven by product and geographical mix as well as additional incentives for the homes projected to be delivered during the quarter.

Gross margin performance from home settlements as a percent of sales for the third quarter are anticipated to be in the approximate range of 13 to 14%.

The projected gross margins for the quarter primarily reflect pricing strategies and generating sales momentum and pricing incentives experienced over the period in response to market conditions for homes to be delivered.

In addition, this gross margin range includes an estimated 90 basis point improvement from the recovery of the additional inventory valuation adjustments taken in the second quarter.

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

As a percentage of sales, SG&A is expected to be in the range of 10 to 10.5% for the quarter.

This guidance includes benefits derived from our restructuring initiatives taken in the second quarter, in addition to better overhead leverage with the anticipated increased closing volume for the third quarter.

In the homebuilding other income and expense category for the third quarter, we are projecting an expense of approximately 6 to $7 million.

Again, given no material change from the current and short-term projected interest rate environment or a significant shift to consumer mortgage product preference, pre-tax income in our Financial Services operations is expected to be approximately 8 to $9 million for the third quarter.

Total other non-operating expenses are projected to be 14 to $15 million for the third quarter.

We are projecting the effective income tax rate to be approximately 38% in the third quarter.

Given the continued uncertainty in this challenging market environment and the lack of visibility to look beyond the quarter, we are once again offering no full-year outlook at this time.

We will continue to assess conditions through the next quarter and provide an update accordingly on our third quarter conference call.

As I mentioned last quarter, we continue to target ending the year with a cash position in excess of $1 billion, less any senior debt repurchases made over the next several quarters, plus the $61 million already repurchased during the second quarter.

Additionally, we anticipate no outstandings on our revolving credit facility at year-end, and in net debt to total capitalization ratio in the low 30% range.

We have continued to focus on reducing our land pipeline and are committed to maintaining a solid and flexible balance sheet.

Now I'll turn the call over to speak Steve Petruska for more specific comments on the operations through the second quarter.

Steve?

Thanks, Roger, and good morning everyone.

Throughout our homebuilding operations in the second quarter we continued to experience deteriorating market conditions brought about by an extremely over supplied housing market and very weak consumer demand.

Nearly every market we do business in has a record supply of resale inventory.

When you couple that with the consumers who are concerned about falling housing values, you get an operating environment that is abnormally weak and, unfortunately, showing no immediate signs of getting any better.

We have stayed relentless in our execution of our near-term operational goals of right-sizing our land pipeline, tightly managing starts and spec inventory, and finding the price that allows us to sell homes.

Additionally, as previously noted, we made a significant change to our business organization so that our operating expenses better reflect the market conditions we expect in the coming quarters.

Let me bring you update on how we're doing in these areas.

Regarding our land inventory, our primary focus centers on slowing the pace of land purchases, reducing the supply of lots under control, and renegotiating existing option agreements to purchase land.

At the end of Q2 2007, Pulte controlled approximately 192,000 lots, down 13% sequentially from the first quarter 2007, down 41% from the same period last year, and 48% lower than our third quarter 2005 peak.

Except for land development dollars on current projects and take-downs on finished lots where we're still seeing acceptable absorption pace and margin, we are putting very little new money into land.

As for house inventory, the number of speculative homes at the end of the second quarter was approximately 3700 units, which is down 14% from the first quarter, and down 58% from the same quarter last year.

This reduction in spec inventory was aided by a very successful national sales program run in June.

As proud as I am of our team's continued focus on this front, we still have a lot of work to do.

Our completed spec inventory sits at 835 homes, or about 1.2 finished homes per community.

This represents an improvement in final inventory of 21% versus the first quarter of 2007, and 28% better than this time a year ago.

Overall, our goal of starting significantly fewer specs remains key.

Pulte strives to preserve margin and not force volume where we see an absence of demand.

Frankly, it doesn't make any sense in this environment of high cancellations to start any homes where a buyer is not present and we do not think we can achieve a sale prior to the completion of the home.

We will continue to work through our spec inventory.

In this very dynamic pricing environment, that may require more aggressive marketing by our operators.

Our focus in the third quarter is on converting even more of our completed spec homes into closings.

Settlement revenues for the second quarter 2007 declined 42% from the second quarter 2006 levels as home closings decreased 40% for the same period.

Average sales price was also down approximately 4%.

Second quarter 2007 signups totaled $2.4 billion, as our average sales price per signups were 2% lower from the same period a year ago, and unit volumes decreased approximately 20% year-over-year.

Our cancellation rate was 28% for the second quarter, about flat with the second quarter of 2006, but an increase from the 24% rate we experienced in the first quarter of 2007.

Looking at our cancellation rates by brand, our Del Webb brand continues to outperform with a cancellation rate approximately 530 basis points lower than our traditional Pulte product during the quarter.

The overall number of cancelled contracts trended upward during the quarter which reflect the inability of our buyers to sell their existing homes and buyer remorse due to declining prices.

Let me provide some commentary on what our regions experienced.

For the third consecutive quarter the Northeast showed some marginal improvement.

Signups for the Northeast in the second quarter were up 8% year-over-year.

A couple of new communities in Long Island, and a more aggressive pricing posture in New England helped sales in these markets.

Washington, D.C.

and Baltimore were flat year-over-year.

Strong job growth has helped keep resale inventories relatively flat albeit at a very high historic level.

A positive sign, I think, for this region.

The Southeast, which includes the Carolinas, Georgia and Tennessee, saw year-over-year signups decrease approximately 33%.

We have seen our most significant fall-off in business in Atlanta, with the year-over-year signups down 51%.

Our Carolina and Tennessee businesses were down 20% but we continue to see good margins and very few specs in these markets.

Despite signups being down only 3% versus the second quarter of 2006, our Florida business continues to be challenging.

Resale inventories are still high, unsold spec units are still elevated, having a negative impact on gross margins.

The southern part of the state on both coasts is the most troubled.

Our sales in Ft.

Meyers, Naples and southeast Florida were down 32% from the second quarter of 2006.

As most of you know, inventories are high in these markets and pricing continues to soften.

Orlando was the bright spot for us in the state, with sales increasing 82% from the second quarter of 2006.

However, we had to be very aggressive with our pricing to drive this volume improvement, and overall, Orlando is still a difficult market.

The Midwest continues to struggle; signups were 12% lower for the quarter compared to the same quarter last year.

Minneapolis and Chicago were our softest markets with 33 and 18% decreases in signups respectively year-over-year.

Michigan, Cleveland and Indianapolis were about flat to the second quarter 2006 signups.

Signups for our Central region, which includes Kansas City and Texas, declined 44% year-over-year, following a 51% year-over-year decline in the first quarter of 2007.

Our Texas operations, primarily Dallas and San Antonio, have been the hardest hit in this area.

The second quarter 2007 was the third straight quarter of 40% plus declines in signups.

Falling community count has been some of the issue but our first time buyer communities have been hit hard by the changing mortgage environment.

Also, our active adult businesses in Dallas and San Antonio have shown significant fall-off due to our buyers having difficulty selling their homes in these markets.

Our Southwest area, which includes Colorado, New Mexico, Las Vegas and Arizona, showed a 20% decrease in signups from the second quarter 2006, primarily a result of the continued sell out of our successful Sun City Anthem community in Las Vegas.

However, we continue to see sales strength in our Arizona operations which was down only 4% year-over-year in a very tough selling environment.

Given the very competitive new home landscape in both of these markets, my hat goes off to our Las Vegas and Arizona teams.

I think they're doing a great job.

Our California operations saw signups decline approximately 18% year-over-year as compared with a 10% decline during the first quarter of 2007.

In Northern California, we saw a 12% decline in signups, and we were off an additional 25% in Southern California.

As most of you know, California is a very difficult housing market.

However, California buyers have seen markets like this before, and they appear to be waiting to see where things will bottom out before making a purchase.

Given the amount of oversupply in Sacramento and the East Bay and Northern California and the coastal and north inland empire markets in Southern California, I believe it will take several quarters before that will happen.

In conclusion, operating conditions continue to be a struggle.

However, we're staying diligent to our short-term strategy of controlling the things we can, like inventory, overheads and pricing and reacting as best we can to the things we cannot control like consumer sentiment.

We believe that these conditions may be with us for some time to come, and I am confident that our actions will best position Pulte to return to profitability and allow us to flourish when the market conditions improve.

Now, let me turn the call back to Calvin.

Calvin?

Thank you, Steve.

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

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, after which they will have to get back into the queue.

At this time we will open the call to questions.

Olnika?

Thank you.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of [Nishu Thood] from Deutsche Bank.

Please proceed.

Thanks.

Good morning.

The first question I wanted to ask related to the cost savings initiative.

I had seen that you'd decided to close down the DiVosta headquarters, I believe.

So I wanted to get just your thoughts on that as it relates to the cost cutting program.

And maybe if you could also just kind of give us some thoughts on how that relates to that brand, given it's almost legendary status in the Florida market?

Nishu, this is Richard.

I can speak to the brand components.

The DiVosta brand is alive and well and we continue to have it in several of our cities throughout Florida.

The moves that were made in the quarter were primarily as a result of our SG&A focus and maybe Roger can speak to some of the specifics of that.

But rest assured the DiVosta brand and all it stands for is alive and well and we plan on continuing it through the state.

Roger, do you want to comment on the other?

Just on the SG&A, of course, this is a whole company, not specifically DiVosta, but we wound up with the reductions, some of them were directly related to the cost of sales, others were related to the SG&A overall net.

We did experience some savings in the second quarter as we were moving through the quarter taking some action.

We also benefited in the second quarter from some of the actions we took in the fourth quarter and in the first quarter as well.

So we do have, as I mentioned, additional savings put into third quarter guidance that we gave out there, but overall, again, some of it was based on the construction process in DiVosta from what we could get in the market on a purchase versus doing it ourselves.

Right.

And just on those cost-saving targets I think you'd mentioned when you announced the restructuring program, $200 million annually.

I know in the guidance you gave for the third quarter, you'd given an indication SG&A might be around 10% or so.

Is it that kind of correlates being roughly on track with that $200 million annually, so we would expect maybe $50 million of savings in the third quarter?

Yes, we were even more specific, I mean, for 2007 we gave guidance of roughly about 90 to $110 million in gross savings against a charge of about 40 to $50 million so we were looking this year to get a net savings of close to 50 to $60 million for the year.

The third quarter, I would roughly estimate that we've got about 110 to 130 basis points already included in that 10 to 10.5% guidance.

Now that would equate to roughly 30, $35 million in the SG&A line.

But we also have a savings that will benefit for them in the margin line as well as we absorb some of our costs into inventory.

So we were looking for a gross savings overall so from a gross dollar standpoint we're well on track for that.

We feel pretty comfortable with where we're headed and what we've done and what we've communicated.

Okay.

Thanks.

I'll get back in the queue.

Thank you.

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

Please proceed.

Good morning.

I just want to follow-up on that SG&A question.

You guys did about $1.1 billion in SG&A in '06.

Is that you're savings, call it, roughly $100 million target, kind of $1billion in SG&A?

Yes, our target was roughly about $200 million on an annual basis, so it all depends on the volume, of course and we haven't given anything for 2008 at this point.

So we have to watch the volume and the relationship between the SG&A and that volume.

Okay.

And now just want to understand better the Del Webb versus traditional split again.

How much of the impairments were tied to Del Webb in aggregate if you could kind of describe it that way?

And the reason I ask is in your February 2006 investor day conference you guys talked about the Del Webb and the future path of Del Webb.

And at that time you had about 40 active communities, 42 is what it said in the handout, going up to 100 by 2008 with 11 in Northern California, 10 in Arizona.

I'm just trying to understand how much these impairments are tied to your larger, longer-term communities.

Ken, This is Vinny Frees.

Maybe I can help you with a little bit of insight into that.

Certainly, we reviewed our Del Webb communities just as we reviewed all of our communities.

We identified 13 projects that were Del Webb projects.

Now that might equate to 30 active selling communities and we impaired just under $200 million related to those Del Webb communities.

$200 million relates to the impairments of $603 million for the total company in the second quarter.

Right.

I guess what caused the 120% increase this quarter in impairments relative to that 750, you know, [the] large number relative to all cumulative?

Was it, so there seemed to be a step function in the deterioration of the markets or was that the ice was so thin under these other incremental 100 communities that were impaired?

That's right, Ken, it was the continued deterioration through the second quarter that drove a lot of that and, of course, you're looking at the pace, you're looking at the price and, you know, given the environment with the subprime and the mortgage availability as well as the impact from people having to sell a house to buy a house, all of those things drove a different condition in the second quarter than we saw if in the first quarter.

But it wasn't focused on the Del Webb, so that one's still doing better I mean just looking at the impairment that you guys outlined.

Well, just to highlight the numbers that Vinny said, Ken, approximately one-third of the charges related to impairments were Del Webb-related and Del Webb relates to just under 50% of our total business, 44, to 45%.

So you can see it's still performing a little better, and as Steve indicated, our cancellation rate continues to be better there.

But as Roger indicated, the market did decline in the second quarter causing the change.

Thank you.

Thank you.

Your next question comes from the line of Rob Stevenson with Morgan Stanley.

Please proceed, sir.

Good morning.

Can you guys talk about incentives and discounting and sort of where that sort of stood throughout the quarter and whether or not there was material difference between the Del Webb and the Pulte brand?

This is Roger, Rob.

We continue to see roughly around 8 to 10 to 11% on average for the Company around on discounting and incentives.

We're pretty comparable to the first quarter and again, the environment that was never based on closings that we experienced in the second quarter.

And as we saw the deterioration going forward into the second quarter, some of the changes are now becoming in base prices as well so maybe Steve can comment a little bit specifically about the differences there.

Yes, Rob.

I mean as it pertains to discounting, in past environments we would have kept our sales prices high and then ran a discount off of that.

As we continue to sell homes, we try to sell them really kind of now today at more of a market price and use that on our pricing sheets.

But our discount tends to remain flat even though our margins kind of continue to deteriorate because the base price that we start with when we release a new phase might be lower than what the base price was in the previous phase based on market conditions.

As it pertains to the Del Webb buyers specifically, which was part of your question, we've experienced similar things there in those Del Webb communities.

Although the buyer profile, the backlogs are a bit larger in the Del Webb communities and we strive not to discount as much because we disrupt more of our backlog.

But in this environment we haven't been able to be as diligent on that just because prices continue to deteriorate and if that Del Webb buyer wants to close on their home; their new Del Webb home, they often have to discount their personal residence to make that closing.

And they're very aware of market conditions and certainly not shy about asking for a price that's more relative to today's current environment when they come back to the closing table.

Okay.

And then as a follow-up question, what are you guys seeing today in terms of sort of same-store days to build given what's gone on in the labor market, et cetera?

Have you been able to sort of cut any material amount of build time out of the equation?

Rob, that's been something that is part of our simplification process that we've really been focused on anyway.

And the short answer to that is yes, we've been able to gain a lot of efficiency.

A lot of it by process for us as we continue to simplify our plans, but certainly, the availability of labor and the desire for contractors to be on the job site and continue to employ their workers has also helped.

Do you have any sort of anecdotal even evidence, I mean, in terms of what that sort of magnitude is these days?

I do, but it's kind of all over the board because it's not one size fits all.

But I'd say we're experiencing 15 to 20% improvement in cycle times with goals that are even bigger than that.

Okay.

Thanks guys.

Thank you.

Your next question comes from the line of Alex Barron with Agency Trading Group.

Please proceed.

Yes, thanks guys.

I was wondering if you had more specific breakdown in terms of the number of communities by the regions?

I appreciate that you broke out the dollars.

You mean on the impairment?

Yes.

Okay.

So you saw our slide that was included in our webcast this morning?

Right.

I don't have that information readily available.

I know we will be putting that into our 10-Q.

Okay.

Got it.

I guess the second question I wanted to ask you is when you go through thinking about what gets impaired and what qualifies for an impairment, is the test basically speaking that a company has to have an operating loss?

In other words, operating margins go below zero, or is it more that gross margins have to go below zero before you impair something?

No, Alex, this is Roger.

The gross margins have to be below your disposition costs.

So that's the level of impairment and then you run a cash flow.

And if you -- undiscounted, and if you get a negative cash flow from that, then you come back and you discount it.

And there are a lot of assumptions that go into it because you have to assume that the project is built out.

So it's not just your current environment, but if you've a project that's going to last three or four years, you make assumptions on price and cost and pace out over that time period and then you bring it back and make the adjustments based on that.

So it's much more complicated than just looking at currently where you are, but you have to make assumption about the future as well.

Got it.

And how successful do you guys think that event you had in June was?

I know you've maintained those same prices going forward?

In many communities we have maintained those prices.

On an overall basis, it was very successful.

Although, you know, we saw some buildup to the event where I think that our sales teams were trying to make it successful for that weekend.

And certainly when you sell a whole lot of homes in one single weekend, you see kind of a post mortem that says that we drained our lead bank pretty well.

So on an overall basis, though, I still think that our operators would tell you that it was a successful event on an overall basis.

All right.

Thanks a lot, guys.

You're welcome.

Thank you.

Your next question comes from the line of Greg Gieber with A.G.

Edwards.

Please proceed.

Morning, guys.

Richard, the question I had for you was really not, you know, near-term but it's looking out a few years.

If I remember back in the 2005 period in some of your conferences, I got the impression that you were kind of building an infrastructure that could eventually handle 70,000 a year in the way of closings.

Obviously, that's sort of level for any builder today is a pipe dream.

I just wonder what kind of infrastructure, what sort of volume, you know, one, two, years down the road, your infrastructure currently could handle?

That's a good question, Greg.

We believe the infrastructure that we put in place after our announced restructuring that we announced in May can probably handle 20 to 30% volume improvement from here, if not a little bit more.

We did take a strong look at the top of the organization and how we're organized and the number of areas that we have, the number of divisions we have, et cetera, but we purposely wanted to make sure that we left enough backbone to be able to do just what you said, to increase business on a same-store basis fairly substantially.

So clearly, the organization structure we have today can't handle 60, 70,000 units down the road but it can handle 20 to 30% more business than we have today.

Okay.

You also at the same time talked about a revolution in homebuilder management and given how antiquated the industry is, there are things that I thought were exciting.

What's happened to that?

Have you had to roll it back some, just sort of put it into suspension?

Or did you decide this industry really isn't ready for that type of radical movement yet?

No, actually we believe that probably we're getting more traction on those efforts today than we ever have.

Frankly, when the market's going great it's difficult to really see the opportunity that is before you, but now that things are tough, it's a lot easier for us to see where we have opportunity.

Specifically you're speaking to our overall simplification supply chain efforts, efforts to reduce cycle time and overall become a much more efficient operator.

We've used the term ala Toyota.

We're very much on track with that effort.

It's a long-term view, it's not something that you see quarter-to-quarter but we believe the focus here is on process change, the way we construct and build and deliver our homes as opposed to just the day-to-day change you get based on the market environment.

So we're very much on track with those efforts and do believe the industry is very ripe for that.

We call it our simplification efforts.

So stay tuned for more in the future.

That's nice to hear.

My final question really has to do, I think it's a follow-up to a previous question, on Del Webb.

You did have an aggressive schedule of planning to open new Del Webb communities, particularly smaller ones.

What is your current schedule?

And you put a lot of that on temporary hold or are you proceeding?

Well, I'll start to answer, this is Richard, and then Steve can give a little more detail.

A lot of the plans that were in place over the years, the past couple years for Del Webb, a lot of those communities have been opened over the last 18 months or so, so we're substantially up in our Del Webb community count.

However, going forward, as the market has deteriorated a lot, all of our new land purchases have been put on hold, Del Webb and otherwise, if we do not feel they can meet kind of today's pace and price assumption.

So you'll see a corresponding decline in overall community growth with Del Webb as well.

But that's not to say that we're not much bigger in Del Webb than we were.

Steve, maybe you can give a little detail.

As Richard mentioned, Greg, the activity that we've taken around diminishing our land pipeline has impacted Del Webb as well as Pulte communities.

But on an overall basis, our Del Webb community growth is still there.

In fact, we've got a couple openings coming this month in Georgia, we continue to see market opportunity.

Demographics in spite of what's happening to the housing market, the demographics aren't changing.

And it's still for us a very, very favorable demographic to go after and we've got the best brand in the business to do it.

And we're still going to drive to make that an important part of our business.

Greg, in addition to what Steve mentioned in Georgia, we've opened this year a new community in Charleston, South Carolina, we've opened up a new penetration outside of Las Vegas called Mesquite, very successful project.

So we've had a number of openings adding to our success.

Your next question comes from the line of Stephen Kim with Citigroup.

Please proceed.

Hello?

Hello.

Hi.

Sorry about that.

I was on another call.

Okay.

I wanted to ask you a couple questions if I could about your [can] rate, actually.

The backlog can rate, which is kind of the way we track it, looks like it was pretty good this quarter by my reckoning, it was like 22%.

It was down sequentially, about 400 basis points.

And I just wanted to get a sense for how you think cancellations trended through the quarter and whether we can expect to continue to see that can rate as a percentage of backlog sort of remain under control here?

Stephen, in raw numbers, we saw more cancellations every month sequentially throughout the quarter.

Because our signups were for the quarter, we had a better month signup-wise in June because of the contests that we ran, it was pretty successful.

Cancellations dropped, cancellation rate percentage, which we calculate off of gross signups, decreased a little bit in June relative to the rest of the quarter, but overall we continue to see a fairly difficult environment when it comes to cancellations.

I think the that your numbers probably show something that's favorable because our backlog was growing in the first quarter.

So when you compute it as a percent of backlog and our backlogs tend to be a little longer than our competitors due to the nature of the Del Webb communities and the preselling that we do in those things.

And we get a little bit better cancellation rate in the Del Webb communities, a little bit lower meaning by better.

All those things kind of play into some of your numbers.

But, you know, it's still a struggle out there.

I mean consumers come to us that look good all the way through the process, sell their home, but they're very, very aware of market conditions and they still come to us right at the closing time and want a deal.

And in some cases, we make the deal.

Most cases we try to make the deal.

In some cases, their buyer remorse is still so high because they're concerned about falling prices, they'll still cancel on us.

So I expect that we'll continue to run in the mid to high 20s as a percentage of gross sales as we move forward and we're just not seeing anything out there today that would tell us that it's going to be any different than that.

Okay.

Appreciate that color.

Was wondering if you could talk about your land supply?

In terms of managing your overall land supply, and I guess I should toss in a housekeeping item which is, I'd love to know how much you had optioned versus owned outright, but as you manage your land supply, it looks like you're running in the mid fives in terms of year's supply if you were to use a trailing 12-month closings number.

Where do you target your land supply, let's say, by the end of the year or three quarters out?

What kind of a metric do you use?

Do you use it as a year's supply of trailing closings or current closings run rate?

What your metric is and where your target is for comfortability in, let's say, two to three quarters?

Steve, Vinny will give you the breakdown of option and owned and then I can answer the other piece.

Sure.

The easy one first, Stephen.

Steve Petruska had mentioned 192,000 lots under control, 146,000 are owned that and represents about 76% of the total.

Okay.

A 76/24 breakdown.

In terms of our target, if you will, we continue to run focused on the balance sheet and our goal is to continue to lower our leverage overall.

As it relates to year's supply we would like to take our own percentage, our own, excuse me, cumulative down from here, frankly, in the two to three-year range would be nice.

We're above that at this point because, of course, we've been walking away from the options.

Our metric tends to be a little bit different in terms of the way that other folks look at it, though, partly based on our Del Webb communities and the longer life of those.

We do have several communities that have gotten multi-thousand lots involved that, frankly, we're pleased with and we certainly don't want to walk away from.

So we don't sit around saying, boy, we want to go to 2.2 years of supply or 2.8 or what have you, it's more focused on our overall balance sheet leverage and metrics from that perspective.

Nevertheless, I want to be clear, we do want to drop our land under control for now for the time being until we see some change in the environment.

Your next question comes from the line of Michael Rehaut with JPMorgan.

Please proceed.

Hi.

Good morning.

Thanks.

Hi, Mike.

First question, if you could just give us a little bit of insight into the real volatility here with the gross margins that you've seen and that you're projecting to continue going into the third quarter.

You actually had a much higher core gross margin this quarter than I would have thought, and if you could just kind of go into the timing of perhaps some of these more aggressive spec sales that -- or inventory reduction that's maybe impacting the 3Q gross margins more than normal.

And given this range of maybe 16.5 to 19 to 13 to 14, excluding some of these kind of inventory clearing events, where is the business today, what are orders being written at from a gross margin perspective?

Yes, Mike, this is Roger.

First of all, as you know, the volatility in the market is significant so as we look at all of this, we're here to sell houses and that's what we're trying to do is move the inventory.

So based on the market conditions, we're adjusting prices, which is going to fall to margin.

I think coming out of the second quarter at 13.1% looking at the third quarter of 13 to 14%, quite frankly is not a great deal of volatility from what we're just seen.

For instance, in the second quarter we closed roughly about two-thirds of our volume were spec-related and so a third was dirt sales and so that's supporting some of it from the dirt side because we do have a better margin on the dirt side.

Specifically when you get into the Del Webb projects where, as Steve had mentioned, the backlog's a little bit longer, tends to be longer on the Del Webb side, we've seen that hold up a little bit better relative to just on the traditional side of the business.

So we're being supported with that.

From a margin standpoint, there's benefit from the write-offs that we take coming in the future.

We've talked about that as well.

So we're still seeing volatility on the price side.

What you see in closed in this quarter is not what we sold in this quarter.

So I think that volatility is still playing out there, and it's not something I can tell you for the fourth quarter or the first quarter of next year what that's going to be.

But given hat we think we see in our backlog, the conditions and the way we priced it and the way we're going to manage our business from a balance sheet perspective is all giving rise to what those margins are going to be to drive volume.

So Mike, this is Richard.

You seem to imply that margins were degrading substantially in third quarter and that's not the case according to our projections.

Aren't you at 19.1 ex-charges in the second quarter?

No, 13.1.

13.1 Okay.

I have that as a wrong number.

The second question I had was, oh, and just before I go onto the second question, you're saying that two-thirds of the volume that you closed this quarter was spec-related?

Yes, roughly.

Okay.

The second question, just on the impairments.

Last quarter you did really take any charges in Florida, now you took about $100 million.

I was hoping you can give us a feel for the age of the land that you had taken the charges in.

I think you had mentioned that most of that land is, you know, you had bought in '03 or '04, and given the step-up in charges really that we've seen, are we by and large kind of dipping into an '04 vintage or how much of these impairments also were re-impairments of previously impaired communities?

Yes, Mike, Roger.

Again, I think what's indicative of all the geographical segments that we've taken impairments in in this quarter is the pricing environment that continue to erode through the second quarter.

So even though we may have bought projects back in 2004, again, they're not immune from the overall environment.

And for us to compete in a marketplace to sell homes rather than just sit on them, of course, we're going to adjust accordingly to those markets conditions.

Roughly about 79% of the projects we impaired during the second quarter came from 2004 and earlier.

So again, those are the projects that typically we have today that we're selling out of in a lot of the markets, and that's not just Florida, that's the entire country.

I don't have information specifically by each one of the markets or communities.

So overall, very few from the '05, '06 time frame as you can see and the balance of them we're 2004 and earlier.

Your next question comes from the line of Carl Reichardt with Wachovia.

Please proceed.

Good morning.

It's actually Adam [Ruter] on behalf of Carl.

I was wondering if you can give us some more details, I think it was the $29 million that you've mentioned the general liability reserve for the product claims?

I was wondering if you could talk about what that specifically was for?

It's specifically for a number of claims.

As we look at our quality as a company we continue to be very proactive in that, especially when you're into a large communities like Del Webb, we want to move very quickly to solve our issues on the construction side.

What we ended up doing this quarter and we do periodically throughout the year, is we actually run actuarial assumptions to get our reserves in line with what we're experiencing.

So what you've got running through there is when you get a claim, you take a look at the severity and the frequency of those claims and you actuarially assume what you need to have a reserve for.

And, of course, It's sort of like the 100-year flood, you think you have the 100-year flood taken care of and then all of a sudden you get another one and it's within the 100 years so what you end up doing is adjusting your reserves for that.

So we went back and adjusted our reserve this quarter as we actuarially looked at some of the claims that we experienced and that generated an additional $29 million and an increase in the reserve in the second quarter.

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

Please proceed.

Thanks.

Good morning, guys.

Most of my questions have been answered but I was wondering if you look at the, I mean the very limited number of markets where your volume now has sort of flattened out or reasonably stable, could you kind of characterize what it's taken to get there in pricing or discounts and give a little more color on that if that's particularly kind of DC, Northeast and maybe a little bit in California?

I think if you look year-over-year, Jim, you're going to find decreases, I think that's where your question is, where were we a year ago, where are we today?

I think our operators would show you and our backlog would show you that it changes, obviously, by the average sales price in market.

But it's down probably a good 20%.

I mean, if your average sales price was $500,000 in DC, it's $400,000 today to move houses and that's a ballpark-type number.

But to insinuate that it's stabilized, I mean, we've seen a stabilization in the resale inventories, what I commented on in my comments, it's dynamic out there.

It could change tomorrow on us based on what a competitor does.

As Roger indicated, we're going to continue to aggressively try to sell homes at dirt so that we don't have to build spec houses and that could change tomorrow on us.

But on an overall basis I'd say it's down 20 to 25% if you look at it that way in that particular market.

Okay.

And could you characterize any, I mean, are some of the markets [further] down, I suppose a lot more than that right now or any you care to comment on, like, maybe Florida?

I don't have the data specific in front of me, so I really don't want to comment on it.

But we've got markets that are probably down more than that as well.

Okay.

That's fine.

Great.

Thanks.

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

Please proceed.

A bit more about some thoughts on pricing out there.

You'd mentioned Orlando, orders up 82% year-over-year, where you've been aggressive on the pricing side.

As you think about the Central region or other areas such as Southern California where there are credit issues, do you think that's it's sort of a, it's a problem that's not even price sensitive where the buyers can't get the mortgages no matter what you cut the prices to there?

And how do you think about this as we see lenders continue to cut back on types of mortgages that are being offered to customers as that could [(inaudible)?

I'll talk just about some of the sales issues and let Roger talk about some of the mortgage issues.

Obviously, Dan, the demand for our product is relatively inelastic and I'd say the world relatively, but in most of these markets that you talk about, especially Orlando I think is a great one to use as an example, we've got continued job growth in Orlando.

We've got fairly decent macroeconomics.

We just have a massive oversupply.

So it's not like consumers are being priced out of the market by mortgages or anything else, it's more of where can I get the best deal relative to everything that's going on in the marketplace.

And they continue to shop, they're very savvy, and they are shopping for the best deal.

And that is affecting our ability to sell as we dynamically change prices and look at what's happened on a week-to-week basis.

But affordability factors in places like Orlando, I mean, we're not bumping up against anything there, even with the loss of the subprime, I think that Roger spoke, and I'm going to let him talk here in a second, to the strength of our buyer.

I mean if you just look at the FICO scores and those type of things, we continue to see a strong buyer that's in a very, very strong negotiating position walking through the door to buy homes.

Dan, this is Roger.

On the mortgage side, of course, we're not subject to the very low end so we're not suffering from that standpoint.

So directly because the subprime is a very small percentage of our overall business and has been, the direct impact is not significant.

Certainly, there's a ripple effect and you've got the domino effect that comes through where, again, where there are others that had to sell a house to buy a house, and if they're dependent on it and we're dependent on it, there is a dampening in the demand overall.

But generally speaking, our direct impact is something we can quantify.

The indirect impact is the overall demand in the marketplace that we're seeing and, of course, right now the demand has been dampened.

Dan, this is Richard.

Just to put one more point on that.

We continue to believe that consumer sentiment is a much bigger factor in the downturn right now than lack of available mortgage product.

Clearly, that's a percentage of it and folks that previously could quantify can't today.

But there's ample evidence that people are just even not shopping, traffic levels are down, et cetera.

So it's this malaise where people are kind of waiting until they believe things have bottomed.

Thanks.

And I guess a follow-up.

Just thinking of the Del Webb business, can you give us a better sense in terms of how much that's out performing in terms of what net order trends were for the quarter relative to the rest of the business?

I don't think we have any details on that.

I think what we can tell you is that we continue to see a Del Webb buyer that would like to buy our home.

That buyer segment is not characterized as much by a nondesire to purchase even at these prices.

The problem for the Del Webb buyer is inability to sell their existing home.

Right.

I guess it'd be helpful if you [could] talk about cancellation rates for that business and presumably you need the orders for the cancellations just we have more color.

Dan, we gave that in our prepared comments, our can rate in Del Webb was down 530 basis points versus our can rate for Pulte, Pulte specifically.

Your final question comes from the line of Susan Berliner with Bear Stearns.

Please proceed.

Good morning.

Just wanted to know if you could help me out and tell me what the cash use was in the first half of the year?

Because I know in the second half you've articulated you're going to generate in excess of $900 million.

Basically, Sue, this is Roger.

Basically we've put in about $650 million into the business so far this year, and roughly about $380 million went into inventory.

House alone, as I mentioned earlier, moved into the second quarter, and that's house without land, we basically invested about $250 million for the seasonal build.

So far land that we've taken down rolling options is roughly about $130 million, and that's net of everything.

That's, you know, the rolling options plus development less the relief overall.

So net-net we're about $130 million in, so that's about $380 million just in inventory movement.

We, as I mentioned earlier, $61 million in the debt repurchase, payables about $192 million, and this is all from year-end, again, year-to-date.

So that's about the $650 million bridge.

That's great.

Thanks very much.

At this time there are no additional questions in queue.

I would now like to turn the call back over to Mr.

Calvin Boyd for closing remarks.

Thank you, Olnika.

Thanks everyone for your participation on the call today.

If you have any follow-up questions please feel free to give me a call.

Have a great day.

Ladies and gentlemen this concludes the presentation.

You may now disconnect.

Thank you and have a good day.