普爾特房屋 (PHM) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the third quarter 2009 Pulte Homes incorporated earnings conference call.

My name is Katina and I'll be your coordinator for today.

(Operator Instructions) I would now like to turn the presentation over to you host for today Mr.

Jim Zeumer, please proceed.

Thank you, Katina .

Let me welcome everyone to the call and listening via the internet to this morning's call t o discuss Pulte Homes results for the third quarter and nine months ended September 30, 2009.

On the call with me to discuss our results are Richard Dugas, Chairman, President and Chief Executive Officer, Steve Petruska, Executive Vie President and Chief Operating Officer, Roger Cregg, Executive Vice President and Chief Financial Officer and Mike Schweninger, Vice President and Controller.

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

Given our third quarter merger with Centex, and the resulting impact on our reported third quarter results, we have expanded the slide content.

And we believe these slides will greatly assist the understanding and analysis of our third quarter financial performance and we strongly encourage everyone to review this material.

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

As a reminder, on August 18, 2009, Pulte Homes completed its merger with Centex Corporation.

Unless otherwise identified, results reported in the release and on this reflect the inclusion of Centex's's operations for the period from August 19, 2009 through September 30, 2009.

Prior period results have not been adjusted for this merger.

Finally, 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 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 as a result of new information in the future.

Participants in today's call should refer to Pulte's annual report on form 10k for the year ended December 31, 2008 and this morning's press release for a detailed list of the risks 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 to open the queue for questions I will now turn the call over to Richard Dugas for opening comments.

Thanks Jim.

And thank you to everyone joining us on the call today.

Back in April this year, we explained the strategic importance of our merger with Centex and highlighted opportunities around business synergies, land and customer diversification and branding.

IN the third quarter we completed this transaction and I am confident in saying.that the rationale underlying this combination has only grown more compelling in the months since the announcement.

At the time we highlighted the opportunity for us to realize $350 million in synergies by the third year after completion of the merger.

In addition to having now raised the target by 25% to $440 million in expected annualized savings, we have already implemented needed actions.

to capture more than half of these savings.

We expect to reach the initial target of $350 million in annualized savings early in 2010 far earlier than originally projected and then achieve the $440 million annual run rate in the back half of 2010.

Once the merger closed, our purchasing team was able to dive much deeper into Centex's practices and better assess the buying opportunities for the merged company.

Based on the team's initial analysis, they have identified between $150 million and $200 million in annualized synergies that can be realized on future buying volumes.

This work is still in the early stages but preliminary findings point to tremendous opportunities to lower costs and support Pulte's efforts to return to profitability as quickly as possible.

If the economy rebounds in 2010, these savings can provide great leverage and help accelerate Pulte's return to profitability.

If, however, the economy drifts sideways or even stumbles, $440 million in savings would be even more important.

Either way, we're excited about the overall leverage this merger can provide.

Building on top of any immediate savings, we expect the lots we obtained through the Centex merger can deliver long term value to the company.

The recent "Wall Street Journal" article on the absence of land transactions was similar in tone to recent research pieces, all of which suggest we won't experience an RTC-like purge of A-plus land onto the market like we did 20 years ago.

What is becoming clearer is that banks are retaining many of their land parcels, especially the A-rated positions until market conditions improve and they can realize better pricing.

Right now, banks are not being pushed to sell their land portfolios.

In addition, banks see and hear all the same reports we do and they understand that some builders may be forced to move bids higher in order to replenish a land pipeline that is running on empty.

Given their low cost of carry, banks can afford to be patient.

Even a recent talk about a big uptick in land transactions may be a lot more smoke than any real fire.

In a number of markets across the country, builders continue to make bids and submit a series of offers but relatively few of these transactions are meaningful enough to set a new benchmark price for prime land parcels.

As for the deals that are getting done, they are typically for a small number of lots under some form of rolling option terms that allow the builder to walk away if housing demand isn't there.

Clearly we are a long way from the volume or scale of land transactions that were undertaken in this industry in 2006 and before.

Could conditions change if the economy gets weaker instead of stronger in 2010 and banks find themselves under more pressure?

Of course.

But given that banks have held on this long, we believe a few incremental deals might get forced out but not the flood of lots many have expected and feared.

With approximately 177,000 lots under control, of which roughly one-third are developed, Pulte Homes has a land pipeline that can support future sales and cash flows without having to invest significant dollars in acquisition or development.

As in this quarter, we have had to adjust these land positions to more accurately current market value, but we are left about a well located and diversified portfolio that is properly valued.

That can be a source of future benefits to the company.

Managing these land assets as well as our entire operation, effectively requires that we integrate the businesses quickly and that we get everyone refocused on the basic blocking and tackling of home building.

To this end, our senior and area leadership teams are in place and effectively all of the Pulte and Centex market offices are now combined.

We have scaled operations to reflect current market realities and we're making plans for 2010 with conservative assumptions about market conditions.

As the mid-quarter merger and related acquisition accounting can make analysis more difficult, let me say that market conditions for much of the quarter were consistent with what we experienced earlier in the year.

More specifically, customer traffic, demand levels and cancellation rates were in line with prior periods of 2009 but we continue to see some volatility.

For example, business through July and August was stable but we did see some softness in September.likely due to the pending exploration of the $8,000 tax credit..

Our sales may have also been slowed by our decision not to build inventory to catch the last of the tax credit buyers as we felt it was more important to continue our shift to higher margin presold homes and you can see the benefits beginning to show in our Q3 results.

I will hightlight that on a stand alone basis, Pulte's roughly 3,000 sign ups for the quarter were effectively flat with last year or achieved on almost 150 fewer communities.

Roger will provide more detail on Q3 and where possible, try to isolate Pulte versus Centex versus acquisition accounting.

.

This is important because as expected, the merger makes our financial results more challenging to analyze and interpret.

Peel back the onion, however, and you will find we're making steady progress in the business and toward returning to profitability.

With the inclusion of Centex's operations for approximately six weeks, Pulte reported revenue for the quarter increased from the second quarter by roughly 60% to more than $1 billion.

Looking at our underlying business, sequential gross margin showed an increase of 370 basis points from Q2 to 13.1% before the impact of interest, merger costs, land impairments and other land charges.

For the quarter, we continue to benefit from our focus on cost controls and the ongoing emphasis on preselling homes.

It is great to see margin expansion and with improved margins in backlog, our expectations are for continued gains in the future.

Having ended the quarter with $1.6 billion in cash after paying down $1.7 billion of debt, Pulte continues to maintain ample liquidity as we look to close out 2009 with the expected cash position of approximately $2 billion.

We are working hard to return to profitability and the opportunities for future gains, particularly resulting from the merger, are significant.

Before turning over the call, I just want to thank all our employees for our efforts in the quarter and in the period leading up to the merger.

The integration planning and subsequent implementation involved hundreds of people and thousands upon thousands of hours.

Throughout the process, our team continued to serve our customers and deliver industry-leading quality and service as evidenced by our dominance in the JD Power and Associates annual survey results that were reported in September.

I thank our employees for their efforts and ongoing commitment to the success of Pulte Homes.

Now let me turn the call over to Roger Cregg for additional details on Pulte's third quarter financial results.

Thank you, Richard.

Good morning, everyone.

As you're aware, on August 18, 2009, the company completed the merger with Centex and accordingly, the results of Centex are included in the company's consolidated financial statements from the date of the merger.

We have added supplemental information on the webcast line to aid in the understanding of some of the third quarter results and the contributions by each company during the quarter.

As we quickly work toward a full integration of both organization, the information of stand alone details will become less meaningful and available.

We will therefore be limited on breaking out these details in the future in a similar format.

During the third quarter, home building net new unit order rate increased approximately 35% from the third quarter last year, which is all attributed to the additional Centex orders in the quarter of 1125 homes .

Revenues from home settlements for the home building operations decreased approximately 30% from the prior year quarter to approximately $1.1 billion.

Lower revenues reflect lower unit closings that were below prior year by approximately 23% including the contribution of 1394 closings from Centex.

The average sales price decreased approximately 10% versus the prior year quarter to an average of $253,000, which includes an average sales price of $237,000 from the Centex closings and $261,000 from the Pulte closings.

In the third quarter, land sales generated approximately $3 million in total revenues which is a decrease of approximately $10 million versus the prior year's quarter.

Home building gross profits from home settlements for the quarter including home building interest expense was a loss of approximately $26 million versus a loss of $90 million in the prior year quarter.

For those with access to the webcast slides, I refer to you slide number eight which outlines our gross margins in the following details.

Home building gross margins from home settlements as a percentage of revenue was a negative 2.5% compared with a negative 6% in the third quarter 2008.

Adjusting the current quarter gross margins,for land and community valuation charges, interest expense and the acquisition accounting writeup for the Centex work in process resulted in a 13.1% conversion compared to 9.4% for the second quarter of 2009.

Or on an improvement of 370 basis points.

As I mentioned in our prior conference call, we expected sequential quarterly improvements in gross margins as we worked our way through the backlog of higher incentives from the fourth and first quarters and the house cost reduction initiatives we executed during the first quarter of 2009.

On a further note, the Centex closings converted on an adjusted margin basis of approximately 14%, the Pulte closings at 12.6%.

The bring back to gross margins from the fair value accounting adjustments on the Centex land was approximately $3 million for a contribution of approximately 30 basis points for the quarter on the combined revenue.

Home building interest expense decreased during the quarter to approximately $36 million versus approximately $53 million in the prior year.

Included in the interest expense of $36 million, an additional $15 million of expense related to 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 adjustment in the amount of approximately $117 million.

For the third quarter we tested approximately 74 Pulte communities for potential impairment and evaluation adjustments.

We recorded evaluation adjustments on approximately 48 communities for the quarter, of which, approximately 39 communities or 81% had previously been impaired.

Of the $117 million of land and community valuation adjustments, approximately 63% or $74 million were related to Del Webb communities reflecting adjustments due to current absorbition rates and pricing.

The total gross loss from land sales posted for the quarter was approximately $9 million.

Losses mainly attributed mainly to the fair market value adjustment in the (inaudible) quarter for land being held for disposition and land sold in the amount of approximately $8 million which is included in the land cost of sales.

Home building SG&A expenses as a percentage of home sales for the quarter was approximately 19.8% or $209 million, an increase of approximately $17 million or approximately 9% versus the prior year quarter.

The current quarter reflects the inclusion of the Centex operation after the merger.

In addition the third quarter included approximately $51million for employee severance costs in merger integration expenses.

In the home building other income expense category for the quarter, the expense of approximately $47 million includes the writeup of deposits of preacquisition costs resulting from the decision not to pursue certain land acquisitions in the amount of $17 million.

Valuation adjustments in unconsolidated joint venture investments totaling approximately $6 million.

Also included in the category for the quarter, is approximately $15 million associated with restructuring charges related to overhead expense reductions associated with lease exit costs and fixed asset impairments and the amortization of intangible assets associated with the backlog related to the merger with Centex.

The home building pre tax loss for the third quarter of approximately $292 million resulted in a pretax margin of approximately a negative 27.6% on total home building revenues.

Adjusting for the impact of the charges related to the valuation adjustments of land inventory and investments , land held for sale, severance and related charges, merger and (inaudible) expenses and the Centex work in process adjustment, approximately $241 million.

Home building pretax margins converted at approximately a negative 4.8% from operations or approximately a $51 million loss to the current quarter.

The pretax loss for Pulte's financial services operations for the third quarter was approximately $8.6 million or a decrease compared with the previous year's quarter of approximately $19 million.

The loss in the quarter was mainly attributed to the reduction in loan origination principle volume from reduced settlements, an increase in loss loans reserves by approximately $12 million during the quarter and integration costs related to the Centex merger of approximately $5 million.

Total mortgage origination dollars were $622 million, a decrease of 29% when compared to the same period last year.

The decrease is related to volume decrease in the home builder closing activities for the quarter.

Total agency originations were $586 million, nonagency originations were approximately $2 million, and brokered or nonfunded loans were approximately $34 million.

Additionally, with the funded agency originations, FHA loans were approximately 43% of loans funded from the financing line in the third quarter compared to approximately 34% in the second quarter of 2009.

FHA loans in the quarter for Pulte on a stand alone basis represented 35% and Centex was 60%.

Pulte mortgages capture rate for the current quarter on a combined basis was approximately 86% with Pulte on a stand alone basis at approximately 92%.

In the other nonoperating category, pretax loss for the third quarter of approximately $59 million, includes $47 million of losses related to repurchase of Pulte senior notes, corporate expenses of approximately $7 million, net interest income of approximately 1 million related to the invested cash balance during the quarter and approximately $5 million of transaction and integration costs directly related to the merger.

For the third quarter, the company's pretax loss was approximately $359 million.

Pretax loss includes $298 million for the charges related to valuation adjustments and land inventory and investments, land held for sale, severance and related charges, the merger and integration related expenses and the loss on the repurchased debt.

The net loss for the third quarter was approximately $361 million or a loss of $1.15 per share as compared to a net loss of approximately $280 million or loss of $1.11 per share for the same period last year.

Third quarter 2008 reflects a tax benefit of approximately $14 million primarily due to an adjustment in deferred income taxes.

The number of shares used in the EPS calculation is approximately 313 million shares for the third quarter.

Please note that the share count was based on the weighted average count for the quarter.

The total shares outstanding at September 30, 2009 was approximately 380.2 million shares.

Centex merger was accounted for in accordance with AFC 805 business combinations.

The acquired assets and assumed liabilities were recorded at their estimated fair values with certain limited exceptions.

We determined the estimated fair values with the assistance of appraisals or valuations performed by independent third party specialists, discounted cash flow analysis quoted market prices were available, and estimates made by management.

To the extent the consideration transferred exceeded fair value of the net assets acquired, the excess was assigned to good will.

We have completed the majority of the business combination accounting as of September 30, 2009.

We expect to substantially complete the remainder in the fourth quarter 2009.

We have not received final valuations from certain independent valuation specialists..

Final determinations of the values of assets acquired and liabilities assumed may result in adjustments to the values presented for the corresponding adjustment to good will.

Before specifically turning to the balance sheet for the quarterly activity, I want to highlight the development of the major items included in good will for the Centex merger.

Again for those with access to the webcast slides, I refer you to slide number 13 and present the major items for good will.

Pursuant to the terms of the merger agreement, Pulte acquired all of the outstanding shares of Centex issuing approximately 122 million Pulte shares at a closing price August 18, 2009 of $12.33 per share, resulting in total consideration of approximately $1.5 billion.

Centex's closing book value of net assets acquired on August 18, 2009, was approximately $905 million.

resulting in $600 million to good will before considering any fair value adjustments related to acquisition accounting.

With respect to acquisition accounting adjustment we determined the intangible assets, trade names and trademarks associated primarily with Centex brand and expected to be targeting the first time home buyer approximately $100 million using valuation assistance from independent third party specialists The fair value inventory was determined on a community by community basis primarily using a combination of discounted cash flow models, market comparable land transaction where available and on a limited basis, independent third party appraisals.

These cash flows are impacted by estimates related to average selling prices, sales closing paces, land development and construction times and assumptions related to land development, construction and overhead costs and discount rates.

The estimated fair value adjustments to the Centex land inventory was a net writedown of approximately $674 million plus the elimination of $150 million of capitalized interest.

The estimated fair value process was performed at approximately 750 communities of which approximately 70% were determined through the discounted cash flow method and remainder by comparable market analysis and third party independent appraisals on several nontraditional assets.

Of the net writedown of approximately $674 million approximately 5% of the communities represented approximately $450 million or 80% of the net writedown.

The net fair value adjustment reflects differences between fair value accounting and SFAS 144 accounting, recent performance, strategic marketing changes and direction in some of the assets related to long asset lives changes to price, development and construction costs and closing pace assumptions In total, approximately 52% of the communities have writedowns.

31% had writeups and 17% remained unchanged.

The all other net includes the estimated fair value adjustments of all other asset and liabilities.

Now to review the balance sheet for the quarter.

We ended with a cash balance of approximately $1.55 billion decreasing approximately $85 million from the second quarter of 2009.

The major components of the mid change in cash use of approximately $85 million for the quarter including the acquired cash for the Centex merger of approximately $1.8 billion offset by the repurchase of approximately $1.8 billion of debt and the related transaction integration costs associated with the merger in normal operating activities.

During the quarter, we added approximately $2.1 billion from the inventory of the Centex merger.

House and land inventory ended the quarter at approximately $5.6 billion during the quarter we added approximately $2.1 billion to the inventory from the Centex merger.

Major changes to the land inventory for the second quarter in addition, excuse me in the third quarter in addition to the-- from the second quarter in addition to the Centex inventory on a combined basis were from relief from home settlements of approximately $253 million offset by investments and roll option takeouts and purchases for approximately $56 million and land development spending of approximately $137 million for the quarter.

In accordance with SFAS 109, accounting for income taxes, at September 30, we had net deferred tax assets of approximately $3.1 billion, which was substantially offset by a valuation allowance due to the uncertainty of realizing these deferred tax assets.

With approximately $1.55 billion in cash to end the third quarter we had no outstanding balance drawn on the revolving credit facility at the end of the quarter.

The company's gross debt to total capitalization ratio was approximately 56.4% and on a net basis 45.2%.

Interest incurred amounted to approximately $61 million in the third quarter compared to $54 million in the same period last year.

Pulte Homes shareholder equity for the third quarter was approximately $3.3 billion.

We repurchased no shares during the quarter and the company has approximately $102 million remaining on our current authorization.

On our financial covenants, the third quarter, the required debt to total capitalization ratio was not to exceed 55% and at September 30, the ratio as defined in the credit facility was 53.8%.

And on the tangible net worth test as defined in the credit agreement was to have required a tangible networth of $2 billion.

As of September 30, we were not in compliance with the tangible network covenant under the credit facility.

We subsequently requested and received a limited waiver from the banks until December 15, 2009.

We expect to negotiate a permanent amendment by December 15, 2009, but there can be no assurance that any agreement regarding the amendment can be reached.

If we do not reach an agreement with the banks prior to the expiration of the waiver, we may seek an extension of the waiver or alternatively terminate the credit facility.

In the event we terminate the facility, we believe we have sufficient liquidity given or current and expected cash position.

I'll turn the call over to Steve for additional comments on the

Thanks, Roger.

And, again, good morning, everyone.

Having spent most of the past two months visiting our operations throughout the country, I am even more confident in the long-term success of our business.

The nuts and bolts integration work continues but operationally, we're looking ahead and making plans on how to best manage the total asset position within each given market and how to best leverage our greater local and national scale.

Nationally our purchasing group has already hosted a series of vendor meetings as we work to centralize and leverage our post merger volumes.

Based on the integration planning work and these follow-on meetings, we've identified $150 million to $200 million of annualized purchasing savings that can be realized in the future.

These are potential savings on top of the $440 million target we have already established.

Locally, we've already started rolling out the required tools and training to shift our business towards a more of a build to order planned production model.

Some of you may be familiar with Centex's achieving competitive excellence or ACE building processes.

By strategically integrating select ACE practices into our Pulte operating system, we can be in a better position to achieve our goals of lowering house costs, gaining greater construction efficiencies, preselling from a position of strength and driving a more level production cadence.

Simply put, through our Pulte operating system, we see opportunities to reduce our total cost of operation and make it easier for to us expand margins by reducing costs and improving revenue.

We are very pleased with our progress so far.

Altering our business model will take a few quarters, but we are well on the way.

The success we are achieving in controlling speculative inventory is in alignment with where we are headed.

Pulte ended the quarter with 2500 spec units including just 930 that were in Centex communities.

On a stand alone basis, Pulte spec inventory was below 1600 homes, which was down 13% from Q2 of this year and down almost 60% from the same period last year.

Again,looking at just the Pulte units we ended Q3 with less than 700 finished specs which is a drop of 16% from the second quarter and represents the lowest finish count we have seen in years.

Our reduced spec position may have resulted in a loss of a few sales tied to the expiring tax credit, but we believe it puts Pulte in a stronger selling position going forward.

As we discussed on the second quarter call, we think managing specs appropriately is critical to driving margin expansion and ultimately getting back to profitability.

As Richard touched on, we are continuing to see a recovery in our margins that were 13.1% before interest, merger costs, impairments and the work in process write up compared with 9.4% in Q2 of this year.

The quarter benefited from getting past the volume of spec units we sold at a big discount in late 2008 and early 2009.

Part of the gain also reflects our ongoing efforts to get costs out of our homes and construction processes.

We entered the quarter with roughly 177,000 lots under control including 62,000 lots associated with the Centex communities.

Of these total lots approximately 154,000 were owned and 23,000 are controlled with options.

Supporting a comment Richard made, In the quarter, we completed only a handful of land transactions, the majority of which were continuations of existing projects.

In general, our basic project profile hasn't changed as we remain focused on asset efficient transactions typically defined as small deals, finish lot option takedowns, quick turns with limited capital outlays.

These types of opportunities can be tough to find.

We certainly remain engaged in the process through out our markets.

Getting a little deeper into our numbers, the cancellation rate for the quarter came in just below 23%.

This was little change from the second quarter and the overall trend was positive as the cancellation rates were lower in the back half of the quarter.

At 18% cancellation rates in our Del Webb communities continue to track slightly better than our traditional projects.

On a reported basis, signups for the quarter total 4050 homes which represented an increase of 20% over the second quarter 2009.

35% over same period last year.

Reported signups in Q3 obviously benefited from the inclusion of Centex's business for the final six weeks of the quarter.

On a stand alone basis, Pulte signups were down about 13% from Q2 and roughly flat with the prior year but on 25% fewer communities.

Pulte's reported backlog at quarter end totaled just under 8400 homes.

Quarter end backlog reflects the usual signup and closing activity as well as the inclusion of roughly 4300 Centex homes.

Let me point out, when the merger was closed, Centex had approximately 4600 units in their backlog.

We chose to roll these homes directly into our backlog rather than ta take them through signups.

as we have done with prior transactions.

As with prior conference calls, let me provide some comments about how our areas performed in the quarter.

Before I get to the details, let me point out that we're now reporting under our six area structure that we went to following the merger.

Also, I think it would be too confusing to give numbers and comments with and without Centex.

so the following numbers are inclusive of the Centex operation for the final six weeks of the quarter.

I will, however, try to adjust for the differences and really just talk to the market conditions.

Given our expanded presence in the mid-Atlantic markets following the merger, we elected to separate what had been our Atlantic coast area into what is now our northeast and southeast areas.

Reported signups for our northeast area, which is essentially northern Virginia to Massachusetts totaled 502 homes which is up 17% from Q2.

The primary driver of the increase was the addition of the Centex operations.

As our base business was relatively stable showing a typical seasonal slowdown as we moved through the quarter.

In our new southeast area, signups for the third quarter were up 55% to 753 homes.

Along with the new Centex sign ups, we continued to experience good demand in Georgia, Charlotte and South Carolina.

We expect these markets to are areas of strength for Pulte not only now but into 2010 and beyond.

Pulte's midwest area saw improved sign ups in the quarter with a 29% sequential increase from Q2 to 502 homes.

Beyond the gains driven by the merger, we actually saw improved signups in Michigan relative to the second quarter combined with stable signups in most midwest markets except for Cleveland.

In aggregate, our Gulf Coast operations posted a 40% increase in reported signups.

Relative to the second quarter demand across all of our Florida operations was modest but consistent while results in Texas benefited from the strong position Centex maintains throughout the key markets.

After a better showing in the first half of the year, our southwest operations experienced much softer demand in the quarter with signups falling 25% from Q2.

The Centex merger had minimal impact on reported numbers for the quarter.

Demand in both Las Vegas and Phoenix was noticeably weaker as potential home buyers moved into the resale market to take advantage of the available foreclosure inventory.

Or these buyers moved to the sidelines entirely.

In our west area, reported signups for the quarter showed an increase of 22% from Q2.

As our results benefited from the inclusion of the Centex operations for the last six weeks of the period.

Demand in our California markets was stable for the first couple of months, but we did see a trail off modestly as the quarter progressed.

This was fairly consistent in both northern and Southern California.

And finally, we ended the quarter with 957 communities, of which 469 were Pulte or Del Webb and 488 were Centex.

It's worth noting that our definition of what constitutes an act of selling effort differed from Centex.

Directionally we expect the combined number will decline going forward as soldout communities are not immediately replaced.

As with Richard and Roger's comments, the merger makes it more difficult to get a clean read on market conditions just by looking at the numbers.

Based on comments, from our operators I would say the market is holding up, although September was softer than July or August, most likely driven by uncertainty over the tax credit extension and some normal seasonality.

Our field teams are focused on finalizing integration and on shifting our business towards a presale planned production operating model that will continue to drive better margins.

Everyone involved is working overtime to implement the needed changes, but the operating and purchasing synergies are important to getting us back to profitability and I am very proud and pleased with the work they are doing.

I'll turn the call back over to Jim now for some Q&A.

Jim?

Thanks, Steve.

We will now open the call to questions.

We ask that you keep to one question and one follow-up.

If you have additional questions,please feel free to get back in the queue where you can follow up with us directly after the call.

Operator, if you would please give any needed directions, we'll now open the call to questions.

Thank you (Operator Instructions) Your first question comes from the line of Megan McGrath representing Barclays Capital.

Please proceed.

Good morning, thank you.

I have a ton of questions, but I guess, the first one is more of a modeling question, but I appreciate the charts on the good will.

I guess I'm still a little bit confused.

Can you explain the difference in the good will balance from when you filed your 8k in September when it was about $690 million to the $1.4 billion it ended up today?

Yes, Megan.

This is Roger.

There were a couple of differences against that one.

One was about $170 million associated with the debt.

Again, we're fair valuing and looking at the debt as we came through quarters.

Prices continue to come in from the discount that Centex was trading at.

By the time we got to closing date, there was very little difference between market and book value on that..

The other was about $400 million in the assets themselves.

As I mentioned, they were driven around a small number of communities, but when we ended up looking at what we were doing on the fair value to the more extensive opportunity, we got to look at the assets themselves and do a lot more analysis on it, we wound up with variances related to loss densities, asset lives, some of the assumptions on pricing as I mentioned.

So, a lot of those things that I mentioned earlier were some of the things that drove some of the differences in some of the projects.

But they're really isolated to rather a few projects, not all projects.

Some of them were concentrated more in the southeastern part of the United States and the Florida market.

Okay.

Thanks.

That's helpful.

And then, Richard, sort of a more higher view question.

As we move throughout 2010, you acknowledged that, the P&L and balance sheet could be a little complex over the next couple of quarters.

How would you suggest that investors evaluate the success of this merger as we go throughout the year.

What are some things we can look for to say that this merger is really working?

I think you need to look at the financial performance of kind of the core run rate of the business, Megan, excluding these adjustments that are going to flow through primarily this quarter and next.

That's why we tried to obviously isolate the run rate of the business relative to margins as an an example You can see the improvement we have there and our comments are for further expectation of improvement in the future.

It's those items.

margins , SG&A performance, signup performance,the typical, I would say metrics that you look at to determine,P&L success.

Obviously that's our keen focus.

We're extremely pleased with what we see going forward, and to your point, it's going to take a little bit of time for investors to be able to interpret through the noise, but that's why we're trying to provide disclosure.

Steve, I don't know if you wanted to add anything to

No, I think that's exactly.

Certainly gross profit margin's a huge area of focus for us.

I think indicative of the work we're doing and the health of the business, Richard mentioned signups and closings.

This continued notion of leveraging the overhead of the two companies.

We increased our guidance on that.

Quite frankly I think we've got opportunities to hit that much quicker than what we originally thought.

As you look at that metric, we'll continue to report out on how we're doing versus what we think is out there.

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

Good morning, everyone.

Morning Mike.

First question.

Focuses on the synergies and then I have a second question on the gross margins, I believe.

But the synergies, I was wondering if you could give us a sense for, given that you have have accelerated kind of time line, let's say, or that you think you can get more quicker just looking out in the fourth quarter, relative to what you perhaps have already to capture in the third quarter, how are we to think of incremental benefits from synergies vis-a-vis, the impact on gross margin and SG&A from the current numbers that we see in the 3Q results?

Mike this is Roger.

It's going to be a bit more difficult in the fourth quarter and that's why we're trying to break out sort of the run rate here.

The 350 million we've talked about being at about $270 million at an annual run rate.

We're in the process from the bottoms up putting our business plans together to get a better view of that so that we got at the lowest level in the organization from a zero-based budget approach so to speak.

So in the short term it's going to be hard because some of the charges still flowing through in the fourth quarter.

We're trying to separate these for you as we go forward.

We had about $270 million run rate captured through the fourth quarter.

We expect about $350 million through the first quarter and then the balance coming through the balance of the year.

So we're showing it more in the margin.

That's why we've broken these out this way as well to show you what kind of run rate then and .

the improvement that we've had really on the Pulte side, not so much the Centex side at this point.

Because as we are coming off, if you look at that chart from the Pulte side from the specs we drove it down..

I think, as we go forward, you are ought to see better improvement in the overhead leverage which we should expect as we continue to add charges but we'll separate those so you get a better view as we look at

And second question with gross margins related to the impairments taken, I guess particularly on the Centex side but maybe you could speak to both businesses.

What with the kind of a different the DCF approach and some more perhaps aggressive approaches that taken that versus perhaps originally expecting to take, can you give us a sense for the post impairment what the gross margins might be on those projects and also just remind us typically what type of margins the Pulte part of the inventory, what gross margins you're comparing those assets to as well?

I think as far as the current impairments, we showed that in the quarter and again broke those out.

If you look at that chart, you'll see the Pulte numbers without those.

Certainly we expect the benefit on those going forward.

Some of the current impairments that we've had are on the longer life assets Del Webb and are not going to flow immediately through the gross margins.

That's what we've really been experiencing the last two or three quarters as more of our projects are the longer lived assets.

You're not seeing our margins rebound significantly because of that.

On the Centex side, specifically for the fair value accounting when we made those adjustments just roughly as we look at some of them, margins moved by about 500 basis points in total on the total project roughly from where they were to the after fair value adjustments.

Now, again, you can't look at those and say that 500 basis points are going to show up next quarter because you have to look at the life of the asset.

That would be the gross margins if you will on the asset for the life of the asset.

Again, some of those have longer lives.

When you start to look at gross margins, some of the price appreciation assumptions you use in modeling could be further out, so again, that's not to say they are all back end loaded but that 500 basis point won't roll in on an immediate basis as we get to the next quarter and the next quarter.

But again, that's why we somewhat trying to break out looking at the margins at this point from where we're starting from to where we're going to in the future.

Your next question comes from the line of Dave Goldberg representing UBS.

Morning everybody/

Hi, David.

The first question is on the deferred tax asset and the FAS (inaudible) allowances and Roger, I know you gave $3.1 billion.

I'm wondering if we could get more clarity around what was acquired deferred tax assets that are potentially subject to 382 and if you guys have better visibility than when you first announced the merger as to the useability or realizability or potentially what you get eliminated because of 382 among the assets that you acquired from Centex?

When I look at the deferred tax asset that was acquired from Centex, was roughly about $1.3 billion, and roughly what we determined is we're at a run rate now at of $68 million a year on a 382 limited basis.

So,roughly, that's about $1.7 billion if you take it out over 25 years and 35% would be roughly $600 million of that would be available to us on a limited basis.

And then again, when you end up with land that you still own after the five-year period that becomes unlimited and tax claim that goes into that as well going forward.

Just on a limited basis, we would have access to roughly about $600 million.

I guess the question was really, how much of the $600 million do you think, in other words, I want to make sure I say this right.

I understand the limitation the $600 million.

Do you think you will exceed that level?

Do you have any better visibility after the actual recognizability in what might be lost?

No, I can't tell you today.

That depends on profitability and timing and things like that.

As we've said, we're working very quickly and diligently to try to get to profitability to be able to maximize our value on that, and anything else we can get off of it as well.

There's a fair amount of tax playing that needs to get on with projects.

Again, we talked about in the past, if you have two projects together and they both do the same thing, one a Pulte and one a Centex, you may slow down on Centex or push on Pulte so you've got the ability to carry that over after a period of time.

So you started up in year three instead of year one, and you have the ability to carry it over and maximize the opportunity of the potential of that nonlimited amount.

All that is what we're working on today with the organization to look at the opportunity to capture as much as possible.

Your next question comes from the line of [Dennis McGill] representing Zelman & Associates.

Good morning guys.

Roger or Richard, sorry, the comments you were making earlier about sort of the view of how land assets are going to come out of the banks, or other distressed sellers, obviously implying that it might not be as advantageous for those sitting on cash to be able to reload at really attractive prices.

You had an opportunity here through Centex to get quality assets that arguably good prices.

You didn't have to use cash to do it.

That obviously probably benefits you more than anybody else as you look at how the land market might evolve the next couple of years.

Can you maybe just give us a sense of how your combined company now can look from a cash flow basis and from a growth basis as far as being able to open communities without really having to invest a lot of cash and maybe even being able to generate cash when the market turns around as opposed to others who may have to put a lot of money into the ground?

Just trying to understand how maybe the advantage of having the Centex assets might change the cash needs of your company versus others.

This is Richard.

I'll start and then throw it to Roger or Steve if they have any additional comments.

Generally speaking, we're not looking to invest a tremendous amount of money into new acquisition in the near term.

We still of course have development dollars that are going to be flowing through.

Some limited transactions where we can find opportunities on a avery asset efficient basis..

But directionally, the way you characterize is the way we think about it.

We like the land positions we have

We've obviously made significant investment in land here with the Centex combination and we expect to reap the benefits from that.

Our operators are not feeling the need to be aggressive with regard to land acquisition.

We've got a sizable position in quite a few markets.

So we're pleased with that.

We're not giving any guidance yet on how we see cash flow coming in yet.

Perhaps we'll see more about that in the future, but generally speaking, we agree with kind of what you said there.

We don't see the need to have to reload any time soon.

We feel like over time the value in this dirt will show itself as land sellers are smart and are going to raise prices as people need land.

We're not one of those who need land.

Roger, you want to add to that?

Yes, I'll just add we just acquired 488 communities roughly so our ability to have to go out and buy is much more limited.

We have a number of communities that are rolling off.

So, this are smaller communities that are going to generate cash much quicker in the short run.

Our ability to have to use cash for land is limited as Richard said.

A more pressing need would be putting cash into (inaudible) as the business begins to.

We'll see some of the cash go back over there because we need it into the overall capital working capital side of it.

As we go forward, again, looking at opportunities, we still have that ability to replace where we need to, and we still, continue to focus on what we've just acquired.

So in the short run, again, from a cash standpoint, pretty solid from that going forward here.

Your next question comes from the line of Nishu Sood representing Deutsche Bank

Hi this is Rob Hansen in for Nishu.

Just building on the last question.

Going forward your upset (inaudible) maturity schedule on this land, how much cash are you comfortable with on the balance sheet going forward?

What would be your goals to keep, kind of a minimum level if the revolver is terminated or if you keep the revolver.

Rob this is Roger.

Certainly a lot of what ifs.

But in the short run, as we've talked about over the last couple of years, liquidity is very important at this point.

Being comfortable a certain amount, certainly I don't think you can ever have enough in this environment.

Again, we need to continue to watch where the future environment's going to go.

Sill a very choppy and fragile market.

that we're in today.

I think having enough is very important to us from a liquidity standpoint.

I think our maturities are in good shape.

We've set ourselves up well for that, not having any near-term significant maturities coming at us.

We can be patient about what we want to do going forward from this point.

So we haven't set a target exactly.

We're still coming out of a very deteriorated market and shattering on the balance sheets of the industry that, cash is king at this point until we clearly see an avenue to make investments one way or another.

All right.

And in terms of, I just wanted to tray to get a little more detail in terms of your purchasing synergies where exactly that is and what kind of volume levels you'll need for that.

Rob this is Steve Petruska.

When we got a chance to really dig into things post merger, we focused on three key areas.

I would tell you the immediate synergies are coming out of two of those three key areas.

The first being vendor consolidation.

In the markets that we operated in, obviously, our vendor segment was not the same, and as you might expect, pricing differed sometimes in favor of Centex, sometimes into favor of Pulte.

Certainly our town hall meetings with our vendors and suppliers was designed to consolidate that vendor group.

It's not like any of them are operating at peak capacity and they certainly would like to get some more work and certainly we can see better pricing because of that.

So that was that first bucket.

That's a fairly large bucket.

The second one is what we call price rationalization.

As we became bigger in each one of these markets, in addition to the trade base being able to be more efficient because we can give them more work, we also saw a lot of price rationalization between materials used in building of the product.

That's a fairly large bucket for us.

We are aggressively going after those dollars and hope to have a lot of that into what we call our Schedule A, which is our ability as we start new homes by January 1, start really recognizing that.

Then the third is, as we look at our overall specifications of product.

Both of us were operating businesses that were targeting similar consumers, yet we found that because Centex's business was much more targeted toward the entry level buyer, they had a much more defined spec base for that entry level product than Pulte did.

So we're able to go in and look at the standard specifications in a Pulte home targeting an entry level consumer and adjust those specifications and see some significant house cost savings at a base level.

When we look at the 150 to $200 million that we think we can build to in the future on a run rate it's coming out of primarily those three buckets.

Your next question comes from the line of Dan Oppenheim representing Credit Suisse.

Please proceed.

Thanks very much.

Was wondering if you could talk about the merger synergies with the $270 million run rate in the fourth quarter.

Imagine that basically the savings and interest come especially included in that.

So of the remainder, how much of that is comming from corporate versus field versus financial at this point and what should we expect to see coming next?

Dan, this is Roger.

I don't have the specific numbers for the fourth quarter in front of me.

You're right, the combination of the interest savings on a quarterly basis.

Of course the corporate was the first thing that's going to contribute the largest amount earliest because we had redundant functions in both companies so we made changes very quickly there.

I would tell you that the majority's going to start to really generate from the corporate savings plus the interest.

The field organization's still working on a lot of theirs but have moved very aggressively through that as well.

So it's a combination of each one of those.

I don't have the specific detail in front of me.

Corporate interest and then, if you look at the field organization, will generate that kind of in that order at this point.

Dan this is Richard.

I would just add that we did a lot of the planning of this between the time of announcement and the time of closing.

So we're able to move very quickly.

That's one of the reasons we upped the time line as we're able to exceed our own expectations in terms of pace of flight here.

Great.

Then, I guess, in terms of your comments about the slowdown in September due to the uncertainty of the tax credit and the seasonality there.

Can you quantify that also, how do you think about potential for demand pulled forward there so it's not some certainty we've seen some of the demand so we may be a bit lower level as we go through the fall and (inaudible) .

Dan, actually, we think that the overall demand level -- this is Richard.

The overall demand level for housing in the country has actually been fairly consistent.

What we've seen over the last few weeks, though,a shift to the resale market where there's inventory available particularly for close inventory.

That's reflected in the numbers that just got reported in just the last few days, on the pretty stark difference between new housing numbers which came in "disappointing", versus resale numbers which came in far exceeding expectations.

I think what you're seeing is new home builders for the most part have not built much inventory to try to capture the tax credit.

And the resale market still has a ton of inventory out there So I think demand has been relatively flat and consistent.

Having said that, we're certainly in favor of the tax credit getting extended and expanded and we're very hopeful that that happens because the economy is still relatively fragile.

It's hard to quantify how much has been "pulled forward".

I've seen some of the write ups on that and candidly, it's very difficult to know, but as we talked to operators and get anecdotal evidence out there, still a lot of buyers shopping, but if they can't get home from us by November 30, they're buying from a resale.

Your next question comes from the line of Carl Reichardt representing Wells Fargo.

Please proceed.

Good morning.

Good morning, Carl.

But Roger I wanted to-- you mentioned some appraisals haven't been completed that might adjust that good will number as we look out the next quarter.

Can you give me a sense is that likely to be a significant adjustment or do you think it will be relatively minor?

I want to make sure.

if it were heading to a good will number here or close to it.

Carl, I'm always cautious about, what material or not as a point, but we have, a number of projects.

It's a handful of projects it's not hundreds of them that we're getting third party appraisals on.

But we still have some of the JV's that we're working on, income taxes, deferred taxes, some of the PP&E and some casualty insurance.

Those are a couple buckets that we continue to work on with third party appraisers and, participants.

So it's hard for me to tell you until we actual I had get there and get to a conclusion on it.

But, so I don't know what to tell you on a number at this point.

Okay.

Just second.

If you look out what of the next couple of quarters would you expect to see the most impact from the written ups and text deliveries?

Where should we be looking at them?

I would assume it's Q4 Q1 in where should we be looking at the most significant impact from those written up deliveries?

Also, could you tell me whether or not right now you give me a sense of when you think you could be cash flow positive in 2010 giving all that you've got now that you'll be moving through?

I'll start with the first one on the acquisition accounting.

Centex basically on their web we wrote up around roughly around $39 million and we took $10.5 million in the third quarter there'll be almost twice that amount basically in the the fourth quarter and a little bit more in the first and second quarter next year.

That's pretty much how it probably is going to roll out.

That is all dependent on the volume and level of the activity that comes through on the closings.

But, kind of just that rule of thumb fourth quarter should see the biggest impact and less of the first and second.

So, that'll that be piece.

Cash flow again I would tell you that, we need to first see our business plans, understand those.

Naturally, we're not going to change our are stripes as a company.

So you've seen what we've done the last couple of years managing the business.

These are the things we'll continue to do on a consolidated basis with both companies.

Our efforts there won't change from where we've been.

The drive's going to be to try to have a healthy balance sheet and business going forward.

Your next question comes from the line of Joshua Pollard representing Goldman Sachs.

Please proceed.

Good morning.

It seems you guys are guiding investors most closely to your cost improvements and you raised your guidance there twice post the Centex merger Can you outline what the base is for the $440 million cost synergies?

This is Roger.

Basically what we did is when we began to work with Centex, we put baselines together in our April time frame of this year.

That was where the business was at that point in time.

We baselined it off of there to go forward.

So we took both organizations, looked at our cost structures, put 'em together and, put estimates together of pulling costs out of both those organizations,

Hello?

Yeah, we can still hear you.

Okay.

I apologize, my phone must have cut off and I didn't hear the end.

I guess my question here is, you guys are cutting the 440, but what was the total number of costs for the combined companies the way you guys are calculating it?

It's hard to show you because a lot of it's public information.

What we had was,, information from our business plans and our forecast internally.

So if you're looking at prior year added together, the number will exceed the $440 million of course, because each business has been on a downturn from the last couple of years.

Every single quarter that we've come through the last couple of years, our overhead cost structures will be coming down.

What we set as a base line for what we thought internally our business was going forward, of course we didn't give that guidance and we've discontinued our guidance given the environment today.

But if you were were to add prior period together, would you see that number eventually wind up to be larger than the $440 million.

We had view of what our run rate was at that time.

Your next question comes from the line of Ken Zener representing Macquarie.

Good morning.

Good morning, Ken.

I wonder if you could just expand and give a little more color on the land impairments you guys took with Centex, I thought it was fascinating only 5% of the communities committed 80% of the writedown.

Can you give us thought process as to why that happened based on where the prior accounting process, in terms of triggers occurred.

A was it related to mothballs and perhaps what the implication was for your book.

Yes, Ken, again this is Roger.

I've pretty much described all the components that went into it naturally when you take a look at it, 750 communities to look through.

As we got deeper involved in some communities, as I mentioned, in the southeastern part of the US and Florida markets specifically we had a number of projects there where's we took a look at the strategy of those projects, the pace, the pricing, some of the assumptions that went into them and we made some strategic modifications to those as we would view them.

Others came through looking at the pace of what we saw versus potentially what we had modeled earlier.

All of those started to play into it.

The significant ones were the differences in the larger projects as I mentioned in the south eastern part of the US where we saw strategic differences in the way we were going to run it.

Changing densities, that type thing generated probably a bigger portion of the overall change.

Okay, I appreciate that.

Just to follow up on the runs that you wrote up, what was the actual dollar value there .

And if you guys could give us the combined units under construction for both-- for the combined company and related to your own lots.

You guys move lots to held for sale you actually remove it from your own lot count if could you quantify that related to the merged

I'll answer the first one.

Mike will take the second one.

Again, looking at what was the total writeup and calculate which dollars were the total writeup and which were the total writedown.

This was a net adjustment.

Some up, some down.

I don't have a total number of which ones were write up other than the statistics I gave you of the percentage of the communities that went up and down.

I don't have the dollars specifically for the writeups on a gross basis.

This is Mike.

Total units under construction combined was 8807.

That does not include model units.

Your next question comes from the line of Alex Baron.

representing Agency Trading Group Please proceed.

Thanks, guys.

I wasn't sure if you guys gave the number of the benefits of gross margins from previous impairments?

This is Roger.

We didn't.

I think I've mentioned this a number of times.

It's becoming less meaningless to continue to talk about that number, but roughly a Pulte stand alone if you were to look at it.

It was roughly $95 million of bring back in the total margin.

It's becoming meaningless because we have pricing movements and stuff like that.

So it doesn't do a lot to give that.

On the Centex side, as I mentioned, their adjustment, we had two of them in the margin this quarter $10.5 million from the with and basically, this was a positive impact $3 million of bringback from the land fair value adjustments in the quarter as well.

Great.

The other thing I was wondering going back to the slide on the good will accounting, as I add of the inventory writedowns on the capitalized interest comes out to $900 million, is this any reason that couldn't just be written down this quarter as opposed to be put on as good will?

That's the accounting convention now.

So, no, that's not the alternative is to run thousand your P&L The, accounting convention is to take it to good will.

Your final question comes from the line of Susan Berliner representing JPMorgan

Good morning.

Thanks.

Two quick questions.

One, I was wondering if you guys could talk about what you're hearing on the NOL potentially passing and how you're kind of looking at that and what it could potentially provide to you.

The second question I was wondering,with your large land supply now, if you could give any more additional details with regards to how much is exactly finished, partially finished, et cetera?

Sue this is Richard.

I can take the first one.

Then perhaps Roger or Mike can help you on the second one.

We're really not commenting on the NOL legislation at this point.

It's obviously a work in process and not sure where it's going to go.

A lot of our focus is obviously on the tax credit legislation.

Roger or Mike, do you have any details?

This is Mike.

In terms of our own lots 50,500 are finished.

Ladies and gentlemen, this concludes the time that we have for questions on today.

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

Jim Zeumer for closing remarks.

Thanks very much.

Thank you, everybody, for your time and attention today.

We're certainly available after this call ends for any additional questions.

We look forward to speaking with you on the next quarter.

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

This concludes your presentation.

You may now disconnect.

Good day.