普爾特房屋 (PHM) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the fourth quarter 2009 Pulte Homes, Inc.

earnings conference call.

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

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

We will be facilitating a question and answer session towards the end of this conference.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr.

James Zeumer.

Please proceed, sir.

Thank you, Erica.

I want to welcome everyone on the call and listening via the internet to this morning's call to discuss Pulte Homes results for the quarter ended December 31, 2009.

On the call with me to discuss the results are Richard Dugas, Chairman, President and Chief Executive Officer, Steve Petruska, Executive Vice 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 pulteinc.com will accompany this discussion.

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

We believe these slides will greatly assist you in understanding and the analysis of our quarterly performance and strongly encourage everyone to review this material.

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

Unless otherwise identified results reported in this release and on the call reflect the inclusion of Centex operations for the entire fourth quarter, although prior period results have not been adjusted for this merger.

Finally, I want to alert everyone 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 call should refer to Pulte's annual report on Form 10-K for the year ended December 31, 2008, and this morning's press release for a detailed list of risks and uncertainties associated with the business.

Certain statements made -- excuse me -- during this call also contain references to non-GAAP financial measures through this morning's press release, which is available at our corporate website, pulteinc.com, for reconciliation of non-GAAP financial measures to comparable GAAP numbers.

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

We'll wait until then to open the queue for questions.

I will now turn the call over to Richard Dugas for this morning's comments.

Richard?

I will now turn the call over to Richard Dugas for this morning's comments.

Richard?

Thanks, Jim, and thanks to everyone joining us on the call today.

From sign-up pace and origins to cost controls and cash accumulation, Pulte Homes' fourth quarter results demonstrate another quarter of improvement in key business and financial metrics.

Our operations are clearly making important strides, as we continue to advance on our primary financial priority, which remains consistent profitability.

Pulte Homes' fourth quarter results reveal a number of very positive data points.

That said, accounting charges related to good will, land and merger costs make this quarter more challenging to interpret.

As we did in the third quarter, we'll do our best to isolate the significant charges taken in the quarter in order to provide better insight into the performance of our ongoing operations.

Roger will provide more details on the quarterly financial results, but at a high level, there are several key metrics I would like to highlight.

First, order rates for the quarter were up 113% on a reported basis.

The 100+% increase obviously reflects the merger with Centex.

If you look at the results on more of a proforma basis, our Q4 sign-ups were also very strong, showing an increase of 32% over combined Pulte and Centex numbers for the same period last year.

Along with strong orders, we realized continued expansion in gross margin, which was 14.2% for the quarter before impairments and merger-related costs.

Margins expanded every quarter in 2009, as we worked hard to lower our construction costs while improving our selling position by moving toward a build to order model.

There is still much work for us to do, but we made steady progress over the course of 2009 and expect further margin improvement in 2010.

Along with reducing our cost of goods, we are realizing similar success in lowering and leveraging our SG&A.

Fourth quarter home building SG&A for the combined businesses was $188 million, which is down more than $17 million from Pulte's stand-alone last year.

SG&A costs as a percentage of home building revenue dropped 170 basis points, as we realized meaningful overhead leverage on the volume delivered in the quarter.

When you stop to consider that we are now running two businesses versus just one last year, this absolute reduction in overhead clearly demonstrates how aggressively we are attacking these costs.

Adjusting for the charges taken in the quarter, we have significantly moved the needle on profitability through the gains we have delivered in both margin and overhead leverage.

We fully appreciate that you still have to count all the other costs, but driving the business to and ultimately beyond break-even are critical next steps to our consistent profitability.

That brings us to the question that seems to be on everyone's mind.

Can Pulte be profitable in 2010?

We stopped providing guidance two years ago, but I think it's important that we help to set expectations.

As demonstrated in the fourth quarter, on an adjusted basis, we are much closer to being profitable than many expected.

Organizationally, we have positioned the business to be profitable in 2010, but success ultimately requires ongoing stability in market demand and associated pricing.

Internally, we'll do our part in that we fully expect to realize targeted synergies and overhead leverage and to capture the benefits associated with the adoption of our build to order model, which include better margins and more consistent closings.

Externally, while we are cautiously optimistic about housing demand in the year ahead, we can't control macro conditions, but can only be prepared to respond as the year plays out.

Again, in making these comments, it is not our intent to open up a financial modeling discussion, rather we just want to highlight the fact that our operations have worked very hard to reduce costs and improve their operating position, heading into a year in which the macro environment is yet to be defined.

After three-plus years of depressed industry sales and recent signs that the economy is beginning to gear up, there are reasons to be hopeful about US housing demand in 2010.

We continue to believe that job growth and improved consumer confidence are needed to drive a meaningful rebound in new home sales.

That being said, we appreciate that as the economy gets better, the government will look to remove industry supports.

The tax credit likely won't be extended.

Mortgage rates will likely move higher, and the FHA has already outlined plans that will result in some limited tightening of lending standards.

Over time, we believe that all of the government supports for housing will and need to go away.

Ideally it happens as soon as consumer confidence and job growth return.

Regardless of demand conditions in the immediate future, having the opportunity to be profitable in 2010 was clearly enhanced by the strategic decision to merge with Centex.

By running the two businesses with essentially one management team, we have the opportunity to save over $310 million in corporate and field costs, plus $130 million in interest savings we are realizing from paying down the $1.9 billion in debt.

We have already implemented needed actions to generate these savings and remain on track toward our stated goal of capturing the first $350 million in annualized savings by the end of the first quarter this year.

We also remain confident in achieving the targeted $440 million in annual savings by the end of 2010.

Beyond these cost savings, as a result of the merger, Pulte now controls approximately 155,000 lots, which means we have a land pipeline that can help drive future sales and cash flow generation.

More importantly, the simple fact that we control lots and are not under any pressure to acquire additional land positions is certainly an advantage.

One of the strategic pillars to the deal was acquiring Centex's 56,000 lots while retaining our cash position.

I think everyone is getting a better appreciation for the current land environment and the limited availability of well-positioned finished lots.

The long anticipated and feared flood of bank-owned lots has not and in our view will not materialize.

Replacing this fear more recently has been a growing concern that A-location lots will remain scarce and that lot pricing has already started to rise.

We are seeing new land transactions being offered and completed at values that are meaningfully higher than those of just six to 12 months ago.

2009 was tough, but clearly a different trajectory than the prior couple of years.

We'll have to see how 2010 develops, but the Company's ample cash position puts Pulte Homes in a very strong position to manage whatever the market has to offer.

If conditions become more challenging, we can further liquidate our inventory and increase our cash position.

If conditions get better, we have a supportive land pipeline to meet customer demand and the liquidity to fund working capital needs associated with any increase in home construction.

In conclusion, let me thank our employees and business partners for their efforts and commitments throughout 2009.

They have helped to dramatically improve Pulte Homes' results and its near-term prospects.

We are in a much improved position heading into the new year and as we say internally, it's time to get back to winning.

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

Roger?

Thank you, Richard.

Good morning.

Revenues from home settlements for the home building operations increased approximately 5% from the prior year quarter to approximately $1.6 billion.

Increased revenues reflect the increase in unit closings that were above prior year by approximately 13%.

The average sales price decreased approximately 7% versus the prior year quarter to an average of $258,000.

In the fourth quarter, land sales generated approximately $90 million in total revenues, which is a decrease of approximately $2 million versus the prior year's quarter.

The sales in the quarter resulted from the rationalization of our land portfolio and giving consideration to the land acquired in the merger.

Specifically, these were assets deemed to be nonstrategic in their respective markets, given the positioning and concentration of their portfolios as we look to rebalance, to optimize profitability and returns.

We sold approximately 40 land parcels, of which approximately three quarters were Pulte positions and the remainder was former Centex positions.

Additionally, we eliminated approximately $4 million in annual carrying costs.

Home building gross profits from home settlements for the quarter, including home building interest expense, was approximately $26 million versus a loss of $84 million in the prior year quarter.

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

Home building gross margins from home settlements as a percentage of revenues was 1.6% compared with the negative 5.5% in the fourth quarter of 2008.

Adjusting the current quarter's gross margin for land and community valuation charges, interest expense, and the acquisition accounting write-up for the Centex work-in-process resulted in a 14.2% conversion compared to 13.1% for the third quarter of 2009, or an improvement of 110 basis points.

As I mentioned in our prior conference calls, we expect the sequential quarterly improvements in gross margin, as we worked our way through the backlog of higher incentives from earlier in the year and the house cost reduction initiatives we executed during the first quarter of 2009, now benefiting margins on home closings in later quarters.

Home building interest expense decreased during the quarter to approximately $41 million versus approximately $61 million in the prior year.

Included in the interest expense of $41 million is an additional $11 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 $140 million.

For the fourth quarter, we tested approximately 53 communities for potential impairment evaluation adjustments.

We recorded valuation adjustments on approximately 40 communities for the quarter, of which approximately 34 communities or 85% had been previously impaired.

Additionally, we impaired three large projects, which represented approximately $99 million, or 71% of the total $140 million in impairments.

Of the $140 million of land and community valuation adjustments, approximately 49%, or $69 million were related to Del Webb communities reflecting adjustments due to current absorption rates and pricing.

The total net loss from land sales posted for the quarter was approximately $97 million.

The loss is mainly attributed to the fair market value adjustment in the current quarter for land sold and land being held for disposition in the amount of approximately $98 million, which is included in the land cost of sales.

Home building SG&A expenses as a percent of home sales for the quarter was approximately 11.8%, or $188 million, a decrease of approximately $17 million, or approximately 8% versus the prior year quarter.

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

In addition, the fourth quarter includes approximately $7 million for employee severance costs and merger and integration expenses.

If we look at SG&A on a proforma basis, our expenses reflect a reduction of approximately $168 million, or 45% of the combined Pulte and Centex SG&A expenses from the previous year's quarter.

In the home building other income and expense category for the quarter, the expense of approximately $608 million includes a good will impairment of approximately $563 million, the write-off of deposits and preacquisition costs, resulting from the decision not to pursue certain land acquisitions in the amount of $36 million, and valuation adjustments in unconsolidated joint venture investments with the liability reversal of approximately $5 million.

As included in the category for the quarter is approximately $10 million associated with restructuring charges related to overhead expense reductions associated with lease exit costs and fixed asset impairments related to the merger with Centex.

To further expand on the good will impairment, during the fourth quarter and specifically as of October 31 of each year, we perform our annual good will impairment test in accordance with AFC 350, where we evaluate the recoverability of good will by comparing the carrying value of the Company's reporting units to their fair value.

Fair value is determined using accepted valuation methods, including discounted cash flows supplemented by market-based assessments of fair value.

Impairment is measured as the difference between the resulting implied fair value of good will and the recorded carrying value of good will.

We had recorded in the third quarter approximately $1.4 billion in good will, all attributable to the Centex merger.

As a result of the test, we determined that approximately $563 million of good will was impaired.

This impairment resulted from a number of factors, including the significant decline in the overall market capitalization of the Company between the Centex merger date and the good will valuation test date.

The relationship between market capitalization and shareholder equity, and the requirement under AFC 350 to allocate all good will to the reporting units, even though a significant portion of the good will is attributable to the economic value of deferred tax assets, and corporate and financing synergies that do not get directly reflected in the fair values of the individual reporting units.

The home building pretax loss for the fourth quarter of approximately $867 million resulted in a pretax margin of approximately a negative 51% on total home building revenues.

Adjusting for the impact of the charges related to the good will adjustment, the valuation adjustments in land inventory and investments, land held for sale, severance and related charges, merger and integration expenses, and the Centex work-in-process adjustment of approximately $884 million, home building pretax margins converted at a break-even level for the quarter.

The pretax loss from Pulte's financial services operations for the fourth quarter was approximately $36 million, or an increased loss compared to the previous year's quarter of approximately $28 million.

The loss in the quarter is mainly attributed to an increase in loan repurchase loss reserves by approximately $37 million during the quarter and integration and severance costs related to the Centex merger of approximately $4 million, partially offset by an increase in loan origination principle volume from an increase in settlements.

Total mortgage principle origination dollars were $906 million, an increase of 7% when compared to the same period last year.

The increase is related to the volume increase in the home builder closing activity for the quarter.

Total agency originations were $823 million.

Non-agency originations were approximately $6 million, and brokered or non-funded loans were approximately $77 million.

Additionally, within the funded agency originations, FHA loans were approximately 45% of the loans funded from the financing line in the fourth quarter compared to approximately 43% in the third quarter of 2009.

Pulte mortgage's capture rate for the current quarter was approximately 81% and the average FICO score for the quarter was 735.

In the other nonoperating category, pretax loss for the fourth quarter of approximately $14 million includes corporate expenses of approximately $11 million, and the write-off of approximately $3 million associated with capitalized bank fees as a result of our completed amendment to the revolver agreement during the quarter.

For the fourth quarter, the Company's pretax loss was approximately $917 million.

The pretax loss includes $928 million for the charges related to the good will impairment, valuation adjustments and land inventory and investments, land held for sale, severance and related charges, merger and integration-related expenses, loan repurchase loss reserves, and the write-off of the capitalized bank fees.

The net loss for the fourth quarter was approximately $117 million, or a loss of $0.31 per share as compared to a net loss of $338 million, or a loss of $1.33 per share for the same period last year.

The quarter reflects a tax benefit of approximately $800 million, primarily due to an adjustment in the deferred income tax assets related to the enacted Worker, Homeownership, and Business Assistance Act of 2009 legislation, which allows for the carry-back of federal tax losses.

The new legislation extended in that operating loss carry-back period from two years to five years.

The number of shares used in the EPS calculation was approximately 376.9 million shares for the fourth quarter.

The total shares outstanding at December 31 were approximately 380.7 million shares.

Now to review the balance sheet for the quarter, we ended with a cash balance of approximately $1.9 billion, increasing approximately $340 million from the third quarter of 2009.

House and land inventory ended the quarter at approximately $4.9 billion.

The total reduction in house and land inventory and land held for sale generated approximately $356 million in cash from the third quarter of 2009.

During the fourth quarter, our new investments in land were enrolling lot option takedowns and purchases of approximately $90 million and land development spending of approximately $170 million.

With the passing of the new legislation extending the carry-back period on the NOL, we increased our income tax receivable by approximately $917 million to $955 million associated with the expected federal tax refund.

And the difference of $38 million associated with the state tax refunds receivable.

In accordance with AFC 740, or FAS 109 accounting for income taxes, at December 31, we had net deferred tax assets of approximately $2.3 billion, which were offset equally by a valuation allowance due to the uncertainty of realizing these net deferred taxes.

With approximately $1.9 billion in cash to end the fourth 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 57.3% and on a net basis, 42.8%.

Interest incurred amounted to approximately $69 million in the fourth quarter compared to $54 million for the same period last year.

Pulte's home shareholder equity for the fourth quarter was approximately $3.2 billion.

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

I will now turn the call over to Steve for additional comments on the fourth quarter.

Steve?

Thanks, Roger.

And once again, good morning to everyone.

Externally the fourth quarter saw a continuation of market conditions experienced through much of the year, while internally we successfully advanced key operating initiatives, while continuing the integration with Centex.

To that last point, we've grown increasingly confident in our ability to capture the critical benefits associated with this transaction related to cost savings, brand development, and land access, having effectively absorbed Centex community's indoor tracking and reporting systems.

We've also started the process of rationalizing some of the combined land positions along with redesigning and/or rebranding select communities to better match the targeted consumer profile.

At year end, the combined operations controlled just under 155,000 lots, of which 89% were owned and the remaining 11% under option.

Within our land pipeline, about one third of the lots are developed, which means we're in a great position heading into the selling season and for meeting demand in general.

There's been a lot of discussion about the increasing demand for land and it is certainly the case that finished lots in decent locations can have multiple bidders.

The obvious result is that land prices are starting to creep up in a number of markets, or more specifically, submarkets across the country.

Our existing land pipeline means we aren't under any undue pressure to complete deals so we can be more selective in acquiring positions that offer the best possible returns.

Further, because we still have land development capabilities in-house, we can look at alternative transactions where the land is entitled, but we may have to rework those entitlements.

Builders that have dismantled their land operations no longer have the expertise to change entitlements, meaning they are effectively restricted to bidding on projects at the most competitive segment of the land market.

Consistent with the comments above, in the fourth quarter we acquired approximately 2600 new lots, while rationalizing some of the combined Pulte Centex inventory by selling approximately 12,000 lots.

Beyond land, our purchasing operations are through the first phase of integration, which involved among other things, a line-by-line comparison of the material and labor costs for Pulte and Centex.

With the best prices identified, we then set about ensuring that both organizations were at a minimum paying this lowest price.

The purchasing group has now moved on to the next phase, which is to capture opportunities to take supply costs down even further.

Given our adoption of key elements of Centex's build to order model, part of this work involves a detailed analysis of total vendor costs, including those specific to how they deliver materials or services to our operations.

Home building this historically has not been the most efficient business, so there are numerous activities which have developed over time that increase the time, complexity, and/or costs associated with building the home.

By partnering with suppliers, we can identify these low value-added activities and related costs and find ways to eliminate them.

As part of our Q3 results, we talked about targeting purchasing synergies in the range of $150 million to $200 million.

I'm pleased with the progress we've made to date and the opportunities we are seeing to realize ongoing benefits in the future.

Cost savings along with reduced spec sales continue to help our margins, which increased 110 basis points sequentially to 14.2% before interest, merger costs, impairments, and the work in-process write-up.

Further, given the near-term visibility associated with our current backlog, our expectations are that we can realize additional margin expansion in 2010.

Moving on to other data points for the quarter, on a reported basis, sign-ups for the quarter totaled 3,748 homes, which is an increase of 113% over the same period last year.

As Richard mentioned, just as a point of reference, Q4 sign-ups increased 32% compared to combined numbers for Pulte and Centex last year.

Our Q4 sign-ups were generated from a community count of 882, which is down approximately 8% from the third quarter 2009.

Cancellation rates for the quarter ticked up to 25.9% from just under 23% in Q3, although significantly better than last year's cancellation rate of almost 50%.

Cancellation rates bounced around throughout the quarter with no specific period or region driving the changes.

The higher cancellation rate did roll back our unsold inventory position which at just under 2,800 homes was at 11% from the prior quarter.

While up slightly from Q3, this represents a 20% decrease from Pulte standalone at the end of 2008.

Pulte's backlog at quarter end totalled approximately 6,000 with a value of $1.6 billion.

As with prior conference calls, let me provide some comments about how our area has performed during the quarter.

The merger makes direct comparisons of sign-ups less meaningful, so I'll try to provide commentary as to the underlying business conditions.

Reported sign-ups for our Northeast are which is essentially northern Virginia and Washington, DC up to Massachusetts totalled about 448 homes.

The markets have held up relatively well although we did feel the impact of community closings and uncertainty around the tax credit.

In our Southeast area, sign-ups for the area were 649 homes.

We have experienced good demand in our South Carolina coastal operations although this was offset by seasonal slowdowns and some pullback in demand out of our Georgia operations.

Given the land positions we acquired via Centex, we expect this area to be a solid performer in 2010 and beyond.

Sign-ups in our Midwest area totaled 434 homes and look to be consistent with the typical seasonal slowdown combined with a 6% decline in community count.

General economic conditions for the Midwest remain very challenging, although it would appear that they did not get materially weaker as we ended 2009.

Our Gulf Coast operations continued to show very strong performance with sign-ups of 1,337 homes in the quarter.

Gains were particularly strong in both South Florida and Dallas.

In general, demand in Texas has been fairly consistent across the markets, while Florida remains difficult, but with some glimmers of demand in the single-family detached product.

Market conditions in the Southwest continued to be among the most difficult in the country, as both Phoenix and Las Vegas continue to struggle with too much inventory on the ground.

Even within this environment, we are finding pockets of improvement in markets closer in towards Phoenix.

Q4 sign-ups in the area were 429 homes, with demand growth in New Mexico being among the bright spots, albeit at small volumes.

Finally, sign-ups of 409 homes in our west area reflected relatively stable market conditions.

We're excited about the operations we acquired in Seattle and Portland, although they may be among the most challenging land markets we face in the country.

Moving south into California, we experienced a little weakness in the bay area, but it's likely more seasonal than any real change in demand.

In general, closer in positions in both Northern and Southern California are holding up well.

It's the further out markets into which building expanded during the run up that are still really struggling.

In terms of sales, I'll tell you that our markets are still working through the integration process, as they sort through the existing land positions and community offerings, which make the demand picture a little cloudy.

That said, I think Q4 was a continuation of the relatively stable environment we saw earlier in the year.

Offset by some seasonal weakness and slowing associated with the off again-on again tax credit.

As I've told our operators, I'm excited about Pulte's opportunities heading into 2010.

In the month of January we experienced good traffic and conversion rates and we've experienced improvement as each week has progressed, which is what you want to see heading into the selling season.

With the primary selling season in front of us and the opportunity to create a greater sense of urgency for buyers, we think this bodes well for continuation of these trends.

Our operators have done a great job managing through a challenging year while at the same time successfully integrating another organization.

I know I speak for the entire team when I say thank you to our employers, our employees and our business partners who have been instrumental to the gains we've realized last year and we will realize in the year ahead.

Let me turn the call back to Richard for an additional comment.

Richard?

Thanks, Steve.

I just want to make sure that everyone is aware that in the coming weeks, we'll be moving to our new corporate name of Pulte Group.

Shareholders voted to approve this change last year, but it's part of a larger branding program that we are just starting to roll out.

This change will not impact our New York Stock Exchange symbol or trading on the exchange.

The name change coincides with this year's celebration of Pulte's 60th year in operation, which is a tremendous milestone in any industry, but especially in home building.

The Company has come a long way from the first house that Bill Pulte built himself in 1950, but we are as passionate now about the business as when Bill first founded it.

Let me turn the call back to Jim.

Thanks, Richard.

We'll now open the call to questions.

As we have done on prior calls, 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, or you can follow up with us directly, later in the day.

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

Thank you.

(Operator Instructions) Our first question comes from the line of Josh Levin with Citi.

Please proceed.

If home prices are stable from here, how should we think of gross margins going forward?

You said they would get better, but should we assume the fourth quarter was basically the floor in gross margins?

And is there a point at which you get a step-up in gross margin from the Centex assets that were written down or will flow through income statement over the next few quarters?

This is Roger.

I would say looking at the fourth quarter, that would be the floor going into 2010, we expect to continue to see an expansion into 2010 with the margins.

And, again, assuming pricing is stable from this point forward as well.

So again, we feel pretty good about that based on work that we've done on the cost side, as well as the pricing side of it is also.

Yes, Josh, this is Richard.

I'll answer your second one.

In terms of Centex inventory and how that affects margins, I think you ought to think about it as more of a gradual improvement than a step-up at any one point in time.

I think we mentioned on our third quarter call that the assets are coming on-line and the way to -- the purchase accounting worked, it's going to take some time to realize the full benefit of that, so reasonably, we won't get to our full run rate of any benefit for some time yet.

So, rather than expect a step-up, in any one quarter as a result specifically of that, it's going to be more gradual.

Having said that, to Roger's point we do expect margins better in 2010 than what we've delivered in '09.

And, to bring back in the fourth quarter was roughly about $17 million on the Centex volume.

Okay.

And one follow-up, if I might.

If home prices and absorption rates are stable, or they rise from here, how should we think about impairments going forward?

It's Roger again.

I think what we saw in the fourth quarter, we had three large projects that we impaired to roughly about $100 million out of the $140 million excluding the interest on that.

We're seeing a decreasing level of impairments and expectation would be stability there on the absorption and also the price will bring those down, going forward as well.

So I think we've been seeing that coming through 2009.

And except for the three large projects that we had, we're seeing that in the remainder of the business.

Our next question comes from the line of David Goldberg with UBS.

Please proceed.

Thanks.

Good morning, guys.

Good morning, David.

The first question I have, I was hoping we could talk a little bit about the sales mix between buyer segments and maybe house sales for community were varying between the different buyers than what you guys were focusing on.

Yes, David, this is Steve.

Specifically, I don't have the details right in front of me.

Mike could probably give us those so we could break out the sign-ups by brand.

But in general, just as we suspected, we're seeing probably a little bit slower absorption base in our Del Webb brand, although our traffic and visitor rates to communities continue to be fairly stable, which is a good sign, meaning those buyers aren't buying.

We saw some follow-up in the Centex traffic levels, as you would expect after the tax rebate expired at the end of 11/30 and then was put back in.

But that was probably temporary.

We think that those folks will be back out in force.

Centex is making up roughly a third, maybe to 40% of our sign-ups in the quarter.

And then the Pulte overall demand remained relatively strong, although that's where we've seen predominantly more community runoff over the last two years.

And so it's tough to get comparisons unless you dig into a -- adjusted comparison by community count.

But relatively stable traffic counts, relatively stable demand.

And this is Mike.

If you want to give some specifics on the sign-up numbers for the quarter, Pulte was approximately 1,000 units.

Centex was approximately 1,800 units.

Del Webb was 850.

And the Divosta was approximately 100.

Okay, and then just as a follow-up, Roger, can you give more detail on the deferred tax valuation allowance?

And what I'm trying to figure out is the split between assets that are subject to 382 limitations out of the $2.1 billion that's left and what is not subject to 382?

Basically what's limited is roughly about -- let me just grab it here.

$1.3 billion.

And that's the NOL size.

This is Mike.

If you look at our totals of $2.3 billion, about $1 billion is related to Pulte and $1.3 billion is related to Centex.

Our next question comes from the line of Carl Reichardt with Wells Fargo Securities.

Please proceed.

Good morning, guys.

I've got a couple of questions for Steve.

You talked about the purchasing synergies, the $150 million to $200 million, and you're pleased with what you're achieving.

I'm curious, what kind of volume levels or variable do you need to get to having that run the full $200 million?

And can you just give a little bit of details about what particular building materials or labor cost savings you're seeing there?

Yes it's a loaded question.

Without giving you what our anticipated volume is for the year, Carl, but I would tell you that that $150 million to $200 million is based on the volume that we see out in front of us this year.

In other words, we're not basing that off of some pie in the sky number like 25 or 30,000 closings.

So, we're pretty confident that we can achieve it based on the volume that we see right out in front of us.

That said, it depends on the market and it depends on the trade and the synergies that we're seeing by marketplace.

I could give you examples of -- at the foundation level in California.

We're seeing anywhere from, $800 to $1,000 per house savings just in the way that we've synergized our operation and combined our trade bases throughout California.

Likewise, one of our largest savings in a place that we're still working on because it's a very large geographic area is Washington, DC.

And just in our drywall savings there, we've seen, so far, up to about $1,100 a house in drywall savings.

So it, it varies by trade.

We bring in our trades.

We sit down and literally summit with them and figure out who wants the business, who can service the Company best, who has the ability to really allow to -- work with us, we can peer into their books, they can understand where we're going and it's all across the board.

So I would tell you that's what gives us confidence in driving to the $150 million, $200 million, is that we're seeing savings across the board.

It's not any one particular line item of cost savings.

Okay, thank you.

And then you had had another comment, Steve, about reworking entitlements and your attempts to do that along with your peers.

Can you give me a little more detail there?

Is that largely changing plats over to increased density or changing the product you're putting on LIBOR?

In any case, is it taking a product that was entitled for Webb type of product and moving it to a first time buyer or another type of buyer?

Yes, it's all of the above, but I would tell you primarily, Carl, it is around looking at projects that are entitled and ready to go, with services there for maybe attached product that was entitled during the runup, and now both the city and we feel that a better product would actually be taking densities down and going back to single-family detached.

We have a lot of expertise and wherewithal to do that.

Obviously with our Webb operations, we've been able to keep a lot of our land development folks.

I'll tell you, when we talk to land sellers about those type of opportunities, the number of builders they are talking to is much shorter than the guy that's got 38 developed lots that are ready to go.

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

Please proceed.

Good morning.

Good morning, Mike.

First question I wanted to focus on was the land part of the equation.

You highlighted that, given your position and relative to the land market that's being bid up in some areas, it leaves you in a relatively more flexible position.

At the same time you said you acquired 2,600 lots and so, I'm just trying to understand, number one, where are you short and where are you acquiring and given that you probably have a lot of land moth balled or communities moth balled, what would we expect going forward into the next year in terms of what you might take off the shelf relative to still participating in a land market that's already heating up?

Mike, this is Roger.

On some of the 2,600, they were lot takedowns out of options that we already had.

But we are in the market as well.

We are buying parcels of land and I think we mentioned this even on the last call.

They are not very big positions.

We're doing smaller positions around the country, where the opportunity to get a quick cash return, high margins and a high return in the project itself, fully developed lots, and little money down, all option, give us the ability to continue to run the business in those markets very profitably.

So we are looking for those.

They are not, again, large parcels themselves, but we're doing 50 lots, 70 lots here and there, and it is spread across the country where we can be opportunistic, again, not in a very large fashion.

Okay.

Thank you.

Second question, focusing on the good will, you walked through that -- a part of that charge was related to the share price and the market cap relative to the shareholders equity post the merger date.

If possible, can you just give us a little more detail in terms of if it works this way in fact, how much of the charge was triggered by that and going forward, now your share prices rebounded a little bit, but what the share price was that triggered the charge, how much of that was related to that and how are we to think about the share price relative to potential future charges going forward?

Mike, I wish I could spend as much time explaining it because it is extremely complicated in the formula.

Basically if we go back and look at the share price movement from almost the date of announcement to the date of closing, the stock went up 15%.

From the date of closing till the measurement date, which is important here as well, because it's October 31, the share price fell by 27% from $12.33 at the closing to $9.01.

So there is an impact on the market cap when you go back and take a look at doing the fair value of your assets.

And, again gets to be pretty complicated.

Can't tell you specifically what came from each one of those areas, but going forward, the biggest impact is definitely going to be the market cap of the Company and how that stock price moves around, how it will end up affecting the balance of almost $900 million in good will that remains.

So there is risk and it's based on generally the market cap that's going to drive that more than anything else.

Our next question comes from the line of Megan McGrath with Barclays Capital.

Please proceed.

Good morning, thanks.

Wanted to follow up a little bit on the balance sheet.

After you get your tax refund, you'll have close to $3 billion in cash, so can you talk a little bit about your priorities for allocating that cash over the next year, whether debt repurchase, more land development, more land purchases?

Megan, this is Roger.

First of all, this year we spent about almost $750 million of investment in land and land acquisition.

Of that, we basically had about $200 million in land acquisition and about $550 million in development.

Next year in 2010, we're probably looking at right around the $1 billion level.

And again, you have to appreciate that we added Centex.

Centex investment was running at roughly about $200 million.

So if you look at our roughly $700 million and their $200 million, we're at the $900 to $1 billion level.

That doesn't include a lot of new land acquisition, although, we're continuing to look at that.

That could change given the environment.

Demand is going to be the biggest driver when we look at where we end up allocating our capital from that standpoint.

And as the market begins to turn, of course with that much cash, finance 101 would say not to carry that cash for the return.

So, looking at the debt structure of the Company, other opportunities, will certainly be on the board.

But in the short run, as we move into 2010, it's going to be more about the environment and how comfortable you are with looking at the overall demand in the marketplace.

Okay, thanks.

That's helpful.

And then just a follow-up in terms of your expectations for 2010, understanding that you didn't want to get into a modeling discussion.

But we've heard different things from different builders about their expectations for seasonality this year, given the tax credit.

Do you think not having your crystal ball that will follow similar seasonal patterns this year, or could we see, for example, 2Q be an outsized quarter for you more than usual given the tax credit?

Megan, this is Richard.

I think you saw clearly the tax credit impact last year, particularly on the Hallmark, including existing homes.

It would not surprise us if you see the same thing this year as the April 30 deadline looms.

The only caution I would give you is that's not necessarily going to be reflected exclusively in your earnings performance for one given quarter.

It's going to, depending on the builder's spec position and their build to order model, et cetera it, could be different from one builder to another.

Yes, I think it's realistic to expect a typical spring selling season that is enhanced somewhat this year because of the tax credit.

And of course the unknown is what happens after that.

I think we indicated on our call, we positioned the Company to do our part, but, nobody knows what happens post that.

Ideally, you've got consumer confidence and job growth beginning to return in the late spring, early summer to make up for that.

But we don't know yet.

Our next question comes from the line of Dennis McGill with Zelman & Associates.

Please proceed.

Good morning.

Thanks for taking my question.

Good morning, Dennis.

The first, Richard, just goes back to a conversation we had a few months ago related to inventory and spec-ing and I think you were pretty firm that Pulte wasn't interested in building spec, similar to maybe what the industry did a year ago, being left with heavy discounts.

Can you talk about how you guys are approaching spec in relation to the tax credit, maybe your view on where the market is from an inventory standpoint and what you're seeing some of the competitors do?

Yes, sure, Dennis.

We remain firm in our conviction that the large spec buildup only leads us to discounting at some point in the future.

Admittedly, we're going to sacrifice a few sign-ups and closings in the short-term as a result of that.

But as you've seen, we just posted our third consecutive increase in margins for the quarter and we indicated that we got more in that tank for 2010.

That's directly attributable to, number one, our focus on a presale model versus spec, but also the purchasing work and all the good work that our teams are doing as a result of the merger.

Our long-term business model includes that more predictable process-driven pace of our business, and we're not going to let the short-term opportunity, which may last another quarter, maybe two quarters to deter us from that.

In terms of the market overall, I think that most builders are following that same view, with one or two notable outliers, and admittedly, those folks will have an opportunistic position for the short-term, but we saw what happened to our margins in the fourth quarter of 2008 coming into the first two quarters of '09 and we don't want to repeat that mistake.

We got caught with a lot of inventory at a bad time in the market, depressed our margins dramatically and we're not going back there, God willing.

Okay.

So it's fair to assume that you might see a little bit of unit share maybe lost relative to the market, but that will come with the benefit of better profitability and maybe a sooner return to profitability?

Well, that's obviously our goal.

I'll also point out, as Steve said, with close to 3,000 specs, it's not like we don't have anything available to take advantage of the opportunity, Dennis.

And whatever portion of those units that we might be able to move as a result of a tax credit, I think the watch word would be for us not to move them at a heavy discount, to move them at a respectable pace.

So, yes, that's the view.

Okay, thank you.

Thanks.

Our next question comes from the line of Ken Zener with Macquarie.

Please proceed.

Good morning.

Good morning, Ken.

You guys are obviously doing well on SG&A, which was important for you.

I wonder, at the gross margins where they are, can you talk about how you're trapping inflation in the system, for example lumber, which is up I think 15% to 20% quarter over quarter, is there a fixed price contract that you have, or how are you managing that inflation that you're seeing on the hard cost?

Ken, this is Steve Petruska.

I would tell you that some of the lumber increases are passing through.

The way that we do our pricing with our vendors, it's on a realtime type basis, so we're not buying forwards and fixing in pricing like that.

Obviously in this demand environment, that's very risky.

But what we focused on is where we're getting some of these price increases, is that we continue to focus on the inefficient sides of framing, for instance.

And, there's a lot more to be gained in picking up premium efficiencies, either through panelization, obviously a lot more trusting than certainly on the labor side in general and certainly maintaining the proper cadence so that you can adjust your framing contractors overhead appropriately for the size of business that we have.

Where we've seen some of these cost increases, we can isolate it to the cost of the dimensional lumber that's actually going up in price.

We've got very detailed takeoffs on every home that we've built and the labor market is still pretty soft out there for framers and net-net, I would expect that our ability to manage this and keep the framing costs low in spite of some rising lumber prices on an overall basis isn't going to be so bad as we continue to manage more through the labor side of things.

Okay, and then I guess, could you -- I didn't hear.

Your units under construction, your finished spec count, and then your owned lots.

Mike's got that.

Yes, owned lots would be 138,273, finished spec count would be 1,309 and total units under construction would be 6,653.

And I guess what led to that higher, obviously the core cancellations?

Was there something unique about that given that you guys haven't been at -- above 2,400 over the last year.

Was there something unique about the cancels that you saw?

Ken, this is Richard.

I think a piece of it was that we acquired Centex.

I think we indicated that we were down 20% from year ago levels which was just Pulte standalone but that was the majority of it as we continue to rationalize the Company's positions overall.

Plus, I think the tickup in can rate was pretty minor, about 2%.

Our next question comes from the line of Nishu Sood with Deutsche Bank.

Please proceed.

It's actually Rob Hansen on for Nishu.

Hi, Rob.

Hi.

Just wanted to ask about the tax refund.

I think originally you said it was around $450 million.

Just trying to understand the Delta between that and the $900 million that you expect now.

Yes, Rob, it's Roger.

Basically it came from losses that we incurred in the balance of the year, in the fourth quarter.

So we took some tax planning opportunities, prepaid some liabilities, and then, again, the additional losses even from some of the land sales that we had had that created in the fourth quarter gave rise to the differential there.

Okay, and then what was the book value of the land prior to it being sold?

Well, you saw that we took a write-off of roughly $98 million, and we had about $90 million in revenue.

So, that would be the gap there.

Our next question comes from the line of [Alex Barron with Housing Research Center] Please proceed.

Yes, thank you guys.

Good morning.

I was hoping you could help me understand the good will charge a little bit.

What change I guess since the timely acquisition on your assumptions or what led to that charge and can we expect that going forward?

Yes, Alex, Roger again.

Specifically what it was, as I mentioned, that the movement in the stock value or the market cap of the Company gave rise to the change and it was nothing fundamentally different with the overall business.

The business is the same business that we had in the third quarter, but the difference was the stock price at the closing of the transaction was basically $12.33 and then you have to do the impairment test and basically the date we have because we chose it a while back, was the end of October -- October 31.

And the stock price on that date was $9.01, that was basically a drop of about $1.3 billion in our market cap.

So there is a sensitivity here when you do the analysis on the good will impairment to look at what the market cap is.

And, again, so now we're basically at a floor of about $9.01 from where we were at $12.33.

Really that's the change and that gave rise to the significant part of the write-off and the $563 million in the quarter.

Okay.

So it wasn't related to sales base or lower margin assumptions with the Centex land then?

No, the business is performing the same that we saw in the third quarter, and our expectation is that's going to continue.

Our next question comes from the line of Joshua Pollard with Goldman Sachs.

Please proceed.

Hey, good morning to you all.

What portion of your lots are finished from the 128,000 you have in owned?

And what's the carrying costs in inventory of those lots?

Is it $50,000 a home, $60,000 a home at this point?

This is Mike.

Of the 138,000 owned lots, 44,755 are finished.

And there's 1,657 models within that.

And we don't have the carrying costs on the -- on that question.

Sorry.

Oh, okay.

The average lot cost is averaging right around $60,000 per lot.

So, again, in between developing, the timing and everything else like that, that's somewhat been the standard after all the impairments that we've had, roughly around $60,000.

That would be a decent proxy for you, Josh, but we don't have it broken down specifically by those finished lots.

Okay.

The other part of the question is, how high could we expect your margin expansion to be, simply as a factor of the cost reductions that you guys are doing on your base business and with the inclusion of Centex ultimately if you're assuming no price improvement or declines?

How high could we expect that margin expansion to be from 14.2% today?

Josh, we haven't given any guidance on that.

We've simply said it's improved over the past three quarters since we hit our low in the first quarter of '09 and we expect further improvement.

It's not just the cogs piece, although that's a large piece of it.

It's also the focus on a build to order model and not doing as much spec discounting as we clearly got caught in in the early part of '09.

And then of course a few other factors that flow through there, but we're not giving any specific number guidance.

Our next question comes from the line of Dan Oppenheim with Credit Suisse.

Please proceed.

Great, thanks very much.

Was wondering if you could talk about the -- your thoughts in terms of the orders.

You had talked about you're trying to avoid the discounting and manage the specs.

Clearly there's some other builders out there who are less focused on that and are more focused on the volume and the market share, given the focus on the tax credit.

How much do you worry, and as you look through the remainder of this year, given that there is still very competitive business, do you think that you will have to switch the strategy where you're competing more in prices to capture some volumes so you're not losing market share in others?

Dan, this is Richard.

I can give you a general answer and see if Steve wants to add anything.

Couple of things.

I think a 32% order growth over prior year proforma numbers compared to a couple of other builders who might have been in that range or in the 40% range, shows that we didn't give up a whole heck of a lot in volume to drive the business that we have.

Second thing is we have worked very hard internally to adopt a model that gets us to a more planned production view that ultimately should benefit us in terms of much more level closing volume and much more predictable earnings.

We think it's a little irresponsible to chase a tax credit in the short-term for that long-term benefit.

And, unless we saw our business going to nothing, which is not the case -- I think Steve indicated that January has started out pretty nicely for us, that we think it's the right approach overall.

The government is clearly going to lift support for housing at some point in time, whether it's as scheduled here in the spring or sometime later.

It's going to eventually happen and we would rather have a model internally that allows us to operate in a way we're comfortable for the long run.

So I would also just tell you one other thing.

With 880 communities out there, the chances of us losing a lot of market share is not real great.

I've said repeatedly on these calls, the first place we're going to see an improvement in business is in same-store sales growth and the fact that we got 880 communities operational and 2,800 specs out there, I hardly think we're in a weak spot to not enjoy whatever business rebound there may be.

Steve, do you want to add anything?

The only thing I would add to that, Dan, is that, we don't go head to head with competitors in every one of those communities.

Our operators know that where they have got to be price competitive, they are.

And we've continued to show, as Richard pointed out, not only the sales volume growth, but also the margin growth.

So on a per community basis, if we've got to go head to head with a very fierce competitor that's got a lot of inventory, our operators do that and they do it very well.

We're not of the mindset that if a community operates very well at five or six a month that we need to lower the price to try to tweak the demand to ten a month.

We think the land control on the ground is a good thing to have and that there's margin opportunities by keeping to a proper cadence and we continue to pursue the business that way.

Our next question comes from the line of Joel Locker with FBN Securities.

Please proceed.

Hi, guys.

Just a housekeeping question.

What's the exact tax valuation allowance at the end of the fourth quarter?

Looking it up, Joel.

$2.3 billion.

Do you want the exact--

Just down to the million.

While you look for that, your orders per quarter, do you have a -- I'm sorry, your orders per month in the fourth quarter -- do you have a breakdown of October, November, December?

We don't have that, Joel, but I think Mike or Roger's got the tax number for you.

Yes, the tax number is $2.345 billion.

$2.345.

Yes.

Billion.

In billion.

That's all.

Thanks a lot.

Our final question will be a follow-up question from the line of Michael Rehaut from JPMorgan.

Please proceed.

All right, thanks.

Couple quick questions here.

The community count, Richard you just mentioned that as having a lot of stores open, which obviously helped you maintain some share and with regards to your spec strategy, but can you give us a sense of where you expect that to go over the next 12 months?

Yes, Mike, this is Roger.

I think, again, we're not assuming a lot of land acquisitions next year.

We potentially could be down 15%, through the end of next year.

That would be from the end of the year to the end of the year.

And again, that's all going to depend on a lot of things that go on on the demand side.

Okay, and, secondly, I think you broke out earlier, the mix of orders from the different brand line, so to speak, the different segments.

And if I'm right here, it looks like the Pulte business grew about 11% and the Centex business on a core basis grew about 67%.

I was just wondering -- A, am I looking at that right, when you add up Pulte, Del Webb, Divosta and then look at Centex, and if you could just give some color as to why Pulte was growing so much slower, if that was just due to the continued slower absorption at Del Webb and the better vibrancy at Centex or are there timing issues related to sales were a little weaker when Centex was getting integrated or taking on -- online, on the Pulte side, or any other color you could give us?

Yes, Mike, this is Steve.

The Centex sales were certainly driven by the tax credit that expired.

We had a lot of inventory in Centex and they had built up a little bit for October and November deliveries before the original expiration of that.

So that was clearly a motivating factor there.

On the Pulte side, a lot of it, as I said before, was just driven by pure community count.

As we have not invested in new land positions on a wholesale basis over the past few years, that has come mostly at the expense of the Pulte community count and therefore, the lower sales volume.

This concludes the Q&A session.

I will now turn the call over to Jim Zeumer for any closing remarks.

Thank you, operator.

Very much appreciate everybody's time this morning.

If you have any follow-up questions, certainly feel free to give us a call.

Look forward to speaking with you in the future.

Thank you for your participation in today's conference.

This concludes the presentation.

Everyone have a great day.