普爾特房屋 (PHM) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Pulte Group, Inc.

earnings conference call.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions).

I would now like to turn the conference over to your host for today, Mr.

James Zeumer.

You may proceed.

Thank you, Stephanie.

I want to welcome everyone to this morning's call to discuss Pulte Group's results for the quarter ended March 31, 2010.

On the call with me today are Richard Dugas, Chairman, President, Chief Executive Officer; Steve Petruska, Executive Vice President, Chief Operating Officer; Roger Cregg, Executive Vice President, Chief Financial Officer; and Mike Schweninger, Vice President, controller.

For those of you who have access to the internet a slide presentation available at pultegroupinc.com will accompany this discussion.

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

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

Unless otherwise identified, results reported in the release and on the call reflect the inclusion of Centex's operations for the first quarter of 2010, although results for the comparable prior-year period 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 Group believes such statements are based on reasonable assumptions but there are no assurances that actual outcomes will not materially -- 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 Group's annual report on Form 10-K for the year ended December 31, 2009 and this morning's press release for a detailed list of risks and uncertainties associated with the business.

Certain statements during this call also contain references to non-GAAP financial measures.

See this morning's press release, which is available on our corporate website, pultegroupinc.com, for a reconciliation of the non-GAAP financial measures to the comparable GAAP numbers.

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 over the call to Richard Dugas for his opening comments.

Richard?

Thanks, Jim, and thank you to everyone joining us on the call today, our first call as the newly-named Pulte Group.

I'm very pleased to discuss Pulte Group's first quarter results, as they demonstrate the significant gains we continue to realize in the critical areas of margin expansion and overhead leverage.

The expected benefits from last year's merger with Centex are clearly evident in the numbers, and an accelerating Pulte Group's progress toward profitability.

In planning for 2010 during last year's budgeting process we worked under the assumption that demand for new homes in 2010 would be comparable to what we experienced in 2009.

We were looking for volume and pricing to remain relatively stable, similar to what we saw in the back half of 2009, with the potential for volatility from month to month.

At the time, this view was less optimistic than many economists held but with one quarter down it looks like 2010 is unfolding more in line with our expectations.

Given the planning assumption of relatively stable industry demand we organized our operations to be successful within this environment while being positioned to respond to more robust demand if it materialized.

We continued to advance initiatives focused on expanding margins, gaining overhead leverage and protecting our balance sheet.

We also continued to shift away from a sales model that emphasizes the production of spec inventory to one that focuses more on leveling production and building to an existing order.

By properly organizing and sizing our operations in alignment with anticipated market conditions we generated significantly-better financial results.

On what we would call relatively-modest revenue and closing volumes for the first quarter, Pulte Group reported a net loss for the period of approximately $12 million, or $0.03 per share.

In contrast to the roughly $2 per share loss in Q1 of last year we made tremendous gains by emphasizing profitability over volume and by dramatically improving overhead leverage.

Improved earnings for the quarter reflect a combination of factors.

First, better gross margins, which continue to expand in the quarter.

Since bottoming out in late 2008 and early 2009, we have realized steadily-improving margins within our home building operations.

We still have a lot of work to do on improving margins over the long term but we have made solid progress during the past year.

Second, we captured critical overhead leverage on the combined Pulte-Centex volumes and delivered on the underlying merger strategy of running two businesses essentially on one overhead structure.

And third, the absence of significant impairment charges.

Given more stable demand and pricing conditions in the market and improving margins, we believe that the worst of the impairment process should be behind us.

Of course, a key component to the year-over-year gains Pulte Group realized in the quarter was last-year's merger with Centex and the aggressive actions taken to capture the targeted $440 million in savings and synergies.

When we announced the merger we talked about the critical underlying strategic benefits supporting this transaction, including significant cost savings and operating efficiencies, overhead leverage, acquisition of critical land assets and some unique branding opportunities.

At that time we also talked about how the merger with Centex could help accelerate Pulte Group's progress in these key areas and, in particular, advance our return to profitability.

Given Pulte Group's strong start in 2010, our Q1 results demonstrate clearly that we are realizing the significant operating and financial benefits associated with the Centex merger.

With the opportunity to realize on-going margin expansion, additional SG&A leverage, and improved closing volumes, assuming market conditions for the housing industry remain stable, we expect Pulte Group to be profitable for 2010.

With regard to the merger integration work, I will tell you that we are effectively done and operating as one company.

There's still projects to complete in important areas as we transition information systems and complete the integration works supporting our operations and financial processes, but I feel comfortable in saying the bigger merger risks are behind us.

Now it's a matter of completing select tasks and capturing any additional synergy opportunities, particularly in the areas of construction efficiencies and purchasing.

As I said at the outset of this call I think we've gotten off to a solid start in a year that may not be as robust as some has--had expected.

I think the US housing industry is finding and may have already found a bottom but that's different from saying that a recovery is at hand.

We believe that any meaningful sustained improvement will require employment gains and, in turn, better consumer confidence.

To the latter point, while unemployment is high at roughly 10%, that still means that 90% of people are working but not many of them are buying homes right now.

Even a modest up-tick in employment could have a significant impact on demand, assuming it drives greater confidence among this larger group.

Pulte Group is in an excellent position to meet currently -- excuse me.

Pulte Group is in an excellent position to meet current and optimistically increasing demand, given our strong land pipeline and robust cash position, which benefited from the tax refunds associated with last-year's NOL legislation.

The 20-plus land transactions primarily involved finished lots so we can move quickly to selling and constructing new homes, which can provide new jobs and help the economic recovery at both a local and national level.

As always I want to thank our associates for the great work they continue to do in delivering superior product quality and an unmatched home buying experience to our customers.

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

Roger?

Thanks, Richard, and good morning.

Revenues from home settlements for the home building operations increased approximately 73% from the prior-year quarter to approximately $1 billion.

Increased revenues reflect the increase in unit closings that were above prior year by approximately 77%.

The average sales price decreased approximately 2% versus the prior-year quarter, to an average of $257,000.

This decrease is attributed to the mix of greater first-time home buyer volume due to the Centex merger, in addition to the geographical and product mix of homes closed during the quarter.

In the first quarter land sales generated approximately $13 million of total revenues, which is an increase of approximately $12 million versus the prior-year's quarter.

The sales in the quarter mainly reflect lot sales to other builders and several land parcel sales negotiated before the merger.

Home building gross profits from home settlements for the quarter, including home building interest expense, was approximately $127 million versus the loss of $333 million in the prior-year quarter.

For those with access to the webcast slides I refer you to slide six, the adjusted margin analysis, which outlines our gross margins in the following detail.

Home building gross margins from home settlements as a percentage of revenues was 13% compared to a -59% in the first quarter of 2009.

Adjusting the current quarter gross margins for land and community valuation charges, interest expense, and the acquisition accounting write up for the Centex work in process resulted in a conversion of 16.3%,compared to 14.2% for the fourth quarter of 2009, or an improvement of 210-basis points.

On a comparative basis versus the previous-year's first quarter compar -- conversion of 8.6%, the adjusted increase of 770-basis points.

We expected sequential quarterly improvements in gross margins as we worked through the backlog of higher incentives in early 2009, along with the house cost reductions initiatives we executed during last year, plus the added benefits of the merger.

Home building interest expense decreased during the quarter to approximately $27 million versus approximately $55 million in the prior year.

Included in the interest expense of the $27 million there's an additional $1 million of expense related to land and community valuation adjustments taken in the 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 $4 million.

For the first quarter we tested approximately 18 communities for potential impairment and valuation adjustments.

We recorded valuation adjustments on approximately ten communities for the quarter of which approximately nine communities have been previously impaired.

The total net gain for land sales posted for quarter was approximately $4 million.

The gain is mainly attributed to the sale of lots and several parcels of land in the quarter, offset by the fair value adjustment in land sold and land being held for disposition in the amount of approximately $600,000, 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 15.4%, or $151 million, an increase of approximately $31 million, or approximately 26% versus the prior-year quarter.

This increase reflects the additional overhead as a result of the merger with the Centex operations.

In addition, the first quarter includes approximately $3 million for employee severance and related costs.

If we look at the SG&A line on a pro forma basis our expenses reflect a reduction of approximately $88 million, or 37% from the combined Pulte and Centex SG&A expenses from the previous-year's quarter.

In addition, relative to our SG&A expenses in the fourth quarter of 2009 we reduced the expense sequentially by $37 million, or approximately 20%.

In the home building other income and expense category for quarter the income of approximately $8 million includes a write off of the deposits and preacquisition costs resulting from the decision not to pursue certain land acquisitions in the amount of $500,000, and valuation adjustments in unconsolidated joint ventures of approximately $2 million.

Also included in the category for the quarter is an expense of approximately $1.4 million associated with overhead expense reductions for lease exit and related costs.

The home building pretax loss for the quarter of approximately $11.8 million resulted in a pretax margin of approximately a negative 1% on total home building revenues.

The pretax loss is inclusive of the charges related to the valuation adjustments on land inventory and investments, land held for sale, severance and lease exit-related charges and the acquisition accounting write-up for the Centex work in process.

The pretax income from Pulte's financial service operation for the first quarter was approximately $5 million, or an increase compared with the previous quarter-year's quarter of approximately $6 million.

The pretax income increase is primarily the result of the increased home settlements reflecting the Centex merger volume.

Total mortgage principle origination dollars were $498 million, an increase of 45% when compared to the same period last year.

The increase is related to greater home settlements from the home building closing activity for the quarter.

Total agency originations were $469 million, nonagency originations were approximately $6 million, and brokered or nonfunded loans were approximately $23 million.

Additionally, within the funded agency originations FHA loans were approximately 40% of the loans funded from the financing line in the quarter compared to approximately 45% in the fourth quarter of 2009.

Pulte Mortgage's capture rate for the current quarter was approximately 75% and the average FICO score for the quarter was 748.

In the other non-operating category, pretax loss for the first quarter of approximately $8 million includes corporate expenses of approximately $10 million, partially offset by net interest income of $2 million resulting from our invested cash balances.

If we look at the corporate expense line on a pro forma basis our expenses reflect a reduction of approximately $25 million, or 70% from the combined Pulte and Centex corporate expenses from the previous-year's quarter.

For the first quarter the Company's pretax loss was approximately $14.5 million.

This pretax loss for the quarter is inclusive of the charges related to the valuation adjustments on land inventory and investments, land held for sale, severance and lease exit and related costs, and the acquisition accounting for the Centex work in process write up.

The net loss for the first quarter was approximately $12.5 million, or a loss of $0.03 per share loss as compared to a net loss of approximately $515 million or a loss of $2.02 per share for the same period last year.

The quarter reflects a tax benefit of approximately $2 million, primarily due to the Accounting Standards (inaudible) 740, or formerly FIN 48, accounting for uncertainty for income taxes.

The number of shares used in the EPS calculation was approximately 377.7 million shares for the first quarter of 2010.

The total shares outstanding at March 31, 2010 were--were approximately 382.5 million shares.

Reviewing the balance sheet for the quarter we ended with a cash balance of approximately $2.6 billion, increasing approximately $722 million from the fourth quarter of 2009.

We received approximately $778 million in cash refunds during the first quarter related to our NOL carrybacks.

Subsequently, in April we received an additional $103 million of refunds for a total of approximately $880 million related to the NOL carrybacks.

House and land inventory ended the quarter at approximately $5 billion.

The increase in house and land inventory and land held for sale consumed approximately $30 million in cash from the fourth quarter of 2009.

During the first quarter our new investments in land were in rolling lot option take-downs and purchases of approximately $164 million and lan--land development spending of approximately $108 million, offset by a modest reduction in house inventory by approximately $14 million.

With approximately $2.6 billion in cash to end the 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, 34.7%.

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

Pulte Group shareholder equity for the first quarter was approximately $3.2 billion.

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

With that I'll turn the call over to Steve for some additional comments on the quarter.

Steve?

Thanks, Roger, and once again, good morning, everyone.

As Richard touched on, actual housing demand for the first quarter of 2010 was likely below many estimates.

As we've talked about before our expectations for market demand heading into the year were pretty modest and Q1 demand was about what we expected, so we were properly positioned to realize significant overhead leverage.

Our operations did a great job staying focused on the critical business drivers, closings, margins and overhead leverage and on capturing the opportunities related to our merger with Centex.

In the markets our process change work was on going in quarter as we continued to shift our operating model to focus more on building to order and away from our historical emphasis on carrying a higher level of spec inventory.

We likely gave up some sales in the quarter but we also realized a 4% decrease in our unsold inventory position from the fourth quarter of 2009.

We ended Q1 with fewer than 2,700 unsold inventory homes.

More importantly, the majority of the decrease was in spec finals, which fell by 15% to about 1,100 homes.

Along with helping to control our unsold inventory positions our process change work continues to benefit construction efficiency and purchasing activities, which over time can translate into further margin expansion.

The enhanced Pulte operating system has been rolled out the all markets.

When we started rolling out the system our operating divisions were at different stages of development, but all are quickly moving up the learning curve and adopting the critical processes and related information systems.

We are tracking a number of performance metrics in critical operating categories, including material costs, cycle times and delivered quality.

Once our Pulte operating system is fully implemented we will be in a better position to consistently track and measure critical sales and construction metrics across all communities in a -- in a market and across all of our markets around the country.

Layering on top of this work our purchasing group has gotten through much of the data collection analysis and initial vendor discussions associated with efforts to capture the targeted $150 million to $200 million in purchasing synergies.

The group is now transitioning to bidding and the cont -- to the bidding and contracting stage.

A number of important categories, including flooring, appliances and cabinets, will be entering the RFP process in the second and third quarters of 2010.

These are important next steps as we work to capture the targeted merger synergies.

Moving on to other data point for the quarter, on a reported basis net sign-ups for the quarter totaled 4,320 homes, which is an increase of 43% over the same period last year and in line with our expectations.

Maybe even more relevant given the timing of the merger close, orders were up 15% from the fourth quarter of 2009 as absorptions per community improved.

While direct comparisons are difficult, assuming Pulte Group and Centex were combined in 2009, reported Q1 orders were down roughly 26% compared to last year.

The year-over-year change reflects a combination of the 19% decrease in community count and the change in our sign-up process implemented at the start of the year.

Consistent with our build-to-order strategy we are now taking buyers deeper into the mortgage approval process before counting them as a sign-up.

As a result of this process change, which is designed to help lower our cancellation rate and ensure that buyers ultimately close on the home, there were approximately 450 pending sales that would have previously been counted as sign-ups.

Overall we are pleased with our first quarter sign-ups, which were consistent with our plans heading into the year.

Pulte Group's reported backlog at quarter end totaled approximately 6,500 homes, more than double last year's number, with a value of approximately $1.7 billion.

Moving past the data analysis I'll provide some some high-level comments about how our geographic areas performed during the first quarter.

As I discussed on the last call, 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 the Northeast, which covers an area from Southern Virginia through Washington D.C.

and into Massachusetts, totaled 461 homes.

As you've probably heard many times, the D.C.

market has been one of the better performing areas of the country, even with the difficult weather conditions to start this year.

Offsetting this somewhat was weakness in our Delaware Valley markets.

In the Southeast area sign-ups for the quarter totaled 730 homes.

As we talked about on the last call we expect this area to be a solid performer, as last-year's merger added both great people and land positions to our exiting operations in this area.

Overall the business was relatively stable through the quarter with most of the markets experiencing a typical, albeit modest, seasonal pick-up as the month progressed.

Sign-ups in our Midwest area totaled 560 homes, with relatively stable year-over-year demand throughout most of the markets.

Our home state of Michigan, however, continued to struggle with weak economic conditions.

Hopefully improving conditions among car manufacturers can translate into jobs and an overall improving economy both here in Michigan and in the surrounding states.

Once again Pulte Group's Gulf Coast operations experienced another good quarter of activity in reporting 1,551 signs-up for the period.

While Florida remains one of the most difficult operating environments we did see some pick-up in our north and south Florida operations.

Central Florida has yet to see much of a rebound.

Moving to the west, demand in Texas remained stable across all markets.

Continuing further west to our Southwest area, Phoenix and Las Vegas continue to face very difficult conditions, as sign-ups for the quarter total 514 homes, Part of our struggle in Las Vegas is Company specific, as we have a limited number of closer-in communities currently operating.

Long term, Las Vegas is still a market where we see opportunities and we are looking at several land deals that can improve our market position in 2011 and beyond.

Finally, sign-ups in our West area were 504 homes for the quarter.

Activity remains generally stable without big swings in demand or pricing from a month to month--from month to month.

Drilling down a little we continue to see some weakness in the Central Valley, which we run from the Bay area as we didn't feel much of a seasonal lift.

On the other hand, Sacramento and Southern California saw a modest year-over-year gain in sign-ups but on relatively small numbers.

There are reasons to be optimistic about California as the broader economy improves and the state's new tax credit takes effect, although we will have to wait and see how budget issues at the state level affect the rate of improvement.

I touched briefly on the potential to be buying some lots in Las Vegas, so let me finish up my comments with some additional color about our land pipeline.

We ended Q1 with just under a 1,000 -- or 150,000 lots under control, of which 92% were owned and the remaining 8% controlled via option.

As was the case last quarter about one-third of these lots are developed.

We've remained active in the land market and continue to find small, but profitable deals in many markets across the country.

The basic project profile hasn't changed, as we are primarily looking for finished lot deals that can be controlled via option agreement and can pencil to a mid 20% return or better.

In the first quarter we completed roughly 20 transactions accounting for approximately 1,700 lots so, obviously, these are not big communities.

The deals represent an eventual capital outlay of approximately $110 million, although minimal cash went out the door in initially tying up these positions.

These new communities offer an average margin from the high teens into the low 20% range.

We continue to see land acquisition opportunities that make sense and where we are effectively buying the position at a price that is below replacement cost.

That said, land prices in the more preferred submarkets are starting to rise, making the deals more challenging from a return standpoint.

We'll have to wait and see if the higher prices bring more opportunities into the market.

As of right now, that has not been the case.

Echoing Richard's comments we've gotten off to a good start and we're in a strong position heading into an uncertain period given the state of the economy, the expiration of the tax credit and the potential for rising interest rates.

Our operating teams have done a great job aligning their businesses with the market.

Let me now turn the call back over to Jim Zeumer.

Jim?

Thanks, Steve.

We'll now open the call for questions.

As we've done on prior call's 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 us with -- up with us directly after the call.

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

Thank you.

(Operator Instructions).

Our first question comes from the line of Josh Levin with Citi.

You may proceed.

Good morning, everybody.

Morning, Josh.

How should we think of gross margin expansion from here.

Is it incremental every quarter or is there a step function at some point as t some of the Centex land rolls to the income statement?

Yes, Josh, this is Roger.

As we come through 2009 and coming into this year, again, we're looking sequentially improvements.

Again, I don't know who you're step function looking forward very large jumps.

We did have a pretty large jump coming from the fourth quarter from basically the 14.2% up to the 16.3%, so it is a 210-basis point improvement for this quarter.

Again some of things that we're doing on -- Steven mentioned on the house cost reduction side it's benefiting that in the future, as well.

So, gain, as we've mentioned before we continue to see improvement even going forward to the end of this year.

Okay.

And, Richard, when you say Pulte will be profitable in 2010, does that mean Pulte will be profitable on a full-year basis or that Pulte will have positive net income quarters coming up?

No, profitable on a full-year basis.

That was our comment, and that's what we believe, Josh, obviously, with the caveat around relatively stable conditions that we put in there.

But we've got much more consistency in our backlog, visibility in the backlog overall and we like the way that a combination of margin, overhead leverage and improved closing volumes for the coming quarters are playing out.

Okay, thank you very much.

Thank you.

Your next question comes from the line of Ivy Zelman with Zelman & Associates .

You may

Thank you.

Good morning, guys, Can you hear me okay.

Yes, good morning, Ivy, we can hear you fine.

Thank you.

Realizing that you implemented a strategy to not start specs and you may have given up a little share, as you indicated.

Sales certainly, with the community count, maybe Centex closing out a little bit faster than you might have presumed, can you give us a little differentiation with respect to product, I know the active adult business first time?

And then looking at the full year, if you were -- again, with visibility, as you indicated on the backlog and the concerns about tax credits going away, generally what kind of order growth would you think is a reasonable thing to consider year over year and maybe on a go-forward basis, given capital constraints.

Should we be thinking that Pulte can % to 20% growth rate?

A little bit about your strategic goals of growth and just commentary on the current quarter differentiation on product and mix.

No problem, Ivy, this is Richard.

Even Mike Schweninger's having trouble keeping track of the questions you just asked there.

Well, I'm only allowed one, so sorry.

Very good.

Listen, a couple of comments there.

Overall the sign-up performance for the quarter, as Steve indicated we had a significant community count drop, as well as a change in reporting methodology, which were the two main drivers between maybe what some were expecting on sign-ups and what we have.

Having said that the overall business performed well within our expects and actually, we beat our own business plan for Q1, both on sign-ups, as well as on overall profitability.

In terms of the actual numbers we can maybe ask Steve or Mike to give you some comment but we saw the expected benefit in the Centex side from the positioning there, the Pulte business, as well, and then the Del Webb business was relatively flat quarter over quarter.

I don't know, Steve or Mike, if you want to provide any additional commentary?

First, Ivy, getting back to your direct question on the expectations as we move forward, we're not going to give guidance on that, obviously, but what we'll tell you is that that's our focus and you kind of saw it in some of our land acquisition.

Our focus has been on to improve absorptions per community as we move forward, and that has been the message to our operating teams, both on certainly the number of sales per community but also on the margin performance and the overall operating performance within those communities.

We have a lot of active stores, we saw -- we did see a big run off in the first quarter.

We had a difficult first quarter comp on a pro forma basis, as both Pulte and Centex had different operating results in the first quarter of last year.

OUrs was to move specs and raise cash, and so was Centex.

We feel pretty comfortable as we move forward to say let's focus on the land that we have, and let's focus on the opportunities there.

We have repositioned product, we have aligned things with brand, we have done a lot of good things in the first quarter that put us in a better position on a sales per community basis as we move forward, and we feel pretty comfortable with that direction,.

Whether that results in 20% year-over-year growth or 50$% year-over-year growth that's more probably indicative of market conditions, but we think on our community count we can continue to drive more absorption per community almost regardless of market growth.

We think we can do that just relative to flat conditions like Richard talked about in his comments.

Mike?

This is Mike.

Just in terms of specific numbers if you look at our sign-ups for the quarter approximately 43% came from our Centex community and about 35% from the Pulte communities and about 22% from the Del Webb communities.

Great, thank you.

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

You may proceed.

Hi, this is Jason Marcus in for Mike.

Hi, Jason.

Just a quick question about SG&A.

SG&A was a little bit off our estimate and I wanted to know where you think you are in term of the Centex synergies and your expectations for SG&A, are throughout the rest of the year?

Don't know what, Jason, you had in your estimates but certainly we've made significant strikes with the SG&A and we're not giving guidance, but I think, as Richard mentioned, with increasing volume you certainly get the leverage if you're looking at a percent basis, but we've made great efforts in the $440 million in synergies we've talked about.

We think certainly we've got close to $350 million, $375 million through the first quarter, the balance will come on as we start moving to the back end of 2010.

Mostly that's now because we've got redundant systems and that type of thing that we're continuing to focus on the integration side of that, as well.

But going forward, again, volume-related leverage is what we're anticipating as we come through the balance of this year.

Okay, great.

Jason, I'm sorry, one other comment from Richard.

If you look at the $37 million drop sequentially from fourth quarter to first quarter, we would tell you we are extremely pleased with that performance and it certainly is something we're very, very proud of.

In terms of the conversion on the volume side, as Roger indicated and I indicated on the comments, improved closing volumes in further quarters will help that conversion but we try to manage the actual dollar number and that's why we're very pleased.

Great, thanks a lot.

The next question comes from Dan Oppenheim with Credit Suisse.

You may proceed.

Thanks very much.

I was wondering if you can talk a little bit more in terms of the volume leverage.

In the past you've talked about really working on the margins.

We've seen some companies always starting different promotions here at the start of May following tax credits, how responsive do you plan to be with that and what's your look towards the absorption -- the sales per community here as you think about the leverage versus maintain the margins?

Dan, to answer your question we pretty much anticipated that we would have some markets where other builders would get very active with spec discounts as they ended up with a lot more inventory because there was a yawn overall to the tax credit.

So, we haven't -- we have not started that many spec homes.

We will not play that game, so to speak.

We'll let others go out and do what they have to do.

We feel comfortable with our deliveries for the second quarter and -- relative to our forecast and we really don't have a lot to sell.

In fact, very few to sell to make what our internal projections are for the second quarter and we think that gives us a greet deal of leverage to continue to not have to play the game of discounting specs to continue to get them to move in the marketplace.

We aren't doing that and we don't contemplate doing that.

Dan, remember we talked about shifting our operating model from one where we could be more predictable in the future, building up sold but not started backlog, and don't assume that deliveries going forward are directly related to our ability to sell specs or the tax credit because we've tried to really emphasized as much preselling as possible and as Steve indicated, we like the shape of our backlog here.

Sure, and then a second question relates to that in terms of the comment on the what you count as an order and the mortgage qualification process.

Do you view this 450 orders as just a timing issue?

What sort of impact should we likely think about in terms of the cancellation rate going forward?

Anymore color on that?

Well, Dan, this is Roger.

From this point on it's going to be consistent so we'll report it consistently, so the numbers we report now will have no, no deviation from quarter to quarter to quarter.

Really typically when you make the change from the fourth quarter to the first quarter that's where we ended up seeing the change but it'll be consistent as we move forward with the same methodology.

The variance from quarter to quarter will not be as pronounced as we saw here coming from the fourth to the first.

And Dan, you are right that the cancellation rate should be affected positively in the downward position and we did see a benefit from that in Q1 and we likely will see that going forward: again, all with the operating philosophy of really focusing in on presales and margin growth and profitability over unit volume.

We want the backlog to be more stable and consistent and that's one reason we're able to forecast profitability the rest of the year.

We like the way it's shaping up.

The next question comes from Kenneth Zener with Macquarie .

You may

Good morning.

Morning, Ken.

Clearly the cost saving story's working.

I have two questions, one's around gross margin and the other is what to do with your cash.

So your gross margins obviously somewhat lagging peers, partly as they buy and blend in new lots.

Given that you said you like where your land is, is the philosophical shift that you're buying more and how are you dealing with rising input costs, like lumber and overhead.

Are you trapping that in the system or what is the expectation for that?

Yes, Ken, this is Steve Petruska, I'll answer part of that and then Roger's got part of the answer on the margin piece as we go forward.

On and overall basis, yes, we're blending the land in.

As I talked about a 1,700 lot acquisition in the first quarter is certainly very modest, and we like our land positions.

They were long land positions, many of the impairments that we've taken over the last few years are still embedded in those land positions.

But where we see opportunities to go out and buy land at below market value in great submarkets we continuing to do that but we don't see that as a significant part of our business from a closing standpoint this year.

The second part is, on the lumber price increases and some of the commodity price increases, we price and the way we work is we work on a trailing 13-week basis and we buy our materials direct, and we have great visibility, great transparency into the lumber portion.

So, we have seen lumber price increases, there's no doubt about it, probably to the tune of maybe $400 a house that'll impact closings in the second quarter and maybe a little bit more than that as we go into the third quarter.

But we've been able to offset those with further efficiencies on the labor side and certainly efficiencies on many of the things we're doing in trip charges and those type of things.

You can offset these as long as you componentize the break down of building the house and we've done a tremendous amount of work on that so that on a net-net basis the overall cost to frame a house for us, we haven't seen that much change at all relative to the lumber price increase.

Roger?

Yes, just, Ken, on the margin itself.

Again, I think you have to take in the context of how everybody does their accounting because there are certain aspects of cost that go into capitalizing that come through margin.

Some do more, some do less, so I think you need to actually get to the operating margin side.

But again, we still feel very comfortable with the efforts that we're making and stride we're making on continuing to see the opportunity for increasing our overall margin as we go forward.

So, again, relative to the peer group, again as Steve mentioned, some of them may be blending in more of that land that they buy currently but we're still playing this for the long term not just quarter by quarter.

A lot of the lots out there that are for sale are extremely limited, they're not in mass quantities in any particular location.

So again, as we've seen them, you buy ten lots here, ten lots there, there's not a great deal that you're going to build a big business on for a long time.

So, short-term gain against relatively long-term view.

So, I think there was some dynamics that are going on right now that will, again, be washing out as we come through in two, three quarters from here.

Ken, this is Richard, I want to add something to what Roger and Steve were just talking about on the land side.

Others have talked about margin expansion for new communities being a significant portion of their total and that's because their lot position, in many cases, was significantly down so therefore any land they bring on is going to be a bigger piece.

We made our bet with the large combination with both Pulte and Centex and 55,000 lots that were acquired and resulting accounting from that.

I would suggest that our forecast for margin growth in the future, as Roger indicated, is sustainable and driven by things we can control our own operating efficiencies and not reliance on future land prices.

And while we want to be opportunistic on land purchases where we can, our view is that that's not going last very long.

So whether we get margin benefit from opportunistic land for another quarter or two, that's great, but what happens in 2011 and 2012 et cetera.

I would argue that we are going to have a land basis that's very appropriately valued for the long run, and that's why we're continuing to forecast margin growth.

So, I just wanted to emphasize maybe some of the difference there and the way we're thinking about it.

We don't need a lot of new land in order to expand margins.

Right, and I agree with you because you guys purchased of lot of land via equity, which brings me to my second question, which the cash that you have and actually as you work down those legacy lots you'll continue to lower your leverage in the absence of buying land with cash.

So given that your leverage is already pretty reasonable and it's obviously overset it'll drop as you relieve that land from your balance sheet and don't buy and in that position you're declining, especially when your deferred taxes come back and with housing stabilizing.

How come you guys aren't upgrading share repurchases as a capital deployment because you can only pay down debt, buy land which you don't need, or put your money into alternative asset class like some other, so why isn't share repurchase more a focus?

Thank you.

Yes, Ken, it's a great question and I appreciate you asking.

This is Richard.

To set the context for the answer just appreciate that 12-months ago we were talking about a significant liquidity crisis in home building that was kind of the trough, if you will, in terms of where everyone was really, really concerned.

So I just point out that 12-months ago we were in a very different spot.

We worked extremely hard to get the cash balance where it is and we're very pleased with that and we do think the liquidity crisis is behind us.

So we are, at this point, evaluating many alternatives with regard to our cash and we do not intend to let it just sit here forever.

I'm not in a position today to tell you exactly what we're going to do with it but all of the available opportunities are being discussed.

They're being discussed with our board of directors and we'll have more to say on that as the year progresses.

So we don't want to get ahead of ourselves and announce something immediately, but your comments are well founded and we understand our obligation is to drive return for the shareholders and we intend to do that.

So stay tuned on that one.

Your next quest comes from the line of David Goldberg with UBS.

You may proceed.

Thanks, good morning, guys.

Morning, David.

First question is to get a little bit deeper on the breakout on sales between the various segments.

What I'm trying to look at is actually what kind of absorption rates -- sales rates you had for each of the segments and then with that, what do you think is going to be the factor or factors that maybe accelerates the sales rates in the Del Webb business?

David, this is Richard.

Our Del Webb business was actually sequentially up a little bit community by community velocities from the fourth quarter to the first quarter of this year, and on a year-over-year basis was fairly flat, quite frankly, largely driven by the fact that we did not have a lot of the Del Webb communities rolling off and we did have a lot of Centex and Pulte communities rolling off.

So, the -- what we're hearing from our sales team out there -- and Steve can comment more -- is that the Del Webb buyer is beginning to come back and beginning to shop a lot more.

They've not yet pulled the trigger in terms of big purchases yet, but you can sense the momentum building as the market has improved.

And this buyer, we've known all along, takes a longer period of time in order to make their decision.

So our expectations are that the Del Webb business improves from here.

We don't expect it to rocket up or anything like that but we do expect improvement.

I don't know, Roger, if you want to give any more color?

Yes, just on your question on the absorption rate, if we looked at the Del Webb for the first quarter it was roughly about seven and Pulte was roughly about five and Centex was roughly about 4.6.

Okay, great, and then, just my second question and maybe it's a little bit of follow up on Ken's question.

I'm wondering about working capital and inventory, and I know you have 50% of you lots are developed or the total -- I'm sorry -- 50,000 (inaudible) are developed but I'm wondering how you think about cash expenditures as you eventually start to grow the business.

And I know backlog's down a little bit year over year at this point on a Centex and Pulte basis, but as you think about reaccelerating the growth how do you think about the amount of cash spend you need to rebuild the inventory and if you could really put some -- give some quantification around it I think that'd really helpful for trying to think about future cash flows?

Yes, David, this is Roger.

We're certainly thinking about it.

Again, there's a lot of dynamics going on in the market from lending, from bank revolvers, what's available there today is a lot less than what it used to been.

Most of the revolvers -- and there's only a couple left in the industry today -- have been used for letter of credit.

So there's not much available from that standpoint that people are relying upon to build working capital going forward.

So, as we look at it certainly we've got to have cash to put back in on the vertical side because you're putting $2 to $3 for every $1 of land into the vertical side.

And so, of course velocity's important on that so it's going to be exactly what the pace is going to be is going drive how much actually we're going to use for working capital.

So there's not quantification that I have to give you but cash will go into that.

I think we said easily could see maybe $500 million, $700 million depending on where the market is and how mump volume is out there from the market standpoint to put back into that side.

And then again, a lot of what we've been doing on the land development side has been to try to be more cash constrained than efficient on development side.

So rather than developing 300 lots in a community we prefer maybe to develop less than 100 to make sure that from a liquidity standpoint we're in good shape just to weather another downturn.

So all those of things are factors that we're doing today and running it a lot smarter on the cash side that we could capture costs going forward if we feel good about the liquidity side.

And again, those things that we are considering, but we have to have a better view of of the market overall before we start to -- what I would say is move back into a normalized view of how we run operations day to day.

Your next question comes from the line of Nishu Sood with Deutsche bank.

You may proceed.

Thanks.Good morning and nice job on the SG&A reduction.

Thanks, Nishu

But I wanted to follow up on the land question.

Clearly from the earlier questions we've been talking about your strategic differentiation, let's focus on our land pipeline that we already have as opposed to being in a scramble out there in the market.

Some of your other peers -- I'd say most of your other peers that have a lengthy land supply are going for the idea that, yes, we have a lot of land -- some of them have a lot of land, as well, but to develop it and bring it to market might be 12, 18 months plus, and being risk adverse they're saying, okay, le's rather go out and buy finished lots.

I know you're doing that to some extent, as well, but I think Steve mentioned $100 million in land development expenditure.

So I wanted to get -- I wanted to dig into that number.

Are you folks also taking the view that you wanted to be risk adverse, let's not develop our own land that might still be 12-to-18 months out, are you different there?

Is this land development expenditure simply things like longer multi-stage Del Webb communities?

So I was wondering maybe if you could talk us through that a little bit?

Yes, Nishu, what I would tell you is this.

First of all, we are not adverse to developing our own land where we need to develop our own land.

I think initially when Roger talked at the last call we talked about maybe putting up to $700 million, $800 million into land development this year that were in our cash flow projections.

Now certainly maybe a quarter of that to a third of that is some soft cost relative to property taxes and various assessment districts and those type of things, but the rest is physical hard development.

And clearly we're doing that in some communities where we have proper demand and as Roger spoke about earlier, we're doing it smartly.

We're developing smaller pods of lots and not putting that much land out in front of us.

What we're really looking at on the acquisition side is where can we improve our position.

I spoke about-- we clearly -- we know what it costs to develop land, we know the raw basis that you can buy land at today in the market, and if you can go out and get a developed lot in a preferred submarket that targets a consumer that we're very good at serving that's below those costs, it just makes good business sense for us to go out and buy those lots, as well, and we did.

We -- approximately 20, 25 transactions in the first quarter and the $110 million I talked about was the total cash outlay eventually on those deals as we take down all of the lots, not what we put out in the first quarter to acquire those lots.

So for us it's clearly a blend.

We like our land positions that we have, we've said that for a long time.

Unfortunately we've had to impair those positions as the market downturn has been here the last couple of years, but we haven't burned through those positions.

Those impairments are trapped now into the basis of the land and as we look out and we start to see some activity in these preferred submarkets where we own land, as well, we see a very good situation emerging for us.

And as Richard talked about, our opportunity to improve margin doesn't lie in -- totally on our ability to have to buy land at below market value and we feel pretty good about that.

So I think that hopefully that answers your question but that's really what we're looking at.

It's a combination for us but I think we're more weighted toward our current projects and that's why when I was asked the question we're focused on improving absorption in those communities that we already own.

Nishu, this is Richard.

We're in a nice position to being able to be choosy on what we want to select in terms of go-forward land positions and our operators are doing a great job on everything we're buying being accretive in the short term, being very cash-flow positive, et cetera, but we have a sizable portion of the balance sheet tied up in projects that we want to get active.

And we like the locations, as Steve said, and we like the potential and we're going to be bringing those to market over the coming quarter, so that's our view.

Got it, that's very helpful.

And the second question I wanted to ask was a little bit different.

Most of us externally when we're looking at your closings we're looking at it as a conversion of backlog ratio and the ratio was fairly low.

It's almost back to normal at about 60%, 65% or so.

Most other people have been elevated because of their pursuit of specs, tax credit oriented, and so you -- so everyone's going to get back to normal eventually.

Your folks perhaps with less focus on the spec building could have fallen a little more but still it was more than we expected even taking that into account.

Especially -- Steve was mentioning the change the in the way that you guys are accounting for orders.

I would've expected that would've actually boosted the conversion rates a little bit.

So I was wondering if you can maybe walk us through.

Was that a mix issue?

Why was the closings ratio lower than we might have anticipated?

Nishu, this is Richard.

It was what we expected.

Not sure how to put a point on it more than that.

Frankly, we have been moving to this build-to-order model, we have been building backlog and not putting as much in production and to be honest with you, we don't look at a conversion ration internally.

I know it ' a metric that you guys track but I'm not sure other than to tell you that we hit our own targets internally.

We're pleased with the result.

We're particularly pleased with the overhead leverage on what we would acknowledge is a modest volume a quarter.

And we did indicate based on our focus on profitability for the year that you can expect better closings going forward as we come into the year.

So it's playing out as we expected.

I don't mean to think there was any one thing that drove something to tell you, yes, we fell short here or there.

It was what we looked for.

Yes, the only thing I would add to that was is that as I said in my prepared comments we didn't play the game of trying to discount the spec to get the sale in March and drive the delivery as quickly as we could because, number one, we felt pretty comfortable with our overall spec inventory, and -- so those quick turns, especially in the Centex brand could have affected the calculations that you had.

You may have expected us to really go toe to toe in some of those markets where other builders were trying to get the buyers in at a spec discount and move that and we did not do that.

We felt very comfortable overall in our land -- on our spec positions and feel like we can absorb them as you normally would, right, where people who need a home for reasons of transfer or they sold their home quicker than they thought they would, that's why we want to have -- if we the have available inventory that's why we want to have it.

Not to belabor it guys, but we have really worked hard to get out of a vicious cycle of excess spec inventory getting discounted at the end of a quarter or the end of a year, or frankly, post the expiration of a tax credit.

We don't want to go back there and so that's why the operating model is playing out as we foresaw it.

The next question comes from the line of Jonathan Ellis with Banc of America-Merrill Lynch.

You may proceed.

Hi, this is [Jay Chatbar] in for Jonathan Ellis.

Hi, Jay.

Hi.

What was the carrying cost of finished lots in the inventory and if you can also provide an exact number of finished lots owned?

We'll get back to you on the first question but in terms of finished lots owned --

Yes, this is Mike.

For finished lots owned we're at 42,720 and that included approximately 8,900 related to house.

Okay.

If you can also provide deferred tax valuation loans at the end of the quarter?

Ye, Jonathan, this is Roger, two things.

One is back on your question, the carrying, we said typically the carrying cost for us is around $225 million to $250 million a year and that's what we spend from a soft cost, as Steve had mentioned earlier.

And then again, you can look at the balance sheet make up and then what percent to debt is of the overall capital relative to the inventory.

Again I'm not sure where you are headed with that.

Then the next question --

Deferred tax valuation loans?

Yes, about $2.3 million, that's with the corresponding valuation allowance.

Okay, thank you.

The next question comes from [Alex Barron] with Houseing Research Center.

You may proceed.

Thanks, guys.

I had a couple of questions.

The first one has to do with your interest capitalization policy and how that works.

Was wondering what was the interest incurred versus how much was capitalized?

And then my second question was on your impairment policy.

When you guys impair a community, given that they're pretty big, do you guys only impair the phase that's ahead of you, or do you impair the entire community at the same level?

Yes, this is Roger, I'll take the second part of the question.

First of all, our impairment policy has not changed.

We look at the entire project, and that means every lot that winds up in the project is viewed for impairment, so we don't impair by phase and then wait for another phase to impair it.

So it's been pretty consistent what we've done since the start of this and we are carrying that today the same way.

Mike?

Yes, in terms of our interest incurred in the quarter it's approximately $69 million, and our interest capitalized was approximately $69 million, as well.

As Roger mentioned in his script, we expensed approximately $27 million of cost during the quarter.

The next question comes from [Matt Lubsen] with Barclays Capital.

You may proceed.

Hi, thanks for taking my call.

Going back to your comment on land prices starting to rise in some of the preferred markets, can you talk about how you think about the dynamic between land prices and home prices in those markets?

If there's a ton of existing inventory in the market, for instance, it's hard to imagine there'd be significant home price appreciation, so in those situations do you think an increase in land prices could drive a higher home price, or how do you think about that relationship.

Typically what happens is, is that the land is being acquired based on what builders believe they can sell homes for in that submarket and so the land price supports probably the current pricing.

We do not price appreciation in or anything like that.

So, what we think is happening is there's just a very short supply of this readily-available land that we believe is below replacement cost.

You can't go out and buy the raw dirt and develop it for that and builders are buying that to sell it into the price that's being absorbed in the submarket.

What we think's going to happen is, is that number one, you're going to increase the overall supply of homes.

It's going to be moved from a supply of land to a supply of homes, obviously.

And typically, unless you see more demand in that submarket, relatively speaking, that tends to have sometimes a downward pressure on pricing.

So we think it's going be flat to maybe slightly up or down, depending on the builders that actually bought the land and how aggressive they go in there with new product and new housing.

And then obviously what the corresponding surrounding (inaudible) market looks like.

So it's probably not an endless supply of price increases because everybody's buying up the land.

I think that in our -- what we've seen is that the returns just continue to get tighter and tighter on trying to make it work at the current pricing and that's really our jumping off point.

If we can't get the returns that we want to get we let it go to somebody else.

Got you, okay.

and then just one final housekeeping.

The $2.3 billion DTA, is that $1.3 billion that's estricted under section 382?

Yes, that $2.31 billion's related to Pulte and $1.3 billion's is related to Centex operation.

Our final question will come from the line of Buck Horne with Raymond James.

You may proceed.

Thand you.

Just a quick question the change to the sign-up process again.

Would you guys consider that what you're doing now is more conservative than what your peers are doing in terms of walking customers through the -- or taking them deeper into the sign-up process?

Definitely more conservative, yes.

Okay, And lastly if you have a -- if you have the numbers in terms of active community count by the brand and any guidance you might be able to give us on what to expect in terms of how the community count will trend for the rest of the year?

I'll give you the current community count by brand; Pulte, 305; Centex, 401; Dell Webb, 136.

And Buck, as I mentioned last quarter, we were looking at the end of 2009's community count.

We were expecting to be down -- I gave a number of about 15% for the year.

So from the beginning of the year to the end of the year 2010 roughly about 15.

Now I might say we might be down roughly around 12% from what we're look at today.

So, again, quarter by quarter we look at what we're buying, what's rolling off, what we are bringing on, so roughly year to year I would say right now roughly about 12%.

Ladies and gentlemen, that concludes our question-and-answer session.

I will now turn the call over to Mr.

Jim Zeumer for any closing remarks.

You may proceed.

Thank you, operator.

I want to thank everybody for their time this morning.

We'll certainly be available throughout the day if you have any follow-up questions and we'll look forward to speaking with you in the future.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect and have a great day.