普爾特房屋 (PHM) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q2 2010 PulteGroup, Inc earnings conference call.

I will be your coordinator for today.

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

We will be conducting a question-and-answer session towards the end of today's 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 Jim Zeumer, please proceed.

Thank you, Veronica.

I want to welcome everyone to this morning's call to discuss PulteGroup's results for the second quarter and six months ended June 30, 2010.

On the call with me today are Richard Dugas, Chairman, President and Chief Executive Officer, Roger Cregg, Executive Vice President and Chief Financial Officer, and Mike Schweninger, Vice President and Controller.

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

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

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

Results reported in the release and on this call reflect the inclusion of Centex's operations for the second quarter and six months of 2010, although results for the comparable prior periods 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.

PulteGroup 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 PulteGroup'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 made during this call also contain references to non-GAAP financial measures.

See this morning's press release, which is available at our corporate website, pultegroupinc.

com, for a reconciliation of 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.

I will now turn the call over to Richard Dugas for his opening comments.

Richard.

Thanks, Jim, and good morning, everyone.

In preparing for today's discussion I reviewed our comments from PulteGroup's last two quarterly conference calls.

During those calls we talked about expectations that new home sales in 2010 would likely be comparable to 2009 and how we had set up our business to be successful in that type of difficult macro environment.

At the time we also talked about how important the Centex merger would be in accelerating PulteGroup's overall pace of operating and financial improvement.

The significant gains in PulteGroup's second quarter financial results demonstrate that we are achieving the goals that we have set for the Company.

As Roger will detail in a moment, we continue to realize improvement throughout our operations, as home building revenue roughly doubled to $1.3 billion, home building margins before land related charges and interest costs expanded to 17.2%, SG&A dropped to 11.7% of home sale revenue and reported earnings per share of $0.20 a share represent a major step in the process of rebuilding shareholder value for our investors.

Successfully executing against a small number of key initiatives helped the Company to deliver improved operating and financial results.

The Company significantly reduced year-over-year pretax loss of $6 million, which includes $45 million in land and mortgage related charges, reflects lower impairments and the benefit of gross margin expansion and better overhead leverage within our home building operations.

In combination with our ongoing work against these key initiatives, the dramatic improvement in PulteGroup's performance was driven in large part by last year's merger with Centex.

By putting the two organizations together it allowed us to meaningfully increase the number of homes we delivered and the corresponding revenue we recognized.

In turn, having moved quickly to integrate the businesses and capture expected overhead synergies, we were able to realize significant leverage on our SG&A spending, which as a percentage of settlement revenues dropped by almost 600 basis points.

We have been focused on our efforts to reduce overhead costs during the prolonged market slowdown, but achieving these results would have been difficult without the merger.

The merger integration is all but complete, but the benefits will continue to support our results for many years to come.

As concerns about potential integration risks rapidly dissipate, comments from more and more investors acknowledge the positive business impact the transaction is having on our business.

Overall we are pleased with our second quarter financial results and the progress we continue to make in strengthening our operations and improving our market position.

PulteGroup associates throughout the country have worked hard to close homes, control costs, and execute against our key business strategies.

I want to thank them for their continued efforts in support of the Company.

Beyond the improvement in our second quarter numbers, we appreciate that the focus of the past couple of months was and remains the current state of housing following the April 30th expiration of the federal tax credit.

The fall-off in demand has been well documented and, in truth, has likely exceeded just about all expectations.

We believe that it is a positive sign that our demand has been stable since the initial pull-back, but overall volumes remain well below normal seasonal demand.

There is certainly no shortage of economic research attempting to estimate how much demand was pulled forward and how long any effects will be felt.

Some believe the housing malaise could linger, while others think that some level of rebound could be evident within months.

And while the industry could experience a modest seasonal lift in the back half of the year, within PulteGroup we'll continue to err on the side of caution in terms of how we manage our operations until a more sustained rebound is evident.

In the end, almost regardless of how future demand plays out, we still believe that the tax credit had to end.

We need to know the true level of demand without government stimulus distorting the market so that we can continue to properly position our business for ongoing improvement.

Beyond the immediacy of any tax credit impact, for the industry to experience a meaningful and sustained rebound in demand over the long-term we need a stronger economy, job creation and better consumer confidence.

At a run rate bouncing around 300,000 to 350,000 new home sales annually, our industry continues to face incredibly low demand.

Supply, be it traditional home sales, vacancies, short sales, foreclosures, shadow or otherwise, is obviously important, but right now the industry's biggest issue is a lack of buyers.

The good news is that coming off such low levels even a modest improvement in fundamental demand can be experienced relatively quickly.

Given the low interest rate environment and incredible home values, even slight improvements in local market economies or consumer sentiment can help convert home shoppers into home buyers.

Our operations are in a good position as we work through these next few months.

With only 1100 finished spec homes or just slightly more than one per community, our inventory position is certainly manageable, as we are benefiting from our strategy of not chasing the tax credit buyer earlier in the year.

Right now let me turn the call over to Roger Cregg for additional details on PulteGroup's second quarter financial results, after which I'll provide a little more detail on market conditions during the quarter.

Roger.

Thank you, Richard, and good morning, everyone.

Revenues from home settlements for the home building operations increased approximately 93% from the prior year quarter to approximately $1.3 billion.

Increased revenues reflect the increase in unit closings that were above prior year by approximately 101%, mainly attributed to the merger with Centex.

The average sales price decreased approximately 4% versus the prior year quarter to an average of $251,000.

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 current quarter.

In the second quarter land sales generated approximately $7 million in total revenues, which is an increase of approximately $3 million versus the previous year's quarter.

The sales in the quarter mainly reflect the sale of lots and land parcels to other builders.

Home building gross profits from home settlements for the quarter, including home building interest expense, was approximately $159 million versus a loss of $71 million in the prior year quarter.

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

Home building gross margins from home settlements as a percentage of revenues was 12.6% compared with a negative 10.9% in the second quarter 2009.

Adjusting the current quarter's 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 17.2% compared to an adjusted margin of 16.3% for the first quarter of 2010 or a sequential improvement of 90 basis points on an adjusted basis.

On a comparative basis versus the previous year's second quarter conversion of 9.4%, the adjusted increase is 780 basis points.

The improved margins are a direct result of lower sales incentives, house cost improvements and stable market pricing.

Home building interest expense increased during the quarter to approximately $38 million versus approximately $33 million in the prior year.

Included in the interest expense of $38 million is an additional $5 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 $20 million.

Consistent with prior quarters, we have reviewed all of our communities for impairment indicators.

Based on this review in the second quarter we identified and tested approximately 30 communities for potential impairment evaluation adjustments.

We recorded valuation adjustments on approximately 16 communities for the quarter of which approximately nine communities or 56% have been previously impaired.

Additionally, we impaired three projects which represented approximately $15 million or 75% of the total $20 million in impairments.

Also for the quarter the acquisition accounting work in process charge is approximately $500,000.

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

The gain is mainly attributed to the sale of lots and parcels of land in the quarter.

Home building SG&A expenses as a percent of home sales for the quarter was approximately 11.7% or $147 million, an increase of approximately $33 million or 29% versus the prior year quarter.

This increase reflects the additional incremental overhead associated with the merger of the Centex operations.

In addition, the second quarter includes approximately $1 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 $44 million or 23% from 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 $9 million includes the write-off of deposits and preacquisition costs resulting from the decision not to pursue certain land acquisitions in the amount of $2.3 million.

Also included in the category for the quarter is an expense of approximately $1.3 million associated with overhead expense reductions for lease exit and related costs and an additional $1.4 million goodwill impairment charge related to the completion of a final valuation of self-insurance liabilities assumed in the Centex merger.

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

The pretax income is inclusive of charges related to the valuation adjustments and land inventory and investments, land held for sale, goodwill impairment, severance and related charges and the Centex work in process adjustment for a total of approximately $32 million.

The pretax loss from Pulte's financial services operations for the second quarter was approximately $9 million, relatively flat versus the previous year's quarter.

The loss in the quarter is mainly attributed to an increase in loan repurchase loss reserves by approximately $17 million during the quarter and severance and lease exit costs related to the merger of approximately $1 million, all partially offset by an increase in loan origination principal volume from an increase in settlements.

Total mortgage principal origination dollars were $667 million, an increase of 65% 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 with the addition of the Centex volume.

Total agency originations were $622 million.

Non-agency originations were approximately $10 million and brokered or non-funded loans were approximately $35 million.

Additionally within the funded agency originations FHA loans were approximately 43% of the loans funded from the financing line in the quarter compared to approximately 40% in the first quarter of 2010.

Pulte mortgages capture rate for the current quarter was approximately 76% and the average FICO score for the quarter was 741.

In the other non-operating category pretax loss for the second quarter of approximately $9 million includes corporate expenses of approximately $10 million, partially offset by net interest income of $1 million resulting from an invested cash balances.

If we look at this line on a pro forma basis our expenses reflect a reduction of approximately $43 million or 81% from the combined Pulte and Centex expenses from the previous year's quarter.

For the second quarter the Company's pretax loss was approximately $6 million.

The pretax loss for the quarter is inclusive of $50 million in charges related to the valuation adjustments and land inventory and investments, land held for sale, severance and lease exit and related costs, acquisition accounting write-up for the Centex work in process inventory, loan repurchase loss reserves and the goodwill impairment.

The net income for the second quarter was approximately $76 million or $0.20 per share as compared to a net loss of approximately $189 million or a loss of $0.74 per share for the same period last year.

The quarter reflects a net benefit from income taxes of approximately $82 million, primarily due to the favorable resolution of certain federal and state income taxes.

The number of shares used in the EPS calculation was approximately 380.4 million diluted shares for the second quarter of 2010.

The total shares outstanding at June 30th were approximately 382.7 million shares.

Reviewing the balance sheet for the current quarter, we ended with a cash balance of approximately $2.7 billion, increasing approximately $163 million from the first quarter 2010.

We received approximately $103 million in cash refunds during the second quarter related to our federal NOL carry-backs.

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

The decrease in house and land inventory and land held for sale for the current quarter was approximately $146 million from the first quarter of 2010.

During the second quarter, our new investments in land were in rolling lot option take-downs and purchases of approximately $62 million and land development spending of approximately $166 million, offset by a modest reduction in house inventory by approximately $53 million.

With approximately $2.7 billion in unrestricted cash at the end of the quarter we had no outstanding balance drawn on our revolving credit facility.

The Company's gross debt to total capitalization ratio was approximately 56.6% and on a net basis 31.9%.

Interest incurred amounted to approximately $68 million in the quarter compared to $53 million for the same period last year.

PulteGroup shareholder equity for the second quarter was approximately $3.3 billion.

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

I will now turn the call back to Richard for some additional comments and on the quarter.

Richard.

Thanks, Roger.

As we've done in the past before opening the call to questions we wanted to provide some additional details on market conditions during the quarter.

Although given how well the industry demand has been tracked it seems almost real-time during these past few months.

I'm not sure there will be much new information.

Sign-ups for the quarter totaled 4,218 homes, which was a increase of 25% over the same period in 2009 and essential flat with the first quarter of this year.

On a pro forma basis, assuming Pulte and Centex were one Company last year, second quarter sign-ups are down 32% on 9% fewer communities.

I'm sure it won't be a surprise to hear that April was the strongest month of the second quarter with year-over-year sign-ups slowing meaningfully as we moved through May and into June.

Given the impact of the merger on year-over-year comparisons and the tax credit impact mid-quarter, I will focus more on sign-up trends within the second quarter of the year.

In terms of units sold month to month during the second quarter our Gulf Coast, southeast and northeast operations held up the best.

In fact, net sign-ups in the Gulf Coast and southeast areas improved May to June, led by gains in Texas, north and central Florida, and the Carolinas and Tennessee.

Our Midwest, southwest, and west areas experienced more significant slowing during the quarter, with Arizona and Nevada facing the most difficult demand environment.

This is consistent with demand conditions we have seen for much of the downturn, with Phoenix and Las Vegas being among the most challenged of the markets.

From a product standpoint I would highlight that sign-ups within our Del Webb brand were consistent year-over-year for the second quarter, as well as for the first six months of the year.

Active adult represents roughly one-third of PulteGroup's business and is an area that has been under pressure since the fourth quarter 2008.

Demand stability and obviously growth sometime in the future within this buyer segment is important for us.

Del Webb communities are much larger than traditional single family communities and can drive tremendous same-store sales volume when demand is healthy.

Assuming this buyer segment has found its footing, the timing could be advantageous as we will be moving into the stronger fall and winter selling season for many of the Del Webb destination communities which are located in warm weather markets.

In sum, demand pulled back after April 30th, which was to be expected, although the pull-back was greater than expected.

Demand has been relatively stable after the initial change, but it's going to take a few months before we have a truer read on demand.

One point I would like to make is to caution people who keep slicing demand data segments smaller and smaller.

You hear people attempting to gauge business conditions based on shorter and shorter time frames.

While useful there can be a lot of noise in this data.

Moving beyond sign-ups, we ended the quarter with 150,000 lots under control of which 90% were owned and 10% were under option.

Of these lots, approximately 48,000 were fully developed with an additional 21,000 currently in the development pipeline.

During the second quarter we remained active in the land market, having approved 31 new investments.

Total lots involved were just over 2,200, so you can see that the basic project profile remains the same in that we're focusing in on smaller finished lot deals that can be controlled via an option agreement and I can pencil to a mid 20% return or better.

As we've talked about before good deals are getting harder and harder to find.

Land development has been close to nonexistent over the past several years, so few new developed lots are coming into the market.

From a location standpoint, most of the A-location properties have been picked over and pricing has been moving higher, so it's getting tougher to make deals pencil to an acceptable return.

We have certainly been opportunistic in pursuing these deals, but we have always known that you couldn't build a sustainable business strategy on the backs of these small transactions.

With the recent demand softness you may see the deal flow ease a little, which isn't an issue given our strong land position.

We'll have to see if the pause is long enough for land prices to pull back a little.

Given our balance sheet we can remain actively involved in the process, but given our supply of finished lots we can certainly be selective in what we buy.

In conclusion we made great progress in the quarter and the first half of 2010 and enter the second half of the year as a much stronger, more efficient Company.

We'll be optimistic that demand conditions improve, while remaining cautious in how we operate the business.

As we've said in the past, we're well positioned to take advantage of the market opportunities that develop.

Let me now turn the call back to Jim.

thank you, Richard.

We will now open the call to questions.

As we've done on prior calls we ask you to keep it to the one question and one follow-up.

If you have an additional question at that point, please feel free to get back in the queue or you can follow us up with -- follow-up with us directly after the call.

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

(Operator Instructions) And your first question comes from the line of Josh Levin from Citi.

Please proceed.

Good morning everybody.

Good morning, Josh So I guess if you back out the tax item it was close to a break-even quarter.

That obviously includes the charges, but this was probably the high point for volumes for the year.

So in terms of trying to be profitable going forward what's the game plan?

Do you sort of wait to see if demand picks up or do you start looking for additional ways to cut SG&A here?

How do we think about your profitability strategy going forward?

Josh, it's Richard.

I don't think we wait.

Clearly it's going to be a challenging year and we're looking for all opportunities to improve profitability.

At this point we still feel that we can be profitable for the year, but given the pull back in demand it's going to be a steeper hill than we thought.

So our view is to look at not only SG&A, but additional ways to drive revenue and from a charges standpoint, we have not seen significant reductions in pricing across the markets nor do we anticipate that going forward.

Some of the charges we had in the quarter were on a couple of isolated projects that Roger can detail a little bit more, so we obviously can't forecast those going forward.

It's difficult.

You have to come through the period.

I don't know, Roger, if you want to speak to that a bit.

Yes, on the impairments we had, basically probably three projects, as I mentioned in the prepared remarks.

One of them was a repositioning from Del Webb project to a Pulte project and then the other couple were basically changes in estimates on the projects themselves.

So again, not material across the country.

They were very much isolated and I am not seeing anything systemic in price erosion to drive more impairments.

Okay.

And one follow-up if I may.

You have shown sequential gross margin improvement the past few quarters.

How does that go, how do gross margins trend from here?

Should we think they're still going to be up or flat or down, especially given the demand environment?

Yes,Josh, Roger again.

I think what we're going to see is somewhat a plateau from here a little bit.

Could be some opportunity up, but we're seeing some of the headwinds now start to come from the material costs that we saw go up earlier in the year.

So we're seeing a little pressure on that, but, again, we continue to work on house cost improvements throughout the country.

So I would tell you, we're probably expecting it to plateau from this point a little bit and it could move a little bit one way or the other, but nothing meaningful.

Next question comes from the line of David Goldberg from UBS.

Please proceed.

Thanks, morning, everybody.

Hi, David.

Wanted to follow up on Josh's question a little bit on the pricing and the strategy.

And I guess what I'm trying to get an idea about is it seems to me like we're hearing more and more already about some of your competitors cutting prices to try to drive a little bit of volume at this point given the weakness we've seen.

And I'm trying to understand how that relates to the impairment, the indication of impairment testing you guys do, how you kind of think about what prices to use in the model, how you think about pricing's going to fare moving forward and sales pace is going fare moving forward when you think about potential impairments as you look forward.

Yes, David, Roger.

I think when we take a look at each one of those, as the markets go through, they're looking at the competition, what they have to do to sell homes.

And typically what we've done in the past is if we need to compete and prices continue to fall significantly, we were competing in dropping our pricing and so that was creating the weight from the impairment side as margins were diminishing.

Again, you look at the volume as well, and so volumes an indicator of price as well, so if you are not selling anything, maybe because you're out of bed on the pricing in general, and so those are the indicators that the markets continue to look at and adjust to.

So I would tell you again competitively across the country it's not systemic across all the markets and all the communities.

I know you continue to hear that from builders, but they're isolated.

They might be isolated situations where they are in a particular market or segments of markets where they are adjusting price to move some volume.

And again, we end up looking at how deep that volume happens to be in the market relative to where we are and positioned and whether we have to react to that or not.

So each one of those is very specific, but very detailed to the market in looking at what your local competition is doing and how deep that supply is.

Got it.

And then just a quick follow-up question.

You guys were kind enough last quarter to provide kind of a sales pace per segment, and Richard I appreciate the detail on segment performance, but I'm wondering if we could get something like that, kind of a sales pace by segment this quarter and kind of how each segment compared to each other.

Yes, this is Mike.

If you take a look at Centex, about 41% of our sign-ups came from Centex, 31% came from Pulte, and 28% came from Del Webb.

And how does that compare to the community count layout?

Community count layout is -- a second.

Bear with us while we dig that out, David

Community count, if you take a look at Centex 377, Pulte 307, and Del Webb's 155.

Great, thank you very much.

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

Morning.

Thank you.

Good morning, Ivy.

Thank you.

Good quarter, guys.

The impairment concerns in the market are pretty pervasive and analysts are very concerned about another big substantial increase, so Roger, maybe if you could just elaborate a little bit more on the details of what you have that is arguably on a watch list.

Horton disclosed a watch list yesterday.

I don't know if you guys have ever done that.

But how much of your land is undeveloped that may have been mothballed and therefore really have potential with more capital investment in the ground, sewers, roads, and pipes that need to be put in place, could arguably be at risk of not getting your money back when you think about the cash that you invested initially.

Just kind of give us some comfort that pricing -- how much does pricing have to go down before you would be worried, Roger?

And recognizing, as you said, it's market by market, it's project by project, but I think we need, as analysts, more comfort from you guys to know that something Draconian has to happen in order for you to see a big increase as opposed to quarterly, if it is $10 million, $20 million, $30 million here and there, we understand that's going to happen, but a huge wave coming.

That's a long question but the same topic.

Ivy, it's Richard.

l'll start with that and then turn it over to Roger for some details.

First of all I just want to assure everybody that our strategy is not to lower price from here on a widespread basis to try to drive volume.

Frankly, I've been very close to the operations recently and I'm not hearing anybody say that we are in need of wholesale price adjustments.

Frankly, largely because the market operators don't feel that it's going drive that much incremental , maybe a little bit here and there.

So actions we're likely to take on price are very specific and isolated to communities and frankly, well over half of our impairments this quarter were driven from things unrelated to price.

In one case a strategy change on a large project and in a couple of other cases, estimate changes in the individual projects.

So I just want to reassure folks that we do not see at this point big impairments returning.

That's not to say that isolated projects can't be there.

So with that kind of backdrop overall maybe Roger could give some color about the watch list, so to speak, and

Yes, Ivy, our watch list is pretty small.

When we look at where we've been over the last almost four years, the adjustments we've taken, many of them constantly quarter after quarter after quarter.

We set the level of pricing based on the formulas that the accounting dictates, so you can't be ultra aggressive to write everything down to zero.

And naturally you wouldn't want to.

I think you can see by the level of the margins that are coming through, we've been spreading that gap and the gap has been spreading because we've been more disciplined on the pricing.

Now if we were to become undisciplined that creates a whole other level of environmental change on impairments in general, but that's not been our strategy.

So we think we have a fair amount of cushion in there for further decreases, if that were the case.

And then, again, you just need to look at, again, the overhead levels that you support.

As Richard said, you could go back to the overheads and adjustment those if pricing continues or would continue to deteriorate significantly.

So I think from a major project, the largest projects, we feel comfortable where we are with where the values are, where we've taken them down on the book.

And then again just environment community by community is going to dictate the level that goes on, I think, each quarter there going forward.

But we don't feel exposed as significantly as we had in the past just given the more stable pricing environment.

Just a follow-up Roger, can you quantify what percent is raw ground and then secondly, Richard, you mentioned that you are not going to lower price and start a price war.

Unfortunately, some of your competitors are lowering prices as a strategy.

Horton said yesterday they are going to sell them and close them at whatever price they need to.

That affects the appraisals.

So recognizing if you are across the street from them or even at neighboring communities a few blocks down you could have an impact on appraisal.

So how do you mitigate that being an issue even though you're not necessarily going to try to compete against them as that's a big problem in the market with appraisals.

Okay, I'll start with the answer, Ivy, and then go back to Roger.

In terms of trying to compete against any individual builder, Horton or others, we are clearly subject to what they do on a community by community basis.

But I would tell you that is isolated to the communities where we directly compete with them.

You are right around appraisals, but the way I'm thinking about it, Ivy, is if you go back to 2007 and 2008, the market was on a wholesale free-fall decline.

And no one could find any footing no matter what was happening, so price kept spiraling down and obviously hundreds of millions of dollars of impairments per quarter resulted from that.

I'm not seeing that kind of environment.

Despite what Horton is doing or a couple of other builders, our opinion collectively internally is that price is not going to move the business a lot and therefore I suspect on the edges you are going to see some competition there and we'll have to deal with appraisals and other issues like that, but I'm not expecting things to drop 10% from here.

And again, as I've been talking to our operators, it does not appear that that's moving a lot of product.

Things are -- it's not a price problem.

it's a consumer confidence issue.

So we'll have to compete community by community, but I think that's going to be more spotty.

So it's not keeping me up at night.

Yes, Ivy, Roger.

Just on the undeveloped, basically, I'll give you on a lot basis.

I don't have the dollars in front of us.

But on a lot basis and out of the 150,000 lots that we talked about there's roughly about 100,000 that are undeveloped, so that's almost two-thirds.

Again, we can follow up with you on the specific dollars.

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

Please proceed.

Hi, I've got yet another question on impairments and then I'll turn it to some of the cost savings side.

You talked about a potential pull-back in land prices that would create an investment opportunity.

What would that do to some of the land holdings that you currently have.

Would you potentially have to write those down as a result?

Yes, Joshua, this is Roger.

No, we would not.

You always buy land at different prices, so if you buy one that is lower than another one doesn't mean you go back and adjust your book.

The only time you adjust your book if you felt that that was impaired and again the land pricing itself doesn't do that.

It's the house pricing, the margins, the pace, and those type of things that will typically drive the impairments.

So you could very well, which we're doing today buying land for less than we have on our books in some instances, which given ourselves opportunities to improve margins.

I think you've heard that from the other builders as well.

Some of them are focusing more of their attention on doing acquisitions than actually using the land that they own today to be able to capitalize on that type of margin improvement.

So overall that's a good thing if you can buy it for less, but it does not mean you impair any of the book.

Great.

The second piece of the question, you guys had outlined $350 million of annualized cost savings because we didn't have the original basis for that number.

Could you quantify what you have saved to date and then you made some comments in your prepared statement about potentially capitalizing on more opportunities that were a little bit more long-term.

Could you outline what some of those are and quantify them for us, please?

Sure, again Joshua, this is Roger.

Basically as I mentioned in first quarter we had about over $115 million in savings in SG&A alone.

This quarter we mentioned again about $86 million if you follow the script.

So that's about $200 million in the two quarters.

I didn't go back and try to calculate the fourth quarter for you, but again there was savings there as we put the companies together in the fourth quarter.

Interest alone was probably at a half year probably about $65 million, so this year we're probably running $265 million.

I would tell you we're probably in the $300 million plus range and two more quarters to go until we're at the end of the year.

So we outlined about $440 million.

We're well on track to that number.

We talked about another $150 million to $200 million in the purchasing side.

We're starting to see some of that come along in the margins.

You do see some of the improvements in the margin as being helped by some of the cost, house costs saving that we're able to get by putting vendors together.

More of that should come as we move in the future.

Now what I always said was that number in the purchasing side was always soft because you don't always get the demonstrated if you have commodity costs beginning to rise.

So when we think we had an opportunity to save money in that $150 million to $200 million, if commodity costs go up, which they have earlier this year on a year-to-date basis pretty significantly, that also plays in the headwind of actually dropping it to the gross margin line.

So well on track for the $440 million and again the other $150 million to $200 million we're seeing that starting to come through the gross margin side and will hopefully in the next couple of quarters as well.

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

Please proceed.

Thanks.

Good morning, everyone.

Good morning, Mike.

First question, on the goodwill balance.

I think we've talked a little bit about, obviously, on the land impairment side, but I believe a couple of quarters ago, when you took the large charge, you had referred to a $9.01 stock price threshold.

So I think there were some people expecting some type of additional charge there as you fell below.

I was wondering if you could just discuss the dynamics there and how we should think about that going forward.

And then I have a second question.

Yes, Mike, I think what we said it wasn't really a threshold.

Really what it was was an indicator of value and so there's a very sophisticated complicated formula you work through when you are looking at the book value relative to market value and future value for the book.

And so all those things are taken into consideration, but the specific market cap is not a single driver.

It's an indicator.

And again, what you look at is your book.

We added back for tax assets because, again, the market gives us value for that relative to what the book has.

So in and of itself, the market cap did not drive an impairment this quarter.

And again, we took a look at any other indicators that might have been there and again, none rose to the level that would indicate a full-blown impairment would be taken.

So just to follow-up on that and I'll kind of get my second question in just in case I'm cut off, but just to close out the goodwill.

So going forward, what type of scenarios might there be, and it sounds like obviously it's a complicated amalgam of different drivers, but is it safe to say that at current conditions and current market cap that obviously you haven't taken a charge yet, but what would the drivers be or what would we need to see to take another material goodwill charge?

That's just following-up on that question.

Second question, on the gross margins you saw some nice sequential improvement, actually some of your peers saw some sequential declines.

How much of that was driven by some of the improvement in house costs, which might be merger related, versus incentives and going forward I believe you said that you expect gross margins to be in a similar range or neighborhood.

Does that mean 16% to 18%?

Is there a little bit of downward bias risk given how incentives have maybe increased modestly.

If you can give us some thoughts around that as well?

Okay, Mike, on the goodwill, no, I would say that there is risk, even if the value of the stock were to go up, because it's also based on how the goodwill is allocated across markets.

So you could have markets that deteriorate that could cause goodwill on a particular asset in those markets.

And so it is not as easy as just saying I look at one indicator and I can feel comfortable or uncomfortable about it.

It is, again, a complicated formula.

You have to look at your allocation of goodwill across the markets and then how those actually perform.

It is a future view, so you are looking at what the future value of that generation is of the assets as well and so, again, that's why it's pretty complicated.

But, no, you can't just say that there's no risk because the market cap goes up or stays the same.

And those are the things we continue to look at market by market as we would do that goodwill impairment test.

Mike, on the gross margin question, Richard, we had indicated we expect margins from here to be relatively flat with no particular bias one way or another.

We've gotten significant benefit from the merger.

Clearly the combination of the volume from both companies given us the opportunity to open contracts with vendors has helped us.

We're going to have that but going forward we also have the market to deal with as well.

So Roger indicated that margins had likely plateaued for the time being with relatively flat outlook from here.

Your next question comes from the line of Mike Widner from Stifel Nicolaus.

Please proceed.

Good morning, guys.

Good morning, Mike.

Just let me ask you a more technical and probably easier question.

A lot of my others have been asked already.

An average sales price, I am just looking at the change in, well some of the comments you have here.

It looked like there was a nice increase in average sales price in the quarter, but down in the notes you indicate that it has a compositive, changes in the backlog, et cetera, so just wondering if you could give us an actual average sales price for the new orders in the quarter and then if there's something peculiar in there if you could comment on that.

Yes, let's see, we're looking for that, Mike.

Basically the -- we did talk about the price from last year actually going down about 4% from a Pulte to the combined companies.

So again, that's mix, more mix driving in there than anything else currently from quarter to quarter even.

We're down even from the first quarter to the second quarter.

So as we look at some of that stuff it's more mix driven at this point by the number and the units by the markets.

And again, first time home buyer relative to active adult, as that mix moves, the pricing moves along with it.

So same thing with more closings in the western part of the US versus the southern part of the U.S.

where you will see some of those movements.

Mike, you have some of the detail?

Yes.

In terms of our -- with the net sign-up units of 4,218 we had about an average of $272,000 on the sales price on those.

And in our backlog, we have approximately $280,000 average sales price in backlog.

And I would just add that even though we have that in our backlog, doesn't mean all those homes that we have in our backlog are going to get closed in the next quarter, so you cannot extrapolate the number that is in our backlog to get the next quarter's average selling price.

We have specs that we sell in the quarter, cancellations where a house might resell, so all of those type of things will affect overall the average selling price from quarter to quarter.

So, appreciate that detail.

I guess the thing I was specifically alluding to here is the 272 indicated average selling price, if you just do the math that you just mentioned, that's a big increase on a Q over Q basis or year-over-year basis.

I'm just wondering if that's actually real or what you indicate in the note underneath that chart is that that 1.15 in order dollars actually includes both new order sign-ups and some adjustments for changes in the backlog.

And I'm just wondering if that changes in the backlog is distorting the number or if you did indeed see $20,000 Q over Q increase in average new order price.

Yes, Mike, as I mentioned earlier and as we talked the script, the average selling price is a function of where it's selling throughout the country.

So as we did talk about the stability in price, we're not seeing huge increases to drive that type of thing, even on average, let alone specifically community by community.

So it is more driven on mix than it is anything else moving through that.

Mike, as an example, we indicated our Del Webb business has been relatively flat.

It's got a higher ASP than the Centex brand does, which is our entry level brand.

So don't interpret that as we raised prices on average $20,000.

Interpret it as though we have a very bifurcated mix in our Company with the active adult, the move-up under the Pulte brand, and then Centex being the entry level brand.

We've seen some stabilization in Del Webb, which has taken ASPs for this particular quarter's sign-ups a little bit higher.

Again, I would caution you against reading too much into that relative to what closes in the next quarter due to the vagaries of cancellations et cetera.

But that's what causing it as opposed to a real change in strategy or change in pricing philosophy.

No, understood.

See that all makes sense.

I just wanted to make sure there wasn't sort of an accounting thing there making -- like I said, the note indicates that there's changes in backlog also reflected, just wanted to make sure there wasn't anomaly in there.

And then just one other technical one, if you could, the DTA impairment at the end of the quarter.

Basically, we're right where we were the previous quarter, about $2.3 billion in deferred tax asset with a $2.3 billion valuation reserve up against it.

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

Please proceed.

Thanks.

First question I wanted to ask was about your cash balance.

You folks still have the largest cash balance in the industry.

If you kind of think about the two main ways investors think about that cash balance, first, as an opportunity fund to pursue incremental new land purchase opportunities and second from the kind of security or safety or liquidity perspective just as a buffer against a weak market conditions.

On the first front you folks have been very, very consistent in saying we have a great land position and that's our primary focus going forward.

And on the second front with the second quarter, obviously nice achievement, first positive EPS number, according to our numbers, your first positive operating margin, impairments have come down, gross margins have stabilized.

So there's less need on that front as well.

So given that conditions may be weak for some time further here, depending how the economy recovers, is it the right time to be considering scaling back the balance sheet to reflect a kind of shrunken housing market?

Nishu, this is Richard.

I think your comments are well placed.

And clearly as we've discussed things in the previous couple months and going forward, that's our discussion around here is what's the best allocation.

We're a conservative Company and frankly I wouldn't expect us to change our stripes there and get real aggressive one way or another, but overall, point well taken.

We do think any significant liquidity concerns of a couple of years ago or a year and a half ago are gone and that's a good thing.

So we're looking at the best use of funding.

Our preference would be to put it in inventory, if we could, but frankly, and what I mean by that is land inventory.

However, we're being very cautious and selective on what we're buying.

We indicated we're seeing some price pressure in the market on the land side and we don't want to chase things.

150,000 lots under control.

We made a bet with regard to Centex in terms of land acquisition and we're very pleased with that.

So we don't find ourselves in a position of having to grow community count or grow store count like maybe some peers feel like they're in that spot.

We don't feel that way.

But we are looking at all uses of cash and beyond that, Roger?

Yes.

I think, as we've stated quarter after quarter here, that we're waiting to see how the market moves and quite frankly, the market is moving in the opposite direction than many thought two quarters ago.

We wanted to be conservative to see it.

We wanted the fog to lift, so to speak, so that we get a clear direction on paying down debt, vesting more heavily in land, as Richard mentioned.

All of those things on the table that you do with the cash and the capital to make the balance sheet even stronger.

So it's not lost on us.

It's clearly about value creation and how we actually get there from our investment strategy going forward.

Those are the things we've been waiting to see as the fog lifts and we get to see truly what the market is going to do.

Great, thanks.

No, that's helpful.

And second question, Roger, I wanted to ask for some more color on the income tax refund or reversal.

I'm not quite sure whether that was a reversal of some of your DTA.

Maybe that related to some of the Centex tax issues that they -- the discussions they were having last year.

I thought that had been resolved.

So maybe if you could just give us some more color on that.

Yes.

Basically they were two items and they were tax liabilities, income tax liabilities, so that's why if you looked at the balance sheet down in the income tax area you will see the liabilities actually move.

And so they were basically two issues that we had that were resolved during the current quarter, where we basically removed those liabilities.

So the deferred tax asset really didn't move in the quarter, over the last couple quarters.

It's been pretty much the same.

Again, as I mentioned, it's per tax asset has a full valuation reserve against it.

So it was the majority of it was basically tax liabilities.

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

Please proceed.

Thanks very much.

Was wondering if you can talk about SG&A.

You commented on the benefits of the merger bringing that down.

How do you think about SG&A over the next several quarters here?

What level of SG&A as a percentage of revenue can be sustained?

Dan, we're looking at it more on a dollar basis.

Revenue is obviously a function of demand and overall conversion.

But we would look for our true level of SG&A to be pretty consistent going forward with what we've seen.

Roger, I don't know if you want to add any color.

Yes, basically I would tell you we're in that range.

You saw last quarter just over $150 million, this quarter $147 million.

It could be up or down.

This quarter we had some insurance adjustments in there that go through based on an actuarial review when we look at it.

So some of those things influence it a little bit here and there, but I think we're sort of at that run rate at this point, if you looked at those dollars I could tell you between $140 million, $150 million on a given quarter and again, there's nuances of accounting that run through there.

You have got different type of accounting expenses that might move one quarter versus another quarter, but I would tell you we're generally in that range today, pretty much on a dollar basis.

And then as Richard mentioned, the leverage will come with the volumes and the closings, as helped us out in the second quarter here and we'll see when the quarters go forward with the closing potentials in the next couple of quarters and the leverage on that side of it.

Great, thanks.

And I guess just secondly was wondering about the comments you are pretty consistent saying you wouldn't, didn't want to chase orders of the tax credit and don't want to cut pricing, which doesn't drive so much incremental demand right now.

While it might be the right strategy, how pragmatic are you and then if you see others doing much more and so, yes, it is a community by community, but when it becomes a much higher portion of your communities where you are seeing this at what point do you look at that and say we don't want our volume to fall off too dramatically, we need to respond to this?

Yes, Dan, that's good question and frankly, we do want to be competitive in the market and we will be competitive in the market.

I will tell you though, remember the banks control all the small builders in the industry.

And if you add up all the big builders combined you are still not more than 25% or 30% of the total new housing market.

So there's an awful lot of folks out there who don't have the ability to cut price, frankly, because they can't build any inventory at all because all they're able to build is sold inventory based on the overall shut down of lending in the industry.

So I personally think to say a builder or two builders or three builders who are chasing pricing are going to influence a new home building market is a little bit of a stretch.

It is not the environment we were in, in '07 and '08, where there was a constant downward spiral.

Everyone was stealing everyone else's backlog.

Things kept spiraling down.

We're not seeing that.

So yes, we're going to have to be pragmatic, but does that mean it's going to affect 5% of our communities, 10% of our communities?

I don't see it being a majority of our communities because each individual asset is asset independent.

I'll just point out an obvious fact.

I hope it is not lost on everyone.

30% of our assets are in Del Webb.

They don't have any significant competition.

I'm not sure why I would lower price in any Del Webb community.

That wipes out roughly a third of our competitive impact right there.

Just to point that out.

We're going to be pragmatic and focused as we need to be, but it's not across the board.

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

Please proceed.

Good morning, thanks.

Just wanted to follow up on a couple of your comments around the back half of the year.

First, Richard, you said in your opening commentary, I believe, that there could possibly be a seasonal up lift in the back half of the year.

Just wanted to follow up on that.

Typically that's not really how we see seasonality, at least from the order front in the back half of the year.

So are you saying that our seasonality is a little bit off this year because of the pull back and we could see an up-turn or does it have to do with something you are seeing in the market right now?

Megan, it really doesn't have anything to do with the market as we see it now.

Here's what's going on.

Typically the summer is weak, the spring is obviously the best, and then we get a little bit better demand environment in September, October.

I think that's exacerbated this year and effectively it wouldn't surprise me if we see the overall new housing numbers improve modestly later this year because of the two or three-month pull forward and then the two or three month post tax credit lull that clearly is in the market today.

I will point out that even if we get that I'm not talking about any exciting level of demand, right.

But it's not impossible that new home sales could go from $300,000 to $350,000 or $360,000 later this year or some number approaching that, which on a headline basis would look like a big percentage improvement.

So that's what I'm speaking about.

In order to get sustainable real change, 450,000, 500,000, 600,000 new home sales, it's going to take job growth and we get that, but that's what I'm talking about.

Okay, thanks, That's helpful.

And then to follow-up on your comments around profitability, it's encouraging to hear that you are still aiming for it for the year, but throughout the call you have talked about gross margins flattening out, SG&A kind of flat from a dollar perspective.

I wouldn't expect that your closing volume would be able to get much higher than it is this quarter, so I just want to make sure from a modeling perspective we're all apples to apples here and not assuming anything too aggressive.

Was that comment sort of post tax write-up EPS number?

Was it pretax income?

Can you help us out there?

Yes, Megan, this is Roger.

It is pretax and it is even with the charges that are in there that we're looking at from a pretax standpoint.

Again, it's going to be dependent on volume in the next couple of quarters, but right now we have a forecast for that and that goes with what we had commented on.

Megan, I would also point out we did say that the hill would be steeper than we saw a quarter ago and that's definitely the case.

So what I am basically trying to say is the number that we're looking at is not phenomenal.

I would also say, secondly, that we do have by far the biggest dollar value of backlog in the industry based on the way that our operating model has shifted.

And that is meaningful.

We intend to convert that backlog and from what -- for what it's worth, that shouldn't be ignored.

If we had half the backlog we have it would be much tougher for us to feel good about that, because we'd be dependent on demand in the near-term.

Obviously the operating model shift in a kind of a presale focus that's one of the benefits.

You get a little bit better consistency than if you're hand to mouth.

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

Please proceed.

Thank you.

One clarification and one question.

The breakout, 41, 31, 28, Centex, Pulte, Webb, that's unit orders for the quarter.

Is that correct?

That's correct.

Okay, thanks.

And then I'm interested in your traffic conversion rates by those segments as well.

Have they changed meaningfully or are there significant differences among them, Richard?

Well, not a lot of significant change over all, Carl.

Basically as you know our can rate has flattened significantly from last year and the prior years, but relative to the segments, Del Webb has by far the lowest conversion.

Centex and Pulte have higher conversion rates, but that's nothing new.

The active adult buyer tends to shop for six months or more before they make their purchasing decision.

So we see more traffic but a lower conversion.

But not a meaningful shift in any one of them, if that's your question.

Is that what you are asking?

Yes, that's what I was asking.

Thanks very much.

Your next question comes from the line of Alex Barron from Housing Research Center.

Please proceed.

Good morning, guys.

I guess my first question kind of two-part, I wanted to know what the capitalized interest was at the end of the quarter and along with that, what your -- what the policy is for how you expense or don't expense interest.

And then the second part was just your general strategy.

I think you commented on your land that you don't feel the need to chase land deals or new communities based on prices.

So does that mean we will see the community count generally trend down and you just feel comfortable staying in the communities you are at?

Alex, this is Richard.

I'll answer the community count first and then Roger and Mike can talk about capitalized interest.

Overall we've indicated consistently that our community count would likely drop this year.

We obviously have a large number of communities.

Mike, what's our current count?

839.

839 communities.

That's a significant amount of leverage for us to drive.

And so we are looking for community count to continue to decline in the short-term.

At some point that will level off based on the new investments that we're making overall, but we are not in the mode where we feel like we have to increase community count to get leverage to avoid becoming too small in an individual market to have meaningful share if you will.

The way you should think about that is we're being opportunistic, we are being smart we think with land, we are being conservative, because the market is still somewhat cloudy.

But, Yes community count will continue to decline somewhat.

In addition to that we had mentioned in the last couple of calls we thought there would be roughly 10% to 15% decrease in community counts.

It looks more like we'll be down roughly about 10% from the end of last year to potentially the end of this year.

That would not include any new communities that we would come across for the back half of 2010.

So there could be some up side to that.

Specifically to the question on the capitalized interest, we look at capitalized interest relative to the land that we have on our books and the value of being able to carry that against the long-term debt, so that's really been the driver.

We had a slight expense this quarter, roughly about $600,000.

It wasn't material and our view there is that, again, we're in good shape not to see large expense coming through on the interest side to the P&L because we can't capitalize it.

Mike, do you have the capitalized interest for the quarter?

Capitalized interest on the balance sheet at the end of the quarter was approximately $311 million and we capitalized approximately $67 million of interest during the quarter.

Your next question comes from the line of Jay McCanless from Guggenheim Partners, please proceed.

Good morning, everyone.

Wanted to find out if the backlogs at the end of 2Q had the same segmentation as the orders that you all gave.

I can do that.

Backlog, Centex is 42%, Pulte 27%, and Del Webb is 31%.

That's units.

That's units?

Okay.

And then the second question I had, I believe you all gave the finished spec count at the beginning of the call.

Could you repeat that and then also what the total spec was at the end of the quarter.

Total specs at the end of the quarter was 3,175, of which 1,138 were finished.

Great, thank you.

Your next question comes from the line of [John Brenda] from Susquehanna.

Please proceed.

Hi, good morning, guys.

This is [John Bettis] sitting in for Jack Micenko this morning.

Just a quick question just to dig a little bit deeper into goodwill and possible future impairments.

Just sort of related to the fully allowanced DTA and wouldn't it stand to reason that since the DTA still is fully allowanced that another round of goodwill impairments is more likely than not.

Or are those unrelated instances

No, I would say not.

Again, relative to the DTA, you relatively look at the market value, the book value.

The back value didn't have anything on it.

Since we actually did that we took some of the deferred tax asset back in the fourth quarter of last year, which was again not contemplated from the standpoint of looking at what that value is.

So we still think there's more value in the DTA to go forward.

So I think the correlation between DTA and goodwill is not necessarily a way to look at potential risk for further impairments.

Again, as I mentioned, it is much more complicated than that.

You have to go market by market, asset by asset, the valuations for those looking at basically the life of that market that we're in for the assets we have in perpetuity.

So again, there's a lot of assumptions that go behind that that would drive that, that could create risk one way or the other for further impairments or no impairments.

So again, I would just caution that's not something you can correlate that easily.

All right, thank you.

Your next question comes from the line of Jonathan Ellis from Merrill Lynch.

Please proceed.

Good morning.

This is [Jay Chadbarn] in for Jonathan Ellis.

My first question was, how should we think about the backlog conversion ratio for the second half of the year?

This is Roger.

I would just tell you, Jonathan, not something you can look at at any point in time to say what it's going to be.

Again, it depends on how many specs you might have you sell throughout the quarter, but I would tell you, you look at that time last couple of quarters, the trend has been relatively in the same range.

We've sold or closed, excuse me, closed roughly 76%, 78% of the backlog at the beginning of the quarter to look at it.

So, again, I'm not sure that you can clearly say that that's what's always going to happen.

It depends on just the number of specs.

But we've been in that range.

So it is an indicator, again, but it's not absolute about what we're going to do in the next quarter.

And, Jonathan, that number relative to anyone else is very dependent on an individual operating strategy, right.

A spec heavy strategy is going to yield something different.

It is a little more hand to mouth, kind of a made to order strategy, a little bit different from that.

So just want to point that out.

And my second question, what percent of your sales will come from newly purchased land in 2010 and 2011?

Basically, this is Roger again.

Again as we've talked about not being that robust in the market overall, it's going to be very, very small.

So if you are looking at this year, we've got, quite frankly, the transaction we've done this year, so the land that we actually approved this year, not in 2009, but 2010, we expect to have roughly 170 closings from land that we acquired this year.

Next year, basically, for the land we already acquired this year, roughly about 1200.

Again, if all of those come to pass, based on putting the house up and the timing and the buildout, all those very small numbers in general to our population.

Again, we're not driving the way other builders are, where they're going to close 30% to 50% of what they acquired.

Again, that's not our strategy, so you shouldn't expect that from us.

All right, thank you.

Your next question comes from the line of Buck Horne from Raymond James.

Please proceed.

Hi, good morning.

Just wanted to get some more clarification on the interest expense question.

I just want to understand maybe a little bit better because there's been a growing gap between the amount of interest that's been amortized through cost of sales versus what you are actually incurring.

I'm just wondering how long you think this gap will continue and will it normalize soon or start to even out with each other and just how long do you think that capitalized interest balance will continue to grow?

Yes, Buck, this is Roger.

Again, why it's growing is because we acquired Centex last year and basically you take that off.

And so as you move forward relative to Pulte's position, it was growing.

And so that's an accurate statement for Pulte, but the reason that it's growing is because we added on the debt from Del Webb, excuse me, from Centex in the merger last year.

So you are going to get a normal increase in that relative to where we were.

As we look at it, certainly as you continue to, if one were to continue to deplete the land inventory, then the relative long-term debt against that puts pressure on taking that through the P&L as a greater expense.

So again, if we continue to deplete the inventory over the next two to four quarters, we could see some pressure on bringing that back to the P&L as an interest expense without capitalizing it.

Okay, thanks.

Ladies and gentlemen, this concludes the question-and-answer session.

I will now hand the call back to Mr.

Jim Zeumer for closing remarks.

Please proceed.

Thank you, Veronica.

Appreciate everybody's time on the call this morning.

If you have any questions certainly feel free to follow up with us the rest of the day.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.