普爾特房屋 (PHM) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 PulteGroup Incorporated earnings conference call.

My name is Kendall, and I will be your operator for today.

At this time, all participants under 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.

Jim Zeumer, Vice President of Investor Relations.

Please proceed.

Great.

Thank you, Kendall.

Good morning.

I want to thank everyone for participating in today's call to discuss PulteGroup's second quarter financial results.

On the call today are Richard Dugas, Chairman, President and CEO; Bob O'Shaughnessey, Executive Vice President and Chief Financial Officer; and Mike Schweninger, Vice President and Controller.

Before we begin, a copy of this morning's Press Release and presentation slides that accompany today's call have been posted to our corporate website at pultegroupinc.com.

Further, an audio replay of today's call will also be available on the site later today.

Please note that any non-GAAP financial measures discussed on the call are reconciled to the US GAAP equivalent as part of the Press Release and as an appendix to the call's presentation slide deck.

Finally, today's presentation may include forward-looking statements about PulteGroup's future performance.

Actual results could differ materially from those suggested by our comments made today.

The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides.

These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.

With that, let me turn the call over to Richard Dugas.

Richard?

Thanks, Jim.

Good morning, everyone.

With the first six months of 2011 behind us, I can say that the year's developing in line with many of the planning assumptions we used headed into 2011.

We continue to believe that the industry is moving along a cyclical bottom that is proving to be fairly stable.

Our Q2 results are consistent with this position as our net sign-ups of roughly 4,200 homes were comparable to both last year and the first quarter of 2011.

More than the often-cited excess of supply of existing housing stock in the market, we view the lack of demand as the bigger issue hurting the industry today.

Simply put, we need more jobs and better consumer confidence before a meaningful recovery can occur.

Given this as a backdrop, we'll take it as a positive that demand remains flat.

The less positive news is that the industry is operating at very low levels of production with single family starts around 400,000 and new home sales of roughly 300,000.

At the risk of stating the obvious, such low volume makes the business that much more challenging and demands that we re-evaluate every facet of our operations.

For how we think about local market opportunity and related land acquisition to the homes we design and the materials we source, we are working to deliver improving results in the face of today's highly competitive market conditions.

Many of you are familiar with the project work we launched toward the end of 2010 to identify and address key issues that were hindering our business performance.

The ultimate goal of this work is to drive significant improvement in PulteGroup's operating and financial results and in turn, long-term shareholder returns.

The project work helped to define potential strategies and tactics to meaningfully expand margins, reduce overheads and increase asset turns.

The work also looked at opportunities within the Company's capital allocation processes, including how best and how much to invest in the business, prioritizing individual markets and how to structure land investment to drive better returns.

PulteGroup's Q2 results show that we are starting to make some progress toward improving these key metrics and our overall business performance.

In a few minutes, I'll ask Bob O'Shaughnessey to provide details on PulteGroup's second quarter results, but there are a couple of points I want to highlight as representative of the progress we're making.

Reflecting the expiration of the home buyer tax credit in April of last year, closings on a year-over-year basis were down in the quarter, but adjusted gross margins remained stable at 17.2%, and were up sequentially 30 basis points from Q1 of this year.

Including these 30 points, over the past two years we have recaptured about 800 basis points of gross margin.

We appreciate there's still a lot of runway in front of us to continue the rebuilding process.

Accordingly, we expect to deliver additional margin gains through the back half of this year and assuming overall operating conditions remain stable or improved in future quarters as well.

Among the opportunities we see to maintain and ultimately enhance margins are, first, preliminary gains from our house cost construction initiatives.

Longer term, we see the potential and the need to capture significantly more margin dollars from our core construction operations.

Second, increased closings of higher margin presale homes with less reliance on potentially lower margin spec sales.

Third, general stability around pricing and in turn selling incentives; and finally, near-term gains associated with increasing closings from distressed land purchased in prior periods.

We won't kid you.

Repositioning the business to capture more construction efficiency and margin, thus allowing for less reliance on price appreciation, involves a lot of hard work.

This is especially true for our Company given the breadth of our geographical footprint, the number of communities in production, and the variety of product we build.

However, the margin opportunity is well worth the effort required for success.

Using last year's company-wide deliveries and average selling prices, even a 1% gain in margin would have added more than $40 million to our pre-tax earnings.

We are starting to recapture these dollars and are encouraged with the momentum we are building within the organization.

Along with margin, we are work aggressively to further reduce SG&A spend and improve resulting overhead leverage.

We continue to right size our overheads in support of long-term goals as well as the more immediate task of getting back to profitability.

On previous quarterly conference calls, we talked about actions taken last year to consolidate our organizational structure, and on a year-over-year basis reduce 2011 SG&A by approximately $100 million.

As some of you may have read in news stories, we built on last year's actions and merged our west and central areas during the second quarter of this year.

Through this reduction and a series of related steps, we have targeted additional overhead savings in the range of $50 million on an annualized basis.

As with last year's reductions, we have implemented the steps needed to capture our targeted savings.

Given higher overhead costs we were realizing in other areas, however, we now anticipate the net savings realized from our 2010 and 2011 actions will be closer to $125 million on an annualized basis.

While implementing staff reductions and other SG&A savings is difficult, I think the Company continues to do a very good job of capturing meaningful savings while maintaining the critical resources needed for success today and tomorrow.

Within a challenging demand and competitive environment, we are realizing success in improving our business results.

We are developing new product that's more efficient to build while offering design innovations to better meet consumer needs.

We're also laying the groundwork for future margin expansion by continuing to lower material and labor costs associated with our construction activities.

From developing entirely new house designs to value engineering existing plans to altering our base house and option pricing strategies, we're changing our business to capture meaningful and sustainable margin expansion.

And we are continuously reviewing our structure, and where appropriate, taking actions to lower our overheads.

We are at a stage where meaningful savings require fundamental changes in how we are organized to manage the business, but I think we've demonstrated the determination to make any needed adjustments.

Given today's economic uncertainty, there are reasons to be cautious about near-term market conditions, but the reality is we can't control changes in the macro environment.

What we can do is continue advancing those initiatives which will improve our business results by driving revenue higher, lowering our cost and making capital investment more effective.

Successfully implementing related programs is beginning to have a positive impact and has positioned PulteGroup to be profitable in the back half of 2011.

Now I'm pleased to introduce Bob O'Shaughnessey, PulteGroup's new Executive Vice President and Chief Financial Officer.

Bob joined us just after Memorial Day and has been busy getting up to speed on the Company and the overall housing industry.

Bob brings strong technical skills as well as an analytical process that I've already come to appreciate.

We're excited to have Bob join the leadership team here at PulteGroup.

Let me say welcome and turn the call over to Bob for additional comments on our Q2 results.

Bob?

Thank you, Richard.

Thank you for that kind introduction.

I'm equally excited about joining PulteGroup and the opportunities I see for the Company going forward.

Now let me provide some of the details related to our second quarter results.

Home building revenues for the quarter were $900 million, a 29% decrease compared to last year.

The decrease was driven by a 28% decline in unit closings to 3,622 homes combined with a 1% decrease in average selling price to $249,000.

The large decline in closings reflects the expiration of last year's tax credit.

During the quarter, our reported home building gross profit margin was 12.2%.

Consistent with our historical practice, we reviewed all of our communities for impairment indicators during the quarter.

Based on this review, we recorded valuation adjustments of approximately $3 million related to six communities.

As highlighted on page 6 of our webcast slides, our adjusted gross margin, which excludes the $3 million of land-related charges, $41 million of capitalized interest expense and roughly $400,000 of merger costs related to CPX width, was 17.2%.

This is consistent with last year and is up 30 base us points sequentially.

Looking at our expenses, home building SG&A totaled $132 million or 14.7% of home sales revenue for the quarter.

In total, our home building SG&A was down $15 million from last year and $4 million from the first quarter, reflecting the progress the Company has made on the cost savings initiative we've discussed with you in the past.

Along those lines, our second quarter SG&A included $5 million of severance and related costs related to organizational changes we implemented during the quarter.

As Richard mentioned, including these actions we have targeted additional overhead savings of approximately $50 million on an annualized basis.

Looking at our consolidated other income and expenses, we recorded $6 million in lease exits and other costs related to the Q2 organizational changes.

A $4 million charge related to the write-off of deposits and pre-acquisition costs on several projects that we exited, because they no longer met our investment threshold, and a $3 million loss on the retirement of debt.

With respect to the write-off of deposits and pre-acquisition spend, our decisions to pass on these projects is reflective of our desire to rethink our capital allocation process as we work to strengthen individual market positions and improve overall returns.

I'd now like to spend a moment on the results of our financial service operation, which reported a pre-tax loss of approximately $17 million for the quarter.

Mortgage and related operations earned $3 million in the quarter, which was more than offset by a $19 million charge related to our exposure associated with potential future mortgage repurchases.

In the past, our reserves related to this issue assumed a significant reduction in request by the end of 2011.

As shown on page 10 on our webcast slides, such requests have continued in a fairly tight range during 2011.

As a result, we've adjusted our estimate to assume that this significant reduction will occur by the end of 2012.

In total, the Company reported a net loss of $55 million or $0.15 per share for the quarter.

As noted, the loss includes an aggregate $41 million or $0.11 per share of land, mortgage, restructuring and debt related charges.

Prior year net income of $76 million or $0.20 per share included approximately $48 million or $0.13 per share of land, mortgage, and restructuring charges, offset by a net benefit from income taxes of $82 million or $0.22 per share.

We ended the quarter with $1.2 billion of cash, including restricted cash of $128 million.

The use of cash in the quarter was primarily to meet working capital needs along with the retirement of the $53 million of short-dated debt.

Beyond our financial statements, we operated from 797 communities during the quarter, which was consistent with the first quarter and down 5% from last year.

We opened 31 new communities in the second quarter with plans to open upwards of 60 additional communities in the back half of the year.

We're still projecting a roughly 5% to 10% reduction in our year-end community count.

We have been and continue to be willing to acquire new land positions when the location and terms make sense.

In fact, on a year-to-date basis, we have added 3,100 lots under control, bringing our total under control to 142,000 lots, 30% of which are developed.

However, we continue to see that the finished lots available in the marketplace are somewhat challenged.

In the future, we'll continue to be opportunistic in our land acquisition strategy, but we will enhance our focus on increasing absorptions in open communities and developing our existing land positions.

As Richard mentioned, we're also trying to be more disciplined in our spec home investment.

We ended the quarter with approximately 7,000 homes under construction of which approximately 60% were sold and 40% were spec.

Of the spec units, roughly 1,200 were finished, which is a sequential decrease of 20% from the first quarter.

We continue to balance the desire to achieve the higher margin opportunity associated with presales against having some level of units in production to meet the demands of buyers who have a desire to close quickly.

In closing, I'd like to highlight that I've been extremely impressed by the people here at Pulte.

Their level of dedication and engagement is high, and they are focused on driving improvement in the Company's operating and financial results.

We can see the progress being made as we strive to return to profitability in the back half of the 2011.

More importantly, I'm excited by the longer term opportunities we have to deliver meaningful and a sustained improvement in the business.

I look forward to working with all of you and to meeting with you in the future.

I would encourage you to call if you have any questions and to work with Jim Zeumer if you'd like to set up a meeting with us.

Let me now turn the call back to Richard for some additional comments.

Richard?

Thanks, Bob.

As you would expect from our opening comments that demand remains relatively stable, we haven't seen dramatic changes in business conditions at a local market level.

Again, appreciating the context that overall volumes are low and markets competitive, let me provide some additional comments about market conditions before opening the call to questions.

On a year-over-year basis, sign-ups in our east area were up 3% with continued strength in the greater Washington DC/northern Virginia market and continuing north into Pennsylvania, Delaware Valley and New York/New Jersey metro areas.

South into Tennessee, the Carolinas and Georgia were down slightly to last year, but the weakness was found primarily in April so this looks to be tax credit related in comparing against 2010.

Our Gulf Coast operations recorded a 14% increase in sign-ups with good demand throughout Florida and Texas.

Through the first half of 2011, we have been pleasantly surprised by the overall strength in Florida relative to expectations, although we still sense it may be more related to our Company's specific land positions than a general market recovery.

Our newly configured west area continued to face difficult demand conditions with sign-ups down 12%.

Strong demand in smaller Midwest and Pacific northwest markets couldn't offset ongoing weakness in California and Arizona.

Again, much of the year-over-year decline was driven by April's results and last year's tax credit.

Beyond that dynamic, demand across most of the markets was fairly stable through the quarter.

Having the business showing clear signs of stability is certainly a positive, but I think we all recognize that the broader economy has to rally in order for demand to realize a meaningful recovery.

Until this happens, we can continue to improve the fundamentals of our business to deliver better margins.

One example of our efforts in this area is the development of innovative new floor plans designed to better meet the needs of our first-time Centex home buyers.

These plans which are being piloted in select communities have been redesigned from the ground up with an eye toward cutting per square foot costs by as much as 15% to 25% depending on the local market.

As important, they have been consumer tested to help ensure acceptance by the buyer segment.

We believe the improved value these houses offer, combined with new selling centers we're developing, will enhance Centex's market position while improving our overall financial results.

Success with these new designs and all our efforts can only be realized through the sustained work of our employees.

I want to thank them for their efforts on our behalf.

Their work is directly responsible for keeping our customers delighted and for helping to rebuild the financial performance of this company.

Now let me turn the call back to Jim Zeumer.

Jim?

Thank you, Richard.

At this time, we'll open the call for questions.

We know that it's a busy day for everyone.

So that we can speak with as many participants as possible during the remaining time of this call, we ask that you limit yourselves to one question and one follow-up call.

You are welcome to get back into the queue after that.

Operator, if you'll explain the process, we'll get started.

(Operator Instructions) Your first question comes from the line of Michael Rehaut with JPMorgan.

Please proceed.

Thanks.

Good morning, everyone.

First question I was wondering if you could get a little more granular on the SG&A?

We appreciate certainly the additional steps taken in the quarter, but you said that on a net basis, the cumulative $250 million would only show up as $125 million due to some higher costs, and I guess cost of business.

I was wondering if you could kind of break down what those offsets were, and I assume that also the $50 million, we'd see half of that this year and half of that next year?

Hey, Mike.

It's Bob.

It's $150 million, not $250 million.

What we are seeing is that we've been able to capture the $100 million.

We believe that we'll capture the $50 million.

I don't think it's necessary to get into the pluses and minuses on the ongoing business.

Suffice it to say, we think we've got a little bit of increase in cost relative to our expectations coming into it, so that we think on a net basis, we've got about $125 million net saved.

With respect to the spend that we had this year, we think we'll earn back about what it cost us to do the restructuring in the second quarter so you can expect to see that sort of -- and again, it was $12 million.

So you can expect that sort of to be paid back in fiscal '11; and then followed by full year $50 million save in fiscal '12.

Great.

Thank you.

Second question just on how you're approaching investment as it relates to what you've seen so far this year.

And specifically I was wondering if you could go into how you've seen pricing trends during 2Q, number one.

And I guess as the second part of that question, how that may or might not influence how you're going about investment in land and new deals because you said that you expect community count to be down 5% to 10% by fiscal yearend.

I was wondering if to the extent that you have seen pricing more or less stable during the quarter, and I'd be interested if that's, in fact, the case, how that might influence how you're thinking about community count growth potentially for 2012?

Yes, Mike.

This is Richard.

Couple things.

Yes, we have seen pricing relatively stable through the quarter, and actually, we've been pleased with that overall.

As it relates to how that plays into our overall land investment strategy, I think what we're indicating is that land deals that pencil are getting harder and harder to find, because while there's not a lot of decline in pricing, there's also not a lot of upward movement in pricing.

Our focus is to be as capital efficient as possible.

Part of the work that we have ongoing right now is to drive better returns.

That's indicating being more and more efficient with assets.

As it relates to future land investment, look for us to be cautious to ensure that we're meeting or exceeding our own hurdle rates and not to get too bullish anytime soon.

We'd certainly like to be able to do more with less, and with that, I don't know, Bob, if you want to add any color.

I think that's exactly right.

The goal would be to be efficient and not overpay if we think the market is asking for that.

Your next question comes from the line of Josh Levin with Citigroup.

Please proceed.

Good morning.

I have a strategy question.

The one bright spot in the housing market is the rental market and multifamily construction is headed up.

Is the multifamily market something Pulte would every think about entering?

Or is that just outside of your value width altogether?

Josh, this is Richard.

That's outside the bailiwick.

I'd as soon you mean to build rental housing.

We'd certainly build attached for sale housing as part of our portfolio, but that's not part of what we're interested in.

Okay.

The last point on slide 10, the Mortgage Repurchase Request slide, it ends with the month of June.

Can you tell us the number of repurchase requests in July?

I'll be honest, Josh, I haven't had that conversation yet, so I don't know.

Okay.

Thanks.

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

Please proceed.

Thanks.

Good morning, everybody.

My first question, I want to drill into the mortgage put-back issue a little bit more and the change this quarter.

My understanding, and please correct me if I'm wrong, was that in the past you guys have done a pretty thorough analysis of the loan book and figured out where you thought there might be issues and taking reserves against that accordingly.

So I'm not sure I understand how the timing between the request for put-backs between '11 or '12 or '13 reconciles with the concept that you felt that you had reserved against the loans that had problems substantially in the underwriting.

Can you help me understand that better?

Yes, David.

This is Bob.

I will preface this by saying I'm not exactly sure what you thought you heard.

I don't believe we ever expressed that we had looked at the whole loan portfolio to do this.

I think it was really a -- because there is not a lot of clarity into that.

What we did do is look at the level of loans coming back to us, the dollar value, the severity of each claim.

Most of these are now make-whole provision requests.

The home has actually already been foreclosed upon and sold by the bank, so we're not taking the loan back.

Again, so there is an ongoing risk on that.

And just how many of the requests that come to us that we actually ultimately fund.

So again, I guess looking back at the accounting that was done, the Company made an estimate that you would see a reduction during 2011, such that this sort of unusual or outside return request that's been coming over the last 18 months or so, would decline and start to slow down.

What we're seeing is that that hasn't happened.

Again, we understand that the loan holders are going through their portfolio of loans looking for issues, and it was the Company's expectation then that that process would be coming to an end in 2011.

We just haven't seen that mitigate quite as quickly as we thought.

Our expectation is now it'll go another year.

Thank you, that was very thorough.

My second question was about, I know you don't necessarily want to talk about current operating environment and post quarter.

I'm just trying to take an idea generally how the current situation in the economy, the failure to raise the debt ceiling at this point, how that's impacting the active adult business.

Are you finding buyers are hesitant to make decisions without certainty around Social Security and the future payments from the Government.

I'm trying to get an idea of what's going on in the Government and how that's really affecting the business in the current environment.

This is Richard.

I've been pleasantly surprised that it does not appear to have had much of an impact overall.

Candidly, that's a little bit surprising to me, but I've spoken to our operators this week.

Pretty current information would suggest it has not had a significant impact.

I suppose if they were default, it's possible that it could.

And certainly nobody could predict that.

It's been a little frustrating for everybody to watch what's going on.

Overall, we feel reasonably good with where things are.

Your next question comes from the line of Ken Zener with KeyBanc.

Good morning.

Given the actions you're taking to improve gross margins at interest expense, I wonder if you can kind of talk about the interest expense line, which is obviously having an impact on your gross margin.

I believe there's still some noise related to the Centex merger in there.

Can you give us a sense of how, perhaps, the just normal interest expense will vary as we go into 2012 relative to the decline in the burden from the Centex debt that's being accounted for?

Sure.

I'll walk you through it.

We are seeing in the current year, for example, on our actual reported gross margin, the decline is primarily attributable to the impact of incremental interest expense flowing through the margin line.

It's about 170 bases points in this quarter.

What will happen is we think for the balance of this year, you will see interest capitalized in excess of interest expense that flows through cost of sales.

We think that will normalize in 2012, such that in 2012 actual interest expense and interest coming through gross margin will about equalize.

That is roughly a $40 million increment in our projected interest expense in 2012.

So again it will move our net margin.

Obviously, we are focused on enhancing the margins, as Richard walked through, trying to make sure we can get the most out of the house.

Right.

Then I guess is there any update in terms of the large construction reserve you took last year?

Is that still kind of two seventy, or is there any potential for that could be coming back through the income statement?

I don't -- we track that, obviously, month by month, quarter by quarter.

We haven't seen anything in 2011, that would suggest that the estimates that were recorded last year need to be changed, so we haven't adjusted that reserve up or down.

There's a process that we'll go through where we do a full actuarial analysis.

You know how that goes.

That will start Q3, finish in Q4.

What we're trying to do is make sure, two things, one, is we do these new designs, and then just all of our construction is to make sure that we don't, or to the best of our ability, we minimize these sorts of things going forward.

We're also working diligently to make sure that whatever issues we do have, we fix in the most cost-efficient manner we can.

But again, no change in the accounting Q2, to more directly answer your question.

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

Please proceed.

Good morning, guys.

My first question was whether you had seen any impact at all yet from the upcoming loan limit reductions on the FHA and GSE loans.

Obviously on your to-be-built product, to hit that October 1st closing deadline, you might be seeing an impact now.

Just curious if you guys have done any analysis in your communities and what percentage of closings might be impacted and whether you are actually seeing any impact from that yet?

Alan, this is Richard.

Given the price points we operate at, we have done some looks in that.

The impact for us would appear to be negligible.

You know, less than a percent or two.

Great.

It has not impacted current demand, nor do we expect it to.

If it were to change, which we hope it doesn't.

Got you.

I was hoping you might be able to elaborate a little bit more on some of the things you're doing to drive gross margin higher.

You mentioned retooling some of the construction and bringing down some of your costs on that front.

Any way for you to quantify the impact of that or where you think the upside for margins might be in the back half of the year?

Yes, this is Richard.

I can speak to that a little bit.

It really is a combination of several things.

I would say the most tangible and direct impact, and we have a large effort that's been ongoing for several months and it will continue, is around house costs.

Big, big focus on reducing house costs, so that's a piece of it.

Another piece of it is a continued focus on presale versus spec.

That's definitely helped our margins this year, and we expect it to continue to help them the balance of this year and into next year.

A third area is just looking at our overall pricing, overall.

And then finally would be mix.

It's no surprise, I don't think to anyone, that Del Webb and Pulte continue to have a little bit higher percentage of closings versus Centex, given what we've seen in the overall markets.

Of those, Alan, it's very difficult to break down exactly the percentage coming from each of those.

But we've said, we expect meaningful margin improvements through all of those over the next several years, and this is an effort that you should think about being slow but steady sequential improvement, barring any significant change in the macro environment.

We know we're behind our peer group and we're determined to catch up.

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

Thank you.

First question I wanted to ask was about the move-up by our new orders.

Now, after our first quarter, most investors took your order-out performance as some evidence of traction or rebound in the move-up market, whereas the first-time buyer seems to still be lagging or suffering from the effects of the home buyer tax credit.

Your order performance in the second quarter, I just looked at it from that light of it.

How do we interpret that?

Has there been some shift?

Obviously you're also investing now, as you mentioned, in the Centex brand, the first-time buyer.

So I was just wondering if you could give us some commentary about that.

Yes, Nishu, we continue to see relatively nice performance in Del Webb and Pulte.

We're not disappointed with our Centex performance, either.

It's been within expectations, and kind of that's the watch word through Q2, is the market's been very stable.

Our month-to-month trends have been very stable, but perhaps Mike can provide a little more detail by brand for you.

I'd tell you, if you take a look sequentially, the mix of our sign-up between our brands has held constant as you look at Q1 to Q2.

We're roughly a third, a third, a third.

That continues to track quarter-over-quarter.

Which is consistent with what we said in Q1, but that was a relatively significant change versus the early part of last year when we saw an outperformance in Centex.

Maybe for everybody listening, I would suggest that it's not a case of weakness in the entry level.

It's more a case of normalization in the entry level versus the clear tax credit impact of last year.

Got it.

Great.

Second question, Richard, you mentioned in your view, housing has more of a demand problem rather than a supply problem, which is a point of view that we definitely agree with.

Last year in the second half of the year, one evidence that pointed to that was the pricing inelasticity.

It wasn't effective to lower prices to drive more sales.

I wanted to get an update from you on that.

Now that we're through the spring selling season is behind us.

Is it still pricing inelastic out there or has pricing become a tool again you're seeing in the market used to drive revenues?

Nishu, on a relative basis, it's still pretty inelastic.

That doesn't mean that on a few select, particularly lower entry level communities that you can't drive a little bit of pace with price, but again, with a Company with 800 communities, I would say our incentive levels have been very consistent.

Our overall pricing trends have been very consistent.

The way I look at it internally is for every community where we lower price slightly, we have an offsetting community, say in the DC area or one of our other stronger markets, that we're increasing price slightly.

It has been really very stable.

Like I mentioned a second ago, order trends, April, May, June, very consistent.

So I don't think the market is getting worse.

I don't think the market's getting a little better, and that would indicate price is not a big driver.

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

Please proceed.

Joshua?

Love my mute button.

It works very fine, in case you are wondering.

(Laughter) My first question is on put-backs.

Should we assume no further increases until this time in 2012, when you'd have to reassess the probability of 2013 put-back risk or should we be thinking about it a different way?

Well, I think the right way to look at this is, again, the variables that we see and can identify are, how much is coming at us, how often can we refute it, what's the severe?

Each of those things can and may change over time.

We haven't seen a substantive increase or decrease in any of those variables with the exception of time.

And so, I would tell you, we watch this every quarter.

And so, if we saw a meaningful change in any one of those things, it could drive some accounting.

But I think with respect to time, that's really all that's going to tell us that answer.

So six months from now, again if we see things trending up, we may have to think about it one way.

If we see things trending down, we may get to challenge some of the accounting we've done.

Again, all the input's impacted.

So let me just dig a little deeper on that.

If you guys were to see an increase in severities or you guys aren't able to refute as successfully as you have today, should we make the assumption that the changes should be smaller than this $10 million to $15 million charge that you guys talked to, institute an entire year's worth of additional charges?

Josh, on a relative basis, I think that's a fair thing to say.

If we saw a tripling of the amount that we are responsible for, it could drive up a number of an equal size.

I haven't done the math to say, well, if this changed by this much, what happens to the accounting?

Because again, those things have been very consistent.

I'm not saying they will be in the future.

Our hope would be actually that as the holders have gone through the majority of what we hope is their really troubled portfolio, that we'll see, again, our expectation originally was that it would slow down now.

We hope it will soon.

Similarly, we hope that maybe our ability to refute these will become more pronounced.

So again, I think you can't tell what's going to happen, but we haven't seen those numbers jumping around substantive, you'd get a big accounting answer.

Joshua, this is Richard.

I just want to add one slight point to what Bob said.

Remember the vintage we're dealing with here has not really changed in terms of the troubled time frame, which is primarily '06 and '07.

So the further we get from that in time, our expectations are that at some point in time it's going to slow down.

Unfortunately it hasn't slowed quite as quickly as we anticipated, but that's still our expectations.

Exactly, Richard, that's a good point.

It's the reason we believe that they've gotten through a lot of their truly troubled portfolio.

Your next question comes from the line of Stephen East.

Please proceed.

Thank you.

Good morning, guys.

Richard, you talked a lot about operationally, what you're doing differently and how much you're changing.

You've done a great job explaining on the product side.

Could you talk a little bit -- is there something you're doing differently on the land acquisition side and then on centralized versus decentralized?

I know you talked in the past about pushing more responsibility out into the fields, et cetera.

Yes, Steve.

Good question.

Let me answer them a little bit in reverse.

With regards to central versus decentralized, what we have really keenly become focused on is that the business is very local and/or regional.

It's not very national.

And frankly it's important to be sizable in local markets in order to drive efficiencies.

So therefore, continuing to push responsibility and ownership to the field is the direction we're headed.

That doesn't mean necessarily that each individual market has to be unique, but certainly within zones we're seeing a lot of similarities.

So in general, away from home office to the field environment, whether that's at a division or an area region level if you will.

With regard to land, we do have a pretty intense effort underway to understand capital and asset efficiency.

Candidly, we are evaluating and rethinking some of the way we've invested in the past.

I think we have been focused on a long land position for a long time, and without a meaningful recovery in sight any time soon, we're going to have to be more efficient with the current assets we have.

So a renewed focus and candidly increased focus on asset turns is something that we're really evaluating internally.

Bob has been very helpful in that analysis, as have all of our operators.

We've got the prongs, as we mentioned earlier, margin and SG&A, which are operational, and asset turns which clearly are operational but also more strategic from the home office that we're looking at.

We'll have to see what the future brings with regard to that, but you can count on us to want to be more capital efficient than we've been in the past.

Okay.

That's great.

Along those lines, I'm going to sneak two questions into this one.

First, what do you think are your cash needs, balances, land spend, et cetera, as we look out over the next year or so?

And two, on the Del Webb, I was surprised to hear you say the mix was sort of steady between the three different units.

Could you just talk a little bit, are you seeing any difference geographically in your Del Webb east versus west or southwest, that type of thing?

Let me answer them in reverse, and I'll ask Bob to take the cash flow land question.

On the Del Webb side and the mixed component there, to be clear, we said it was consistent Q1 to Q2, so that still implies a nice business in Del Webb and Pulte that we experienced in Q1, continuing in Q2.

That's been relatively consistent throughout the country.

We're seeing movement in Arizona.

We're seeing movement in Florida and some of our southeast Webb positions and Pulte positions as well.

Again, don't want to imply that there's been a recent change in demand trends between our brands.

Bob, I don't know if you want to tackle a little bit more land spend and cash expectations?

Sure.

The land spend, obviously, the spend for this year is already sort of in the books.

We've got projects underway we're developing.

We have forecast cash utilization for investment in land for 2012.

The planning process here will happen over the next probably 8 to 10 weeks, and what we are going to ask people to do is maybe be more stringent in how they expense capital.

Not necessarily on new lands but development dollars.

You have to remember, though, there's a pretty big amount of money that we spend each year associated with HOA fees and taxes just on the land position we've got.

There's a limit to how much we can really do.

The goal would be, let's look at what the business can generate based on what we think in terms of cash.

Let's make sure that our investment in land, as going forward, is reflective of that generative capacity.

Then think about the capital structure.

Obviously we bought back some debt in June.

It was presented to us as short dated.

It was cash accretive in terms of the investment.

We took the opportunity to do that.

And so in my sort of windshield, I've got the next two years of maturities which are $100 million in '12 and $200 million-ish in '13.

These are the pieces of paper that we would think about.

And then obviously the outer years where we've got more significant maturities, we think about capital market transactions at the same time as we're looking at how much cash we can generate from the business.

Again, no capital market consideration, I'm not trying to raise that.

I'm just saying, as we look forward as part of the '12 planning process and look out '12, '13, '14, we want to make sure that we're in a position to address everything in the most efficient way we can.

Your next question comes from the line of Adam Rudiger with Wells Fargo Securities.

Please proceed.

Thank you.

Bob this is a question for you.

I'm kind of putting you on the spot here, but given Richard's kind introduction, I think it seems fair.

You're two months into this business now.

So I'm just curious what, as you look at this coming from the outside industry, what you've learned or what's been most surprising to you positively or negatively, what really the most interesting thing that you've taken away about the home building industry from an outside perspective?

Well, I guess I'll answer it a little obliquely if that's okay.

I have been impressed by the people on a lot of levels.

This is an industry that certainly has a lot of headline issues when the Company has had a difficult five years, and I am really impressed by the fact that people are engaged.

There is an active involvement and a desire to do better.

On some level, I was sort of expecting people to maybe have been beaten down a little bit by this.

Significant job loss.

So I think that's a testament to the people working here.

I'm also intrigued by the opportunities; Richard has laid them out in some fair level of detail.

The ability -- you never like to eliminate SG&A as a way to get to profitability, but it is necessary in this case, and I think we've done a lot.

The other positive is that all this margin expansion is well within our control.

You know, so if we design good houses, build them well, we can improve margin, so without necessarily an increase in pricing.

So again, I'm intrigued by that.

Certainly the way capital is deployed in this business is a little different than I'm used to.

So it took a little while for me to wrap my head around that.

So I think there are opportunities there, but you want to do things judiciously.

As we go through the planning process, we'll get our hands around collectively what we think is the best way to invest capital is.

You mentioned SG&A.

I have one follow-up question on that.

I believe on the last conference call, you guys expected to average through the year, SG&A plus Corporate would be about $125 million a quarter.

I know you've since, today, talked about a little of some of those gains likely you aren't going to see.

But so far, the way I see, you spend about $280 million year-to-date.

I was wondering what you think a fair number for the year now is, given what you've spent so far and what your expectations are now.

Well, where we see it for fiscal '11 is about $530 million-ish, and then again, that includes the restructuring costs that we incurred, so sort of normalized $525 million.

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

Please proceed.

Thanks very much.

Richard, in one of the questions, you mentioned was in terms of the ways to improve the margins and such in terms of costs and presales pricing mix there.

In terms of the presales, you talked about having basically 40% of the homes under construction being specs, which looks to equate to about two-thirds of the orders that you had for the quarter.

Where do you think that number should be as you think about sort of just being more efficient with capital and where margins are in the specs versus presales?

Dan, a couple things there.

First of all, a long-term goal would be to drive that number well below 20%.

Maybe even lower than that if you could.

Of course you have the impact of cancellations during the quarter that generates specs you didn't intend.

I think we can drive that number meaningfully lower.

We have gotten very, very focused on the impact of margin growth, SG&A performance as to better, frankly, drivers of return than volume, particularly at the margins that we've been at overall.

You can expect to see a meaningful decline in those spec numbers through this year and hopefully beyond as well.

Then in terms of just being more efficient with the assets that you have, should we expect that could mean increased opening of communities that you have in terms of land that's currently owned?

How are you thinking about that in terms of just using the assets you already own?

That's an analysis that continues.

And candidly, as we get very, very focused on our overall capital, it's possible to maybe open a few communities as well that we've had.

But it's a holistic view at capital.

It's looking at house inventory, which we can bring down our levels of house inventory, we think, by less reliance on spec and not hurt our volume.

We believe that we can be more efficient with land development spend, and frankly be a little bit more rigorous with new land investment.

Bob, beyond that, any opportunities you see?

No, I think you covered it.

Your next question comes from Megan McGrath with MKM Partners.

Please proceed.

Good morning.

Thanks.

Just a couple of quick follow-ups.

First of all, on the back half of the year when we're thinking about deliveries, it's hard to see a real clear pattern over the last couple of years given the environment and tax credit and things.

So how should we think about backlog conversion going into the back half of the year.

If it's flattish, you could actually have closings grow next quarter.

But I don't want to assume too much, as sort of seasonally or expecting that to be down a little bit.

Also maybe further into 2012, should we see that start to creep down as you reduce your spec?

Megan, this is Richard.

I think you're likely to see a fairly seasonal, typical seasonal increase in closings in Q3 and Q4.

We intend to deliver our backlog.

We've got a pretty big backlog now.

That's definitely going to help.

As we indicated, we expect to be profitable in the back half of the year.

As it relates to 2012, that's going to completely be dependent on the sales environment for the second half of the year.

And we don't intend to put tremendous inventory in the market, frankly regardless of what the demand environment bears.

But that doesn't scare us at all.

Frankly it excites us because we're getting to the point where margin and SG&A moving in the correct directions, which is opposite from each other, is going to allow us to enjoy better results than we have had.

And we've talked a lot about that, but I don't know what our convergents are going to be into 2012, but you can expect to us deliver a good percentage of our backlog over the next couple quarters.

Just a follow-up.

I'm sorry if you mentioned this and I missed it, but if you could let us know what your cancellation rate was in the quarter.

We saw that weird data point out of existing home sales, that cancellations spiked in June.

It doesn't appear that happened for you guys.

But did anything happen throughout the quarter on cancellations or into July?

In terms of the actual number for the quarter was 19.1%.

Megan, I would say nothing unusual or weird in our cancellation trends that -- I think that's up slightly from what we had in Q1, but nothing that really concerns us.

We haven't really seen a real meaningful change in our environment one way or another.

Your next question comes from the line of Bob Wetenhall with RBC.

Please proceed.

It sounds like your run rate is $500 million in SG&A spend for this year.

And I'm trying to understand from your commentary a little bit better.

Are you expecting to get another $50 million in savings in '12 or is the $50 million in incremental savings you identified factored into that $125 million run rate?

I'll get it.

Let me answer it with net.

We are projecting [X, X, X] fee Q3 -- sorry, Q2 charges, $525 million in fiscal '11.

We think we have $50 million in saved so we would project $475 million for fiscal '12.

That help?

That's a real big help; that's terrific.

I'm just curious, how are you guys finding these savings now?

(multiple speakers)

Bob, this is Richard.

I'm sorry, did you have something else there?

No.

I'm just trying to understand a little bit better because I know you guys had been aggressive on the cost control front.

I'm trying to get a better understanding from an operational standpoint.

I thought you guys had been pretty aggressive cutting to the bone already.

I think we thought we had as well, Bob, but without a sustained industry recovery, we looked again.

We consolidated what was four areas into three, and then we had some associated division consolidations on top of that plus some changes at home office.

It's a variety of things.

Overall no one thing stood out beyond the others.

But listen, when business is this tough this long, we decided last year, and it's continued into this year, to look at building it from the ground up, what we absolutely have to have.

That's a little different view versus justifying why we need what we have had.

So very difficult, as Bob indicated, to do this, but it's been the responsible thing to do.

Just one easy kind of question.

It sounds like you have a pretty defined line of sight strategy on the margin front on gross margins with regard to your comment about how you're looking at increasing or harvesting distressed land, improving gross margins, stable pricing environment.

Are we looking about 50 or 100 basis points of gross margin from the four points you articulated next year?

Can you give us something of a range?

Unfortunately not at this time.

We do expect margin growth the balance of this year, and barring some change in the economic environment that would be terrible from here, further gains in 2012, but we'll have more to say about that as we get closer to the year, overall.

Unfortunately, I don't have any color or detail for you now.

Your next question comes from the line of Mike Smith with [UBS].

Please proceed.

Michael Smith with JMP.

Hi, Michael, how are you?

Hi, guys, there may be another Michael Smith out there.

No, you are the one.

Thanks.

This is a local question on your community count.

You said you were still on track to be down about 5% or 10% year-over-year at the end of this year, at the end of '11.

I'm just wondering obviously that's in a different direction than some of your competitors.

I'm wondering, is that a strategic decision you guys are making given the environment?

I know obviously the decision hasn't just been made this quarter or last, but I'm wondering, is that more strategic or is that still kind of right sizing the operations after the merger or what do you think is the discrepancy there between you and some of the guys that are growing?

Yes, Mike.

A couple things.

First of all, we grew our community count rather dramatically in August of 2009 when we merged with Centex.

We have a lot of work underway to monetize those assets appropriately and focus them aggressively.

That's part of it.

The second part of it is when you have such a large community count, the percentage delta from there is a little more difficult perhaps.

The third thing is, we have not been focused on five or ten locked transactions.

I know a few in the space have been, which technically adds communities.

For what it's worth, I think this is one of the most misunderstood metrics in the entire industry.

A Del Webb community, as an example, that has the opportunity today to deliver a couple hundred units a year and in a good environment, 500 or 600 a year, is not the same as a community of 20 or 30 lots.

I personally do not buy the argument that it's necessary to have community count growth in order to drive incremental revenue or sign-ups.

Obviously it's helpful, but anyway that's a little commentary.

One other thing, land deals that pencil in today's environment are getting tougher to find.

I think the distressed harvest, if you will, was primarily a late '09 in 2010 event.

They're getting more difficult to find in '11, and we don't want to lower our underwriting criteria in a still murky environment.

We'd rather continue to focus on what's still a substantially very large base of business, and drive our revenue from that primarily.

It doesn't mean we don't want to be opportunistic.

As you can see this year, we're still expect to deliver about 15% of our closings from distressed assets purchased in the last 18 or 24 months.

That compares to less than 5% last year.

So it's not like we're not paying attention.

The community count metric itself is fraught with some differences, candidly even in how builders report them.

We're not overly focused on that.

Okay.

No, I mean, that's certainly true.

Just to follow up on the land question.

What's your understanding of why distressed deals aren't coming to market as much?

Are there just not as many pieces of land out there that you would consider distressed?

Have a lot of them been snapped up?

Or is it that banks and other holders aren't bringing them to market or maybe they are waiting for a better market?

What exactly is it that means there's less stuff out there now than there was a year and a half ago or so?

I'll offer two reasons.

The most important is that over the last three or four years, virtually no land has been entitled or processed in the country so that the easy pickings, if you will, of finished lot inventory are largely gone, except for a few scattered deals available here and there.

So now you're into a raw land decision, and a lot of the raw land has been controlled by folks who are a little more patient with their investment and frankly looking for a little better environment.

One of two things have to happen.

Either land prices have to fall or the home building environment has to get better to allow you to pay more for the existing land.

We haven't reached either one of those.

The big picture issue, which is going to be talked about a lot in this industry whenever we get a reasonable recovery is, where is all the land.

That's why we continue to have been pleased with our decision not to be short-term focused with regard to the way we focused on land.

We've looked at it over a longer view.

So that's my view.

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

Please proceed.

Hi, guys.

Most of my questions have been answered, but I just was wondering if you could maybe elaborate a little bit on your comments, it's more of a demand issue than a supply issue.

When I ask that, the data sort of suggests that existing home sales are running kind of pretty close to a long-term average pace as measured by sales divided by households.

And wondering if what we're seeing in the new home sales and the all-time lows there is really directly just an artifact of excess supply in the existing home market.

So does it really makes sense, if that's the context, to say this is really a demand issue and that it can come back if we get any sort of jobs recovery.

We're doing -- what we really need is substantial burnoff of the excess inventory that -- you guys spent mostly a decade, I think, over buildings.

I'm just wondering how that fits into your comments that it's really demand as opposed to supply?

Clearly, the two work together, right?

I think our view and the way we mean it when we say it like is that, we can have a meaningful recovery in our overall financial results with even 10% better demand overall from here.

I don't think supply is going anywhere in the next couple of years.

Foreclosure inventory's going to stay high.

So what's going to happen, in all likelihood, is when there is a little better consumer confidence environment, you'll see demand pick up.

Probably you'll see supply decrease at the same time.

But we've got a real consumer confidence issue today, and I guess pick your poison whether you think it's supply or whether you think it's demand.

We continue to believe that in the new home industry, we have pared back construction so aggressively, it's clearly not a problem today, new home construction.

We are not over built today overall.

So our view is that if you get consumer confidence back a little bit, it can meaningfully impact demand.

Which I guess to your point, will take supply down.

I see your point.

That's just the way we're looking at it.

Fair point.

Otherwise you guys already answered all my questions.

So thanks and good job on getting everything under control and the costs still coming down.

All right.

Well, that's the time we have for the call today.

As I said earlier, we know you have a busy schedule.

We're certainly available as time allows for any follow-up questions.

Thanks very much.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.