普爾特房屋 (PHM) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second-Quarter 2012 PulteGroup Incorporated Earnings Conference Call.

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

Later, we'll facilitate a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Jim Zeumer.

You may proceed.

Thank you, Frances.

This is Jim Zeumer, Vice President of Investor Relations for PulteGroup, and I want to thank everyone for participating in today's call to discuss our second-quarter 2012 financial results.

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

Before we begin, copies of this morning's press release and the presentation slides that accompany today's call have been posted on our corporate website at www.PulteGroupInc.com.

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

Also, please note that any non-GAAP financial measures discussed on this call, including references to gross margins reflecting certain adjustments, are reconciled to the US GAAP equivalent as part of the press release, and as an appendix to the call's presentation deck.

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.

Now, let me turn the call over to Richard Dugas for a few opening comments.

Richard?

Thanks, Jim.

Good morning, everyone.

I'm pleased to report that PulteGroup's second-quarter financial results demonstrate significant year-over-year gains across a number of critical areas of our operations, including sign-ups, gross and operating margins, and most importantly, earnings.

Maybe equally compelling, our second-quarter numbers also point to the opportunities for additional increases in the future.

After a tremendous amount of hard work, our second-quarter earnings mark a clear milestone in PulteGroup's effort to deliver consistent operating earnings and a much improved fundamental homebuilding performance.

You've heard us discuss that a comprehensive analysis of our operations identified fundamental improvements we needed to make to deliver better operating results, and in turn, higher returns on invested capital and higher returns to our shareholders.

Known internally as our value creation work, the underlying initiatives have been focused on expanding margins, realizing greater overhead leverage, accelerating inventory turns, and allocating capital more effectively.

Along with the market tailwind the industry has enjoyed this year, our second-quarter earnings of $0.11 per share also reflect progress we are making in implementing various value creation initiatives.

While still in the early stages, we are starting to see an impact from programs designed to enhance revenue realization, as well as those focused on lowering construction costs.

Although it can be tough to isolate, our second-quarter adjusted margin of 20.3% shows the positive impact from initiatives we continue to advance, and which include the following.

First, a strategic pricing program we have been rolling out, where we are moving to more of a base house offering enhanced by an expanded list of options and upgrades that enable buyers to select the features they most value.

Along with new pricing practices to capture higher lot premiums, our expanded option strategy is more consumer-friendly, while providing greater margins than our previous practices -- a win-win.

Second, benefits from our value engineering and/or [should-cost] activity to lower construction costs are gaining traction.

Given the timeline to build and close homes, we estimate that fewer than 10% of second-quarter closings benefited from this work; but we are very encouraged by the progress we're making.

Going forward, the unit volumes that will have profited from this work will certainly increase and become an ongoing source of opportunities to lower construction cost and/or enhance margins.

Finally, I would note the continued re-weighting of our operations toward more presales with tighter controls around spec production in general, and finished specs in particular.

At quarter-end, finished specs totaled only 600 homes, which is a drop of 50% from last year, and equates to less than one finished spec unit per community.

We have discussed that the discounting, which is often required to sell a finished spec, can lower margins by several hundred basis points, which is magnified when there are more specs on the ground.

Along with positive margin and cash flow implications, limited spec production can help our community sell from a position of strength rather than a let's-make-a-deal mindset.

Limited spec inventory also takes us closer to matching production with actual demand, rather than trying to force volume through the system at any margin.

In addition to second-quarter success we realized in growing margins, we were also able to improve our performance through increased overhead leverage, as SG&A in the period fell to 12.1% of home sale revenues.

The combination of gains resulted in an operating margin increase of more than 600 basis points for the quarter.

Our focus on driving better long-term returns is also evident within this quarter's strong 32% increase in year-over-year sign-ups, as these were generated from 7% fewer communities.

With 125,000 lots under control, we do not have to chase land deals in the market, which is allowing us to be disciplined in our land investment.

We can, and clearly did, get our fair share of buyer demand in the quarter, but did so while being disciplined in our allocation of capital and investment back into the business.

In the short term, this capital discipline enabled us to be cash-flow positive for both Q1 and Q2, and over the long term, such discipline is critical to generating higher overall returns on invested capital.

As we have discussed, we entered 2012 operating under the assumption that new home sales in the US would be flat with 2011.

We have been pleasantly surprised, as demand throughout the selling season and extending into these initial weeks of July has exceeded our expectations.

In some areas, demand may even be a little overheated, as start dates are getting pushed out too far.

So, in select communities, we are purposely constraining sales.

Again, such actions are not widespread, but it is a dramatic change from just a year ago.

Although demand for new homes has accelerated in 2012, I think it's worth noting that many of the macro drivers of demand really haven't changed all that much.

Unemployment remains above 8%, and many experts place the real number much higher.

The most recent consumer sentiment number showed meaningful weakness, with most of the overall decline being in how consumers viewed future prospects for the national economy.

Interest rates have been low for a long time, and while they continue to drift lower, you have to wonder how much of an incremental impact this really has; and there are growing concerns over singular events ranging from a European meltdown to fiscal cliffs.

Given this backdrop, you might well ask -- why is the new housing market stronger?

Along with low interest rates, higher rental lease costs, and several years of pent-up demand, we believe that the most significant driver of the industry's success in 2012 is the low level of home inventory available to prospective buyers.

Consumers do not have a lot of choices, as many of the newer existing homes are often in the wrong location, while older homes are not always in great condition.

A check of the month's supply of homes in many of today's stronger markets shows a large drop in available new and resale inventory over the past several quarters.

With large investors continuing to acquire homes for conversion into rental properties, traditional home buyers grow increasingly enticed by the advantages of buying in the new home market.

As we had discussed in our first-quarter investor call, this is causing potential buyers to have a greater sense of urgency, and an increasing fear of loss that a home not purchased today may not be there tomorrow.

While urgency and fear of loss are important, over the long term, sustaining the recovery in housing will require an improving economy and greater job creation.

Given all of the market positives, ranging from mortgage rates at historic lows and homes priced at compelling values, to the innovative new floor plans we are offering, we are very optimistic about housing demand.

That being said, we are keeping a watchful eye on the macro trends, which ultimately need to turn more positive for the recovery to expand further.

Now, let me turn the call over to Bob who will offer additional insights and details on our second quarter.

Thank you, Richard.

PulteGroup reported significantly improved operating and financial results in the quarter, which, combined with our first-quarter results, leave us well positioned for the rest of the year and on track to report full-year profitability.

While the market has helped, we are particularly pleased that the operational improvements are being driven in the areas of focus and by the key business initiatives we've been discussing for the past year.

Total sign-ups in the period were 5,578 homes, which represents an increase of 32% over last year.

As Richard mentioned, this strong increase in Q2 sign-ups was realized from 7% fewer communities.

Looking further at our sign-ups, we generated higher year-over-year sign-ups in each brand, but continue to see a shift in mix to our move-up or Pulte brand.

During the quarter, sign-ups by brand were 27% for Centex, 48% Pulte, and 25% Del Webb, which compares to 33% for Centex, 41% for Pulte, and 26% for Del Webb in the first quarter of this year.

Looking at our first-quarter results, home sale revenues were just over $1 billion, an increase of 14% compared with last year.

The increase in revenue was driven by an 8% increase in average selling price to $268,000 combined with a 5% increase in closings to 3,816 homes.

During the first quarter, our mix of closings included 33% from Centex, 42% from Pulte, and 25% from Del Webb.

In the prior year, the closing mix was 39% Centex, 34% Pulte, and 27% Del Webb.

The increase in our average selling price reflects the continued shift in our product mix from the first-time buyer towards the move-up buyer.

I would also point out that we continue to strategically prune our land portfolio.

In the second quarter, we generated land proceeds of $9 million.

We recorded a net gain of $1 million in connection with those sales.

In the last four quarters, we have generated land sales proceeds of approximately $125 million.

Turning to our margins, slide 6 of our webcast slides shows that our adjusted gross margin for the second quarter was 20.3%.

This represents an increase of 320 basis points over the second quarter of 2011.

Importantly, our Q2 adjusted margins were also up 160 basis points from the first quarter of this year.

As Richard mentioned, we believe that our value creation initiatives contributed to our strong margin performance, and our second-quarter margins also benefited from an increase in closings from newer communities.

Land-related impairments during the quarter were approximately $3 million.

Looking at our overheads, total SG&A for the quarter was $124 million or 12.1% of home sale revenues.

This represents a $14 million decrease from the second quarter of last year, when SG&A as a percentage of revenue was 15.4%.

As you can see in this morning's earnings release, our financial services operations continued to perform at a high level, generating pretax income of $16 million in the quarter.

This quarter's performance was driven primarily by a 17% increase in loan origination volumes due to the increased activity in our homebuilding operations, coupled with the continuing favorable interest rate environment.

Financial services generated a $17 million loss in the second quarter of 2011, which included a $19 million charge related to our mortgage repurchase exposure.

As noted on slide 11 of our webcast slides, gross repurchase requests in the most recent quarter continued to move between 100 and 150 requests per month, which is consistent with the volumes we have been seeing for the past three quarters.

I'd like to provide a couple of other data points related to financial services before we move on.

In the quarter, we originated 2,603 loans, which compares to 2,217 loans last year.

The increase in originations in the period reflects the increased volume from homebuilding, as well as an increase in our capture rate to 82%, which compares to 77% in 2011.

On a consolidated basis, our reported net income was $42 million or $0.11 per share.

Turning to the balance sheet, we ended the quarter with $1.4 billion of cash, which is up $96 million from the first quarter of 2012.

Our improved cash position resulted from a number of factors, including the more efficient use of our capital by our homebuilding operations for land acquisition and development, our land asset sales, as well as a reduction in the level of our spec-home inventory.

We've been talking about our desire to reduce our investment in spec-homes inventory.

Such reduced investment improves our working capital and protects our margins.

As Richard noted, we reduced our finished-spec inventory by approximately 50% from last year.

That is only part of the story; we've been able to reduce our total spec-unit count by 46% from last year.

As a result, we have freed up approximately $120 million from investment in house inventory.

On top of the benefits we've talked about, we were able to use this cash to fund investment in-house we are making related to the increasing level of to-be-built sales.

In addition, we're extremely pleased with how our capital allocation process and related disciplines are developing.

We believe they're putting the Company in a position to invest in land and related development, so that we can continue to enhance our position in the market, while at the same time enabling us to generate enough cash to reduce our aggregate debt levels.

I would now like to cover a couple of other second-quarter data points.

We ended the quarter with 744 active communities, down 7% from last year, and consistent with the first quarter of 2012.

At quarter-end, we had a total of 7,560 homes in backlog valued at $2.2 billion, representing increases of 31% and 37%, respectively, compared to last June.

We ended the quarter with 6,400 homes under construction, of which 75% were sold and only 25% were spec.

We've previously indicated that we expected to invest approximately $800 million in land and land development spend this year.

Based on our sales activity, we now expect to accelerate certain land purchases and development spend.

As a result, we now expect to spend slightly in excess of $900 million on land and land development.

Beyond this incremental investment in the business, we continue to evaluate the use of cash with a strategic focus on reducing our overall debt levels, and shrinking the size of our balance sheet.

In conclusion, we're extremely pleased with our second-quarter profitability, and the overall strong operating and financial results we reported for the period.

Our strategies and tactics are enabling us to meet near-term operational goals, and to position the Company for long-term success.

Before turning the call over to Richard, I wanted to take a moment to address recent questions we've gotten about our mortgage repurchase reserves.

As you may be aware, a number of regional banks recently recorded increased repurchase reserves, indicating that the increases were prompted, in part, by information provided to them through conversations with one or both of the GSEs.

Given the questions being asked, we thought it would make sense to review again the information we provided related to our mortgage repurchase exposure.

Looking at slide 10 of our webcast materials, we've included the origination data we originally included in our webcast materials in Q3 of 2011 for reference.

You may recall that we indicated last year that more than 80% of our repurchase requests related to originations in 2006 and 2007, and that we cure or refute more than 60% of the repurchase requests we receive.

We also noted last year that we had received an insignificant number of repurchase requests relating to the brokered government and bridge loans.

As a result, we indicated that the majority of our repurchase requests are driven by approximately $25 billion of originations in '06 and '07.

We also noted that the origination values did not reflect any repayment, refinance, or loan modification activity.

In the last nine months, the unpaid principal balance will have been further reduced.

We have had dialog with each of the investors that bought the vast majority of the originations in question.

As of today, we have not received any information which has caused us to amend our reserve estimates.

Now, let me turn the call back over to Richard.

Thanks, Bob.

As is our practice, before opening the call to questions, let me provide some additional color on the market conditions we experienced during the second quarter.

With a 32% increase in sign-ups, it won't come as much of a surprise when I say that most of our markets showed solid improvement during the quarter.

Demand up and down the East Coast remained strong in the period.

We continued to experience exceptional demand in our New England market, which we think reflects gains driven by new communities we've opened in the greater metro Boston area for the past few quarters.

In other markets, demand through northern Virginia, Georgia, the Carolinas, and into Florida also remains strong.

Moving toward the middle of the country, the modest pick up in Midwest demand that we noted in the first quarter continued and even accelerated into the second quarter.

Michigan continues to be an amazing story, as the local economy has once again rallied in response to the much improved auto industry.

Only Chicago continues to struggle, but even that market seems to have bottomed.

That isn't to say a Chicago recovery is in sight, but the market seems to be moving sideways rather than down.

We also saw noticeable gains for our Texas operations in the quarter, as those economies remain a bright spot for the country.

Finally, out west, demand remains strong across the markets, with sustained high rates of demand in Arizona, Nevada, and both southern and northern California.

A number of the communities in these markets are where we have been seeing the highest rates of demand, and have been taking action to ensure that we don't get too far out on our start dates.

Given the demand trends through the first couple of quarters, I would say that we are seeing an expanded opportunity to raise price in a growing number of markets.

Pricing may not be available in every community in each market, but in our well-located communities, our operators are looking to move prices higher.

Just to wrap up before questions, there are a lot of positives within today's earnings announcement.

Profitability for the quarter, which we expect will continue for the year; growth in orders exceeding 30%; meaningful margin expansion at both the gross and operating lines; and positive cash flow for the quarter, which will ultimately support our ability to invest in the business, while still delevering our balance sheet going forward.

To paraphrase the old expression -- the harder we work, the luckier we get.

We are indeed benefiting from improved market conditions, but our employees have worked hard to adopt new processes, and implement new practices, which will enable future gains; gains which can be accelerated through a broader market recovery.

In closing, I would like to thank our entire organization for their hard work.

I would also like to take a minute to recognize our Georgia operations and our trade partners in that market who have donated their time and materials for a very special project called Aimee's Wing.

We are very proud of your efforts.

Now, let me turn the call back to Jim Zeumer.

Jim?

Thank you, Richard.

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

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

Frances, if you'll explain the process, we'll get started with Q&A.

(Operator Instructions) Michael Rehaut, JPMorgan.

Great orders on the reduced community count, by the way.

On that, I was hoping to get a little bit of color on the drivers of the North, as well as the Southeast and Florida in terms of leading the range of results.

In Florida, as we have heard, a lot of strength there.

I know you've kind of pared some of your assets and you have the Tampa asset and maybe just review your positioning in Florida.

But color on those three regions.

Yes, Mike, it's Richard.

Thanks for your comments.

Here's what I would say.

In the first quarter, the strength was primarily Florida, mid-Atlantic, Arizona, et cetera.

I think in Q2, it accelerated to more of the rest of the country.

Our North areas, we've been putting some additional investment in place, which has helped.

Michigan, as an example, believe it or not, even though we don't have a huge investment, Michigan has really been a source of strength for us.

That helped in that market.

The Southeast, all I can say is steady as she goes with continued improvement in most markets.

Florida continues to be excellent and you didn't mention the Southwest, which is probably our strongest market in terms of overall demand levels.

We're very pleased with what we've seen through the quarter, handily beating our expectations.

All right.

Thanks.

Second, just on pricing, you mentioned expanded opportunity to raise price in many markets, I was hoping to get a sense of number one, how you felt pricing progress, let's say, Company average, across the company, across all of your communities.

We've heard pricing may be up, let's say, on an effective basis, up 1% to 2% year-to-date for most builders; I'm talking about orders here.

Is that kind of what you've been seeing greater or lesser and thoughts as we go into the back half of the year?

Yes, Mike, I don't think I'll comment on a specific number, but here's what I'll tell you.

With regard to pricing, we have had a pricing initiative in place for some time that's helped us on options, as well as lot premiums to capture, frankly, more price, if you will, in a different sense through those areas.

We have seen that, but we've also seen an acceleration in our ability to raise base price in more markets than we certainly were earlier in the year.

You may have noted in the commentary, we purposely slowed sales in some of our markets and, frankly, when doing that, we're partly doing that with price and still pleased with the results we're getting.

I wouldn't put a specific number on it, but I would say it varied across the Company depending upon which market you're in.

But the general trend is very positive for pricing.

Stephen East, ISI Group.

Good quarter, guys.

Bob, you talked about the put-back; that was a helpful explanation.

Could you do two things -- could you explain what that $27 billion is that you're not really seeing any put-backs on and then what type of loss rate you're seeing on the other part of your business?

We've brokered loans, for instance, where we didn't keep the rep and warrant is a good example and on government originations, we're not seeing much exposure, if any.

That's the piece of the portfolio that we're saying we don't see much risk in.

In terms of the others where we do see some risk, again, what I would point you to is we see a fairly consistent stream of requests.

It varies in terms of where the originations were in terms of how much money per loan and again, we haven't given a whole lot of color on that over time.

But for the repurchase requests that we're receiving currently, we're not seeing a change in the content of them, really.

The drivers of our exposure haven't changed much, it seems.

Okay.

That's helpful.

If we look at what you all have been seeing on, getting back to the homebuilding in the first half of the year, construction costs, I know you don't really have land purchase costs, but construction costs and the value engineering where you talked about only 10% of your volume is going through that.

Now what type of margin differential do you have on that?

The other thing is, cash flow being positive, typical in the first and second quarters of the year?

Yes, I'll start, Stephen.

This is Richard and then throw it to Bob for commentary, maybe, on costs.

In terms of the value engineering work that we're doing, the 10% commentary was to try to get everyone sensitized to the fact that, as we redo our floor plans, it takes some time.

Obviously, you have to get that done and you have to get those homes sold.

We typically have homes in backlog anywhere from three to eight or nine months.

By the time the closings come through, the 10% number is only going to go up from here.

Our point there was we got more good news where that's coming from.

The differential in terms of margins from that can be substantial and that's part of what we're seeing in terms of our margin growth, even though it's a small percentage today of that stream of work.

A comment on cash flow, we typically are not cash flow positive in Q1 and Q2.

But that was before we got a lot more disciplined with regard to our capital allocation.

I'll just point to everyone on the call that not only do we feel great about our cash flow, we also feel good about the business environment.

We're going to invest a little over $100 million incrementally in the business this year versus what we were planning, as a result of what we're seeing in the business, while still maintaining positive cash flow and our ability to delever.

We feel extremely good about that.

Bob, he had a question, I think, on cost a little bit.

Sure.

The construction costs we've seen consistent I think with what we said at the end of the first quarter, we are seeing a little bit of pressure on things like lumber, not outside what we expected.

In some of the hotter markets, we're starting to see some of the material cost increase, for example, concrete.

But, again, not huge differentials.

What we are experiencing, I think, is a shortage of labor in certain markets and that's going to start to pressure pricing, we think.

In certain markets, we've granted some price increases on labor, and so again, that's in the markets that are relatively hot right now.

Again, for base commodity-type costs consistent with what we saw coming into the year, we have seen drywall stay where it is at a higher level than last year, but, again, not a huge cost component of the house.

Overall not meaningful increases, but again, the watch-out is, as labor tightens, we could see some price pressure there.

Dan Oppenheim, Credit Suisse.

I was wondering if you could just elaborate a bit more.

You talked about the shift in terms of to more options away from standards and such.

What are you learning in terms of a better sense of what customers want in the homes and what they're willing to pay for?

How significant do you think that could be in terms of the impact on the margins there?

Yes, Dan, this is Richard.

Frankly, we've done a tremendous amount of research recently and I would tell you our insight into consumer wants are significantly enhanced from where it was even just a year ago.

What we're finding is that the buyer wants the ability to personalize their home.

Our previous practices of a few years ago were we were loading up a home with a lot of things was not necessarily what the buyers want.

Some people want a base home and maybe four or five options, others want to personalize with a lot more.

We now also, internally, have visibility to the actual drivers of gross margin.

As an example, we can break out for ourselves what we're selling in options, what we're doing in discounts to a much greater degree than we did before and we are seeing substantial pickups in many markets from that.

It's hard to isolate a given number and give you a particular number, but I can tell you, it was a mover of margins in the quarter.

I would tell you that it'll continue to be as people select these options.

Okay.

Great.

In terms of the mortgage conversations that you talked about, conversations and dialog with the investors, just want to clarify and understand that.

Were you talking about recent conversations?

Is there anything in terms of in terms of something more recent or just more in general you've been having those conversations.

I was trying to understand if that's something that we should be expecting more resolution on going forward or if it's just more ongoing dialog there?

We, obviously, have dialog with these folks all the time.

We do business with them.

In terms of resolution of these, I don't think there's anything for us to report at this time.

Okay.

Thank you.

Stephen Kim, Barclays.

Congratulations, guys, good work.

Thanks, Steve.

Two sets of questions.

First questions relate to your comment about certain markets getting a little overheated.

The reason why I wanted to ask you about this, is because, as good as your results have been and as dramatic as the improvement has been, probably what's most interesting or captivating for investors is the potential for this to continue to grow at the extremely strong rates for quite some time, because you're still at a very depressed level.

One of the things that I would love to hear you talk about is your ability to maintain very strong, like, 30%, 40% type growth top line, going forward, let's say, over the next two years.

In that vein, you made this comment that certain of your communities are overheated and you were intentionally slowing things down.

Putting those two things together, I'm trying to understand.

Could you give us a sense for what you think your Company's maximum growth rate, that you're prepared to allow your communities to experience, is?

Are we talking 50% on a compounded annual basis for the next three years or is that level really not reasonable for a bunch of practical reasons within your operations?

Steve, there's a lot loaded in that question.

Let me try to break it down a little bit.

I think you have to look at the individual communities and the individual markets.

As an example, everybody knows we have a lot of inventory on the ground in terms of lots in our Del Webb communities.

We would probably be willing to let our Del Webb communities run quite a bit and potentially a very substantial number of incremental units could be sold there purposely.

On the other hand, we have lots of communities, say, for the Pulte brand and even for the Centex brand, where we have limited lot supply.

Given our desire to generate cash and delever and selectively reinvest, we would feel in a community like that, it would be a lot smarter to drive price, which is, of course, what we're doing in some of these overheated situations that I mentioned.

I would also point out that the market, overall, I would say is likely to be a little bit labor-constrained as the demand comes back.

From running a smart business, in our opinion, it might not be smart to let your backlog run out a year ahead or 15 months ahead.

Frankly, in a few markets, we could have done that in Q2 and we decided not to, we'd rather take the price, we'd rather take the margin.

We're at a 75% presale versus spec mix.

We're extremely proud of that and frankly, think that provides us not only cash flow benefits, but also margin benefits, et cetera.

Not trying to dodge your question, it's hard to answer.

Do we think business can accelerate and revenue can improve from here?

Absolutely.

Is that our key goal?

No.

Our key goal is to drive higher returns and run each community smartly.

I hope that helps.

Yes, it does.

Let me follow-up on that.

For example, I understand what you're saying at a community level, but there are certain communities where the land is -- you have a certain constraint within that community.

On the other hand, my guess would be that when you have a community like that, you probably have some near neighbor communities that maybe are not yet open.

While you may not want to burn through a very successful community today, it would seem that one possibility would be that you would, in that market, open up more communities; some of which are maybe not so well-positioned, but at least you have excess lots in that market.

But your commentary about the ability to get subcontractors onto to the job site, that suggests that maybe that solution is not really a solution and so, therefore, in these markets, slowing things down really is the best option that you have.

Can you help me understand in situations where you have a very successful community, you don't want to blow through it.

Is there the ability to open up more communities?

Are you aggressively trying to do that, so that the net result from a corporate perspective, is that you are able to actually continue to grow at a very accelerated rate?

Yes, Steve, we certainly put our fair share of new lots under control and our desire is to take advantage of those market opportunity by investing.

I would tell you, the general answer to your question is we want to drive the highest ROIC that we can.

That's our goal, is return on invested capital.

We've got to analyze it community by community.

In some situations, it's going to be opening up a new community like you suggested and driving volume.

In other situations, it's going to be a real focus on margin.

We've been so, so pleased with our efforts to drive higher margin.

We think we have more where that's coming from.

I would say our Company's bias is going to be more in that direction.

I'll just, again, point you back to the spec comment.

We don't have a lot of excess inventory anymore, in a given quarter, to capture.

We're matching production to demand.

We like where our backlog is headed, overall.

For us, perhaps, not as much of a focus on volume as you might be suggesting.

But we're quite confident that we'll continue to drive better results than we have in the past by being more disciplined about how we're running the business versus just the push on volume, which I know was our focus years ago.

Nishu Sood, Deutsche Bank.

Richard, looking at the first half of the year, obviously, you've put together terrific results.

If you look at demand in the first quarter, about in the fourth quarter of last year, second quarter further acceleration in demand and even some pricing power.

You've talked about your internal initiatives, as well.

If I listen to what concerns investors at this stage, is it looking into the second half of the year, how can housing's momentum continue, given risks of a recession or I think you called them some discrete event elsewhere coming and spilling onto our shores and maybe affecting job growth.

If I judge from your comments on the macro, as well as you're increasing your land spend from the $800 million, it sounds as though you have some confidence that the pace of housing recovery's momentum can continue.

I just wanted to dig into that a little bit.

What gives you that confidence that housing recovery's momentum can be sustained in light of all the challenges it faces?

Nishu, part of the confidence is the fact that we're still in a country selling a preposterously low level of homes relative to historical trends.

I don't believe for a second people want to rent the rest of their life, I think they want to own.

You've got a certain amount of momentum from people that want to get off the fence.

There is a growing sense that pricing has bottomed and that I better get in while the getting's good.

I do think that can carry us quite a ways, but our commentary was designed to help say that in order for housing to really take a big leg up from here, we are going to need job growth at some point.

We were kind of pointed in our script commentary around the fact that we believe low levels of inventory is driving the majority of the good results you're seeing.

We certainly think that can continue from here.

Can housing double and triple from these levels just on the backs of low inventory?

My guess is no, it probably needs a stronger economy to come along.

We're just trying to be balanced in our overall outlook there.

Having said that, I want to be very clear, we are optimistic about the balance of this year and into next year, if for no other reason than there's been a whole bunch of people that have been sitting on the sidelines that want to get in.

I think we can take housing higher from here.

The question is how high and I don't know.

I would tell you this, we're more focussed on running a good business internally and are very confident that no matter what the housing market brings, that our operational act is together now.

Great.

Thanks.

That's very helpful.

Second question, just shifting gears a bit to the Centex brand.

Since the acquisition, obviously, at the outset, there were some shifting of communities between brands, repositioning them.

But since then, even it seems as though the Centex share of your communities has continued to decline, the Centex branded share of communities.

I was wondering what is the future for Centex?

It seems as though there's been more success in the mid-range or the move-up buyer.

Should we expect the share of Centex communities to continue to decline or at some stage is going to be a turnaround, maybe some more reinvestment in the Centex branded type communities.

Nishu, it's Richard, again.

It is true that most of our recent investment has been into the Pulte brand and Centex brand has accounted for a smaller piece.

Having said that, we are hard at work at a new product line we're calling the Independent Series of homes, which is a very value-based proposition for that entry-level buyer.

I can't predict exactly what the percentage is going to be in the future, but it is not our intention to not reinvest in the Centex brand.

Said a different way, we're very bullish on the entry level buyer over the long run.

We've learned a great deal in the last couple of years about that entry level consumer and we continue to roll out new communities and new different service offerings, as an example, in our mortgage advisor product, as well as a new retail center concept that we're offering for that buyer category, that are very exciting over time.

It's just going to take a little bit of time for that to show up in results.

Over the near-term, I think you're going to continue to see a weighting toward the Pulte brand, primarily, but we intend to continue to invest in Centex.

Joshua Pollard, Goldman-Sachs.

Great quarter, guys.

Would love for you guys to walk through the normal seasonality of your particular business.

Many understand how the market moves, but you guys can manage the business and deliveries by quarter and by month.

Can you tell me what normal seasonality on an orders per community looks like in the third and fourth quarter of a standard year?

Then digging a little bit into July order growth in comparison to that.

Thank you.

Yes, Joshua, this is Richard.

A couple of things.

First of all, I would say that the second quarter, we saw a fairly typical pattern as volumes were slightly lower as we moved through the period and the selling season wound down.

In terms of the balance of the year, of course I have no idea exactly what's going to happen, but typically, we would sell in the range of 60% to 65% of our overall volume in the first half of the year and the balance in the second half.

I see no reason why that normal seasonality will not continue to play out this year.

I would expect overall volumes through the balance of the year to trail down from what we've seen.

As I indicated in our comments earlier, however, the first few weeks of July are still above our expectations, which is a positive thing.

I think the overall level of demand for new housing this year is clearly up fairly dramatically from last year, but I do think it'll follow a fairly typical seasonal pattern.

Ken Zener, KeyBanc.

Exploring the land and gross margin dynamic versus other builders, other builders have pitched that they have been purchasing, have a higher share of newer communities, that's driving certainly some of their growth.

I think for you, and you can certainly highlight how many closings came from new communities, but it's far below others, given, Richard, in the past, you've talked about liking your land, which is going to be my second question.

What do you think is driving -- you talked about the price, the incentives, but within the absence of gross margins coming from new communities, you're still getting better gross margin trends, which do include commissions.

It's kind of surprising.

Is it just the fact that your construction site is better, because you're not seeing such a huge piece from new communities, which other builders really are focusing on.

Ken, I very much appreciate you pointing that out.

We thought, for quite a long time, that the reality of our performance for the next number of years was going to largely be driven by the large land bank that we already have.

Whatever we're able to reinvest certainly will be good and new investment will help and Mike can give you some community count on that in a moment.

But the lion's share of our performance is going to be driven by our existing business.

Frankly, we're not surprised at what we're seeing, because we've been hard at work.

Late 2010, we underwent a real deep dive into how to drive value in this business and we felt like we were leaving a lot of margin on the table.

Yes, our construction practices, what we call value engineering, our focus on something we call should costing, and don't discount these strategic pricing initiatives I mentioned.

We're being much smarter, frankly, with how we're handling options and lot premiums, in addition to whatever we can get from the market momentum in lift of base price.

If I sound bullish for the future, that's why I am.

It's because it's driven off of what we already have.

With that, maybe Mike can give some color in terms of the new communities.

Ken, it's Mike.

In the quarter, about 20% of the closings were what we call from new communities and that's consistent with our expectations.

That will trend up slightly through the year at around 25%.

My final question is about that new community, as well as your view on land, finished supply, et cetera.

The new communities, is that newly opened up from your legacy or from land that you purchased first?

If you could highlight the amount of commissions you have in gross margins?

I know some builders have been restating that, so it would make it a little clearer for everybody to understand.

What is your view on land, I know you're buying some.

But do you think given your long legacy land position, do you think in the gross margins you're seeing, could stuff be coming in better than you might have marked it to?

Maybe Mike can give you commentary on the definition of new communities and then, I can help with the back piece.

When we define a new community, a community that we have purchased after the Centex merger.

It would be anything specific after that.

Just real quick on the commission question, it's around 350 to 400 basis points of commissions in total.

Ken, on your second piece, if I'm hearing it correctly, you're asking about our legacy positions and how we market.

In terms of our impairments over the past, we feel like we used the appropriate methodology for that overall.

We've been hard at work outside of what the land is marked to, to improve our results from the sticks and bricks and the operational side and that's beginning to come through.

I don't know, Bob, if you want to add anything there.

Yes.

The only thing I'd say is that the model that we used to book impairments would put the post-impairment margins at actually a lower level, low to mid-teens, whereas we're underwriting transactions today with a higher margin requirement than that.

In terms of what we're seeing today, it's not being driven by prior impairments.

Joshua Pollard, Goldman-Sachs.

I wanted to talk about the $100 million that you're investing into your business more than your original plan.

Can you talk about what year you're building that for?

I think one of the larger investor concerns is that you guys are buying land that inherently has lower margins than what you're currently reporting.

What we've seen is, actually because of the increase in sales, we're actually closing on transactions sooner.

If it's the next take on option transaction and development to put homes into production for '13 and '14.

It actually defeats the increase that demand that we're seeing.

In terms of the recent vintage of acquisitions, I would say we are not expecting a decline in margins as a result of that at all.

Our underwriting standards are at least as high as what we're generating today.

But focused on returns, as opposed to margin.

David Goldberg, UBS.

My first question, Richard, getting to your comments on how the macro economy maybe isn't as cooperative and we're not really seeing a good strong turn of the macro, and so you think a lot of the benefits that we've seen in the new home market are being driven by inventory levels.

I wanted to get an idea, considering you guys have moved more towards a risk-based pricing model, when you think about buying land, how you think about risk associated with potentially pent-up inventory, if that makes sense?

Especially in a market where you might be seeing home price depreciation, how can you factor that into your models?

David, we do our best not to factor in price depreciation in our models.

Frankly, we've been criticized in the past for being, quote, conservative with our land buying practices maybe relative to some of our peers.

We're okay with that to not get ahead of ourselves.

As I was answering an earlier question, the vast majority of our success or failure in the future is going to be from our legacy position.

I would tell you I think we're being smart about how we're buying land.

Bob, feel free to comment there.

The only thing I would add to that is we've talked about that we've got several criteria that we look at in terms of risk management.

One of the things that actually factors into our consideration of land transactions today is, what's the exit cost?

To your point, if there was excess supply that freed up, whether it's the shadow inventory, we would have expectations of what our exit would be in terms of leaving the transaction if the market got soft on us.

Got it.

Just as a follow-up question, obviously, very good profitability in the financial services business, some of which I know you talked about coming from leverage.

What's the sustainability of that level of profitability?

In our models, you're back where you were when you were doing a lot more units effectively, in terms of the margins you were able to achieve.

Is that pretty sustainable as we move forward?

Can you talk about how that was achieved?

A lot of it is the interest rate environment.

It's a very select market.

There is not a lot of competition.

Pricing is favorable for us today.

I don't know if that's sustainable over the long term.

If and when capital returns to that business, I think you would see margins contract, but until that happens I think you'll continue to see this kind of performance.

Dennis McGill, Zelman and Associates.

Jim, an idea for future calls might be to limit the length of questions in addition to the number.

One on the capacity, Richard, it sounds like you're, along with other builders, running up against being able to start these homes as quickly as you would otherwise.

In an industry where it's down 60%, 70% in volumes, it sounds kind of crazy that capacity's going to be a constraint, but how do you think that plays out over the next couple of quarters and into '13 as far as your ability to get back to what you would deem to be a normal construction cycle?

Dennis, just to be clear, most of that is in the labor side, so I don't think there's much capacity trouble on the material side.

But labor is an issue, particularly for some of the unskilled trades where there's just not as many people in the industry perform in that as in the past.

I actually think it's a good thing.

I think it will keep the market from getting too far out ahead of itself.

Frankly, it plays into our hands, because we're so focused on margin improvement and higher returns today.

Work will find its way and money will find its way to where the opportunity is.

I don't expect it to be a big limiting factor over the long run.

If business continues like we've seen it the first half of the year for much longer, you'll see other people coming back in.

Could it put a temporary lid on how many homes could get built?

Perhaps, but I do think it would be temporary, Dennis.

I don't see that lasting forever.

Okay.

A separate question, you mentioned, I think it was end of '10 that you had done the internal study and changed some of the metrics that you guys manage your business around.

Now you've had some time since that.

How would you describe the internal morale around these decisions and the change in strategy?

Are the people that are in place today fully bought in or is that still a process?

I would say people are fully bought in today and it has taken some time overall, but nothing like results to get everybody excited.

Frankly, the whole company is excited.

This is our best financial performance in years and we're doing a few high fives internally and that generates momentum.

If anything, I'd say, Dennis, people are excited and pleased that the opportunity is as big as we thought it was and are excited to help drive it from here.

Will Randow, Citi.

Nice quarter.

Just running some quick numbers, it seems like you might not fully replenishing land despite the $100 million increase.

I could be wrong there, but let me know.

I'm just curious, what areas are you focusing in terms of that land spend and where do you think that lot supply is constrained?

Will, just as a general commentary, I don't know if Bob might have any more details he wants to add, but in terms of not fully replenishing land, candidly, that's the whole point.

We have too much dirt and we're doing our best.

As we look at our balance sheet, not 100% of our balance sheet is driving our revenue today.

We have a whole bunch of lots that are sitting that are not doing a lot for us.

Our goal is to continue to pare down our land, while still being able to grow appropriately in the market overall.

I think that's fair.

I think we'd like to bring the size of our balance sheet down.

I'd just like to point out for everyone that looking at the numbers, we don't need this size balance sheet to drive this size business and that's obviously going to be a big driver of improved returns over the long haul.

Bob, I don't know if you have anything else you want to add?

I'd agree.

Again, if you look at the year, we've changed our controlled lots.

It's come down by about 6,000 lots.

We have delivered 7,000 lots, so we're still in the game.

We're still buying lots, but the goal is to try and drive that investment in land down.

Makes sense.

I was just thinking, regarding constraining certain communities just because you don't want them to overheat, could you discuss how we should think about conversion rates and cancellation rates, as well as demand in the second half?

Yes, this is Richard.

In terms of conversion rates, just for what it's worth, with a 75% presale business and 25% spec, we don't have as much inventory underground as we did to have an outsized conversion rate in any given quarter.

Our backlog is pretty robust right now for Q3 and Q4, frankly.

We're happy about that.

In terms of cancellation rates, obviously, that's going to be a factor of what happens in the broader economy.

We're very happy with where [can] rates are.

They continue to be below historical norms and no way to predict that going forward.

I don't know, Bob, if you have anything else there.

I think that's our view, Will.

Adam Rudiger, Wells Fargo.

I wanted to circle back on some previous questions about the multi-year outlook and I wanted to tie that into some of the details you've provided on your orders by segment.

If you adjusted those orders by segment, like for your community count by segment, I was curious how that would look?

I'm really asking the question in the context of what the strength is of the entry level buyer right now?

How important, Richard, you think that entry level buyer is in terms of getting us back to a normal level of production in the context of elevated unemployment and difficult mortgage qualifying?

Yes, one of the reasons we like the multi-branded model is that we don't have excess risk weighted into any one category.

I will tell you that all three of our brands saw sign-up growth in the quarter and we do feel the entry level category is an important segment.

Having said that, I don't think it'll come as a shock if and when rates rise, that business is probably not going to perform as well as say, the active adult buyer, which approximately half of them pay cash.

From a long-term perspective, I think you can continue to expect a dominant weighting towards Pulte.

The Del Webb business did pick up nicely for us in Q2, which we think is a positive, but the Centex business was also good.

We just didn't have as much investment in that category.

I don't know, Adam, if I'm getting to the essence of your question.

The essence of the question really is if you guys have the best view of the full spectrum of buyers and it seems to suggest from your results that better results are coming from the move-up luxury, the active adult.

I'm just curious if there's this group of buyers right now that consist of that group that is driving the demand and if we don't see macroeconomic fundamentals, we're going to exhaust the supply of buyers.

I'm just curious what you think about the entry level buyers coming back and what they need to come back?

If they don't come back because of whatever issues, then how sustainable the recovery is?

I would suggest our results right now are more driven by our investment choices in the past year to 18 months, we've been investing more in the Pulte brand.

Of course, on the Del Webb side, we haven't had to invest because we have a ton of lots there.

I would say that's the biggest driver is how we weighted it.

Secondarily, there seems to be some nice strength in the Pulte side.

I'm not trying to suggest lack of strength in the entry level, that's been more driven by the investment side.

The only thing I'd add is, again, our community count makes the numbers a little bit confusing.

If you look at just sales per community, what you would see is that sales per community on the first-time buyer are actually up over 30% for us versus the second quarter of last year, which isn't as quick an increase in pace to Richard's point as the move-up buyer, but again, a fairly robust market.

They're out shopping.

They still have the same issues in terms of can they put a down payment together or are they credit challenged?

But they are a significant portion of what we're seeing today.

Megan McGrath, MKM Partners.

What was your cancellation rate in the quarter?

14%.

14%.

Just as a follow-up to beat this dead horse in terms of your constraining demand, for those of us following the industry for a while, I'm getting some flashbacks from years past where a builder would say we're concentrating on price or margin and then the next quarter you get a big mix in orders or you end up with a lot of spec.

If you could walk us through maybe processes you have in place or lesson learned post-tax credit about how to manage this process where you're trying to raise price a little and not end up with too much spec or not end up with demand coming in lower than you thought?

Yes, Megan, first of all, I don't think you have to worry about us having too much spec unless we have a huge spike in can rate, which we do not forecast.

We have a lot of discipline in the Company around spec.

For us, right now it's about simple calculation around ROIC.

As much as I hate to admit this, in the past, it was more driven around volume.

Whatever provides the greatest return for us in a given community in a given division, is what we're going to focus on.

I don't want everyone to get carried away with constraining demand.

It is in select markets that are very, very strong; candidly, Arizona, parts of Southern California, places like that.

It's not everywhere we're constraining demand.

We're just trying to run a smart business.

Frankly, I was here in '04 and '05 for the heyday.

We're not talking about a market like that.

What we're talking about is, I think, running a smarter business, given what we see on the ground today.

Part of the equation, candidly, is our backlog.

I personally am not comfortable carrying a backlog out for a year, as an example.

A six-month to nine-month backlog is very appropriate.

If we can continue to manage that versus how hand to mouth we were a few years ago as an industry, where we were dying for sales every single quarter, that's about right.

We typically can project and protect our construction costs roughly out six months, that type of thing.

That's our view is to try to be balanced in that record.

I hope that helps.

Now I'll turn the call over to Mr. Zuemer for your closing remarks.

I want to thank everybody for joining us on the call today.

We're certainly around for the remainder of the day.

If you have any follow-up questions, we'll be happy to take them.

We look forward to talking to you on the next quarter.

Thank you.

Ladies and gentlemen, this concludes your presentation.

You may now disconnect and have a good day.