普爾特房屋 (PHM) 2013 Q3 法說會逐字稿

Good morning and welcome to the PulteGroup Inc third-quarter 2013 financial results conference call.

My name is Sarah and I will be facilitating the audio portion of today's interactive broadcast.

(Operator Instructions)

At this time I'd like to turn the show over to Mr. Jim Zeumer.

You may begin your conference, sir.

Thank you Sarah.

This is Jim Zeumer, Vice President of Investor Relations for Pulte Homes and I'll like to thank everyone for joining us this morning to our PulteGroup's earnings third-quarter financial results for the three months ended September 30, 2013.

On the call today to discuss Pulte is results are Richard Dugas, Chairman, President and CEO; Bob O'Shaughnessy, Executive Vice President and Chief Financial Officer; and Jim Ossowski, Vice President Finance and Controller.

Before we begin I want to remind everyone that copies of this morning's earnings release, along with the presentation slides that accompanies today's call have been posted to our corporate website PulteGroupInc.com.

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

I also want to alert participants that any non-GAAP financial measures discussed on this call, including references to gross margins and earnings per share after certain adjustments, are reconciled to the US GAAP equivalent as part of the press release.

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.

Now let me turn the call over to Richard Dugas, Richard?

Thanks Jim, and good morning everyone.

In preparing for today's discussion I reread our comments from prior earnings calls.

I take some satisfaction in knowing that we will make many of the same points today that we have been making for much of the past two years.

First we are extremely pleased with our third-quarter earnings results.

Both the absolute numbers and the demonstrated progress we continue to make operating against our value creation strategy.

Once again our quarterly financial show the benefits of initiatives targeted at driving higher returns on invested capital through increased margins, better overhead leverage and accelerated inventory turns.

Our Q3 financial show improvement in each of these metrics.

On a year over year basis our adjusted gross margin in the quarter increased by 390 basis points to 25.5%.

This makes the 11th quarter in a row of margin expansion.

In addition to better gross margin we captured in incremental 90 basis points of overhead leverage.

If our income statement showed a traditional operating margin, it would have expanded by almost 500 basis points over last year as a result of the combined improvements in gross margin and overhead leverage.

And although less dramatic in this game, inventory turns continue to make steady progress and is now approaching 1 time for the trailing 12 months.

The number can be better appreciated when you put into context of turns being around 0.6 times when we started this work just 2 years ago.

The significant improvements we realized in our homebuilding operations for the quarter drove a 65% or $69 million increase in our consolidated income before taxes.

And this is after having to overcome a $16 million decrease in pretax income from financial services caused by changes in the competitive landscape for mortgage originations resulting from higher interest rates.

I purposely highlighted our pretax income to avoid any distortions created by the DTA reversal taken in the quarter.

While the benefits of the DTA are many I wanted to make sure that the gains our operating team are delivering were clearly visible.

The dramatic progress in PulteGroup's income statement metrics are equally matched by the improvements we reached on our balance sheet.

With this quarter's DTA reversal our reported debt to cap dropped to 31% on a gross basis and 12% on a net basis adjusted for cash, which is less than half of what is ratios showed just three years ago.

The much improved strength of PulteGroup's balance sheet is allowing us to implement our stated plans to be more balanced in our allocation of capital.

As noted in this morning's earnings release through the first nine months of the year we invested $918 million in land and development, retired $461 million of debt, repurchased $83 million of stock and declared $38 million in dividends.

Our improved financial position and operating performance are also allowing us to systematically increase investment into the business with our announced plans to authorize $1.6 billion of land development and acquisition spend in 2014, up almost 70% from our full-year spend in 2012.

With $1.4 billion of cash and leverage down to 31%, we clearly have the capacity to invest much more into the business.

But we have committed to being disciplined in our approach and will not chase volume.

Land prices have gotten extended in some markets and we are willing to be patient and focus on investing only in the smartest deals when putting incremental capital to work.

To that last point let me close out my remarks with a few comments about the overall operating environment we find ourselves in today.

I expect it will come as no surprise when we say that conditions in the housing industry changed during the past few months as some consumers chose to step back from the market.

Is this recent change among potential buyers the result of higher selling prices or higher mortgage rates?

Or the relentless commentary of political turmoil and economic uncertainty?

We would say yes.

It is likely that all of these changes have resulted in consumers taking longer to make the purchase decision.

We have been consistent in our position that housings recovery off the lows of 2011 was driven more by the reduction in supply than a dramatic rally and demand.

Buyer demand since 2011 has slowly but steadily improved and we expect that the recent slowdown in demand will prove to be a modest pullback in an ongoing multi-year recovery in housing.

It is this expectation which gives us confidence in our decision to increase planned land investment in 2014.

We also remain in a camp that a return to a significantly stronger historical level of housing production will require an ongoing recovery in the broader US economy that is slowly developing.

A recovery that can produce more and higher paying jobs.

Achieving substantially higher volumes will also require more participation from first-time buyers.

This buyer category has historically represented over 40% of housing-buyer demand but continued tight underwriting standards and weak personal balance sheets are holding entry-level buyer participation to below 30% of current activity.

All of that being said we expect buyer activity will improve and we are optimistic that the overall recovery in housing will continue.

In fact, over the past few weeks, we have modestly adjusted incentives in a few select communities.

This action has helped to generate stronger buyer interest from the back half of September and the first half of October than we had experienced in the weeks prior to these actions.

While market conditions per be subject to change, what I can tell you that won't change is our commitment to the Company's value-creation strategy and more effective capital allocation.

I am pleased to say that PulteGroup's third-quarter financial results continue to demonstrate the success this strategy and underlying initiatives are having on PulteGroup's profitability and returns.

Now let me turn the call over to Bob for more in depth comments on PulteGroup's third-quarter financial results, Bob?

Thank you Richard, and good morning.

As Richard outlined, our Q3 results demonstrate clear and meaningful progress against a number of the operating and financial goals we established for the Company.

I am pleased to provide some additional details for the financial performance this quarter and to highlight some of the important financial improvements we have achieved.

In the third quarter home sale revenues increased 21% over the prior year to $1.5 billion.

The increase in revenues for the period was driven by an 11% increase in average selling price to $310,000, and a 9% increase in closings to 4,817 homes.

Consistent with trends we have seen for a number of quarters the higher average selling prices in the quarter were driven by price increases and the continuing shift in our closings to move up inactive adult homes.

For the third quarter our closing breakdown is as follows, 46% from Pulte, 30% from Del Webb, and 24% from Centex.

In the third quarter of last year, our closing mix was 42% for Pulte, 25% for Del Webb and 33% from Centex.

The relative percentage of closings from our Centex brand continues to decrease as older Centex communities close out and our current land investment is more concentrated in move-up space.

On average realized $31,000 increase on our year over year selling price from home closings.

In fact we realized higher sales prices on each of our brands, including increases of 7% in Pulte, 5% in Centex, and 10% in Del Webb.

As noted the shift in mix also contributed to the increase in our overall average selling price.

Land sale revenues in the third quarter totaled $56 million and generated pretax income of $5.8 million.

In the prior year land sale revenues and related income were $23 million and $1.6 million respectively.

Consistent with our efforts to improve returns we continue to look for opportunities to dispose of non-core land assets.

In the third quarter our adjusted gross margin was 25.5% which represents a 390 basis point increase over the third quarter last year.

And a 160 basis point over Q2 of this year.

Our gross margins continue to benefit from Company specific and industry-wide factors including better pricing, an increase in the volume of home closings from our Pulte and Del Webb branded communities, our ongoing efforts to lower house-construction costs, and our strategic-pricing initiatives.

Continuing the trend from recent quarters we realized an increase in margin contributions associated with higher-loss premiums and option revenues for closing compared to the prior year.

I would also point out that incentives were 2% this quarter which represent the 270 basis point decrease from Q3 of last year.

It is important to highlight our actual gross margin, which includes the amortization of capitalized interest expense, was 20.9% of the quarter.

This represents an increase of 390 basis points over Q3 last year and 210 basis points over Q2 of this year.

In fact, it is the highest reported gross margin would have had since the second quarter of 2006 and reflects the significant improvements we have made to our operational performance and our financial position.

At the start of 2013 we began discussing the percentage of closings generated from commonly-managed plans.

These represent homes that have been constructed under the more efficient design, cost, and build processes we are implementing throughout the Company.

During the third quarter, commonly-managed plans accounted for 16% of our closing, which is up from 13% in the second quarter.

On a unit basis the number of closings from commonly-managed plans increased almost 800 homes as we continue to make steady progress in expanding the program.

I want to highlight that closings from commonly-managed plans are generating improved margins and importantly, higher paces in closings from comparable non commonly-managed plans.

Over time we expect to increase the percentage of closings from commonly-managed plans to approximately 70% of our total closings.

Looking at overhead our SG&A for the quarter was $139 million or 9.3% of home-sale revenues.

This compares to the overhead cost of $125 million or 10.2% of revenues in Q3 of last year.

The Company continues to realize leverage on its SG&A expense as overhead cost increased by only $13 million against the top line revenue increase of $259 million.

Turning to financial services our Q3 profit was $11 million which is down $16 million from the prior year.

The decrease relates primarily to the rapid increase in interest rates over the past several months which, together with competition from lenders shifting their focus from refinance business to new-money originations, has served to compressed margins.

The increase in competition also contributed to a 310 basis point decrease in our capture rate to approximately 80%.

Total mortgage origination volumes for the quarter increased 2% to 3,126 loans.

The increase reflects higher homebuilding closing volumes partially offset by the decrease in capture rate.

Moving onto income taxes let me address the reversal of the valuation reserve related to our deferred-tax assets.

As we have indicated previously we expected that we would likely reverse the significant percentage of the valuation reserve in the second half of this year.

During the third quarter we concluded it was more likely than not that we would generate sufficient income in future periods to realize the substantial majority of those deferred-tax assets.

Accordingly we reversed $2.1 billion of the valuation allowance.

The valuation allowance remaining after that reversal was partly $230 million, a portion of which relates to the income we expect to earn in the fourth quarter, and a balance of which relates to certain state loss carry forward we may not be able to realize.

Including this benefit, PulteGroup reported earnings of $5.87 per share in the quarter.

Excluding the impact of the reversal of valuation reserve, the Company would have earned $0.45 per share compared to $0.30 per share in the prior year.

Our basic and diluted share counts are as follows.

For the quarter basic shares 383 million, diluted 386 million, for the year basic was 384 million and diluted was 388 million.

These share counts include the impact of our share repurchase activities.

It is worth noting that when we calculate diluted earnings per share we are required to adjust the numerator in the calculation by allocating a portion of the earnings to unvested restricted stock and performance shares.

Typically this is a small adjustment.

But was more impactful this quarter due to the significance of our earnings of the reversals of that deferred tax valuation allowance.

For the quarter this earnings allocation adjustment reduced our diluted EPS by $0.04 per share.

In future quarters we expect the impact of these earnings allocation adjustments to be immaterial.

It is clear that we are continuing to realize significant progress in improving the key metrics we are focused on within our homebuilding operation.

The Company's better margin, improved operating leverage and faster inventory turns are driving better financial performance.

Along with improvement in our operating performance, we continue to improve the strength and flexibility of our financial profile.

Let me provide highlights relating to our cash flows and balance sheet.

During the quarter we generated $220 million of cash flow from operations and reported $1.4 billion of cash at the end of the quarter.

I want to highlight that our cash position increased $140 million from June despite the fact that we repurchased $83 million of stock, taped down $27 million of debt, and paid $19 million of dividends during the quarter.

In total we acquired 5.3 million shares of our common stock at an average price of $15.79 per share and we have $269 million of capacity remaining under our existing share repurchase authorization.

I would also point out that we recorded a loss of $3.9 million during the quarter in connection with our debt repurchase.

We've spoken over the last couple of years of our desire to improve our leverage ratios.

I'm pleased to report that our improved operating results, coupled with the significant equity impact related to the reversal of our deferred tax valuation allowance, has allowed the Company to achieve and in certain instances exceed the objectives we set with regard to restructuring our balance sheet.

In fact, at the end of the quarter as Richard mentioned, our actual debt-to-cap ratio was only 31%.

Looking at other balance sheet metrics we finished the quarter with 269 finished specs.

This is flat with the prior quarter but represents a decrease of 52% compared with the third quarter of last year.

We ended the quarter with just over 900 specs in production which is comparable to the prior quarter but down 37% from last year.

As we have discussed at different times, we are likely reaching the lower limited reducing our spec production but we remain committed to minimizing specs going forward.

At the end of Q3 we had 6,312 homes under construction, so the spec count remained well contained at 15% of production.

We are very comfortable maintaining a low spec count as we typically see better pricing and higher margins on dirt sales.

This is especially true when it comes to moving finished spec units which can require a higher level of incentives.

On the land side we put 9,050 lots under control during the quarter and invested a total of $380 million in land acquisition development.

This is up from $332 million in the second quarter of this year and puts us on a run rate towards the $1.4 billion of land investment we are forecasting for 2013.

We ended the quarter with just over 126,000 lots under control, of which 23% are under option.

This compares to 13% of our lots being optioned one year ago.

I am pleased to say we have realized some success in optioning lots although it is getting more challenging.

At present about 25% of our lots are finished.

As noted in our release we have increased our authorized investment in land acquisition development in 2014 to $1.6 billion, which is up $200 million over the $1.4 billion we were forecasting to spend this year.

It is worth noting that most of the land deals we have approved lately are raw and require development.

And many of the option deals require entitlement work before a purchase is completed.

As a result our land investment at this stage will impact our activities in 2015 and beyond.

In summary, we are extremely pleased with the progress we have made to improving our financial position.

As you know we have also talked about wanting to be more balanced with our capital allocation.

It is worth seeing much of that hard work and planning come to life in the third quarter.

We increased our investment authorization for land and we returned over $100 million to shareholders through our dividends and repurchase program.

We believe these uses of capital are appropriate given our goal of consistent strong returns for our shareholders.

Before handing the call back to Richard let me cover a few more data points.

In the third quarter net new orders totaled 3,781 homes, which is a decrease of 17% from last year.

Given the price increases we've realized the dollar value of sign-ups was $1.2 billion, which is down only 8% from the prior year.

On a year over year basis sign-ups decreased 25% at Pulte and 26% at Centex, but were up 9% at Del Webb.

Absorption paces were down 13% at Pulte, flat at Centex, and up 10% at the Del Webb.

The slowdown in our Pulte brand is not surprising given the price appreciation we've realized over the past 12 months.

And the relative strength of Del Webb is encouraging.

Sign-ups for the period were impacted by 15% decrease in community count, as well as the slowdown in overall buyer demand experienced by the industry over the past several months.

The lower community count for the period is consistent with our previous guidance that our 2013 year-end community count would be down approximately 15% from the end of 2012.

While we don't view community count as a great measure of future activity given the tremendous variation that can exist in the size, pace and profitability from community to community, we appreciate investor interest in this metric.

As such we want to provide a view as to what we expect in 2014.

We have previously indicated that our community count declined in the past couple of years would bottom in 2014 and our latest forecast reaffirms this guidance as our increased land investment is working its way through the pipeline.

Based on our current estimates we expect operate from an approximate range of 560 to 580 communities during all four quarters of 2014.

This includes the opening of approximately 175 exciting new communities next year.

Of course the pace at which existing communities close out or delays in opening new neighborhoods could impact that range.

And finally we ended the quarter with 7,522 homes in backlog, down $2.4 billion.

Backlog dollars are up 8% while units are down 2% from the prior year.

Now let me turn the call back to Richard for some final comments.

Thanks Bob.

Before we open the call for questions I will provide some color on the market conditions we experienced during the third quarter, but recognize it's within the context of changes in industry-wide demand that we work through during the period.

By geography I offer the following views.

Generally buyer demand held up reasonably well in the East Coast with more strength in the Northeast, the Carolinas, Georgia and South Florida.

Washington DC was a little slower, as was north Florida.

But I would tell you that those two areas are where we have been very focused on maximizing our pricing opportunities.

The DC area was also likely impacted by the uncertainties leading into the government shutdown.

Overall we are very pleased with our business performance in the East.

On a relative basis demand in our Midwest markets held up although paces were slower than earlier in the year.

Our Texas markets displayed similar patterns with modestly slower demand reflecting a combination of consumer pullback, seasonality and fewer communities.

Texas also has a higher percentage of Centex buyers relative to the rest of our markets so higher mortgage rates can have a bigger impact within this buyer category.

While generally limited supplies remain the norm out West, we have seen buyers step back to reassess given the rapid price appreciation which is been common over the past year.

That said, overall activity is still very reasonable.

Demand has held up better in the Southwest while California and the Pacific Northwest were little softer.

Again markets with higher prices that have realized above-average pricing for several quarters tended to see a bigger impact from buyer uncertainty, which makes sense.

In conclusion we would tell you that the housing market continues to recover, but just like the stock market it never moves in a straight line.

For all of the reasons we touched on earlier, buyers took a step back during the quarter, but as I mentioned a moment ago, small and appropriate increased incentives in a few select communities since mid-September are already helping to stabilize recent sales activities.

Since we cannot influence national demand or the broader US economy we are focused on continuously improving our fundamental homebuilding operations with the goal of delivering better returns over the housing cycle.

I believe our Q3 results demonstrate further progress in our efforts and show that we are extremely well positioned to take advantage of opportunities they can develop in any market condition.

I want to thank the employees of PulteGroup who continue to do an outstanding job in improving our results while never losing focus on delivering a great buying experience to our consumers.

Again, thank you for your time and I'll now turn the call back to Jim Zeumer, Jim?

Thank you, Richard.

At this time we'll open the call to questions so that we can speak with as many participants as possible during the remaining time of this call.

We ask that you limit yourself to one question and one follow-up.

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

(Operator instructions)

Stephen East ISI group.

Good morning guys, if we can talk about margins first.

You've got a lot of interesting stuff going on and you're one of the few builders that can sort of control their destiny little bit in the current market.

And a lot of that is through your commonly-managed floor plans.

I guess what I would like to understand is, you're 16% into it and you want to take it to about 70%.

How long do you think it takes you to get there?

And what type of differential you talked about both margin and pace?

What type of differential do you see in those floor plans versus the non-commonly managed?

And along with that then, you have been pretty aggressive on pricing.

How much of that is price versus mix?

And how does that change as you move forward?

Yes Steve, this is Richard.

A couple of things.

To give you perspective on the timing.

In the Texas zone, which we're furthest along, we could be upwards of 80% or 90% through there by the end of 2014.

But our Northeast zone, which is our last one just got started a month or two ago.

So probably a two to three year timeframe for us to get to that 70% number commonly managed.

We're going as quickly as we can but it takes a while to kind of reposition the plans.

In terms of the differential, we do see better margins on those products.

Depending on the plan, it can be a couple of hundred basis points.

But I will also tell you that some of the benefits we are trying to get as early as we can through value engineering, [should] costing and some of the work that we started a couple of years ago.

And then probably one of the things we have been most pleased with the process of that we are getting better sales pace from the product.

The product is actually consumer validated and it's frankly, better floor plans.

A good example would be our active adult Del Webb floor plans where we are completely implemented in our Texas and Southeast zones.

And now we are in the middle of converting all of our Del Webb product in the Midwest, which we call our central zone, to that product.

So we are excited about that.

And I think the last part of your question was related to pricing.

Pricing has certainly been a good thing for us this year.

We continued to get price in some communities.

Although as indicated in some, we've had to put a few select incentives in places.

Regarding pricing on the commonly-managed plans overall, we have been real pleased with the results that we have had there.

Okay, and then if you do look at that incentives, I'm interested in and I assume that is pushed a bit more toward your Centex brand.

But what type of incentives are you doing and what is associated with?

Are you seeing buyers take incentives associated with the mortgage financing, whether rate buy down or closing costs et cetera?

It is mostly regard to the option packages that we have been offering.

And it is a very limited number of communities.

And frankly, we don't believe significantly material to our overall margin results overall.

We have been pleased and we have been very targeted.

William Randall, Citi.

Good morning and thank you for taking my question.

Thanks Will.

In terms of community count, often you guys speak of your communities a much larger in terms of scale and size.

How should we think about the size of communities in 2014 as opposed to 2013?

Yes Will, it is going to be a mix.

As Bob indicated we have 175 new communities approximately we are going to open next year and they are in all flavors and sizes.

Generally, a little bit smaller with regard to sort of our legacy book if you will.

But we still have a large portion of Del Webb communities that have a long legacy book out in front of them and as Bob indicated we are seeing better results from the Del Webb category.

So probably not materially different than this year relative to the overall mix of communities and size.

Which is one of the reasons we continue to highlight that is not the best metric to drive our business.

And as a follow-up, as you bring on those communities, given their vintage maybe a bit newer so to speak, how do you think about gross margins relative to your very strong number today going forward?

Well, when we buy we focus on returns.

So as we acquire land, we are somewhat agnostic to margin and we are thinking about what are the return capabilities.

So some of those communities may have, and I will make up a number, 20% margin but a 30% return.

And similarly you could have a transaction that has a 27% return with 25% margin.

So the mix will matter.

Again what we're really trying to work through is how to get the highest return out of each land asset, Will.

Ivy Zelman, Zelman and Associates.

This is actually Alan on for Ivy.

Congrats on the quarter.

Bob, just on that last comment on the return on the threshold for underwriting.

So based on your comments earlier that it seems like a lot of the land that you are buying now, or targeting now is more raw in nature and is more cured for 2015 and beyond.

Should we expect then that given that return focus that maybe the margin on those assets should come in line with where you are at today as opposed to maybe more finished lots if you were buying those which could be lower margins?

It's hard to answer that intelligently because the market moves.

The market has improved in the last two years so the assets that we bought then, even if they were finished-lot option deals that we didn't expect great margins on and we're getting them.

So as we look at this, then we are finding transactions and improving transactions that meet our return requirements.

Some of them are going to be higher margins than others and it really varies on how we are buying the land.

This is Richard and I will add one thing.

We generally have seen higher margins on the deals that we've required over the last two to three years then from our legacy book.

So we are pleased with what we have been able to find.

I think it's probably result of the fact that we have been what I would say is very selective with our land acquisition strategy.

And then just lastly, it is not directly related to your question though, we do see opportunity for margin improvement from here.

In the next few quarters that we have visibility into.

Great, that's helpful, thanks a lot.

And in the second question is Richard, I was just hoping you might be able to expand a little bit on the comments you had in the press release regarding the fact that you see this slowdown as ultimately being short lived.

And it sounds like you are encouraged by some of the trends you are seeing in response to the select incentives you're offering.

But just curious if you can expand upon that a little bit and what gives you that confidence that is more of a short-term issue?

Listen, we believe that the economy is continuing to show slow and steady progress.

We're not in a camp that it is going to get euphoric anytime soon.

But we still have very limited supply of housing out there and that is a key driver.

We still have, on a relative basis, low interest rates.

In hindsight I think the speed at which rates went up was as big a factor in the pause that we have seen as much of the actual rate increases themselves.

And then, when you combine that with the fact that entitlements are taking longer in general, I think all builders are commenting on that.

I don't see a huge influx of supply coming on the market anytime soon.

So with slowly but steadily improving demand and supply being held in check, we are optimistic as we get into next year.

I think the pause that we have recently seen is not necessarily a bad thing over the long run.

So we are in the camp that is likely temporary.

Michael [Reote], JPMorgan.

Thanks and good morning and congrats on all the progress on the margins.

Thanks, Mike.

First questions on sales trends.

The commentary around some of the more recent churn I guess or some of the improvement in September, October was helpful.

I was hoping to get a sense of how the order trends progressed throughout the quarter.

And if we had another builder report yesterday that August was in fact the strongest month that they had in the third quarter.

If that was something that you saw as well?

Or it might've seemed that perhaps there might have been a more steady or even slowing cadence throughout the quarter if you felt the need to do some of the modest incentive changes to drive a little bit more sales in September, October.

So I am wondering if that is the case for you guys?

And maybe if you can give any type of quantifiable granularity in terms of what type of improvement you actually saw in the last four to six weeks?

Yes Mike, this is Richard.

Our trends were generally stable through the quarter, we saw things modestly slow through the quarter.

Although, as noted, when we added a few, and I want to emphasize a few, very select community incentives kind of in the mid-September range, we did see that help our absorption at the end of September and into October.

When you kind of look at it overall it was a reasonably flat performance over the quarter with kind of a slight trended down through the quarter until we got to the last couple of weeks of September.

And I think it is reflective of pricing that was quite high in some communities, along with buyer concern over rates and some of those things appeared to begin to ebb as we got to the end of the quarter and into early October.

But I don't have any specifics in terms of numbers for you.

Okay, and I guess a second question on, maybe a little bit more technical but, interest expense amortization was about flattish.

It has been roughly flattish year over year as a percent of revenue for the last couple of quarters.

How do you expect that to trend I guess?

Maybe more of a question for Bob.

And would that be affected at all by the increase in land spend?

As a percent of revenue as you go forward?

And I think just if I could sneak another one on this topic of more technical.

But the sales commission included in cogs, you guys are only 1 of 3 builders out of 15 that we follow that put that in that line item.

And without it, if you had in SG&A I think it would not only make your gross margins more comparable in a positive sense to your competitors.

But also allow the SG&A to be more comparable as well.

So just any thoughts on making that adjustment.

Another builder in the last year or two ago made that change.

And we found it pretty helpful.

Okay Mike, I will answer the second one first if that's okay.

You had raised, I think a call or two ago and we said we would look at it and we did actually.

What we found was that although you see some people doing that there is inconsistency between internal and external commission.

So I don't know that you'd get, even if we switch it would depend on how we switched, and you wouldn't get consistency throughout the space anyway.

So again, we will always continue to look at how we report versus our peers but we are pretty comfortable with where we are.

And then on CAP interest, the good news is because of the deleveraging we have done our cash interest expense is down about $15 million quarter over quarter.

And we will continue to trend down as we pay down our debt.

But as it relates to the amortization it is really revenue base concept.

We have given some guidance coming into the year that CAP interest expense would actually be up this year by about $60 million.

That is based on closings essentially and so it is weighted towards the back half of the year.

So if you look year over year, the amortization of interest expense is up $11 million in this quarter versus last year, which is about 20%.

And you would expect to see based on closings higher interest expense next quarter to fill that bucket of the incremental 60 million that we talked about at the beginning of the year.

And going forward I think it is fair to say that we will see a decline in interest expense and amortization.

We have got less capitalized interest to amortize and we're capitalizing less as we go.

So I think you will see a benefit in the income statement relating to interest next year.

Bob Wetenhall, RBC capital markets.

Good morning and nice quarter.

I wanted to ask Bob, you guys got very aggressive at doing a strong job of managing the balance sheet.

Gross debt is at 31% and net debts down to almost 10%.

You mentioned the large cash position of $1.3 billion.

You have lower debt levels.

So I just wanted to see from a capital allocation standpoint with that $1.3 billion, is that money going to put mostly toward share repurchases, dividends or land investment now that the debt is basically gone?

Good question.

And it is one that we have spent time thinking about.

We've indicated consistently that will we think the best place to investor is in the business.

We get the best return there and continue to believe that.

But as Richard highlighted we want to make sure that we are buying the best land assets that we can to drive the best returns over time that we can.

And so our belief is that if we try to invest too quickly, some of our managers would likely be forced to take the third or fourth option which might be okay but not great, and we prefer to stay in stuff that we feel really comfortable with.

As it relates to dividends and share repurchases, since we have a big cash position we can make selections almost exclusive of what we think we would do on the land side.

Obviously, we bought some stock last quarter at $15.79 a share.

And we have obviously now got the dividend going.

That is something we would look at and talk about internally with the board.

But mutually exclusive decisions.

Really helpful, just wanted to touch.

You have made tremendous progress in a pretty short period in gross margin improvement.

And you have also done a really good job of leveraging fixed costs and SG&A.

On the SG&A side of the story is there room for improvement, or are you guys kind of at the outer end?

I think you are on track probably for of $575 million of SG&A.

How do want us to think about that going forward?

Bob this is Richard.

Listen, we think we have done a really nice job.

The leverage is certainly going to be somewhat volume dependent and we will have to see of the year unfolds next year.

If you are asking do we plan gross SG&A levels to come down from here, I don't think that is very likely.

On the other hand we want to monitor SG&A.

So I guess the way I'd think about it if I were you, is we are extremely committed to an ROIC story that is driven by gross margins, SG&A leverage and inventory turns.

So I would look for us to pay attention to all three of those.

Adam Rudiger, Wells Fargo.

Hello thanks for taking my question.

I was interested in the comments you had about increased competition from outside lenders.

And the lower capture rate another builder that reported this week actually had, I think, amongst the lowest capture rate we have seen in 10 years or so.

So can we interpret that, as kind of increased or improved lending from outside sources and some better mortgage availability?

Or I guess what are your comments on mortgage availability?

Our perspective is it has not changed much.

And in particular for the first-time buyer it has not changed much.

QM has codified what people can approve as a loan.

Essentially what we think is happening as it relates to competition is as rates went up, the refinance business that the banks had been very aggressively pursuing dried up.

You have seen some of the headlines about some of the downsizing of work forces at the big banks that were big mortgage originators.

And so they have got machines that need to be fed.

And so I think we are pursuing new money originations.

And so we have had to compete with them in order to retain the business.

And we like the business and we think it protects our backlog.

So it has forced us to try to be more competitive on rates.

Okay.

Second question is just on Del Webb.

I was wondering if you could elaborate a little bit on some of the trends that you are seeing there?

In particular I was curious about, I think it was slide 5 which had the had the price increases.

Should we interpret those that the Del Webb price increases bring the largest amongst the three?

Is that where you are seeing the outsized improvement?

Adam this is Richard.

I would suggest a couple of things.

Number one, the buyer is historically been a little bit later than the other buyer categories to sort of return to the market.

So we're not surprised that Webb continues to, at this stage, begin to sort of come into its own.

And we are seeing better results there.

And as you will rightly note we have quite a bit of leverage opportunity if it continues.

The other piece I would mention to you is the commonly-managed plans.

We have chosen to begin our efforts with the Del Webb product.

And we have had nothing short of fantastic results in both Texas and the Southeast where we have introduced our new commonly-managed active adult Del Webb product.

I mentioned earlier we are rolling that now to the Midwest and we expect to have it in the Southwest at some point early in 2014.

So as time goes on, we think we have got an excellent product offering to meet what is hopefully a growing demand category.

Eli Hackel, Goldman Sachs.

Thanks, good morning.

If you could just talk a little bit about the land spend that you're going to do.

Maybe you have some idea in terms of the land you have ready for 2014.

And you mentioned that you are going more to raw land.

Maybe some of the additional dollars $1.6 billion you may spend next year.

Maybe where that is going to be mostly concentrated?

Thank you very much.

Yes Eli, this is Richard.

We're being really discipline with our process, as we have been.

So we are using our risk weighted criteria and frankly that is leading to a pretty diverse implementation of land spend across the system.

Places that we have under invested in the past, we continue to invest in to help position ourselves.

A good example is Minnesota we have highlighted before.

We had put quite a bit of money into Minnesota.

Georgia actually is a market that has recently in the last 6 to 12 months come on.

We're putting a good bit of capital to work there with really good results.

So it is not just one market if you will that is getting the lion's share of the investment.

With regard to 2014, I think it is fair to say that we have limited to virtually no ability to impact 2014 at this point with land.

The dollars that we are putting to work now are for 2015 and 2016.

So again, we're really pleased that our community count is going to be stable next year all year.

Which shows that we are able to get some of the increased investment to work a little bit sooner than we had planned for.

And we are happy because the investments that we are making we believe are very high-quality investments.

Great thanks.

And then just one quick one.

I don't know if you said or I missed it.

But what was the cancellation rate in the quarter?

The cancellation rates in the quarter was 18%.

Great, thank you so much.

Really appreciate it.

David Goldberg, UBS.

Thanks, thanks for taking the call, good quarter.

Thanks.

Good morning.

My first question is actually for Bob.

I wanted to talk to you about the share repurchases in the quarter and this concept of intrinsic value in return on share repurchases relative to buying land and reinvesting the business.

What I'm trying to get some color on is just how you got to 5.3 million shares essentially.

What was the math that kind of got you there that told you that is the right amount relative to more or less?

And relative to the overall balance sheet.

Just turn to understand how you compare the two better.

Well, it is not as if we have set out to say that we want to buy X number of shares.

So it is not a programmed trade.

Essentially what we do as we look at the activity that we are seeing in the market.

Clearly when we have set the program in place, we talked about internally what levels we were comfortable buying at.

And so, over the course of the trading period, it just sort of happened that, that was the volume that we were able to acquire at prices that we were comfortable with.

And in terms of the return differential between the two, again coming back to the intrinsic value.

Can you just get some more clarity on how you think about one versus the other, or how much more it has to be to reinvest in the shares versus land specifically?

And remember, there are separate conversations at this point because of our cash position.

So it is not as if we are saying that we're going to acquire stock in lieu of investing in land.

We are investing in land and that is a process that we go through.

And we're buying back shares.

So it is not as if we're borrowing to do it that puts us in a position of making an either/or choice.

And David, to maybe add a little more clarity.

We believe that over a period of time, the balance that we are showing with regard to the priority being toward land investment, when it makes sense in the smartest deals, and then other uses of capital return to shareholders.

In addition to that, we believe will drive the best ultimate long-term shareholder return.

So just to reiterate to Bob's point it is not an either/or, it's a combination and we worked ourselves into a position where we can be very flexible.

Stephen Kim, Barclays.

Thank you very much guys.

Good progress on the margins.

I wanted to follow up on your comment about anticipating that future communities that you are going to be opening are going to be primarily looked at on a return-on-capital basis which makes a lot of sense.

But I just want to understand a little bit better terms of how you think that might play out.

So it would be my expectation, and I'm curious if you share it, that as you go forward into late 2014 and into 2015 that mortgage availability should broaden out a little bit, I certainly hope so.

And if that's the case you'll probably see a bit of mix shift where you'll see some more buyers who maybe more towards the entry-level side come into the market.

And I was curious first, do you sort of agree that is the way things may play out over the next 18 months?

And if so, do you think that on balance your communities would be more skewed towards a little bit of a higher turn, lower margin type business model?

And then the second thing is, do you feel that you have got that in your pipeline of projects to be able to accommodate that shift?

Thanks.

Hey Steve, this is Richard.

Most of the investment we have been making is in the Pulte brand with some select Del Webb investment and select Centex investment.

So I would suspect that we are going to continue to get really good returns on project but by nature of the investment, if you had to say is it going to be more margin or pace driven because it is Pulte or Del Webb I would suggest margin would get as much play versus the turn side.

In terms of mortgage availability and it's a combination for the first-time buyer, as Bob indicated, it is still tight out there.

The QM rules have sort of defined the underwriting box.

And credit is not particularly easy to get for the buyer category.

And I suspect that is partly why we're not seeing the best return opportunities in that category.

So we certainly hope that opportunity present itself and we will continue to play in that space clearly.

But I'd suggest the majority of our business is going to be driven by the Pulte and Dell Webb side over the next 12 to 24 months.

Thanks.

Clearly Richard, you're correct that the environment is more challenged in terms of mortgage availability because of the reasons you mentioned.

But if over the course of the next two years or so you do see a broadening and some improvement of that situation, how prepared is Pulte to be able to do with react to that changing buyer mix that you see actually visiting your communities?

I would think because you have a relatively long land supply, there are probably some communities that maybe are probably a little further flung and also therefore may be more suitable to a Centex type of product mix.

I'm just kind of curious.

First of all is that supposition correct that some of the older projects you have, maybe from pre 2010, would fit that kind of a buyer?

And then secondly, how quickly could you sort of react to activate those and get models up in the air?

Steve I will try to answer that as best I can.

Most of the acquisition we've done over the past two to three years has been communities that have a two, three, four year life.

So I would suggest that the long-lived planned assets that we have are going to continue for a while and a lot of those are in Del Webb.

So that specific small group but they have a lot of lots associated with and we clearly could not modify to accommodate the entry-level buyer.

On the other hand we'll be cycling through, as Bob indicated, 175 new communities next year.

I don't know how many in 2015.

I would suggest we could be reasonably flexible with regard to new investment but I think to turn existing investment from one category to another is probably not that easy.

Dan Oppenheim, Credit Suisse.

Thanks very much.

Just wondering if you could talk a little bit in terms of the land investments relative to what you are seeing on the sales side.

In the sense that clearly I think most everyone is in agreement that there will hopefully be a short-lived slowdown here.

But what is it that you're looking at as you think about increasing land spending?

What are the factors that you are thinking about that give you the confidence, aside from thinking okay, it should be still the third or fourth inning here.

How do you look at that in terms of tampering -- or your thoughts on boosting the land spending?

And I will answer that as best I can, I'm not sure I get exactly the question.

But we are seeing some really high-quality assets that we are investing in.

So we feel comfortable investing in those.

We also continue to continually canvass our operations in the field.

And they believe, using the very selective discipline criteria that we have, that they can put money to work in a relatively low risk way.

So, while we are increasing investment and clearly we are, we're not throwing the kitchen sink at it, we are being very selective.

So I feel like the discipline we have is very helpful.

The other thing that certainly gets us more comfortable is the fact that our operational progress if you will, our mousetrap is much more efficient than it was 12 or 24 months ago.

We're getting exceptionally good returns we believe and that gives us increasing confidence that provided we are smart with our land buying, we can make it return for us.

Certainly we have more confidence in that now than we did a couple of years ago.

Great.

Thank you for that.

And I guess following up, wondering in terms of the land investments you talked about margins likely to be up over the next several quarters and room for improvement there.

Wondering in terms of the underwriting in terms of new land investment.

Presumably the underwriting margins are current margins.

Is that correct?

It depends on the nature of the transaction.

Some things that we have underwritten absolutely have lower margins that we are experiencing today.

Some are at or higher than.

It all depends on the return characteristics of the new transaction.

Jay McCanless, Sterne Agee.

Good morning everyone.

First question.

Just wanted to ask on the new communities that you are underwriting for 2014.

And I don't know if you all write them this way or not.

But is there an expectation that the per month orders or the per quarter orders of these newer communities are going to exceed what we are seeing in the 2013 results now?

Essentially when we underwrite a transaction, our expectations are predicated on pricing and paces.

Would we underwrite the transaction we are assuming pace is consistent with market at that point in time.

And so, most of the things that we will open in 2014 were bought earlier and call it 18 months ago or so.

And so, I think you'd have to look at that time frame.

Paces are up I think versus what they were two years ago.

So the pace expectations we think we're pretty comfortable with.

And Jay, to be crystal clear, to answer that another way, if you look into 2015 or 2016 which we are buying land for now, we are not assuming pace or price changes from what we have today.

It is a static view in the way we look at it.

Okay thanks.

And it just want to dig a little bit deeper into Del Webb.

Are you starting to see, you said it sounds and correct me if I am wrong, but it sounds like your opinion of Del Webb and that business right now has improved versus the second-quarter conference call.

Are you seeing the opportunity to start raising price now?

Or was this plus10% this quarter just a mix change, more options et cetera?

Jay, it is a little bit of both.

Frankly in some Del Webb communities where we have 2000 lots left we're much better driving pace than price.

In other communities, I can think of one in Charlotte where we are winding down the last phases.

We're driving price really hard because we only have a year or two left before we open up a new community.

So it is a blend.

I would say the general trend is we prefer pace over price to drive higher returns in Del Webb.

Because the lot count we have associated with them.

Having said that, that buyer category is probably the least price resistant regarding options, regarding premiums, or even base price.

So we're trying to be smart about it.

You saw the results of that in Q3.

The only thing I would add to that Richard, is average selling price in Webb is up quarter over quarter since last year.

So, consistent price increases.

Yes, it is good business for us right now.

Ken Zener, KeyBanc capital markets.

Gentleman.

Builders are generally price takers rather than setters.

You just follow the overall market.

So if price is going to be kind of settling down a little bit, can you give us a sense of however you create your value benchmark?

What actually drives your decision in those areas where you started doing some incentives to go after?

And what type of the elasticity did you see?

I will challenge your opening comment a little bit if you don't mind.

This is Richard.

We implemented a new pricing strategy couple of years ago and we started dissecting every single component of price.

And I think most of our operators will tell you that we are among the price leaders in markets today.

And frankly, given the fact that we are dissecting all of the pieces of price, we think it is kind of like the airlines charging you for every little individual option.

(laughter) We're getting lot premium.

We're getting margin, excuse me, we are getting base price.

We are getting option revenue, and we are lowering discount where we can.

And while that sounds very rudimentary.

We were not as disciplined in that years ago.

So I will tell you that we are doing our best and it fits with our strategy.

We have not been as aggressive as some peers with regard to acquisition of land.

We are trying our best to maximize the value of what we have.

We feel that's a disciplined land strategy.

So I just want to start out by saying that we believe in our case we are a little bit of price takers.

Having said that we obviously operated in a competitive environment and we're not unique overall.

So we have had to be responsive.

But even with the selected incentives that we introduced here in the last six or eight weeks, I'll emphasize it was very selective and we were very conscious not to go across the board and just say let's lower price X percent just to get more volume.

It was extremely targeted.

So sorry to be so long winded but I hope that helps.

No, that's fine.

I guess my second question, this is what I've been struggling with as I look at the homebuilders with margins obviously have surged along with prices.

What we see when we look at builders absorption pace actually it's historic seasonality, so seasonal cyclical growth.

Your quarter kind of exhibited that if you look at the pace change quarter to quarter.

How should we think, or how do you guys internally think if you are on pace?

Historically your absorption pace slows about 10% in 4Q versus 3Q, and it is up 35% in 1Q.

And we saw a lot of that normal seasonality.

How do you guys think about if we see the normal seasonality, absorptions are the same, your community count basically flat out year over year next year and I do appreciate that guidance.

But without the absorptions moving up, and we don't see anything outside of normal seasonality right now, where do have confidence that the volume next year would be up for you guys if you're not going to get it in the pace?

Yes again we're not giving volume guidance for next year.

But here's what I'll tell you, the way that we look at that is community by community.

We have some communities right now where frankly we are sold out through Q2 of next year.

There's no reason to drive pace or to focus on any incentives there.

We have other communities where we have a couple more homes left to sell yet for December closings.

There we would be a little more selective in focusing on pace.

So it is very difficult to give you a generalized answer there.

It is more community by community.

Good, thank you.

Mike Roxland, Bank of America Merrill Lynch.

Thanks and congratulations on a good quarter.

Most of my questions have been asked but I want to get, Richard, on your comment about entitlements taking longer.

What have you seen as the biggest impediment and how much recycle times been extended as a result?

Yes, it's municipal staffs frankly.

After the downturn it does not appear that a lot of municipalities have ramped up their hiring enough to keep up with the demand.

So it is not just the rate of dollars that you want to put into the market.

It is the actual pace with which you can get communities open.

And we are seeing those slip two, three or four months relatively routinely.

And it is municipal delays in both the entitlement process as well as sort of the final approvals on your final construction plans for land development and things like that.

To be honest with you Mike, not unexpected.

I think if I could guarantee anything over the next several years it would be that entitlement times would get lengthened in this industry.

It just seems like that's the way works.

Got you.

Okay.

And then just last question on price.

Outside of incentives in those communities where you have seen weakness, have you done anything else in terms of possibly adjusting base prices?

Or has it largely been the incentives which have helped you moved product?

It is almost exclusively around option packages that have been offered at better pricing packages.

Spend $20,000 with us in options and get $5,000 off, that type of thing, Very little if any movement.

I don't think we have done base price changes hardly anywhere.

It's been mostly around incentives and options.

Got you.

Good luck in the upcoming quarter.

Thank you.

Nishu Sood, Deutsche Bank.

Thanks, about gross margins.

You mentioned the 20.9% post interest is the highest I think since 2Q 2006.

In your conversation with Alan you were describing the potential for gross margins to rise.

Obviously it is a big difference between capitalized amortized interest at this stage.

At 4.5% versus just over 1% back in 2006.

So when you are talking about gross margins potentially rising for the next couple of quarters, are you talking about on a pre-interest, or on a post-interest basis?

I was speaking on an adjusted basis if you will excluding interest.

But Bob did give some commentary that we expect capitalized interest of to fall as well next year.

Got it.

And if you do that historical comparison, I believe it is even more impressive if you look at it on a pre-interest basis.

So, I want to just ask a, given the circumstances that we had in the beginning of the year with the tremendous price increases and obviously that is showing up in gross margins, we are still at the beginning of the housing recovery arguably or in the early innings call it.

What is your view on what normalized gross margins should be now?

And if you can frame that in terms of whether you are talking about the adjusted gross margin or the reported?

Appreciate the comments and the complements.

Frankly it depends on what you call normalized in this industry.

Right?

If we got anywhere back to normalized volumes, we could have some exciting numbers.

Here is what I would tell you, you have got to be realistic about the fact that land prices are going up and there's no question about that, which will have some diminishing or push down effect if you will on margins.

Having said that, we are running a different business, commonly-managed plans, the pricing initiatives if you will.

So I'll put it to you this way.

We have been very pleased that we have been able to exceed our own internal plans for margin expansion at this stage.

The market is going to dictate where we go from here.

But look for us to continue to move on the things that we can control ourselves.

Mix is also going to certainly play a role here.

We certainly benefited from a mix towards Pulte and toward Del Webb and away from Centex, which historically is more of a pace business.

So all of that will get cooked into the kettle.

But we have visibility for couple of quarters.

And as I indicated to Alan, we see the opportunity for margin from here to go up based on the visibility we have today.

And this concludes the question-and-answer portion.

I turn the call back to the presenter for closing remarks.

Okay, want to thank everybody for their time this morning.

We will certainly be around all day if you any follow-up questions and we look forward to speaking to you after our fourth quarter.

Have a great day.

And this concludes today's conference call.

You may now disconnect.