PulteGroup, Inc. (PHM) Q1 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2010 PulteGroup, Inc. Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. James Zeumer. You may proceed.

Thank you, Stephanie. I want to welcome everyone to this morning's call to discuss PulteGroup's results for the quarter ended March 31, 2010. On the call with me today are Richard Dugas, Chairman, President and Chief Executive Officer; Steve Petruska, Executive Vice President and Chief Operating Officer; Roger Cregg, Executive Vice President and Chief Financial Officer; and Mike Schweninger, Vice President and Controller. For those of you who have access to the Internet, a slide presentation, available at pultegroupinc.com will accompany this discussion. The slides will be archived on the site for the next 30 days for those who want to review it later. As a reminder, on August 18, 2009, PulteGroup completed its merger with Centex Corporation. Unless otherwise identified, results reported and released and on the call reflect the inclusion of Centex's operations for the first quarter of 2010, although results for the comparable prior year period have not been adjusted for this merger. Finally, I want to alert everyone that certain statements and comments made during the course of this call must be considered forward-looking statements as defined by the Securities Litigation Reform Act of 1995. PulteGroup believes that such statements are based on reasonable assumptions, but there are no assurances that actual outcomes will not be materially different from those discussed today. All forward-looking statements are based on information available to the company on the date of this call, and the company does not undertake any obligation to publicly update or revise any forward-looking statements as a result of new information in the future. Participants in today's call should refer to PulteGroup's annual report on Form 10-K for the year ended December 31, 2009, and this morning's press release for a detailed list of risks and uncertainties associated with the business. Certain statements during this call also contain references to non-GAAP financial measures. See this morning's press release, which is available on our corporate website, pultegroupinc.com, for reconciliation of the non-GAAP financial measures to the comparable GAAP numbers. As always, at the end of our prepared comments, we will have time for Q&A. We wait until then to open the queue for questions. I will now turn over the call over to Richard Dugas for his opening comments. Richard?

Thanks, Jim, and thank you to everyone joining us on the call today. Our first call is the newly named PulteGroup. I'm very pleased to discuss PulteGroup's first quarter results as they demonstrate the significant gains we continue to realize in the critical areas of margin expansion and overhead leverage. The expected benefits from last year's merger with Centex are clearly evident in the numbers and in accelerating PulteGroup's progress toward profitability. In planning for 2010 during last year's budgeting process, we worked under the assumption that demand for new homes in 2010 would be comparable to what we experienced in 2009. We were looking for volume and pricing to remain relatively stable, similar to what we saw in the back half of 2009, with the potential for volatility from month-to-month. At the time, this view was less optimistic than many economists held, but with one quarter down, it looks like 2010 is unfolding more in line with our expectations. Given the planning assumption of relatively stable industry demand, we organized our operations to be successful within this environment while being positioned to respond to more robust demand if it materialized. We continue to advance initiatives focused on expanding margins, gaining overhead leverage and protecting our balance sheet. We also continue to shift away from a sales model that emphasizes the production of spec inventory to one that focuses more on leveling production and building to an existing order. By properly organizing and sizing our operations in alignment with anticipated market conditions, we generated significantly better financial results. On what we would call relatively modest revenue and closing volumes for the first quarter, PulteGroup reported a net loss for the period of approximately $12 million or $0.03 per share. In contrast to the roughly $2.00 per share loss in Q1 of last year, we made tremendous gains by emphasizing profitability over volume and by dramatically improving overhead leverage. Improved earnings for the quarter reflect a combination of factors: first, better gross margins, which continue to expand in the quarter. Since bottoming out in late 2008 and early 2009, we have realized steadily improving margins within our homebuilding operations. We still have a lot of work to do on improving margins over the long term, but we have made solid progress during the past year. Second, we captured critical overhead leverage on the combined Pulte-Centex volumes and delivered on the underlying merger strategy of running two businesses essentially on one overhead structure. And third, the absence of significant impairment charges. Given more stable demand and pricing conditions in the market and improving margins, we believe that the worst of the impairment process should be behind us. Of course, a key component to the year-over-year gains PulteGroup realized in the quarter was last year's merger with Centex and the aggressive actions taken to capture the targeted $440 million in savings and synergies. When we announced the merger, we talked about the critical underlying strategic benefits supporting this transaction, including significant cost savings and operating efficiencies, overhead leverage, acquisition of critical land assets and some unique branding opportunities. At that time, we also talked about how the merger with Centex could help accelerate PulteGroup's progress in these key areas and, in particular, advance our return to profitability. Given PulteGroup's strong start in 2010, our Q1 results demonstrate clearly that we are realizing the significant operating and financial benefits associated with the Centex merger. With the opportunity to realize ongoing margin expansion, additional SG&A leverage and improved closing volumes, assuming market conditions for the housing industry remain stable, we expect PulteGroup to be profitable for 2010. With regard to the merger integration work, I will tell you that we are effectively done and operating as one company. There are still projects to complete in important areas as we transition information systems and complete the integration work supporting our operations and financial processes, but I feel comfortable in saying that the bigger merger risks are behind us. Now it's a matter of completing select tasks and capturing any additional synergy opportunities, particularly in the areas of construction efficiencies and purchasing. As I said at the outset of this call, I think we've gotten off to a solid start in a year that may not be as robust as some had expected. I think the U.S. Housing Industry is finding and may have already found the bottom, but that's different from saying that a recovery is at hand. We believe that any meaningful sustained improvement will require employment gains and in turn, better consumer confidence. To the latter point, while unemployment is high at roughly 10%, that still means that 90% of people are working but not many of them are buying homes right now. Even a modest uptick in employment could have a significant impact on demand, assuming it drives greater confidence among this larger group. PulteGroup is in an excellent position to meet current and optimistically increasing demand given our strong land pipeline and robust cash position, which benefited from the tax refunds associated with last year's NOL legislation. The 20-plus land transactions primarily involved finished lots, so we can move quickly to selling and constructing new homes, which can provide new jobs and help the economic recovery at both a local and national level. As always, I want to thank our associates for the great work they continue to do in delivering superior product quality and an unmatched home buying experience to our customers. Now let me turn the call over to Roger Cregg for additional details on PulteGroup's first quarter financial results. Roger?

Thanks, Richard, and good morning. Revenues from home settlements for the homebuilding operations increased approximately 73% from the prior year quarter to approximately $1 billion. The increased revenues reflect the increase in unit closings that were above prior year by approximately 77%. The average sales price decreased approximately 2% versus the prior-year quarter to an average of $257,000. This decrease is attributed to the mix of greater first time home buyer volume due to the Centex merger, in addition to the geographical and product mix of homes closed during the quarter. In the first quarter, land sales generated approximately $13 million in total revenues, which is an increase of approximately $12 million versus the prior year's quarter. The sales in the quarter mainly reflect lot sales to other builders and several land parcel sales negotiated before the merger. Homebuilding gross profits from home settlements for the quarter, including homebuilding interest expense, was approximately $127 million versus the loss of $333 million in the prior year quarter. For those with access to the webcast slides, I refer you to Slide 6, the adjusted margin analysis, which outlines our gross margins in the following detail: Homebuilding gross margins from home settlements as a percentage of revenues was 13%, compared to a negative 59% in the first quarter of 2009. Adjusting the current quarter's gross margins for land and community valuation charges, interest expense and the acquisition accounting write-up for the Centex work in process, resulted in a conversion of 16.3% compared to 14.2% for the fourth quarter of 2009 or an improvement of 210 basis points. On a comparative basis versus the previous year's first quarter, conversion of 8.6%, the adjusted increase of 770 basis points. We expect that sequential quarterly improvements in gross margins as we worked our way through the backlog of higher incentives in early 2009, along with the house cost reductions initiatives we executed during last year plus the added benefits of the merger. Homebuilding interest expense decreased during the quarter to approximately $27 million versus approximately $55 million in the prior year. Included in the interest expense of the $27 million is an additional $1 million of expense relating to land and community valuation adjustments taken in the current quarter. Also included in the gross margin for the quarter was a charge related to land and community valuation adjustment in the amount of approximately $4 million. For the first quarter, we tested approximately 18 communities for potential impairment and valuation adjustments. The recorded valuation adjustments on approximately 10 communities for the quarter, of which approximately 9 communities have been previously impaired. The total net gain from land sales posted for the quarter was approximately $4 million. The gain is mainly attributed to the sale of lots and several parcels of land in the quarter, offset by the fair value adjustment in land sold and land being held for disposition in the amount of approximately $600,000, which is included in the land cost of sales. Homebuilding SG&A expenses as a percentage of home sales for the quarter was approximately 15.4% or $151 million, an increase of approximately $31 million or approximately 26% versus the prior year quarter. This increase reflects the additional overhead as a result of the merger with the Centex operations. In addition, the first quarter includes approximately $3 million for employee severance and related costs. If we look at the SG&A line on a pro forma basis, our expenses reflect a reduction of approximately $88 million or 37% from the combined Pulte and Centex SG&A expenses from the previous year's quarter. In addition, relative to our SG&A expenses in the fourth quarter of 2009, we reduced the expense sequentially by $37 million or approximately 20%. In the homebuilding, other income and expense category for the quarter, the income of approximately $8 million includes a write-off of deposits and pre-acquisition costs resulting from the decision not to pursue certain land acquisitions in the amount of $500,000 and valuation adjustments and unconsolidated joint ventures of approximately $2 million. Also included in the category for the quarter is an expense of approximately $1.4 million associated with overhead expense reductions for lease exit and related costs. The homebuilding pretax loss for the quarter of approximately $11.8 million resulted in a pretax margin of approximately a negative 1% on total homebuilding revenues. The pretax loss is inclusive of the charges related to the valuation adjustments and land inventory and investments, land held for sale, severance and lease-exit-related charges and the acquisition accounting write-up for the Centex work in process. The pretax income from Pulte's financial service operations for the first quarter was approximately $5 million or an increase compared with the previous year's quarter of approximately $6 million. The pretax income increase is primarily the result of the increased home settlements reflecting the Centex merger volume. Total mortgage principal origination dollars were $498 million, an increase of 45% when compared to the same period last year. The increases related to greater home settlements from the homebuilding closing activity for the quarter. Total agency originations were $469 million, non-agency originations were approximately $6 million and broker or non-funded loans were approximately $23 million. Additionally, within the funded agency originations, FHA loans were approximately 40% of the loans funded from the financing line in the quarter compared to approximately 45% in the fourth quarter of 2009. Pulte Mortgage's capture rate for the current quarter was approximately 75% and the average FICO score for the quarter was 748. In the other non-operating category, pretax loss from the first quarter of approximately $8 million includes corporate expenses of approximately $10 million, partially offset by net interest income of $2 million resulting from our invested cash balances. If we look at the corporate expense line on a pro forma basis, our expenses reflect a reduction of approximately $25 million or 70% from the combined Pulte and Centex corporate expenses from the previous year's quarter. For the first quarter, the company's pretax loss was approximately $14.5 million. This pretax loss for the quarter is inclusive of the charges related to the valuation adjustments in land inventory and investments, land held for sale, severance and lease-exit and related costs and the acquisition accounting for the Centex work-in-process write-off. The net loss for the first quarter was approximately $12.5 million or a loss of $0.03 per share as compared to a net loss of approximately $515 million or a loss of $2.02 per share for the same period last year. The quarter reflects a tax benefit of approximately $2 million, primarily due to the Accounting Standard Codification 740 or formerly FIN 48 accounting for uncertainty for income taxes. The number of shares used in the EPS calculation was approximately 377.7 million shares for the first quarter of 2010. The total shares outstanding in March 31, 2010, were approximately 382.5 million shares. Reviewing the balance sheet for the quarter, we ended with a cash balance of approximately $2.6 billion, increasing approximately $722 million from the fourth quarter of 2009. We received approximately $778 million in cash refunds during the first quarter related to our NOL carrybacks. Subsequently, in April, we received an additional $103 million in refunds for a total of approximately $880 million related to the NOL carrybacks. House and land inventory ended the quarter at approximately $5 billion. The increase in house and land inventory and land held for sale consumed approximately $30 million in cash from the fourth quarter of 2009. During the first quarter, our new investments in land were enrolling lot option takedowns and purchases of approximately $164 million and land development spending of approximately $108 million, offset by a modest reduction in house inventory by approximately $14 million. With approximately $2.6 billion in cash to end the quarter, we had no outstanding balance drawn on the revolving credit facility at the end of the quarter. The company's gross debt-to-total capitalization ratio was approximately 57.3% and on the net basis, 34.7%. Interest incurred amounted to approximately $69 million in the quarter, compared to $54 million for the same period last year. PulteGroup shareholder equity for the first quarter was approximately $3.2 billion. We repurchased no shares during the quarter, and the company has approximately $102 million remaining on our current authorization. With that, I'll turn the call over to Steve for some additional comments on the quarter. Steve?

Thanks, Roger, and once again, good morning, everyone. As Richard touched on, actual housing demand for the first quarter of 2010 was likely below many estimates. As we've talked about before, our expectations for market demand heading into the year were pretty modest, and Q1 demand was about what we expected, so we were properly positioned to realize significant overhead leverage. Our operations did a great job staying focused on the critical business drivers, closings, margins and overhead leverage and on capturing the opportunities related to our merger with Centex. In the markets, our process change work was ongoing in the quarter, as we continued to shift our operating model to focus more on building to order and away from our historical emphasis on carrying a higher level of spec inventory. We likely gave up some sales in the quarter, but we also realized a 4% decrease in our unsold inventory position from the fourth quarter of 2009. We ended Q1 with fewer than 2,700 unsold inventory homes. More importantly, the majority of the decrease was in spec finals, which fell by 15% to about 1,100 homes. Along with helping to control our unsold inventory positions, our process change work continues to benefit construction efficiency and purchasing activities, which over time, can translate into further margin expansion. The enhanced Pulte operating system has been rolled out to all markets. When we started rolling out the system, our operating divisions were at different stages of development, but all are quickly moving up the learning curve and adopting the critical processes and related information systems. We are tracking a number of performance metrics and critical operating categories, including material cost, cycle times and delivered quality. Once our Pulte operating system is fully implemented, we will be in a much better position to consistently track and measure critical sales and construction metrics across all communities in a market and across all of our markets around the country. Layering on top of this work, our Purchasing group has gotten through much of the data collection, analysis and initial vendor discussions associated with efforts to capture the target of the $150 million to $200 million in purchasing synergies. The group is now transitioning to the bidding and contracting stage. A number of important categories, including flooring, appliances and cabinets, will be entering the RFP process in the second and third quarters of 2010. These are important next steps as we work to capture the targeted merger synergies. Moving on to other data points for the quarter. On a reported basis, net sign-ups for the quarter totaled 4,320 homes, which is an increase of 43% over the same period last year and in line with our expectations. Maybe more relevant, given the timing of the merger close, orders were up 15% from the fourth quarter 2009 as absorptions per community improved. While direct comparisons are difficult, assuming PulteGroup and Centex were combined in 2009, reported Q1 orders were down roughly 26% compared to last year. The year-over-year change reflects a combination of a 19% decrease in community count and a change in our sign-up process implemented at the start of the year. Consistent with our build-to-order strategy, we are now taking buyers deeper into the mortgage approval process before counting them as a sign-up. As a result of this process change, which is designed to help lower our cancellation rate and ensure that buyers ultimately close on the home, there were approximately 450 pending sales that would have previously been counted as sign-ups. Overall, we are pleased with our first quarter sign-ups, which were consistent with our plans heading into the year. PulteGroup's reported backlog at quarter end totaled approximately 6,500 homes, more than double last year's number with a value of approximately $1.7 billion. Moving past the data analysis, I'll provide some high-level comments about how our geographic areas performed during the first quarter. As I discussed on the last call, the merger makes direct comparisons of sign-ups less meaningful, so I'll try to provide commentary as to the underlying business conditions. Reported sign-ups for the Northeast, which covers an area from Southern Virginia through Washington, D.C. and into Massachusetts, totaled 461 homes. As you've probably heard many times, the D.C. market has been one of the better performing areas of the country, even with the difficult weather conditions to start this year. Offsetting this somewhat was weakness in our Delaware value markets. In the Southeast area, sign-ups for the quarter totaled 730 homes. As we talked about on the last call, we expect this area to be a solid performer, as last year's merger added both great people and land positions to our existing operations in this area. Overall, the business was relatively stable through the quarter, with most of the markets experiencing a typical, albeit modest, seasonal pickup as the months progress. Sign-ups in our Midwest area totaled 560 homes with relatively stable year-over-year demand throughout most of the markets. Our home state of Michigan, however, continued to struggle with weak economic conditions. Hopefully, improving conditions among car manufacturers can translate into jobs and an overall improving economy, both here and Michigan and in the surroundings states. Once again, PulteGroup's Gulf Coast operations experienced another good quarter of activity in reporting 1,551 sign-ups for the period. While Florida remains once of the most difficult operating environments, we did see some pickup in our North and South Florida operations. Central Florida has yet to see much of a rebound. Moving to the West, demand in Texas remained stable across all markets. Continuing further West to our Southwest area, Phoenix and Las Vegas continue to face very difficult conditions as sign-ups for the quarter totaled 514 homes. Part of our struggle in Las Vegas is company specific. As we have a limited number of closer in [ph] communities currently operating. Long-term, Las Vegas is still a market where we see opportunities and we are looking at several land deals that can improve our market position in 2011 and beyond. Finally, sign-ups in our West area were 504 homes for the quarter. Activity remains generally stable without big swings in demand or pricing from month-to-month. Drilling down a little, we continued to see some weakness in the Central Valley, which we run from the Bay Area, as we didn't feel much of a seasonal lift. On the other hand, Sacramento and Southern California saw a modest year-over-year gain and sign-ups but on relatively small numbers. There are reasons to be optimistic about California as the broader economy improves and the state's new tax credit takes effect. Although, we'll have to wait and see how budget issues at the state level affect the rate of improvement. I touched briefly on the potential to be buying some lots in Las Vegas. So let me finish up my comments with some additional color about our land pipeline. We ended Q1 with just under 150,000 lots under control, of which, 92% were owned and the remaining 8% controlled B option [ph]. As was the case last quarter, about 1/3 of these lots are developed. We've remained active in the land market and continue to find small but profitable builds in many markets across the country. The basic project profile hasn't changed since we are primarily looking for finished lot deals that can be controlled via option agreement and that can pencil to a mid-20% return or better. In the first quarter, we completed roughly 20 transactions accounting for approximately 1,700 lots. So obviously, these are not big communities. The deals represent an eventual capital outlay of approximately $110 million, although minimal cash went out the door in initially tying up these positions. These new communities offer an average margin from the high teens into the low-20% range. We continue to see land acquisition opportunities that make sense and where we are effectively buying the position at a price that is below replacement cost. That said, land prices in the more preferred submarkets are starting to rise, making the deals more challenging from a return standpoint. We'll have to wait and see if the higher prices bring more opportunities into the market. As of right now, that has not been the case. Echoing Richard's comments, we've gotten off to a good start and we're in a strong position heading into an uncertain period, given the state of the economy, the expiration of the tax credit and the potential for rising interest rates. Our operating teams have done a great job aligning their businesses with the market. Let me now turn the call back over to Jim Zeumer. Jim?

Thanks, Steve. We'll now open the call up for questions. As we've done on prior calls, we ask that you keep to one question and one follow-up. If you have additional questions, please feel free to get back in the queue or you can follow up with us directly after the call. Operator, please give any needed directions. And we'll now open the call to questions.

[Operator Instructions] Our first question comes from the line of Josh Levin with Citi.

How should we think of gross margin expansion from here? Is it incremental every quarter? Or is there a step function at some point as some of the Centex land rolls to the income statement?

Yes, Josh. This is Roger. As we've come through 2009 and coming into this year, again we're looking sequential improvements. Again, I don't know who your step function looking for, very large jumps. I mean we did have a pretty large jump coming from the fourth quarter from basically the 14.2% up to the 16.3%, so that was the a 210 basis point improvement for this quarter. Again, some of the things that we're doing on, Steve had mentioned, on the house cost reduction side is benefiting then, the future, as well. So again, as we've mentioned before, we continue to see improvement even going forward to the end of this year.

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

No, profitable on a full year basis. That was our comment and that's what we believe, Josh, obviously, with the caveat around relatively stable conditions that we put in there. But we've got much more consistency in our backlog, visibility in our backlog, overall. And we like the way that a combination of margin, overhead leverage and improved closing volumes for the coming quarters are playing out.

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

Realizing that you implemented a strategy to not start specs and you may have given up a little shares, you indicated sales, certainly, with the community count, maybe Centex closing out a little bit faster than you might have presumed. Can you give us a little differentiation with respect to product? I know the active adult business versus first-time. And then looking at the full year, if you were, again, with visibility as you indicated on your backlog and the concerns about tax credits going away, generally, what kind of order growth would you think is a reasonable thing to consider year-over-year and maybe on a go-forward basis, human capital constraints? Should we be thinking that Pulte can grow 50% a year? Or is it probably limited where you want to maintain sort of more 15% to 20% growth rate? A little bit about your strategic goals of growth and just commentary on the current quarter differentiation on product and mix.

Ivy, this is Richard. Even Mike Schweninger is having trouble keeping track of your questions you just asked there. Listen, a couple comments there. Overall, the sign-up performance for the quarter, as Steve indicated, we had a significant community count drop, as well as a change in reporting methodology, which were the two main drivers between, maybe what some were expecting on sign-ups and what we have. Having said that, the overall business performed well within our expectations. And actually, we beat our own business plan for Q1, both on sign-ups, as well as on overall profitability. In terms of the actual numbers, we can maybe ask Steve or Mike to give you some comment, but we saw the expected benefit in the Centex side from some of the positioning there; the Pulte business, as well; and then the Del Webb business was relatively flat quarter-over-quarter. But I don't know, Steve or Mike, if you want to provide any additional commentary.

First, Ivy, kind of getting back to your direct questions on the expectations as we move forward. We're not going to give guidance on that, obviously, but what we'll tell you is, is that our focus -- and you kind of saw it in some of our land acquisition. Our focus has been on to improve absorptions per community as we move forward, and that has been the message to our operating teams, both on, certainly, the number of sales per community, but also on the margin performance and the overall operating performance within those communities. We have a lot of active stores. We did see a big runoff in the first quarter. We had a difficult first quarter comp on a pro forma basis, as both Pulte and Centex had different operating goals in the first quarter of last year. Ours was to move specs and raise cash and so was Centex. And so we feel pretty comfortable as we move forward to say, "Let's focus on the land that we have and let's focus on the opportunities there." We have repositioned product. We have aligned things with brand. We have done a lot of good things in the first quarter that put us in a better position on a sales per community basis as we move forward, and we feel pretty comfortable with that direction. Whether that results in 20% year-over-year growth or 50% year-over-year growth, that's more probably indicative of market condition. But we think on our community count, we can continue to drive more absorptions per community almost regardless of market growth. We think we can do that just relative to flat conditions like Richard talked about in his comments. Mike?

Ivy, this is Mike. And just in terms of specific numbers, if you take a look at our sign-ups for the quarter, approximately 43% came from our Centex communities, about 35% from the Pulte communities and about 22% from the Del Webb communities.

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

This Jason Marcus [ph] in for Mike. Just a quick question about SG&A. SG&A was a little bit above our estimate. And I just wanted to know where you think you are in terms of the Centex synergies and what your expectations for SG&A are throughout the rest of the year.

I don't know what, Jason, you have in your estimates, but certainly, we've made significant strides with the SG&A. We're not giving any guidance. But I think, as Richard mentioned, with increasing volume, you certainly get the leverage if you're looking at a percent basis, but we've made great efforts in the $440 million in synergies we've talked about. We think certainly we've got close to the $350 million, $375 million through the first quarter. The balance will come on as we start moving to the back end of 2010. Mostly that's now because we've got redundant systems and that type of thing that we're continuing to focus on the integration side of that as well. But going forward, again, volume-related leverage is what we're anticipating as we come through the balance of this year.

Jason, one other comment from Richard. If you look at the $37 million drop, sequentially, from fourth quarter to first quarter, we would tell you we are extremely pleased with that performance. And it certainly is something we're very, very proud of. In terms of the conversion on the volume side, as Roger indicated, and I indicated on my comments, improved closing volumes in future quarters will help that conversion. But we try to manage the actual dollar number and that's why we're very pleased.

The next question comes from the line of Dan Oppenheim with Credit Suisse. Daniel Oppenheim - Crédit Suisse First Boston, Inc.: Was wondering if you can talk a little bit more in terms of the volume leverage. In the past, you've talked about really working on the margins. We've seen some companies always starting different promotions here at the start of May following tax credits. How responsive do you plan to be with that? And just what's your look towards the absorption, the sales per community here as you think about the leverage versus maintaining the margins?

Dan, in answering your question, we pretty much anticipated that we would have markets where other builders would get very active with spec discounts, as they ended up with a lot more inventory because I think there was kind of a yawn overall to the tax credits. So we have not started that many spec homes. We will not play that game, so to speak. We'll let others -- we'll have them do what they have to do. We feel pretty comfortable with our deliveries for the second quarter and relative to our forecast, and we really don't have a lot to sell, in fact, very few to sell to make what our internal projections are for the second quarter. And we think that gives us a great deal of leverage to continue to not have to play the game of discounting specs to continue to get them to move in the marketplace. We aren't doing that and we don't contemplate doing that.

Dan, remember we talked about shifting our operating model from one where we could be more predictable in the future, building up sold but not started backlog, and don't assume that deliveries going forward are directly related to our ability to sell specs or the tax credit because we've tried to really emphasize as much pre selling as possible, and as Steve indicated, we like the shape of our backlog year. Daniel Oppenheim - Crédit Suisse First Boston, Inc.: And then I guess the second question relates to that, in terms of the comment on what you counted as an order in the mortgage classification process. Do you view the 450 orders as just a timing issue? What sort of impact should we likely think about in terms of the cancellation rate going forward? Any more color on that.

Well, Dan, this is Roger. From this point on, it's going to be consistent. So we'll report it consistently, so the numbers that we reported now, we have no deviation from quarter-to-quarter-to-quarter. Really, typically, when you make the change from the fourth quarter to the first quarter, that's where we ended up seeing the change, but it will be consistent as we move forward now with the same methodology. The variance from quarter-to-quarter will not be as pronounced as we saw here coming from the fourth to the first.

And Dan, you're right that the cancellation rates should be affected positively in the downward position, and we did see a benefit from that in Q1 and we likely will see that going forward again, all with the operating philosophy of really focusing on pre-sales and margin growth and profitability over a unit volume. We want our backlog to be more stable and consistent, and that's one of the reasons we're able to forecast profitability the rest year. We like the way it's shaping up.

The next question comes from the line of Kenneth Zener with Macquarie.

Clearly, the cost saving story is working. I have two questions: one's around gross margins and the other is what to do with your cash. So your gross margins are, obviously, somewhat lagging peers, partly as they buy and blend in new lots. Given that you said you like your land, is this philosophical shift that you're buying more? And how are you dealing with rising input costs, like lumber and overhead? Are you trapping that into the system? Or what is the expectation for that?

Ken, this is Steve Petruska. I'll answer part of that and Roger's got part of the answer on the margin piece as we go forward. On an overall basis, yes, we're blending the land in. I mean as I talked about, a 1,700 lot acquisition in the first quarter is certainly very modest and we like our land positions. They were long land positions. Many of the impairments that we've taken over the last few years are still embedded in those land positions, but where we see opportunities to go out and buy land at below market value in great submarkets, we're continuing to do that, but we don't see that as a significant part of our business from a closing standpoint this year. The second part is on the lumber price increases and some of the commodity price increases, we price -- and the way we work is we work on a trailing 13-week basis and we buy our materials direct and we have great visibility, great transparency into the lumber portion. So we have seen lumber price increases. There's no doubt about it. Probably to the tune of maybe $400 a house that'll impact closings in the second quarter and maybe a little bit more than that as we go into the third quarter. But we've been able to offset those with further efficiencies on the labor side and, certainly, efficiencies on many of the things we're doing in trip charges and those type of things. You can offset these, as long as you componentize the breakdown of building the house. And we've done a tremendous amount of work on that so that on a net-net basis, the overall costs to frame a house for us, we haven't seen that much change at all relative to the lumber price increase. Roger?

Yes, just, Ken, on the margins itself, again, I think you have to take it into context of how everybody does their accounting because there are certain aspects of costs that go into the capitalizing that come through margins. Some do more, some do less. So I think you need to actually get to the operating margin side. But again, we still feel very comfortable with the efforts that we're making and the stride we're making on continuing to see the opportunity for increasing our overall margin as we go forward. So again, relative to the peer group, again, as Steve mentioned, some of them may be blending in more of the land that they buy currently, but we're still playing this for the long-term, not just a quarter-by-quarter. And a lot of the lots out there that are for sale are extremely limited. They're not in mass quantities in any particular location. So again, as we've see them, you buy 10 lots, 10 lots there. There's not a great deal that you're going to build a big business on for a long period of time. So short-term gain, again, it's relatively a long=term view. So I think there are some dynamics that are going on right now that will, again, will be washing out as we come through two, three quarters from now.

Ken, this is Richard. I want to add something to what Roger and Steve were just talking about on the land side. Others have talked about margin expansion for new communities being a significant portion of their total and that's because their lot position, in many cases, was significantly down. So therefore, any land they bring on is going to be a bigger piece. We made our bet with the large combination with Pulte and Centex and 55,000 lots that were acquired and the resulting accounting from that. I would suggest that our forecast for margin growth in the future, as Roger indicated, is sustainable and driven by things we can control, our own operating efficiencies and not reliant on future land prices. And while we want to be opportunistic on land purchases where we can, our view is that that's not going to last very long, and so whether we get margin benefit from opportunistic land for another quarter or two, that's great, but what happens in 2011 and 2012, et cetera? I would argue that we are going to have a land basis that's very appropriately valued for the long run and that's why we're continuing to forecast margin growth. So I just wanted to emphasize maybe some of the difference there in the way we're thinking about it. We don't need a lot of new land in order to expand margins.

Right, and I agree with you because you guys purchased a lot of land via equity, which brings me to my second question, which is the cash that you have, and actually as you work down those legacy lots, you'll continue to lower your leverage in the absence of buying land with cash. So given that your leverage is already pretty reasonable and it's obviously, what we'll set [ph], it'll drop as you relieve that land from your balance sheet and don't buy. In a net position, you're declining and especially, when your deferred taxes come back and with housing stabilizing. How come you guys aren't upgrading share repurchases as a capital deployment? Because you can only pay down debt by land, which you don't need, or put your money into an alternative asset class, like some others. So why isn't the share repurchase more focused?

This is Richard. To set the context for the answer, just appreciate that 12 months ago, we were talking about a significant liquidity crisis in homebuilding and that was kind of the trough, if you will, in terms of where everyone was really, rarely concerned. So I just point out that 12 months ago, we were in a very different spot. We worked extremely hard to get the cash balance where it is, and we're very pleased with that and we do think the liquidity crisis is behind us. So we are, at this point, evaluating many alternatives with regard to our cash and we do not intend to let it just sit here forever. I'm not in the position today to tell you exactly what we're going to do with it, but all of the available opportunities are being discussed. They're being discussed with our board of directors, and we'll have more to say on that as the year progresses. So we don't want to get ahead of ourselves and announce something immediately, but your comments are well-founded and we understand our obligation is to drive return for the shareholders and we intend to do that. So stay tuned on that one.

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

First question is to get a little bit deeper on the breakout on sales between the various segments. What I'm trying to look at is actually what kind of sales rates you had for each of the segments. And then with that, what do you think is going to be the factor or factors that maybe accelerates the sales pace in the Del Webb business?

David, this is Richard. Our Del Webb business was actually sequentially up a little bit, community-by-community. Velocities from the fourth quarter to the first quarter of this year and on a year-over-year basis was fairly flat, quite frankly, largely, driven by the fact that we did not have a lot of the Del Webb communities rolling off. And we did have a lot of Centex and Pulte communities rolling off. So what we're hearing from our sales teams out there, and Steve can comment more, is that the Del Webb buyer is beginning to come back and beginning to shop a lot more. They've not yet pulled the trigger in terms of big purchases yet, but you can sense the momentum building as the market has improved. And this buyer, we've known all along, takes a longer period of time in order to make their decisions. So our expectations are that the Del Webb business improves from here. We don't expect it to rocket up or anything like that, but we do expect improvement. But I don't know, Roger, if you want to give more color.

Yes, just on your question on the absorption rate. If we looked at the Del Webb for the first quarter, it was roughly about 7 and Pulte was roughly about 5 and Centex was roughly around 4.6.

I'm wondering about working capital and inventory and I know you have 50% of your lots are developed of the total lot position -- or I'm sorry, 50,000 and third of the lot position are developed. But I'm wondering how you kind of think about cash expenditures as you eventually start to grow the business. And I know the backlog's down a little bit year-over-year at this point on a kind of Centex and Pulte basis, but as you think about re-accelerating the growth, how do you think about the amount of cash spend you need to rebuild the inventory? And if you could really give us some quantification around it, I think that'd really helpful for trying to think about future cash flows.

Yes, David, this is Roger. We're certainly thinking about it. Again, there's a lot of dynamics going on in the market from lending, from bank revolvers. What's available there today is a lot less than what it used to have been. Most of the revolvers, and there's only a couple left in the industry today, have been used for letter of credit. So there's not much available from that standpoint that people are relying upon to build working capital going forward. So as we look at it, certainly, we've got to have cash to put back in on the vertical side because you're putting $2 to $3 for every dollar of land into the vertical side and so, of course, velocity's going to be important on that, so it's going to be exactly what the pace is going to be is going to drive how much actually we're going to use for working capital. So there's no quantification that I have to give you but cash will go into that. I think we've said easily could see maybe $500 million, $700 million, depending on where the market is and how much volume is out there from the market standpoint to put back into that side. And then again, a lot of what we've been doing on the land development side has been to try to be more cash constrained than efficient on development side. So rather than developing 300 lots in a community, we prefer maybe to develop less than 100 to make sure that from a liquidity standpoint, we're in good shape just to weather another downturn. So all those things are factors that we're doing today in running it a lot smarter on the cash side that we can capture costs going forward if we feel good about the liquidity side. So again, those things that we are considering, but we have to have a better view of the market overall before we start to what I would say is move back into a normalized view of how we run the operations day to day.

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

I wanted to follow up on the land question. Clearly, from the earlier questions, we've been talking about your strategic differentiation. Let's focus on our land pipeline that we already have as opposed to being in a scramble out there in the market. And some of your other peers – or I’d say most of your other peers -- that have a lengthy land supply are kind of going for the idea that, yes, we have a lot of land, some of them have a lot of land, as well, but to develop it and bring it to market might be 12, 18 months-plus, and being risk-aversed there, saying, “Okay, let’s rather go out and buy finished lots.” And I know you're doing that to some extent, as well, but I think Steve mentioned $100 million in land-development expenditures. I wanted to dig into that number. Are you folks also taking the view that you want to be risk-averse, “Let's not develop our own land,” that might still be 12 to 18 months out? Are you different there? Is this land development expenditure simply things like longer multi-stage Del Webb communities? So I was wondering if maybe you could talk us through that a little bit.

What I would tell you is this: First of all, we are not adverse to developing our own land where we need to develop our own land. I think that initially, when Roger talked at the last call, we talked about maybe putting up to $700 million, $800 million into land development this year that were in our cash-flow projections. Now certainly, maybe a quarter of that to a third of that is some soft cost relative to property taxes and various assessment districts and those type of things. But the rest is physical hard development, and clearly we're doing that in some communities where we have proper demand and, as Roger spoke about earlier, we're doing it smartly. We're developing smaller pods of lots and not putting that much land out in front of us. What we're really looking at on the acquisition side is, where we can improve our position? I spoke about -- we clearly -- we know what it costs to develop land. We know the raw basis that you can buy land at today in the market. And if you can go out and get a developed lot in a preferred sub-market to target the consumer that we’re very good at serving, that's below those costs, it just makes good business sense for us to go out and buy those lots as well, and we did -- approximately 20, 25 transactions in the first quarter. And the $110 million I talked about was the total cash outlay eventually on those deals as we take down all the lots, not what we put out in the first quarter to acquire those lots. So for us, it's clearly a blend. We like our land positions that we have. We've said that for a long time. Unfortunately, we’ve had to impair those positions as the market downturn has been here over the last couple of years. But we haven't burned through those positions. Those impairments are trapped now into the new basis of that land, and as we look out and we start to see some activity in these preferred sub-markets where we own land as well, we see a very good situation emerging for us. And as Richard talked about, our opportunity to improve margin doesn't lie totally in our ability to have to buy land at below-market value, and we feel pretty good about that. So I think that, hopefully, that answers your question, but that's really what we're looking at. I mean there's a combination for us, but I think we're more weighted towards our current projects, and that's why. when I was asked the question, I mean we're really focused on improving absorptions in those communities that we already own.

Nishu, it's Richard. We're in a nice position of being able to be choosy on what we want to select in terms of go-forward land positions, and [ph] our operators are doing a great job on everything we're buying being accretive in the short term, being very cash-flow positive, etc. But we have a sizable portion of our balance sheet tied up in projects that we want to get active. And we like the locations, as Steve said, and we like the potential, and we're going to be bringing those to market over the coming quarters. So that's our view.

I wanted to ask was a little bit different. Most of us, externally, when we're looking at your closings, we're looking at it as a conversion of a backlog ratio. And the ratio was fairly low. It's almost back to normal at about 60%, 65% or so. Most other people have been elevated because of their pursuit of specs, tax credit-oriented and so everyone’s going to get back to normal eventually. Your folks, perhaps, with less focus on the spec building could have fallen a little bit more. But still, it was more than we expected, even taking that into account. Especially Steve was mentioning the change in the way that you guys are accounting for orders. I would have expected that would’ve actually boosted the conversion ratio a little bit. So I was wondering if you could maybe walk us through. Was that a mixed issue? Why was the closings ratio lower than we might have anticipated?

Nish, it’s Richard. It was what we expected. Not sure how to put a point on it more than that. Frankly, we have been moving to this build-order model; we have been building backlog and not putting as much into production. And to be honest with you, we don’t look at a conversion ratio internally. I know it’s a metric that you guys track, but I’m not sure other than to tell you that we hit our own targets internally. We're pleased with the result. We're particularly pleased with the overhead leverage on what we would acknowledge is a modest volume a quarter, and we did indicate, based on our focus on profitability for the year, that you can expect better closings going forward as we come into the year. So it’s playing out as we expected. I don't think there was any one thing that drove something to tell you, “Yes, we fell short here or there.” It was what we looked for.

Yes, the only thing I would add to that is that, as I said in my prepared comments, that we didn't play the game of trying to discount the spec to get the sale in March and drive the delivery as quickly as we could because number one, we felt pretty comfortable with our overall spec inventory and so those quick turns, especially in the Centex brand, could have affected the calculations that you had. You may have expected us to really go toe to toe in those markets where other builders were trying to get the buyers in spec discount and move that, and we did not do that. We felt very comfortable, overall, in our spec positions and feel like we can absorb them as you normally would, right, where people who need a home for reasons of transfer or they sold their home quicker than they thought they would, that's why we want to have -– if we have available inventory -– that’s why we want to have it.

Not to belabor it, guys, but we have really worked hard to get out of the vicious cycle of excess spec inventory getting discounted at the end of a quarter or the end of the year or, frankly, post the expiration of a tax credit. We don’t want to go back there, and so that's why the operating model is just playing out as we foresaw it.

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

This is Jay Chatfire [ph]in for Jonathan Ellis. What was the carrying cost of finished lots in the inventory and if you could also provide an exact number of finished lots owned?

We'll get back to you on that first question, but in terms of finished lots owned…

This is Mike. For finished-lots-owned we’re at 42,720, and that includes approximately 8,900 related to house.

And if you can also provide differed tax valuation allowance at the end of the quarter?

Jonathan, this is Roger. Two things: One is back on your question to carrying, we said, typically, the carrying cost for us is around $225 million to $250 million a year. That’s what we spend from soft costs as Stephen mentioned earlier. And then again, you could look at the balance sheet makeup and what percent the debt is of the overall capital relative to the inventory. And again, I’m not sure where you're headed with that. And on that question, Mike…

Differed tax valuation allowance?

It’s about $2.3 billion of assets with a corresponding valuation allowance.

The next question comes from the line of Alec Bohem with Housing Research Center.

First one has to do with I guess interest, capitalization policy and how that works. I was wondering what was the interest incurred and versus how much was capitalized. And then my second question was on your impairment policy. When you guys impair a community, given that they’re pretty big, do you guys only impair the phase that’s ahead of you, or do you impair the entire community at the same level?

This is Roger. I’ll take the second part of the question. First of all, when our impairment policy has not changed, we look at the entire project, and that means every lot that winds [ph] up in that project is viewed for impairment, so we don't impair by phase and then wait for another phase to impair it. So it’s been pretty consistent what we’ve done from the start of this, and we're carrying that today in the same way.

In terms of our interest incurred in the quarter, it’s approximately $69 million, and our interest capitalized is approximately $69 million as well. As Roger mentioned in his script, we spent approximately $27 million of cost during the quarter.

The next question comes from the line of Matt Lamden [ph]with Barclays Capital.

Going back to your comments on land prices starting to rise in some of the preferred markets, can you talk about how you think about the dynamic between land prices and home prices in those markets. If there's a ton of existing inventory in the market, for instance, it's hard to imagine there’s be significant home price appreciation. So in those situations, do you think an increase in land prices could drive a higher home price, or how do you think about that relationship?

No. Typically happens is is that the land is being acquired based on what builders believe they can sell homes for in that submarket. And so the land price supports probably the current pricing. We do not price appreciation in or anything like that. What we think is happening is there’s just a very short supply of this readily available land that we believe is below replacement cost. You can’t go out and buy the raw dirt and develop it for that. And builders are buying that to sell it into the price that’s being absorbed in the submarket. What we think is going to happen is that number one, you’re going to increase the overall supply of homes. It’s going to be moved from a supply of land or a supply of homes, obviously, and typically, unless you see more demand in that submarket relatively speaking, that tends to have some kind of a downward pressure on pricing. And we think it's going to be flat to maybe slightly up or down, depending on the builders that actually bought the land and how aggressive they go in there with new products and new housing and then, obviously, what the corresponding retail market looks like. So it's probably not and endless supply of price increases because everybody's buying up the land. I just think that in what we've seen is, is that the returns just continue to get tighter and tighter on trying to make it work at the current pricing, and that's really our jumping-off point. If we can’t get the returns that we want to get, we let it go to somebody else.

The $2.3 billion DTA – is that still $1.3 billion that’s restricted under Section 382?

Of that $$2.3 billion, $1 billion is related to Pulte, and $1.3 billion is related to the Centex operation.

And our final question will come from the line of Buck Horne with Raymond James. Buck Horne - Raymond James & Associates: Just a quick question on the change to the sign-up again. Would you guys consider that what you’re doing now is more conservative than what your peers are doing in terms of walking customers through or taking them deeper into the sign-up process?

Yes, definitely more conservative, yes. Buck Horne - Raymond James & Associates: And I guess lastly, if you have the numbers in terms of active community count by brand for the quarter and any guidance you might be able to give us on what to expect in terms of how community count will trend for the rest of the year

I’ll give you the current community count by brand: Pulte, 305, Centex, 401, Del Webb 136.

And Buck, as I mentioned last quarter, when we were looking at end of 2009’s community count, we were expecting be down, I gave a number of about 15% for the year. So from the beginning of the year to the end of the year 2010, roughly about 15%. Now I might say we might be down roughly around 12% for what we're looking at today. So again, quarter by quarter, we take a look at what we’re buying, what’s rolling off, what we’re bringing on. So roughly year-to-year, I would say roughly right now about 12%.

Ladies and gentlemen, that concludes our question-and-answer session. I will now turn the call over to Mr. Jim Zeumer for any closing remarks. You may proceed.

Thank you, operator. I want to thank everybody for their time this morning. We'll certainly be available throughout the day if you have any follow-up questions, and we’ll look forward to speaking with you in the future.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.