PulteGroup, Inc. (PHM) Q1 2011 Earnings Report, Transcript and Summary

Michael, I can't really give you a whole lot there. I would say in general our operators are being very prudent. We certainly -- last thing we want to do given all the impairments we've taken over the years is buy distressed assets that we end up impairing from here. But I'd it's tough all over. Some markets have a greater need for land than others based on kind of our inventory position, but we're being pretty diligent around there. So I'm sorry I can't give you a whole lot of regional color there.

Sure. Just as a follow-up, you talked a little bit about having more optimistic now. Would you say that means you're a little bit more aggressive on growth and trying to add community count and/or land positions than you were, say, 6 months ago? Or about the same or...

No, Michael. I wouldn't want you to interpret that. The market's still tough. What we're optimistic about is the things within our control, like our ability to drive better margins because of the work we're doing internally or our ability to have our segments outperform. But no, as I think we evidenced, our inventory position did not grow dramatically. I wouldn't look for excess land purchases this year. It's more of a commentary on what we see within what we're controlling as opposed to the market getting dramatically better leading us to load up. And candidly, we've got a whole lot of land that we can drive improvement on there. So don't look for a dramatic change in our land position anytime soon.

No further questions. I'd now like to turn the call back over to management.

Great. Thank you, everybody, for your time this morning. We know you have a number of other calls to get on. We will be around all day should you have any additional follow-up questions. Thanks very much, and we'll look forward to talking to you next quarter.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 PulteGroup, Inc. Earnings Conference Call. My name is Chanel, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, to Mr. Jim Zeumer. Please proceed.

Chanel, thank you. Good morning, everyone. I want to thank you for participating in today's call to discuss PulteGroup's first quarter financial results. On the call today are Richard Dugas, Chairman, President and CEO; Roger Cregg, Executive Vice President and CFO; Mike Schweninger, Vice President and Controller. Before we -- excuse me -- before we begin, copies of this morning's press release and the presentation slides that accompanies today's call have been posted on our corporate website at pultegroupinc.com. Further, an audio replay of today's call will also be available on the site later today. Please note that any non-GAAP financial measures discussed on the call are reconciled to the U.S. GAAP equivalent as part of the press release and as an appendix to the call's presentation slide deck. Finally, today's presentation may include forward-looking statements about PulteGroup's future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now let me turn the call over to Richard Dugas. Richard?

Thanks, Jim, and good morning, everyone. Early in March, we released an interim report on PulteGroup's sign-up results for the first 2 months of 2011. I am pleased to report that we have seen a continuation of the positive signs suggested in that initial release and are encouraged by the business trends we have experienced so far this year. Roger will provide a detailed review of PulteGroup's first quarter results, but there are several key points that I would like to highlight first. At 4,345 homes, reported sign-ups for the quarter showed a slight increase from 2010 before adjusting last year's number higher by approximately 450 units associated with the change in our sign-up reporting process. On an adjusted basis, sign-ups were down roughly 9% on a 5% decrease in community count, a result we are very pleased with, given the competitive environment and the impact of last year's tax credit. Within our Q1 sign-up numbers, we saw a modest selling season begin to develop as customer traffic along with gross and net sign-ups increased from month-to-month throughout the quarter. In our March press release, we reported January sign-ups of 1,206 and February sign-ups of 1,468 homes. We captured an additional 1,671 sign-ups in March for a total of 4,345 sign-ups in the quarter. These sequential changes demonstrate a positive progression that we view as encouraging. I would note that we realized this sign-up performance without having to increase incentives, thus avoiding that source of potential future margin pressure. We are also encouraged by the mix of business, which shows stable demand among move-up buyers for our Pulte Homes brand and active adult buyers for our Del Webb brand. Given the influence of last year's tax credit, we weren't surprised to see some year-over-year weakness in demand among first-time buyers for our Centex Homes. Q1 sign-ups were generated from an average active community count of 800 compared with 842 for the first quarter of last year. However, on a sequential basis, our 800 communities were an increase from 786 in the fourth quarter of 2010. Although community count decreased on a year-over-year basis, we have been successful in converting recently acquired distressed land assets into community openings. During our last conference call, we discussed how closings from distressed land transactions are expected to climb to 15% or even higher in 2011, up from less than 5% of closings in 2010. Given our robust land pipeline and the depth of the land positions within our existing communities, growing community count is not a requirement for expanding our business in the future. We continue to drive sales within existing communities and capture the efficiencies and leverage inherent in this strategy. That is particularly true of our Del Webb communities, which have tremendous volume potential. At their peak, several of our larger Webb positions generated more than 750 closings annually. Today, none are close to that type of velocity. So the leverage potential is significant. As baby boomers get more and more comfortable with their overall financial position, many are now choosing to make the move and execute on their decision to enjoy the Del Webb lifestyle. Overall, given the strong influence of last year's tax credit in pulling forward demand into the first 4 months of 2010, sign-ups being down only 9% for the quarter was ahead of our internal plan. And while limping along at historically low levels, we view current demand in 2011 as much more real and sustainable relative to Q1 2010. With April 2010 marking the end of any tax-driven buying last year, the industry is moving past the year-over-year comp challenge and can look forward to the opportunity to deliver better year-over-year comparisons. As part of my business reviews during the past couple of months, I toured a number of markets including PulteGroup operations in Florida, parts of the Southeast and the Mid-Atlantic. Anecdotal comments from our field operators support the position that demand feels better with customers looking to fill their housing needs provided they view the product offering as a solid value for their investment. Through ongoing consumer research and design innovations, we are working hard to ensure that our homes clearly offer such value to the different buyer segments we serve. By effectively positioning and differentiating our homes with first-time, move-up and active adult buyers, we have been able to maintain overall pricing and avoid relying on incentives to sell homes. A favorable mix of homes closed, along with keeping our pricing and incentives steady, allowed us to realize an adjusted gross margin of 16.9%. This is an increase of approximately 60 basis points from Q1 of last year and a sequential gain of 30 basis points from Q4. We are pleased with the margin gains realized in the quarter but see opportunities for further expansion in the back half of 2011. With our initiatives to increase construction efficiencies, along with lower spec sales and a greater number of closings from recently acquired land positions, we expect to end the year with even higher gross margins. With adjusted gross margins of 16.9% and expectations for further expansion, we know there remains ample opportunity for PulteGroup to meaningfully improve this number going forward. We have discussed our near-term tactics to lower direct construction costs, and we continue to march along that path. Initiatives under way are yielding benefits, as we continue to alter specifications that consumers don't value to simplify our home designs, to capture local purchasing opportunities and advance other related activities. These tactics are part of an important long-term program to meaningfully expand margins which currently lag the group averages. We know this will be a process that demands focus and discipline from the entire organization. It is tough work, but as an organization, we are excited about the opportunities we see and the results that we believe are achievable. With a low backlog heading into the first quarter and the resulting 17% decrease in year-over-year closing volumes, we expected profitability would be challenged in the quarter. We were successful in reducing consolidated SG&A by $19 million compared with the prior year period, but the lower volumes and revenues for the period resulted in us realizing a net loss of $40 million. While slightly better than our internal plan, low closing volumes hindered our ability to achieve profitability in the quarter and will likely keep us in a modest loss position in Q2 as well. However, we continue to implement actions that can drive further margin expansion and sustained overhead leverage. We expect that gains in margin and leverage, in combination with anticipated higher closing volumes later in the year, will enable the company to achieve profitability in the back half of 2011. Overall, I'm very encouraged with how the year started and the potential for sustainable gains as the year progresses. The U.S. economy recovery appears to be gaining traction and is slowly creating more jobs, which is critical to improving consumer confidence. At the same time, apartment rental rates are moving higher throughout the country, making home ownership that much more compelling. That being said, we appreciate that overall industry conditions remain challenging, as the supply of existing homes, particularly distressed properties, remains high while buyers are electing to stay on the sidelines until they're convinced that a true economic recovery is under way. With that, let me turn the call over to Roger for a review of our Q1 results. Roger?

Thank you, Richard, and good morning, everyone. Revenues for the quarter from home settlements for the Homebuilding operations decreased approximately 20% from the prior year quarter to approximately $782 million. Decreased revenues reflect lower unit closings that were below prior year by approximately 17%. The average sales price decreased approximately 3% versus the prior year quarter to an average of $249,000. This decrease is attributed to the geographical and product mix of homes closed during the quarter. In the first quarter, land sales generated approximately $1 million in total revenues, which is a decrease of approximately $12 million versus the previous year's quarter. The sales in the quarter mainly reflect the sale of lots to other builders. Homebuilding gross profits from home settlements for the quarter including Homebuilding interest expense was approximately $97 million versus $127 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. Homebuilding gross margins from home settlements as a percentage of revenues was 12.5% compared to 13% in the first quarter of 2010. 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 conversion of 16.9% compared to an adjusted margin of 16.6% for the fourth quarter of 2010, and on a sequential basis, an increase of approximately 30 basis points on an adjusted basis. This increase is mainly attributed to geographical and product mix of homes closed during the quarter. On a comparative basis versus the previous year's first quarter conversion of 16.3%, the adjusted increase is approximately 60 basis points. The improved margins on an adjusted basis versus the previous year's quarter are a direct result of the geographical and product mix of homes closed, house cost improvements and relatively stable market pricing in most markets. Homebuilding interest expense increased for the quarter to approximately $35 million versus approximately $27 million in the prior year. Included in the interest expense of $35 million is an additional $62,000 of expense related to land and community valuation adjustments taken in the current quarter and $1 million in the same period last year. Also included in gross margin for the quarter was a charge related to land and community valuation adjustments in the amount of approximately $41,000. Consistent with prior quarters, we have reviewed all our communities for impairment indicators. Based on this review in the first quarter, we identified and tested 11 communities for potential impairment and valuation adjustments. We recorded valuation adjustments on one community for the quarter. The total net gain from land sales posted for the quarter was approximately $400,000. The gain is mainly attributed to the sale of lots to other builders in the quarter. Homebuilding SG&A expenses as a percentage of home sales for the quarter was approximately 17.4% or $136 million, a decrease of approximately $15 million or 10% versus the prior year quarter. As we discussed on last quarter's conference call, during the fourth quarter, we reorganized and consolidated several of our operating areas in a number of divisions, in addition to corporate staffing, to streamline our overhead expenses in 2011. In addition, the first quarter included approximately $2 million in severance-related expenses. In the Homebuilding other income and expense category for the quarter, the expense of approximately $4 million includes write-offs of deposits and pre-acquisition costs, resulting from the decision not to pursue certain land acquisitions in the amount of approximately $600,000. The homebuilding pretax loss for the quarter of approximately $41 million is inclusive of the charges related to valuation adjustments in land inventory and investments, severance and related charges, and the Centex work in process adjustment for a total of approximately $3.4 million. The pretax income for Pulte's financial services operations for the first quarter was approximately $1 million. The quarter also includes severance and lease exit costs of approximately $500,000. The decrease of approximately $4 million versus the previous year's quarter is primarily attributed to lower closing volume from the Homebuilding operations. Total mortgage principal origination dollars were $378 million, a decrease of 24% when compared to the same period last year. The decrease is primarily related to the decrease in unit closing volumes. Total agency originations were $355 million, nonagency originations were approximately $3 million and brokered or non-funded loans were approximately $20 million. Additionally, within the funded agency originations, FHA loans were approximately 32% of the loans funded for the quarter compared to approximately 33% in the fourth quarter of 2010. Pulte Mortgage's capture rate for the current quarter was approximately 77%, and the average FICO score for the quarter was 750. There was no adjustment recorded in the current quarter related to mortgage repurchase exposure. We have included a trend slide as part of the webcast, Slide #10, that depicts the gross put-backs from the first quarter. And although the quarter shows an increase versus the prior quarter, it continues to remain at a low level, and we expect to see volatility from month-to-month given the individual and selective nature of the processes involved. In the other nonoperating category, pretax loss for the first quarter were approximately $6 million, includes corporate expenses of approximately $7 million, including a $1.3 million write-off of unamortized fees associated with the termination of the credit facility, partially offset by net interest income of $1 million resulting from our invested cash balances. For the first quarter, the company's pretax loss was approximately $45 million. The pretax loss for the quarter is inclusive of $5 million in charges related to valuation adjustments in land inventory and investments, severance and lease exit and related costs, the acquisition accounting write-up for the Centex work in process inventory, and the write-off of unamortized fees associated with the termination of the credit facility. Net loss for the first quarter was approximately $40 million or a loss of $0.10 per share as compared to a net loss of approximately $12 million or a loss of $0.03 per share for the same period last year. The current quarter reflects a net benefit from income tax of approximately $6 million, primarily due to the favorable resolution of certain federal and state income tax matters versus a $2 million benefit for the same period last year. The number of shares used in the EPS calculation was approximately 379.5 million shares for the first quarter of 2011. The total shares outstanding at March 31 were approximately 382.8 million shares. On the balance sheet for the quarter, we ended with a cash balance of approximately $1.4 billion, including the restricted cash balance of $133 million, which now includes approximately $110 million in the cash collateralization for the letter of credit facilities. The use of cash in the first quarter was mainly for net working capital and a senior note at maturity. House and land inventory ended the quarter at approximately $4.8 billion. During the first quarter, our investments in land were for new community purchases and rolling lot option takedowns of approximately $60 million and land development spending of approximately $154 million. In addition, house inventory decreased by approximately $37 million from the fourth quarter 2010. Interest incurred amounted to approximately $56 million in the quarter compared to $69 million for the same period last year. PulteGroup shareholder equity for the first quarter was approximately $2.1 billion. With that, I'll turn the call back to Richard for some additional comments on operations. Richard?

Thanks, Roger. Before opening the call for questions, I'll finish our prepared remarks with a few additional comments on PulteGroup's first quarter. Within the context of my earlier comments about sign-ups and general market conditions being challenging, I would add that market-specific demand remains generally stable, with signs of improvement in certain geographies. The greater Washington, D.C., Northern Virginia market remains the strongest, with demand being relatively good from the Mid-Atlantic through the Northeast and into New England. Heading south, the Carolinas have continued to see reasonable demand, but the big surprise was Florida, which saw a year-over-year increase in sign-ups in both the northern and southern parts of the state. This may be more a commentary about us having good land positions rather than a general recovery in Florida, but we're still very pleased with the results. Our operations in Texas exceeded their plan for the first quarter. Given our exposure to first-time buyers in these markets and last year's tax credit, the year-over comps were challenging. The locals -- the local economies, excuse me, continue to create jobs, however, so we expect jobs demand will get better as we move through the remainder of year. Most of the Midwest markets continue to struggle, although Michigan reported some great year-over-year increases, understanding that this is off a relatively low base. Still, it's nice to see some life coming back into the area. And finally, the West remains challenging. Arizona isn't getting materially worse but there are still a lot of homes on the market. California lost some ground in the quarter as we closed out several communities. We will be opening new stores later in 2011, which we expect will help improve performance in the back half of the year. At quarter end, we ended with just over 2,900 spec units in production within these 800 selling efforts, which is down 16% from year end. We have talked before about a segment of buyers who are waiting until their house is sold to buy their new home, but then they're looking to move quickly. We are willing to start a few additional spec units to meet this buyer demand, but we are keeping very tight controls on the supply, as demonstrated by the sequential decline. We ended the quarter with 144,000 lots in our control, of which roughly 30% were developed. We remain actively involved in new land deals, including roughly 30 that were at various stages of the review and/or approval process during the quarter. We have to search a lot more and work a lot harder than just a year ago to find deals at pencil. Banks appear to be under no real pressure to improve pricing or terms sufficiently to increase transaction flow beyond the select deals we have been able to uncover. From trade articles to Wall Street research to industry comments, I think more people are beginning to appreciate the potential for builders to face a shortage of lots when demand for new homes increase. With a limited supply of finished lots on the ground and few land parcels in the development pipeline, lot scarcity for the industry is a very real possibility. In the U.S., it still takes an average of 24 to 36 months, and longer in many markets on the coast, to push land through the entitlement process, and that isn't changing. Given pricing dynamics today, for many land parcels it still doesn't pencil to entitle and develop the ground. When buyer demand for new homes finally accelerates, land availability could very quickly become an issue. As demand rebounds, our strategic decision to retain key land positions will be a source of competitive advantage that will enable PulteGroup to meet demand and ultimately expand our market share. Relative to our plans, PulteGroup has gotten off to a modestly better start for 2011, and I want to thank our employees for helping to make this happen. Assuming market conditions remain stable, we have put ourselves in a position to return to profitability in the back half of the year. Now it's about effort and execution, which are clearly within our control. Before opening the call to questions, I want to take just a minute to publicly thank Roger Cregg for his significant contributions to the success of PulteGroup during the past 13-plus years. As you know, in February, Roger announced his plans to retire from the company. Given the progress of our search and the expectations of an announcement on a new CFO in the coming weeks, we anticipate this will be his last quarterly conference call. Roger has developed and guided the company's accounting, finance, treasury and numerous other functions through our dramatic growth phase and then the subsequent industry collapse. He has been instrumental in integrating two of the largest mergers in the history of homebuilding. He is a respected leader in this company and the industry, as well as a trusted adviser to me. His contributions to the success of this company are too numerous to list here, but I know I speak for our entire company and the Board of Directors in wishing him all the best. So thank you, Roger. Now let me turn the call back to Jim Zeumer. Jim?

Thank you, Richard. At this time, we will open the call for questions. We know it's a busy day for earnings, so that we can speak with as many participants as possible during the remaining time of this call, we ask that you limit yourselves to one question and one follow-up. Chanel, if you will explain the process, we will get started.

[Operator Instructions] And your first question comes from the line of David Goldberg of UBS.

My first question, Richard, you talked about not having to use incentives, which I think is great that you guys are focusing on margin. But I want to get an idea, as we talk to other builders, public and private, it seems like they're certainly going [ph] to use more incentives as we move into April because volumes are underperforming. So I'm just trying to get an idea of what you think the competitive environment looks like outside of kind of Pulte communities, and how you're going to react if you are going to start seeing some more incentives in the market as we go forward.

Yes, David, good question. Couple of comments on that. First of all, regarding commodity cost pressures and incentives that may be factored into margin expectations, we factored that into our margin expectations for the year. So we're quite pleased with how margins are holding up, and as indicated, we're forecasting growth in the back half of the year from here. Relative to incentives, I think what you're seeing is really a mix issue for us. Clearly, our Pulte brand and our Del Webb brand are performing best. And I think some of the folks who've reported and a number of builders that have exposure to the first-time sector is probably causing some of the pressure that they're seeing. Having said that, I do think our land positions in certain areas, particularly as an example in Florida, give us a little advantage. As I tour the markets there, I think we're fairly well positioned. I've been spending a lot of time with our operators. We had all of our division presidents together last week, and the topic of incentives and pressure there is just not coming up.

Great. And then my follow-up question is kind of along those lines of the land and the competitive advantage from the land position. It seems to me -- at least from your comments, and tell me if I'm wrong, but it seems to me like the -- some of the land that you picked up in the Centex acquisition is probably a little bit more expensive than what's getting done in the distressed market right now and maybe what you're able to acquire, although maybe there's not that much of it. And what I'm trying to get an idea of, when you talk about land shortage, and as we look forward, how much do you think home prices have to go up before this legacy land that you have, and I know it's kind of a generality, but how much prices have to go up before your legacy land is suddenly giving you an advantage relatively to where people are buying land in the market today?

It's very tough to put a number on that. I think I might characterize it a couple of different ways, David. I mean, I think prices and the industry environment do have to get better, but it's not just a question of prices going up. It's a question of lots running out for many people. And with distressed opportunities effectively gone, there's still a few, as we mentioned, that we're continuing to do, what I think you're likely to see is us being able to hold serve, and frankly grow margins modestly from here, as we get a little better mix of spec or dirt homes -- excuse me, dirt sales versus spec, that type of thing. So I think our advantage could be even more near term than even we're implying because as others are forced to buy to keep community count going, we've seen some folks take impairments even on recently acquired deals as the markets stay challenging. So even though kind of you're characterizing it as though prices have to lift in order for legacy land to be a benefit, even at these margin levels, we think we can grow them modestly from here just because we have them, and they're going to stay in existence for another year or 2 or 3 whereas others are running out. So I hope that provides some commentary. I'm sorry I can't give you an exact number in terms of how far prices have to lift. But that's the best intelligence I have.

Your next question comes from the line of Josh Levin of Citi.

Richard, are you more optimistic today about the opportunities for gross margin expansion than you were, say, 3 or 6 months ago? Or is your level of optimism, is it sort of unchanged?

Much more optimistic, Josh. The work that we have had under way for approximately 9 to 12 months on improving our home cost is finally beginning to realize some benefits. We're also, frankly, doing, I think, a pretty reasonable job with specs, reducing them, and our percentage of dirt sales in the last 6 months we like, and that's got some margin benefit for us. So no, I'm more optimistic than I was.

Second question. How would you compare the availability of mortgage credit for your first-time homebuyers versus your move-up and your active adult customers?

I think it's challenged. It's tight. I don't see it having changed dramatically really in the last 6 months. I think the difference is our exposure to that segment is not as pronounced as maybe others. We analyze our quarter versus a year ago. We saw pretty much a direct shift from Centex into Del Webb if you look at the actual shift in the percentage of sign-ups that we have in the quarter. So I think that's probably why we're not feeling it as much. And clearly, as Roger indicated, with a 750 FICO score, our Pulte buyer, our Del Webb buyer, are very, very credit-healthy, and even our Centex buyer is pretty credit-healthy as well. We're just not selling as many of those homes. So I don't think it feels as great an impact. I don't know, Roger, if you have anything to add to that.

No, I think that's good.

Your next question comes from the line of Stephen East of Ticonderoga Securities.

Richard, if you look at just sort of what's going on with your SG&A, you did a great job explaining where your gross margins, how your gross margins are going to improve. If you look at the SG&A, how do you improve that? Is this really just a function that most of your costs are fixed and you need some operating leverage? Or do you have some more cost take-outs? Is it more variable?

Well, a couple of things, Stephen. First of all, the $100 million we said we'd get this year versus last year we're going to get, I think we did indicate that it would be tougher in the first half of the year given lower volumes to convert it on a leverage basis. But I know our actual costs came down approximately $20 million, and you'll see likely that run rate get better, particularly through the back half of the year as volumes grow, but I would not say that there's never more that we can do. We kind of indicated in our press release, it's kind of a combination of improving margins and lower SG&A that are helping our business. And candidly, that's one of the things that's helping our impairments. I know in your notes specifically you talked a little bit about impairments, and from our view the bigger gap that we drive between margins up and SG&A down, the less risk we have in impairments. So our view is that while we wouldn't expect 0 from here, we certainly think the risk is getting muted more and more each quarter as we improve the fundamentals.

Okay. And then just the other issues that I've got. One, your pricing strategy and trends and how you look at that moving forward. And then, Roger, if you could just sort of run through the charges that you did have, you -- a testament to your speaking fast, I couldn't get all of the different charges that you had in the different buckets.

Okay, I'll answer the first piece. On kind of pricing strategy and trends, it's really a tale of markets. I would say we've seen some modest pricing improvements in markets like the Mid-Atlantic and the Northeast. Other areas like Florida and the Southeast, it's been holding serve. And then we've had a couple of communities where we've had pressure, but in general, I'd say pricing has been pretty stable. Almost all of the margin improvement you've seen is coming from a combination of improved house costs that frankly haven't -- areas that have not added value for the consumer; and then a better mix of closings, Pulte and Del Webb versus Centex; and then thirdly, spec versus pre-sale. We're getting a little bit more benefit, particularly as we look at backlog from dirt sales versus specs. And then, Roger, on the other?

Yes, Stephen, just on the charges, we had impairment-related charges of about $100,000. That was in cost of sales. And the other category in Homebuilder was pretty accurate [ph] right of, sort of about $600,000. And also, we had about less than $300,000 in WIP [work in process] adjustment for the Centex brand. And then we had severance and lease termination-type expenses that cost about $3 million for the quarter. About $500,000 of that was in the mortgage company. And additionally, we had about $1.3 million in the revolver amortization fees that we had written off in the quarter as well. So roughly that's about $5 million.

Your next question comes from the line of Michael Rehaut of JPMorgan. Michael Rehaut - JP Morgan Chase & Co: First, I guess just a -- I have a bunch of questions, but I'm only limited to 2, so I'll have to get in the queue. But, Roger, when you mentioned profit in the back half of the year, is that -- and I know this might be parsing a little bit, but as analysts we have to ask, is that on a combined basis? Or do you expect it to be for each quarter?

Yes. We expect it to be in each quarter in the second half of the year. Michael Rehaut - JP Morgan Chase & Co: Okay. Great. And in terms of the comments with regards to the different segments, is it possible to kind of break out or give us a little better idea, for the Del Webb, you kind of said that move-up and active adult were stronger than first-time. Can you give us an idea, is Del Webb up for the quarter year-over-year on the adjusted basis as you compare it to the negative 9 for the overall?

Yes, Mike, this is Richard. So I'll give you some numbers if you can have a pen ready to jot this down. A little bit complicated because of rebranding in certain communities through the year, et cetera. But all in, here's how the numbers broke out. For Centex, for this quarter, 37% of our sales came from Centex; Pulte was 35%; and Del Webb was 28%. Okay. So 37% for Centex, 35% for Pulte and 28% for Del Webb. If you look at 2010, the comparable quarter had 43% Centex, 35% Pulte and 22% Del Webb. So when I made my comment earlier that the shift from Centex into Del Webb, that's effectively what the sign-ups broke out to be. So hopefully, that gives you a little sense. We are holding serve on our move-up buyer. Again, there's a lot of movement in these numbers with different things, but effectively we think Pulte and Del Webb are leading a little bit of the sign-up strength that we're seeing maybe relative to some of the group that is more dependent on that first-time category.

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

First question I wanted to ask was, I guess a question on perception. Roger, if we read the newspaper or if we talk to most investors out there, you would think that home prices are collapsing again, that absolutely no one can get a mortgage and that volumes are going to go nowhere for a very long period of time. And yet when we listen to your experience of what's been happening over the past few months, it's very different. I mean, you talked about relative pricing stability, you talked about the emergence of a slow but real improvement in demand, relative stability in being able to get a mortgage. So I was just wondering if you could give us your thoughts on reconciling those two. I mean, I know you're not saying that things are terrific out there. Things are still very challenging. But how is the disconnect at you see it?

Yes, Nishu, this is Roger. I think as we look around at different markets, it's also by the segments as well. Certainly, from the mortgage perspective, as Richard mentioned, there are challenges on the first-time buyer. Again, benefit is, from our perspective of having the move-up and the active adults who are -- got better credit from that standpoint, as Richard had mentioned earlier. So those type of things, certainly, have helped us from that perspective. I think also we're certainly not trying to compete with the foreclosures from that standpoint. We know they're out there, so we're not trying to drive pricing down. Again, we've been there in a number of years where we continue to do that and you just erode your business and certainly profitability from that standpoint. So those are the things we continue to focus on market-to-market. There are communities across the country that are challenged from competitive situations like that. We to try to position ourselves or reposition ourselves to be able to compete in that particular market or those markets with those communities. So we're not totally immune from it, but overall, again, generally, we have seen some positive results in the first quarter from that.

Nishu, this is Richard. I'll just add too. It's not lost on us that we've underperformed, particularly in the area of margin. So the benefits that we're seeing there, some might interpret, maybe appropriately so, as just catch-up to where we should have been, and we're working hard on that. So from our standpoint, it feels a hell of a lot better than it did. But we recognize that there's room to grow and just to get where we should be.

Got it. Okay. And second question I wanted to ask was, there were 2 metrics that I was just trying to reconcile with what the kind of qualitative statements you gave. The average sales price falling when you had talked about the shift from Centex into the higher-priced Del Webb and Pulte. And the other thing was the cancels falling despite the fact that you had changed the methodology. So I was just wondering if you could kind of reconcile those for us as well.

Yes. This is Roger, Nishu. I'd just tell you from the perspective of changing product from year-to-year, we've done a lot of that. So even though price mix has changed, it's not really price decrease. I mean, we're not discounting more and driving from that perspective, but certainly, we've changed product, which lowered price. We've decontented as the year has gone by. So that was the reason for more than -- of the decrease more than just you would see in a price reduction or more incentives and that type of thing. So it is more mix-related than pure action to reduce costs that would be negative on the margin side. This was things that we intentionally went towards, as Richard mentioned, in house costs and that type of thing, and some of those were reductions in price as well, but not price to the margin line.

And, Nishu, to give you an example, our Active Adult business in Florida and in some of our other sunbelt markets, we introduced some more affordable product lines. So while the ASPs may have gone down, say, $20,000, the brand strength and the trend was still pretty good, and that buyer was willing to pay us without threat of discounts there. On the cancel piece, Mike?

Yes. I think on the cancellations, a couple of things you need to think about, as we talked about, with the shift and more relative basis to the Del Webb side, our cancellation rates on Del Webb are lower than in the Pulte and Centex buyer. So as you get a greater proportion of that buyer this quarter versus last year, you're going to have an improvement in can rates from that. Plus you had a lower backlog coming into the year this year, so that ought to help in some respects as well.

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

First question. Just wanted to get your thoughts on some of the comments you were making around the first-time buyer and the move-up market. Realizing for you guys there's some rebranding going on, and maybe it's not representative of the market, but if you're seeing for the market that the first-time buyer is weak and the move-up market is strong, typically, that's not a dynamic that can hold. And you need the entry level to be healthy for the move-up market. So is that just a reflection of speaking about it on a year-over-year basis where the tax credit would helped the entry-level buyer more last year? Or are you seeing something different on a sequential basis where the move-up buyer is coming back? And if that's the case, how do you kind of reconcile that if they're having trouble selling their homes to move-up buyers?

Yes, Dennis, I think it's just a reflection of versus last year and the strength we saw in entry level. We're not seeing any particularly pronounced weakness in the entry level. It's just that we've gotten quite a few questions of late about particularly after we introduced our first 2-month sign-ups about "outperformance." I think it's just relative to how our position is -- our business, excuse me, is positioned with our mix versus the inflated entry-level business from last year that we saw. So it's not a comment really on any weakness elsewhere.

Okay. That helps. And then the second part of it just with the data that you've given us on the monthly orders is very helpful to kind of see that progression through the quarter. I was wondering if you could give 2 other data points that would kind of close that loop. One would be where December orders were, so we can kind of see the progression into January. And then the second, anything that you can help us with on April, and maybe either put March or April in perspective on a year-over-year basis so we can kind of see where comps are kind of trending.

Yes, Dennis, I don't think any of us brought the December data. Perhaps we could help you with that later if we have that time. But with regard to April, the month's still in process, and we're not going to really provide any specific detail other than to say we're pleased with how things are developing in April. Right now, the numbers are running slightly below March's numbers, but that's consistent with our expectations. Year-over-year, March is typically the strongest month that we see, and so we're pleased with how April's holding up.

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

You outlined 300 to 500 basis points of gross margin expansion over the next number of years, ultimately playing catch-up to where you guys lost some market share on gross margin. Can you quantify what the opportunity is for this year given your increased optimism in this area?

Josh, we're not giving details on that. I can tell you it's not 300 to 500 basis points this year. We certainly see some margin expansion in backlog, and particularly in Q3 and 4, as we look out coming from a better proportion of dirt sales versus specs that'll be closing then. But we're going to -- we're not going to provide specifics on that, just to tell you that at this point, our expectations is for growth from here.

Understood. My second question is on your SG&A progression. You started the year off at 135, expecting the year to be closer to 500. Should we expect ultimately that the back half of the year to average something below 125 even in the face of revenue picking up sequentially?

Yes.

Yes. Go ahead, Roger. Sorry.

Josh, if you recall, in the last quarter we said, again, it would be candid [ph] from the standpoint of higher in the first quarter and then trailing off through the fourth quarter. So definitely that's what we'll have, is a progression like that as we go through the year quarter-by-quarter, is seeing a higher amount and then going to a lower amount. And again, we used an average of just 125 to set the total amount that we had talked about.

Your next question comes from the line of Dan Oppenheim of Crédit Suisse. Daniel Oppenheim - Crédit Suisse AG: I was wondering, you talked about the mix shift to more, for the Pulte and Del Webb business this year than last in helping margins. How different would you say the margins are on those businesses? And can you talk a bit more in terms of the cost, where you talked about sort of taking out costs where people weren't paying for it? Is that help coming mostly in the Centex side of the business, so there's more to come on that? If you can you just talk a little bit more on that, it would be great.

Yes, Dan, this is Roger. I'll start. First, in the gross margins for our current quarter, the Centex was roughly about 15% in gross margins. The Pulte was about 17%, and Del Webb is roughly about 18%. So and again, each one of those moves around quarter-by-quarter based on the number of mix, the geographies that the homes that are closed in, but those have been in the relative pattern in the last 2, 3 quarters that we've seen. But again, as we've talked about increases, as Richard mentioned, a lot of the activity is going on in all of the areas, so it's on the construction side. And so we expect to see margin improvements coming from each one of the segments, not particularly one over another at this point from what we're doing.

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

First question is on gross margins. Sort of 2-part question. I know you're not going to give specifics around what you think the benefit from construction cost efficiencies would be for the balance of the year, but maybe can you help ring fence what the year-over-year benefit was from cost efficiencies in the first quarter? And then separately, on just looking at land, and Richard, your comments about opportunities in the distressed market. I think you talked about a 300 basis point spread between newer land and legacy land. Is that narrowing at all? Or should we still assume about a 300 basis point spread?

Okay, Jonathan, on the first piece, it's very difficult to parcel out exactly to the nickel where the margin benefit is coming from. I would say that it's fairly equivalent between the house cost moves that were non-value added, that we're taking out across the business, along with a little better discipline on specs versus pre-sales. We know pre-sales have a higher margin, and we'd like to continue to accelerate that. And then a little better mix. As Roger indicated, the mix is helping us. With regard to the land side, we still feel that 300 basis points on distressed land is, relative to existing land, is there. Most of the benefit from that for us will be later in the year, as we get more and more of those communities opened and we get higher toward that run rate of approximately 15% of closings for the year. The only caveat there, as we tried to point out in the script, is that those deals are running out. So we're continuing to emphasize our legacy positions in getting better and better business results out of those because we know we can't just live off those distressed assets forever.

That's helpful. And then my second question is just you talked a little bit about community traffic, and we, you obviously give us the data on order progression. Can you help us understand if there was any change in conversion rates through the quarter from January through March? And then secondly, just as we think about going forward, based on your comments on spec sales versus dirt, should we expect to see the backlog conversion rate come down to be more consistent with where it's been historically?

Yes, this is Roger. I think from the conversion standpoint, the backlog certainly would be -- the level of the backlogs, we're trying to turn that as fast as possible. Certainly, that helps inventory turns and that type of thing. So that's been our focus. As far as the spread on the spec and the dirt, as Richard mentioned, pushing more to the dirt side because the margins are anywhere between 300 to 600 basis points better across the system from that perspective. So again, I think you'd see conversions that may be relatively where they are. At some point if the buying continues to grow there, again, I think you'd see that come back down to normal, but I wouldn't expect that in the short run here.

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

Just to get a little bit more clarity on your SG&A for the full year. You're definitely kind of committed to coming in around the $500 million mark, just scaling lower sequentially in each quarter. Is that correct?

Yes, Bob, it is.

Okay. Great. And I'm just trying to understand. It sounds like some of the gross margin benefit you have is from the distressed land you've already acquired, but it sounds like that's starting to run out as you monetize your backlog. Is there a percentage of lots that you could tell us that has that higher or more attractive gross margin in your inventory?

Yes, Bob, this is Richard. I'll take the first part of that. Your characterization's not exactly right. We do expect the better gross margins from distressed land to have a bigger impact later in the year than this year. When I say "we're running out," what I mean is we're running out of new opportunities, which would likely be conversions into closing, say, in 2012 or beyond. And the point we're trying to make there is you can't just live off the distressed land forever. Clearly, it's been a bigger source of some of our competitors' earnings than ours has been. We'll be catching up a little bit this year with approximately 15% from that. But it's going to be accelerating through the year. And my point is that we don't think we can live on that forever. So the margin benefit that we're seeing right now is a combination of really 3 things: Improved house cost, improved mix between dirt and spec, and then improvement expected from distressed land deals as they close later in the year. And it's probably in that order right now in terms of what we see.

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

Can you help me, just so we have a little bit better chance of trying to get the orders better in my model, can you help tell us what the impact from the change and how you classified orders last year was on the second, third and fourth quarter, if there was any in the fourth?

Yes, there won't be any impact for second and third quarter. And as we discussed, in the fourth quarter, there was a 200-unit impact in the fourth quarter of 2010.

200 unit in the fourth quarter. There's nothing in the second or third because your...

That's correct. It will be comparable in second and third quarter.

Okay. So it's just in the first and the fourth quarter of 2010?

Correct. And they go the opposite way, if you recall, 450 in the first quarter going the one way and then 200 going the opposite way in the fourth quarter.

And then two other quick questions, if I may. One, what was your owned versus option lot control? And then can you clarify, when you talked about gross margin improvement through the year, is that -- if you include your interest, is that still -- would you still think gross margins are going to grow through the year?

The owned lots is 129.5 -- 129,500, and our options are 14,800.

Yes, Adam, and then on the gross margins, what we had talked about was that, no, overall, that we saw margins being slightly down in 2011 versus '10 if we include the interest, as we had talked about that. The amortized interest expense coming through would be higher in '11 than it was in '10. So that was going to drive the margins slightly below where we were in 2010.

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

I wanted to find out a little bit. We track the community counts for each builder each quarter, and we've kind of seen a progression where Centex communities seem to be dropping pretty significantly both this quarter and since the time of your acquisition we estimate at least 30% drop. And I'm just kind of wondering if you guys are just behind on finding new deals to refill that brand type? Or is it more strategic than that?

Yes, Alex, this is Roger. Specifically, when we talked last quarter about seeing our community counts drop between 5% and 10% for 2011, that was a big driver, was the close-outs of the Centex brand. Now we're certainly working on that, but they're harder and harder to find for the Centex brand than the first-time buyer with the underwriting criteria that we're looking for in those. So it's somewhat more market-driven today, our inability to find those. We're finding more certainly on the move-up side that pencil better than the ones in the first-time side, it's not from our lack of effort or abandonment of the brand itself. So we continue to push it back, but just conditions today given underwriting criteria, doesn't give us the opportunity to grow it as much as we'd like.

Yes, Alex, this is Richard. I'll just add to that. We want to be smart about where we place our investment, so it's really a combination of a number of transactions at acquisition time that had very few lots left, which has kind of been the primary driver combined with trying to make sure we make the best investment decisions going forward. We certainly are working hard on our internal business model to make sure we're affordable as we can possibly be to serve that buyer category, but the land market has to give us some help there as well. And we certainly want to make sure that we make good investments.

My second question has to do with your gross margins this quarter. It's kind of a 2-part question. One is how come the interest expense isn't a little bit closer to the interest incurred? And second, why are we not seeing a little bit more impairments since your gross margins are in the low double-digit range?

Again, Alex, this is Roger. When you look at the interest incurred versus the interest expensed, again, we amortize the interest expense based on the life of the communities. So again, that's no different than we've always done it. The buildup there was because of the way the purchase accounting worked for Centex and the debt that we brought on, how that built up and how it comes off. So again, I think we've explained that a number of quarters as we look at that, and you're always going to have that slight difference until a period of time probably that we normal out with the amortization of the Centex portion got that added on.

And with regard to impairments, Alex, a couple of things. We've used the same methodology all along for impairments, so that hasn't changed. So the same criteria is yielding that result. The second thing is even though our margins are low, I kind of spoke to this earlier, they have improved fairly dramatically over the past 12 months, something like a 35% or 40% improvement, and we have expectations for when they get better. So even though they're low, as they get better and better, in our view, the risk gets lower and lower, and that's what the models show. But I want to make sure you understand, we're using the same exact criteria we've always used for impairments. But just because our margins are low, you got to take that into account relative to where they have been. So the impairments mathematically should be coming down based on SG&A improving and margins improving.

Your next question comes from the line of Mike Widner of Stifel, Nicolaus. Michael Widner - Stifel, Nicolaus & Co., Inc.: Here's the first one. Just wanted to get some more color on your views on the seasonal pattern that you've seen. And so basically, what you described is about a 13% increase in orders from February into March, and you described that as sort of encouraging. If I look back at normal seasonal patterns, I mean, that actually looks a little light to what we'd see. If I look at broad industry data over a long period of years, we'd expect something more probably in the 15% to 17% range. And so I'm just wondering if you can comment on seasonally adjusted, I mean, are the patterns really encouraging? Or is it kind of flattish?

Mike, I think your point's a good one. You got to appreciate everything is so ultrasensitive relative to last year's tax credit. And frankly, I don't think we or anybody else in the industry knew what to expect from demand. So what's encouraging is that demand is, relatively speaking, holding up. There's nothing artificial driving demand this year. The stock market's at 12,000. That's helping the portfolio of dollars that our active-adult buyers look at. They're concerned about having enough of an nest egg. So even though they can't sell their home for what they wanted, our home is still a value, but their nest egg is better. So they're feeling better. The move-up buyer, again, that has money in the market's feeling a little bit better. Jobs are slowly but surely being added, very slowly across the economy. All of that just leads us to believe that demand, while it's not great to your point, it's holding up reasonably well. And given last year's pull-forward and then pullback tax credit, pull-up and then the letdown, we're encouraged by the fact that it's rolling out a little bit more normally. Whether it's up 2 or 3 points versus seasonal trends up and down, you're right, we're not trying to say that March is just a blowout and April's a blowout. We're trying to say that it feels a little more like a normal year, admittedly a very low level year, but seasonality, I wouldn't be surprised if it holds up according to much more normal patterns this year versus something we saw last year, which is clearly driven by the tax credit. Michael Widner - Stifel, Nicolaus & Co., Inc.: And just one quick follow-up I guess really on the last question. Just speaking really big picture here, and I don't want get into precise numbers, but you talked about sort of the benefits of a long land supply and potentially a land squeeze down the road, and I know there was a lot of questions about sort of the interest expense. But If I run some really rough number, I mean, you guys pay roughly 6% give or take on your average senior debt, and if I look at your overall senior debt relative to your pure landholdings once I back out inventory and process and all that sort of stuff. I mean, they're sitting at roughly equal levels in the $3.5 billion, $3.8 billion range or thereabouts. So I mean, just conceptually, I guess one easy way to think about it is the effect of carrying costs if your guys holding land, is about 6% a year. And so if there's a big benefit here to having a large land supply and avoiding the land squeeze down the road, seems like the minimum threshold is we need to see land prices appreciate by 6% a year just for you guys to kind of break even on those large landholdings. So again, just very conceptual level, I mean, can you tell me how you feel about that? And is that a reasonable way to think about the issue?

I don't think it's a bad way to think about it. What I think, though, you need to appreciate is the ability to have land to actually convert into margin dollars and ultimately into profitability versus the inability to have it. And what we get concerned about is not forcing the investment criteria right now in a very weak time into deals that don't make sense. And so I don't think anyone's here is portraying that our land has got enormous value for 2011 in terms of incredible margins. What we're saying is that likely the industry is going to have a very slow and steady recovery and that land will have more and more value over time. It's a lot less clear exactly what's going to happen on the land pricing front in the near term other than to say that it's going to go up. Very little land is transacting, and banks are under no pressure, and we and our competitors talk to folks all the time, and a lot of people are just holding their dirt with the expectation of selling it for 15%, 20%, 30% more at some point in the future. So we're just trying to make that point. I don't know, Roger, do you want to add anything to that?

No, I -- that was good.

Your next question comes from the line of Joel Walker of FBN Securities.

Just wanted to see if you had mentioned community count, or what it ended the quarter at.

We ended at 800, and then we said that was up from 786 in Q4 and down from 842, same quarter last year.

And did you have a breakdown between Centex, Del Webb and Pulte?

Yes, about 38% of those are at Pulte, 40% are Centex and 22% Del Webb.

Your next question comes from the line of Jay McCanless of Guggenheim.

Richard, just wanted to take your land commentary a step further about potential for reduced lots going forward. If you look at it by the different segments for your business, can you take that comment down to the segment level and give us an idea of which segments would be less affected or more affected?

Well, I can't give you specifics, but anecdotally our Del Webb positions, we have a long life in them. We can enjoy, I would estimate, 4 or 5 years' worth of growth in those segments before we had to reload, probably next on the Pulte and Centex side. But I'd say Del Webb could be the outperformer there. The typical Pulte community and Centex community are not that different in terms of their average life. They typically are smaller. So I just -- I think the main thing I'd say is that we've got many years' worth of runway with Del Webb inventory.

Your next question comes from the line of Jack Micenko of SIG.

Thanks for taking the question. Most have been asked and answered. But is it -- would it be fair to assume that the Del Webb community mix increases through this year and next year from a community count perspective? And then I have a follow-up.

Jack, I wouldn't go there on community count. The Del Webb communities are very large typically, and I think we've added one or 2 this year already, and we may add one or 2 more, but from a percentage change, it'll probably be the least volatile of our segments. Again, one of the reasons community count particularly for PulteGroup is difficult is the Del Webb communities are so different from the others in terms of their average life, so the community count is not going to be a big driver of our Del Webb performance going -- for the next couple of years.

Okay. Great. And then on the mortgage put-back issue, any update quarter-to-quarter on rescission rates, Fannie-Freddie activity, vintage loans coming out of individual vintages, any color there from a -- just from a sort of sequential trend line?

Yes, this is Roger. I would say no. We're pretty much seeing consistency, other than we saw a little bit higher amount in March. But again, as we've talked about, we're going to see volatility from month-to-month based on what actually comes out of the different investors. But nothing unusual that we hadn't seen in the last couple of quarters.

Your final question comes from the line of Michael Smith, JMP Securities.

Most of my questions have been answered too, but I just had a quick question for you, Richard. You talked some about the sort of scarcity of land out there. Could you talk regionally and specific markets, whatever color you can give us, just on what markets are the toughest to find quality-lot potential for you guys and which ones are a little bit easier and if there's any regional or metro differentiation there?