PulteGroup, Inc. (PHM) Q1 2012 Earnings Report, Transcript and Summary

James P. Zeumer - Vice President of Investor Relations Richard J. Dugas - Chairman, Chief Executive Officer, President and Member of Finance & Investment Committee Robert T. O'shaughnessy - Chief Financial Officer and Executive Vice President Michael J. Schweninger - Principal Accounting Officer, Vice President and Controller

David Goldberg - UBS Investment Bank, Research Division Dennis McGill - Zelman & Associates, Research Division Stephen Kim - Barclays Capital, Research Division Michael Rehaut - JP Morgan Chase & Co, Research Division Daniel Oppenheim - Crédit Suisse AG, Research Division Joshua Pollard - Goldman Sachs Group Inc., Research Division Stephen F. East - ISI Group Inc., Research Division Nishu Sood - Deutsche Bank AG, Research Division Adam Rudiger - Wells Fargo Securities, LLC, Research Division Joel Locker - FBN Securities, Inc., Research Division Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division Alex Barrón - Housing Research Center, LLC James McCanless - Guggenheim Securities, LLC, Research Division Susan Berliner - JP Morgan Chase & Co, Research Division Jack Micenko - Susquehanna Financial Group, LLLP, Research Division

Good day, ladies and gentlemen, and welcome to the Q1 2012 PulteGroup Earnings Conference Call. My name is Catherine, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Jim Zeumer, Vice President of Investor Relations and Corporate Communications. Please proceed, sir.

Okay. Thank you, operator, and good morning to everyone. I want to thank everyone for participating in today's call to discuss PulteGroup's 2012 first quarter financial results. On the call today are Richard Dugas, Chairman, President and CEO; Bob O'shaughnessy, Executive Vice President and CFO; Mike Schweninger, Vice President and Controller. Before we begin, copies of this morning's press release and the presentation slide that accompanies today's call have been posted on our corporate website at www.pultegroupinc.com. Further, an audio replay of today's call will also be available on the site later today. Please note that any non-GAAP financial measures discussed on the call, including references to gross margins reflecting certain adjustments, is reconciled to the U.S. GAAP equivalent as part of the press release and as an appendix to this 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 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. I'm very pleased to discuss PulteGroup's first quarter results, which demonstrate a continuation of the positive operating trends we have been experiencing for a number of quarters. Consistent with other signs of an overall improving demand environment for new homes, PulteGroup's first quarter sign-ups grew to just under 5,000 homes as we realized the 15% increase in year-over-year volume generated from 6% fewer communities. Lowering our community count is among the actions we are taking to help rightsize our balance sheet as we focus on improving our long-term returns on invested capital. You've heard us say on more than one occasion that U.S. housing demand has been relatively stable for the past couple of years, albeit at reduced levels, barely above 300,000 new home sales annually. Conditions remain challenging, but in Q1 2012, it was the first quarter in several years that fundamental demand came in stronger than expected, allowing us to handily beat our internal forecast for the period. It is important to remember that any improvement in activity is off an extremely low starting point. Nevertheless, we are very pleased with how the year has started off, including a continuation of better sales activity thus far in April. So with the understanding that we are still early in the year, there does seem to be a positive change in buyer interest and willingness to sign a sales contract. I don't think it's any single factor but the gradual buildup of multiple conditions that are finally pushing buyers past the tipping point. First, new home prices and mortgage rates being at or close to historically low levels is not new. These factors, combined with ever more expensive rental rates, however, are beginning to tip the scale toward homeownership being a compelling choice versus rental. The cost of ownership figures are persuasive enough that current renters really have to consider their options carefully when the lease is ending and a new lease agreement carries another 5%-plus increase in the monthly rates. Second, for the first time in a while, potential buyers seem to have a greater sense of urgency as they face limited supplies and, in select situations, higher prices. Said another way, potential buyers are experiencing an increasing fear of loss that a home not purchased today may not be there tomorrow, or if it is, the price could be higher. Nowhere is this more evident than in Phoenix, where monthly supply of new and resale inventory has dropped dramatically in the past 18 to 24 months. This inventory reduction is leading to stronger new home sales results and the beginnings of pricing improvement in a market that, just 18 months ago, is oversupplied. Third, while foreclosed or other distressed inventory is certainly still a factor in the market, every day, it gets a little older and a little more rundown. With investors often snapping up the best units available, traditional homebuyers are likely seeing the remaining units as less of a compelling alternative. And finally, although they're still a very small percentage of overall demand, we are starting to see individuals who struggled with foreclosure or bankruptcy much earlier in the downturn that can now be considered for a mortgage. Anecdotal comments from our salespeople suggest that the desire for homeownership remains extremely high with these individuals. It has to be noted that there have been prior years that started strong, but the uptick in demand didn't last more than a few months. What is different about our Q1 gains is that they appear more sustainable and more broad-based in terms of the number of communities and markets seeing better traffic and sales. Also, while we continue to modestly shift our business mix toward the move-up buyer, to different degrees, we are seeing better or at least stable conditions across all buyer groups, first time move-up and active adult. Only time will tell if the stronger demand in Q1 is truly the start of a cyclical upturn in U.S. housing, but we are encouraged by the overall volume of traffic, along with the actions and comments from the potential buyers visiting our communities. Our Q1 results demonstrate that when the market improves, we will get our fair share. And while we will be cautiously optimistic about macro demand going forward, we remain heads down and focused on further advancing the operational gains we have been capturing for a number of quarters. Consistent with this focus, for the quarter, we reported an adjusted gross margin of 18.7%, which is 180 basis points higher than the prior year. This is the fifth quarter in a row of sequential gains in adjusted gross margin and a continuation of trends we have been experiencing for several years. Margin growth in the quarter was helped by ongoing shifts in community and product mix. For the quarter, deliveries under the Pulte Homes brand increased by approximately 6 percentage points to 39% of total closings. Allocation of recent investment dollars back into the business suggests this relative re-weighting will continue for the foreseeable future as we are finding more projects offering better margins and return opportunities within this move-up buyer group. Beyond benefiting from planned changes in our product mix, as we discussed on our Q4 conference call, look for us to drive additional margin gains in future quarters from initiatives underway to lower house construction cost and improve our revenue line through better pricing initiatives on options and lot premiums. Just last week, we met with our area and division presidents and discussed the great progress we are making on these initiatives, including the development of a new, more affordable product series specifically designed for our Centex brand. As we move through the coming quarters and the number of closings from houses that have been reengineered, re-contented, re-costed and repriced increases, we expect that our margins will be further enhanced. Building on top of the gross margin gains in the quarter was a reduction in total SG&A spending of approximately $19 million, which reflects actions we took last year to more effectively match overheads to the current operating environment. On a year-over-year basis, the 180 basis point expansion of our adjusted gross margins and 300 basis point reduction in SG&A expense as a percent of home sale revenues drove a dramatic improvement in our incremental profitability. By focusing on driving greater operational efficiencies, we continue to put the company in the position to be profitable in 2012 and successful in the future, whether year-over-year housing demand continues to get stronger or not. Overall, we are pleased with the demand environment in the quarter and carrying through into April and even more excited about the progress we are making in repositioning PulteGroup's business and operating capabilities. Now let me turn the call over to Bob to provide more details on PulteGroup's first quarter results. Bob?

Thank you, Richard. As Richard said, we've gotten off to a good start in 2012, and there are certainly reasons to be optimistic about the year ahead as our operational initiatives continue to gain traction and we seek to drive additional improvement in our financial performance. Our first quarter results reflect continued benefit from actions we have taken to expand margins, increase our overhead leverage and improve our inventory turns through more efficient allocation of our capital. For the quarter, home sale revenues were $814 million, an increase of 4% compared with last year. The increase in our revenues was driven by a 5% increase in our average selling price to $261,000, partially offset by a 1% decrease in closings to 3,117 homes. Breaking down the mix of our closings this quarter, 35% were from Centex, 39% from Pulte and 26% from Del Webb. In the prior year, the mix was 38% Centex, 33% Pulte and 29% Del Webb. The increase in our average selling price reflects a continued shift in our product mix as we delivered more Pulte Homes, which carry a higher price relative to our Centex brand. As noted on Slide 7 of our webcast material, our adjusted gross margin for the first quarter was 18.7%, an improvement of 180 basis points over the first quarter of last year and of 10 basis point over the fourth quarter of 2011. Our increased margin reflects the higher mix of move-up homes, improvement related to our strategy to deemphasize spec inventory, as well as improved margin performance from newer communities. Land charges during the quarter were minimal, including just under $5 million of impairments on existing communities, $700,000 of pre-acquisition costs on assets we have elected not to pursue and $600,000 of NRV charges on properties we have approved for sale. Looking at our overhead, SG&A for the quarter was $123 million or 15.2% of home sale revenues. This is down $19 million from $142 million or 18.2% of revenues last year. Our lower overheads reflect the actions we took in the second quarter of last year. Based on our current projections, we expect the full year overhead to be in the range of $485 million to $495 million compared with $520 million in 2011. In the quarter, we continued to selectively sell certain land positions as we look to allocate more capital more effectively within our operation. During the quarter, we sold approximately $38 million of land assets, which resulted in $6 million of pretax income. We also approved the sale of certain additional parcels, which drove the $600,000 of NRV adjustments I mentioned a moment ago. For the quarter, our Financial Services operations generated $7 million of pretax income compared with $1 million in the prior year. The increase was driven by an 8% increase in our loan origination volumes as well as higher revenues per loan. In total, we originated 2,021 loans in the first quarter. Our capture rate for the quarter was 78% compared with 76% for the same quarter last year. As you can see on Slide 11 of our webcast material, repurchase requests in the quarter were consistent with the fourth quarter, which is consistent with the volumes we assumed in our reserve estimates. In summary, PulteGroup's reported net loss for the quarter was $12 million or $0.03 per share, which includes the following items: aggregate land-related charges of approximately $6 million, of which $4 million is recorded in home sale cost of revenues, $1 million is in land sale cost of sales and $1 million is in other income and expenses; we also had $6 million of land sale gains recorded in land sales. Turning to our balance sheet, we ended the quarter with $1.3 billion of cash, which is up $117 million from the fourth quarter of 2011. Our improved cash position resulted from a number of factors, including the routine return of working capital from our mortgage operations, reduced land spend for acquisitions and development, the sale of land assets and a reduction in level of our spec home inventory. Notably, we reduced our total spec units under production from the end of 2011 by 800 homes to approximately 2,000 houses and importantly, reduced our finished spec inventory by 30% to 1,039 homes. In addition to freeing up cash, limited spec production allows our communities to sell from a stronger market position, which, we believe, will support margin growth going forward. The company did not repurchase any debt during the quarter. In other Q1 activity, we generated 4,991 sign-ups in the period and ended the quarter with 753 active communities. This represents a 15% increase over the sign-ups we reported in Q1 last year. It's important to note that our sign-ups were generated from 47, or 6%, fewer communities than last year. As of March 31, we had homes in backlog valued at $1.6 billion. On a year-over-year basis, this represents a unit increase of 12% and in dollar terms, a gain of 16%. During the quarter, we opened approximately 41 new communities. We also put an incremental 1,600 lots under control. Consistent with our goal of driving better long-term returns, we remain judicious with our capital investments and are focused on identifying projects capable of generating acceptable risk-adjusted returns. A few final data points. We ended the first quarter with just shy of 5,500 homes under construction. Given the reduction in spec inventory I discussed earlier, the split between sold and spec is about 60% sold and 40% spec. Overall, we are very pleased with the results for the quarter and how our operations are positioned for the second quarter and the remainder of the year. Now let me turn the call back to Richard.

Thanks, Bob. Before opening the call to questions, we wanted to provide some additional details on the market conditions we experienced during the first quarter. In the Eastern third of the country, we experienced better demand in our New England markets as we introduced several new communities into the greater Metro Boston area. Demand for our communities in the Washington D.C. and Northern Virginia area continued to be strong as we benefited from a number of well-placed communities. Moving further South, demand was improved across most of our markets, with the most notable improvement in the Coastal Carolinas and South Florida. In the middle third of the country, we saw a modest pickup in business develop in Midwest, although overall market conditions remain challenging. But one clear exception is Michigan, which is being positively impacted by a resurgence in the Detroit-based auto industry. After a slower start in January, business in Texas picked up nicely in the quarter, led by strong demand in Dallas. Out West, demand was improved pretty much across the board. As various Wall Street research reports have detailed and consistent with my earlier comments, Phoenix continued to rebound strongly as excess inventories have been worked down, which is supporting better demand for new homes. This is particularly encouraging given our large investment in that market. Beyond Arizona, we experienced sign-up growth in California, Nevada and the Pacific Northwest. Consistent with comments at the beginning of this call, we were pleased with the demand conditions we experienced in Q1 as they exceeded last year and our forecast headed into 2012. We won't provide any details on Q2 other than to reiterate that the first few weeks of April have seen a continuation of the improved demand we experienced in Q1. At the end of the fourth quarter earnings call, I said there were reasons to be optimistic about medium and long-term demand but that it would be interesting to see how 2012 developed. Given the additional data points we have thus far this year, we are cautiously upbeat about current market conditions. That said, regardless of how macro demand plays out from here, we are bullish about the operational gains PulteGroup continues to make and the opportunities for further improvements ahead. Simply put, we are running a better business than we were a few years back and are encouraged by the progress already realized and yet to come in 2012 and beyond. [indiscernible] to thank the men and women of PulteGroup who have worked so hard to put this company on a positive path we now find ourselves. Now let me turn the call back to Jim Zeumer. Jim?

Thank you, Richard. At this time, we'll open the call for questions. [Operator Instructions] Operator, if you'll explain the process, we'll get started.

[Operator Instructions] Please stand by for your first question, which comes from the line of Mr. David Goldberg from UBS.

My first question, Richard, you spent time talking about the efforts you guys are making on the cost and the efficiency side, which, I think, is great. What I'm trying to get an idea is if we're in an improving market and we're starting to see more players coming back into the market at some point and the competitive environment remaining very challenging, what do you do to codify the changes that you make so as you introduce new product, as you go back to growth, you don't fall into the trap of getting -- I'm going to use the word sloppy. It's probably not the right word, but you don't lose the discipline that you've worked so hard to put in place now.

David, great question. I think the first part to that answer has to do with the fact that we are not emphasizing growth as much as we are improvement in margins, SG&A and turns. Around the company, for the past 12 to 18 months, that's been the mantra, so we are purposely kind of out-sizing our focus there. Secondly, I'll tell you through a deep dive analysis that we've done, we realized that there's a lot of opportunity in the operational area, and we've got a good fact base around how to improve it, and that's widespread understood throughout the company today. So I think for us going forward, it's going to be more about continuing to emphasize that versus chasing units for unit's sake, and I think you'll continue to see that reflected in our results. And as we indicated, we expect further operational gains from here based on what we can see in backlog.

Can we make the inference that if you're not chasing growth as much, that almost -- it means you're going to be more shareholder-friendly when it comes to cash as conditions start to get better?

Well, I'll offer a couple of comments, and then Bob can comment as well. Clearly, there is a shift in focus for us the past 12 to 18 months to return on invested capital being the metric that we are attempting to drive higher. That means that we are being more judicious with land allocation. We're doing our best to work down some of the outsized land positions where we don't need that because it's dragging returns. And I think we've demonstrated over the past year that debt reduction is important to us. So whether you call that shareholder-friendly or not, I would, overall, but with that, I guess I'll offer it to Bob to comment, too.

I agree with everything Richard said. The cash generation will, in the near term, be used for debt reduction. I think when you get through that, you have to think about what the market looks like, what level of activity is out there because as we've talked about before, to the extent that there is an actual increase beyond today's relatively low levels of homebuilding, we're going to have to invest money in both land and house. So we'll have to weigh those against the capital structure because I presume you're asking about dividends and stock repurchases. So we would consider all those, but we have to look at what the needs for the business are.

David I think if I could just offer one other final comment. I think in the past, we would have been rightly characterized as land-heavy. We want to be much more balanced going forward.

It comes from the line of Mr. Dennis McGill, Zelman & Associates. Dennis McGill - Zelman & Associates, Research Division: Richard, I think in the third quarter was probably the first time that you had called out Phoenix for your own operations. And I think at the time, you kind of talked about some of the tightening of inventory, and it seemed to maybe just be a onetime event to many at the time, but we've seen acceleration since then. So I'm just kind of curious, from your perspective, do you think Phoenix is the anomaly today or a leading indicator for other markets?

I would indicate a slightly leading indicator. The biggest driver of what's happening in Phoenix, Dennis, which is somewhat amazing, is reduced inventory. Inventory levels in that market, as we indicated a year ago, were still high, headed down. Today, I would say they're abnormally low. Investors have clearly bought a tremendous amount of property and are renting them out, which is providing our buyers limited choice. I think you are going to continue to see that in other markets as well. I saw a report that Denver is experiencing the same kind of thing as a couple of other markets. So I do think Phoenix is ahead of the curve in that regard, but by no means, in my opinion, is it the only market that you're likely to see that. Dennis McGill - Zelman & Associates, Research Division: Okay. And then just more big picture across the footprint. You talked a little bit about where your homes under construction sit between spec and sold. Is there a way to quantify within the quarter on the order side what the split would be between to-be-builts and spec and then just generally, your sense of the willingness of consumers to purchase the yet to be built and take that forward view on the market?

So I'll answer the second piece and then turn it over to Bob or Mike for maybe a more detail on the quarter. We are not seeing a difference -- well, we're not seeing a preference for buyers to buy spec, if you will. We are seeing a significant willingness for buyers to go to the pre-sale market. I guess what I'm trying to say here, Dennis, is I don't think we're costing ourselves any sales by focusing this way. What's really nice about the efforts to reduce finished spec is that it's enhancing our margin opportunities. So not only is it working to generate cash, which is one of our key drivers in the company, it's also enhancing our margins. And I would say that the results you see in Q1 are still from a relatively spec-heavy environment, and that is headed lower from here. So with that, I don't know, Bob, if you have any details.

Yes, Dennis, I would suggest it's about 60-40 dirt [ph]versus spec. You have to remember for attached product, we're often going to build the building. We'll start the building before we've sold all the units. So as Richard said, the goal is to become less reliant on spec, but I think you'll always see it as part of the business model, particularly in certain markets with attached.

The next question comes from the line of Stephen Kim from Barclays.

I guess I wanted to ask you about price increases. I recognize that this is a somewhat contentious issue for some builders, and I recognize that the market is still tough. But particularly, when we visited your communities down in Phoenix and when we visited communities out in Denver, we've been very impressed to see builders being pretty good about trying to put through price increases. One of the builders that reported today actually called that out in their release. You didn't mention it, but I was curious if you could give some commentary on what you're able to achieve in terms of price increases across the country.

Yes, Steve, we are attempting to push price in a number of markets around the country. I don't want to get ahead of ourselves to say that it's widespread yet, but the beginnings of it are here. We are facing some resistance with appraisals in a couple of markets, but clearly, there's been a pickup in, say, the last 3 or 4 months in terms of our ability to get price in some communities around the country vis-a-vis where we were 3 or 4 months ago. So we're cautiously optimistic. I'll also point out that in our case, particular, we're focused on premiums, options, reduced incentives, all of the above, to drive margin. And candidly, it's working for us. We can see it in our backlog. So we feel good about that, but in terms of just base price increases, beginnings of it are starting. So I would kind of agree with you.

I just want to make sure the clarifying point that when I refer to price increases, I include lot -- more aggressive lot premiums, reduced incentives and the like into that phrase, price increases. If we were to use that broader definition, would you say that -- would you hazard a guess, maybe 1/3 of your communities, the top half of your communities, you've been able to achieve some form or one or all of the above in terms of price increases?

I wouldn't want to quantify a specific number. What I would say is we've been working for several quarters on premiums, options and discounts and with some relative success. What's a little more recent is pure base price increases to add to that mix. So again, without trying to peg a particular number, the general trend is positive.

The next question comes from the line of Michael Rehaut from JPMorgan. Michael Rehaut - JP Morgan Chase & Co, Research Division: First question, I was hoping if you could give a little bit more clarity around intra-quarter trends in terms of orders and off of that -- including in that, rather, how April faired relative to -- within the quarter how things fell out?

Mike, I would say generally, things got better through the quarter overall, and we've seen a continuation of positive trends into April. So I don't want to provide any more specificity than that, but the run rate got better as we got through the quarter. Michael Rehaut - JP Morgan Chase & Co, Research Division: Okay. Second question, you mentioned, you pointed to on Slide 11 the put-back requests kind of continuing at this somewhat of a higher level since the middle of last year. At this point, are you still comfortable with your reserves? And also, if you could discuss -- there was a filing at the end of March with regards to the former check business, the Centex home equity business, I believe, in the amount of $236 million. How does that affect, if any, the outstanding $100 million liability cap on that former unit, also in terms of just the accounting of it?

I'll deal with [indiscernible] first. We are aware of the filing. It does not, in our view, impact us. It hasn't resulted in any accounting. So when we sold the business, there was a $100 million indemnification, but we haven't heard from anybody on that and candidly don't expect to. As it relates to the accounting for the reserves, generally, we looked at, when we did the accounting in the fourth quarter, we looked at the activity in the back half of last year and projected that out. So the activity we've seen in the first quarter is consistent with that, so our accounting hasn't changed.

The next question comes from Dan Oppenheim from Credit Suisse. Daniel Oppenheim - Crédit Suisse AG, Research Division: I was wondering if you can talk a little bit more in terms of -- you're saying for the new product line for Centex, a bit more affordable. Is that an effort to really target those who are renting right now and looking at rental increases and bringing down that cost of ownership further?

Dan, it's Richard. It is. One of the things that we've targeted is a monthly payment that's equivalent to or even less than rental, and this is a very affordable product line that we're piling in, in a couple of markets, along with some additional things that we've done from our retail environment on the Centex side. We've got open in about 40 Centex communities around the country, all designed to generate better returns in that business overall. So yes, it's targeted to compete with rental. Daniel Oppenheim - Crédit Suisse AG, Research Division: And I guess if you can still elaborate a bit more in terms of what you're doing on the content side there. As you're taking some content down, any risk that you're going to worry that as the consumer confidence is improving, people are actually looking for more content rather than less at this point?

No, Dan. This is a continuation of some of the thinking that we have found from, frankly, diving a little deeper into consumer sentiment, where our base house was configured too high in many instances. What I mean is we were offering too much standard in our home. So part of our process here with this new product line is to have a lower level of specification for the base home and then allowing the consumer to option up where they would like to. The benefits of that are twofold as we're finding. Number one, we're attracting more people to that lower entry-level price point. And second, we're making more money on the total sale because the buyers that are willing to option up, we're getting a premium price for the options there. And while that's nothing new, I think we've indicated before we were probably behind in recognizing that and are catching up now.

The next question is from Joshua Pollard from Goldman Sachs.

I think you said, Richard, reengineered, re-contented, re-cost and repriced. I like that. But I'd love to understand what portion of your business now falls into that category, and I'd love if you could juxtapose that with what portion of your business you really can't change. I know when you guys did the Centex merger, you talked a lot about their being legacy property, even in the Pulte suite of communities, that it didn't make sense to make a lot of changes to, just given either how large they were, how deep you were in the process. I'm trying to understand what portion of your business you have reengineered, what portion of your business you can reengineer and what sort of -- you just have to wait until it burns off.

So Josh, let's deal with them into 2 buckets. The reengineered, re-contented component has to do primarily with home construction, home design, specifications, et cetera. And then the repriced is bucket 2. In bucket 1, it's been a relatively small percentage of homes that have flown through the income statement so far that have had that action because of the time it takes for us to go through that. And we should start seeing more benefit from those actions as we get through the year here. In terms of the repriced component, that's a much quicker and easier area to attack and a larger percentage of our business there. Again, to Stephen Kim's question, I don't have an exact number for you there, but anecdotally, we've accomplished more on the pricing side in the near-term with a lot of the benefits from reengineering, redesign, re-contenting yet to come for the company overall. With regards to what percentage of our business we can apply this to, I think what we're referring to earlier is that in many cases, we were 2/3 or 3/4 of the way through the community, so it didn't make sense to spend the time and expense to go through that process. Aside from that, as those communities finish up their life, there's no reason we can't attack all of our product lines with this process, which is certainly our intention over the coming years. It's going to take time for all of that to roll through, but I think like you've seen, a slow and steady progress is our goal.

Okay. I guess the one thing I'd love to understand in addition to that is around your land purchases, obviously, a higher focus on returns on invested capital, which, I think, makes a lot of sense. Is that leading you towards more finished lots, or is that leading you towards actually building out and developing land? I know the quick run at returns on invested capital may say finished lots, but we've obviously heard a fair amount about competition there. Where is that -- where is the return on invested capital metric leading you at this point on balance?

Well, initially, when we got this focus started, it did lead us to more finished lots. Those have been snapped up in a lot of cases. So we are, on a limited basis, investing in raw land. I think what's a little bit unique, even though, about the raw land is we're getting more option deals through our focus on attempting to orient the business that way. And, Bob, I don't know if you want to provide any more color on that?

No, I agree. We have had, over the last 18 months, the opportunity to buy a lot more finished lots. They are frequently on takes as opposed to buying the dirt. So I think as we focus on return, if we can get them priced appropriately, a rolling option take is really attractive, obviously. But I think you've heard us and others talk about that there may be a shortage of those lots going forward. We're going to have to build the portfolio over time, where we will have to look at developing lots. But even in the first quarter, the lots we put under control, more than 70% of those are option deals. So we're still finding the opportunity to put those together.

The next question comes from the line of Stephen East, ISI Group.

Richard, in your prepared remarks, you talked about lowering the community count is a part of the way to rightsize your balance sheet. And then you also mentioned the Pulte portion of your business growing in magnitude relative to Del Webb and Centex. Could you just explain further what the thought process is on the community count lowering for the balance sheet, where you think that goes and then what's driving on the Pulte versus the other 2 segments of the business?

Sure. So Del Webb is staying relatively consistent, Steve, in the large communities with lots of runway ahead of us there. So not much movement in Del Webb. What you're seeing now is a shift from Centex into Pulte, purposeful shift in that regard over the past number of quarters as we found better return opportunities in land transactions for the move-up buyer, which is served by the Pulte brand overall. And that's what's driving it. Obviously, we want our operators to invest where they have the best return opportunities. Having said that, both the Centex and the Pulte brands, the buyer categories, are performing well in the marketplace in terms of absorption category. So as mentioned, we have a bit of a renewed vigor toward breathing better returns into the Centex business through some of these re-engineered and redone value product that we're coming out with overall. But that's what's driving the shift overall.

In lowering your community count to rightsize the balance sheet, just the thought process on it?

Yes, so I'll give you a bit of a top line, and then I'll ask Bob to comment. We've got excess land, to put it simply, overall. And our goal is to kind of reduce the bucket of land that is far out in the future that we're not going to get to for a long time and use some of those dollars, if possible, to either pay down debt or where we reinvest in land assets to ensure that those are on a return-friendly basis. That means getting, frankly, more disciplined about the way we invest. And I mentioned earlier we were long land, and we're known for being long land. We want to be more balanced going forward. And so the result of that happens to be community count declines. I will tell you we are not as driven as I think the outside world is by the pure metric of community count, given the fact that community count is so variable and particularly, for us, with Del Webb, not as meaningful. As you've seen, we were able to drive very nice top line growth and will get our fair share of revenue improvement with the macro environment improving. So we are not "worried" about community count declines. We're actually pleased with it because it's continuing to demonstrate the improvement, I believe, in returns as evidenced by cash flow and Q1 being positive, where we typically would consume cash in Q1. So a little bit long-winded there. Sorry, Bob.

I actually wouldn't add anything to that.

The next question comes from Nishu Sood from Deutsche Bank.

Just following up on that thought about the community count. In the first quarter, your community count was up significantly. I think year-over-year, you were down 11%. In the fourth quarter, you're only down 6%. And when you talked about community count after the fourth quarter, you had even sort of guided us to this concept that you were just discussing that community counts would be down through the year. So what happened in the first quarter? Did you -- it doesn't look like you -- it was through a lot of new investment. Were those new communities that were opening, were those on your balance sheet already and you are trying to bring them to market and monetize them? Or what drove the surprise against the kind of expectations?

Well, I think we had guided at 5% to 10% down for the year, which we continue to believe will happen. I think if you look at the historical cadence of our community counts, we are stronger in the beginning of the year as we open communities to prepare for the selling season. I think you saw that happen this year again, we opened 40-plus communities. So again, our view is that through the end of the year, we'll still see that 5% decline.

Got it, great. And the second question, related. You're mentioning, Richard, that you're not as focused on the community count metric as some in the investment community or some others in the industry might be. And that seems like a very sensible stance given where demand has been in the last year or 2 and where it is currently, even with the pickup we've seen so far this year. But on a conservative basis, just normalizing in the housing market implies a doubling of volumes from where we are here, and there's no reason to think that as a leading builder, you wouldn't participate in that fully. So if I think about the decreased community count, the focus on debt reduction, what can we expect in terms of Pulte's volume growth through the recovery trajectory looking out over the next couple of years?

Nishu, it's a great question, and we certainly have analyzed this in great detail. Keep in mind we are a very long land company, and when you look at our results kind of beneath the covers, if you will, in Q1, while we had 15% growth in sign-ups, it was on a reduction in community count that kind of implies a 20-plus percent improvement in overall demand. So we are participating in the recovery, and I would argue that as the active adult buyer gets more and more comfortable, that could provide even more leverage for us. So while you're not directionally wrong and yes, we would expect to participate fully in any kind of recovery in the sector overall, the reality is we don't have to reinvest as much as many peers do in order to provide that, which, I think, spells very good things for improvements in return overall. Now if we continue to see the market look better, you can expect us to invest in the business. We definitely are not intending to starve the business by any way, shape or form. We're just becoming much more disciplined with how we allocate capital because, frankly, we were not as disciplined in the past as we needed to be.

The next question comes from Adam Rudiger from Wells Fargo Securities.

I was wondering if you could -- if the comments you talked about about being more balanced in land and more focused on return on invested capital, I was wondering what that meant, if anything at all, for the Del Webb business, if that changes any approach to that?

Yes, Adam, I certainly -- this is Richard. I don't think it means anything for the next number of years. We are, shall I say, fully invested in Del Webb. We're actually in a good position because -- save 1 or 2 acquisition opportunities that we've taken advantage of in the last year. So we have Del Webb communities open, operational, full amenities in, lots on the ground in all of the major or almost all of the major metro markets we want them. So it's a harvest mode for Del Webb for several years before we're faced with really significant reinvestment challenge. Having said that, we'll face that as we get to it. I suspect you will see continued investment in Del Webb in the moderate-size communities, like we've demonstrated real success in 1,000, 1,500 lots, with some select larger investments in the destination locations. So probably not a great deal of change because if you step back, big picture, Adam, we invested heavily in Del Webb through '06, '07 time frames and we're where we need to be now for quite a while. For now, it's more of a harvest and maintenance mode for a while.

Okay. And then the second question is the SG&A, I think you said that you're expecting $485 million to $495 million this year and in previous guidance, maybe around $475 million. So it's not a huge dollar amount, but that's changed. I was just curious what were the drivers of that change and what you're seeing now, what elevated costs. I'd want you to take that up a little bit.

The preponderance of it, candidly, is compensation-related. A couple of things influence that. We've got some equities-related compensation. The stock price is up, so we think that the costs will be up. Given the elevated sales environment, our expectation is that earnings will be higher for the people under their compensation plan, so we've reflected that. We also made a conscious decision to reinstitute the 401(k) match that had been actually eliminated back in the heights of the downturn. That's almost $8 million of incremental cost. So again, most of it is really compensation-related and business-related.

The next question comes from Joe Locker, FBN Securities.

I just wanted to check on -- you mentioned your increase of recent foreclosures, or short sale buyers from a couple of years ago have increased. Can you quantify that or just put a ballpark figure on that? Is that 20% of your buyers now or something along those lines?

Joe, I'm sorry, we don't have great detail on that. It's just an overall reflection that as inventory levels reduce, the buyers are left with either choice for better resales or new homes, and we're getting a little pickup from that.

Right. And then what about any backlash from -- or any complications from some of the recent FHA increases on April 1 on the fee structures?

I think too early to really tell if there's any significant change there. We certainly don't expect it. 2/3 of our business is either active adult or move-up, with a large percentage on the active adult side of cash. So, Joel, we're not expecting a big impact from that, but no detail on that yet.

The next question comes from Ken Zener from KeyBanc.

You talked about the land acquisitions driving -- it sounds like you're talking about the land acquisitions driving the mix shift towards Pulte, the trade-up buyer, versus your Centex land. So within that context, could you comment on what percent of closings you've had this quarter in general from new lots and how that syncs with, perhaps, your past comments that in general, you already have the land that you want? So I'm trying to see if the trade-up buyer is better. It sounds like you're saying your land purchases are driving that mix shift.

Well, I think we walked through the closing, so it's 39% Pulte, 35% Centex. Last year, that would have been 31% Pulte, 40% Centex. A couple of things driving that. One, there were smaller relatively Centex communities that came with the Centex acquisition. A lot of those have closed out. And over time, what we have seen is that the investment we've been making has been more geared towards the move-up buyer because, as Richard described, our ability to drive return on those has been higher. Oftentimes, you need more volume through a community, more pace in order to make that first-time buyer return well. And so the good news is that we've actually seen pace increase across the Centex and Pulte brands this year relative to last year. So again, what we're seeing is -- in the current environment, we just see returns higher on the move-up communities.

Right. But is that being tied to the trade-up buyer being stronger, excluding your lower lot cost? Because if that's the case, are you saying that trade-up buyers are already selling their home, or are you seeing the trend where they're buying a house in anticipation of selling their home, which used to be more of a standard procedure? Or is it really just that you're deploying capital into new land, which is giving you the better margin as opposed to a comment on your legacy lot position in that category?

Ken, it's less a comment on our legacy lot position, except for the fact, as Bob indicated, that we had a lot of Centex properties that were smaller in duration. So that's part of it. But the big part of it is the land acquisition strategy of 12 and 6 months ago that's reflecting in a larger percentage of move-up sales today.

The next question is from the line of Mr. Alex Barrón, Housing Research Center. Alex Barrón - Housing Research Center, LLC: I wanted to ask you, I guess, your thoughts or philosophy -- when you start to see the sales pace improve, how are you guys thinking about at what time is the right time to kind of implement price increases, or do you just prefer to take the volume right now because you're not too certain it's sustainable? And I guess along those lines, what are your thoughts on selling to investors the new homes?

Alex, this is Richard. I think we've indicated before, given the depth of the downturn and the difficulties the whole industry has experienced, we expect the pace to rise before price. Having said that, you're beginning to see both in select markets today. So I think it's fair to say that the first few months of better activity in any city, you let the pace run more, which, of course, is excellent leverage for us. Now you're getting to the point in a few cities, and I don't want to imply it is all, but in a few cities where you're actually able to do both. You're able to work on some pricing as well as pace. So I think pace before price, but they do go together to some degree. And we've seen this movie before in this industry. I'm sorry, in terms of your question about selling to investors, we prefer not to do that. Alex Barrón - Housing Research Center, LLC: Okay. And my second question is in those markets where you're starting to see the ability to raise prices, are you also seeing any pressures on the cost of labor or any pressures on what land sellers want for their land?

Yes, we are on the cost of labor. We'll get to land in just a second. Cost of labor, we assumed some increase in our forecast for the year. We're seeing that play out in a couple of categories. I would say, within expectations, however, for the vast majority of our markets. A couple of markets that are beginning to really heat up a la Phoenix we are seeing more broad-based pressure. Thus far, we believe we've been able to outstrip that with what we're working on the pricing side. In terms of cost of land, overall, not as big a factor yet. We're being very disciplined as we indicated with regard to our capital allocation. So I wouldn't have a whole lot of commentary there about increased land prices. That certainly can and should be expected over time, though.

The next question is from James McCanless from Guggenheim.

I wanted to ask about the transformation of Centex, kind of a two-pronged question. First, if the FHA concessions are reduced, does that affect the Centex strategy? And then from a land perspective and a timing perspective, how far along do think you are on that transformation?

I would suggest the FHA changes, we do not expect a huge impact from. It's very difficult to figure it out exactly until we kind of see it in the marketplace. So a little bit of an update to come on that going forward. Can you ask the second part of your question again, please?

Well, just how far -- from a timing perspective, how long should this transformation for Centex take, and do you think you have the land onboard right now or will you need to go acquire land to make this transformation?

We've got a new retail environment in place, as I mentioned, in 40 communities already, with plans to expand it to all the Centex communities relatively soon all out this year. With regard to the new product introduction, we want to see the results of that for a few months before we're ready to kind of go widespread with that. We have plenty of Centex land on our balance sheet to use those lots in. And assuming that this plays out as we anticipate, you can expect us to be acquiring more Centex-focused lots in the future for that buyer category. Roughly, today, we've got about 250 Centex communities. So that's an awful lot of communities to be able to enjoy the benefit from, provided it works out the way we anticipate.

The next question is from Susan Berliner from JPMorgan. Susan Berliner - JP Morgan Chase & Co, Research Division: I was wondering if we could go back to the put back, and I guess just looking at Slide 11, it looks like it's been, obviously, coming down more recently but a little bit volatile since the end of the year. Can you talk about why are those -- why is it volatile? I mean, any color behind that and what you're seeing thus far in April?

We haven't given any commentary on April. The volatility, I wish I could answer that more intelligently, but it is just what we get. I've heard anecdotal conversations where people say it's the banks and the GSEs getting through their book, that they're trying to get things resolved to have better control over their processes and data. I don't know. It's not "We've got the following questions. We'd like you to take a look at these loans." And that's been consistent since I've got here, and I think everybody will tell you even before that.

The only thing I'd add, on a volatility perspective, you're talking about a relatively small population of put back in a month-to-month basis, so a change of 10 can look volatile. Susan Berliner - JP Morgan Chase & Co, Research Division: Okay. And I guess switching topics, I was wondering if you could comment on what your expectation is for the Las Vegas market? And I know inventory is finally coming down to close the normal range, but what are you guys seeing there and what are you expecting going forward?

Susan, it's Richard. If you asked the second question 6 months ago, we have been relatively bleak with regard to our outlook. Inventory levels are coming down, however, and it's kind of looking like the movie that we're seeing playing out in Arizona maybe 12 or 18 months behind. So I don't have anything definitive to tell you other than that we're watching it closely. We've made an awful lot of money in that market over the years. We've lost an awful lot of money in that market in recent years as has everybody else. So we're paying attention, and one thing I do know is that supply and demand work together to make things attractive or unattractive in this industry. And to your point, inventory levels are coming down. So we are hearing first few bits of a little bit better sales environment there, certainly nowhere near like we're seeing in other markets, but we'll see what happens. So I don't have a better answer than that for you, though.

The next question comes from the line of Jack Micenko from Susquehanna International.

Have you given the reserve on the put backs for the end of the first quarter? And then, Bob, I want to go back to Michael's question. You'd said you didn't feel like there was liability on the new lawsuit. Is that because it's a trustee lawsuit, or is it because of the nature of the product? Or is it there something in the sale terms that gives you that confidence?

We're not a party to that lawsuit. And so the question would be would the folks that bought the check business think that we have liability with respect to that. Time has passed, and so we just don't expect that to be in their conclusion.

The reserve at the end of the quarter is about $123 million, so it's just down due to the settlement during the quarter.

The next question comes with Stephen Kim from Barclays.

Just as a follow-up question, I was curious if you could provide a little bit of a greater breakdown in your inventory if you have the numbers. In particular, I was curious if you had a sticks and bricks figure for the first quarter and the homes under construction and land under development breakout?

I'll just tell you from -- total units under construction is, as Bob mentioned earlier, is 5,466, and then in terms of land, our total control is 128,228. Of that, finished is 37,773 on a control basis.

Okay. Those are in units, right?

Correct.

Yes. I was wondering if you had particularly the inventory breakout.

So house, at dollars, $664 million. Land, $3.9 billion.

The next question comes from Michael Rehaut from JPMorgan. Michael Rehaut - JP Morgan Chase & Co, Research Division: I just wanted to go back to the gross margins for a second. Richard, you said, I believe, that you see further operational gains based on the backlog. We've seen now gross margins, ex charges, in the mid-18s, drifting up 10 basis points each of the last couple of quarters. I know you don't want to give guidance at this point, but now with 3 quarters in this mid to high 18% range, is it something that, perhaps, you'd expect to just drift up at the same type of more modest pace that we've seen, or is there something, perhaps, a greater going on when you say further operational gains in the backlog?

Mike, we think we've got further opportunity over a period of time. If you remember, margins can be volatile quarter-to-quarter based on mix and what comes through the sold versus spec in the quarter. So I would just leave it as we expect further gains from here. Michael Rehaut - JP Morgan Chase & Co, Research Division: Okay, but in pointing specifically to the backlog itself, does that give you confidence that the current gross margin that we've seen in the first quarter can be maintained at least? Or are you saying that there'll still be a little bit of volatility quarter to quarter?

Yes, Steve -- or excuse me, Mike, all I continue to say is we expect further gains from here. And frankly, mix in a given quarter, cancellations in a given quarter can expect it. So I would not expect kind of a perfectly linear climb in margins, but our margins in backlog indicate that we can go higher from what we just reported. I'll leave it at that.

The next question comes from Stephen East from ISI Group.

Bob, just one follow-up on that. Capitalized interest jumped up. I guess what's going on there, and what percentage of inventory is capitalized interest? Sort of what can we expect hitting the gross margin as we go through the quarters?

We have $355 million or $360 million of cumulative capitalized interest, and so what you're seeing is that we are expensing more than we're paying. We had indicated last year that we thought we would go from roughly $185 million to about $220 million in expense. Our cash paid for this year is about $205 million, we think. So going forward, I think you'll see that the bleed off of the amortization, it will take a while for the reduction in cash paid to catch up to the income statement. I wouldn't want to give predictions on the future only because the capital structure may change. There are a lot of things that influence that. But again, through the balance of this year, you'll see expense outweigh cash cost. Obviously, that will turn over time.

And the other thing I'll add to that, I mean, Bob is talking about per year. You are going to see some volatility on a quarter-to-quarter basis just given some of the anomalies with the way model works as we get to this normalized cap interest number. So part of what you're seeing is just a little bit of that over time. But as Bob mentioned, we're trying to give you guys the guidance on a total year basis, if you will.

Okay. And as you sell land, is there -- can you assign more or less, or is just a prorated amount that goes over to it?

There's a specific amount of capitalized interest to each parcel of land. And to Mike's point, how that sells out lot by lot if we're producing can influence the flow of the expense on a quarterly basis, but for the land that we're selling, there's a discrete amount of capitalized interest that we write off when we sell the land.

Thank you for your questions. I would now like to turn the call over to Mr. Jim Zeumer for closing remarks. Thank you.

I want to thank everybody for your time and attention to call. We will be available later on if you have any additional questions. We want you to have a good day, and the call will end now.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a very good day.