PulteGroup, Inc. (PHM) Q1 2013 Earnings Report, Transcript and Summary

James P. Zeumer - Vice President of Investor and Corporate Communications 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

Ivy Lynne Zelman - Zelman & Associates, LLC David Goldberg - UBS Investment Bank, Research Division Jason Aaron Marcus - JP Morgan Chase & Co, Research Division Stephen F. East - ISI Group Inc., Research Division Adam Rudiger - Wells Fargo Securities, LLC, Research Division Michael Dahl - Crédit Suisse AG, Research Division Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division Megan McGrath - MKM Partners LLC, Research Division Joel Locker - FBN Securities, Inc., Research Division Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division Stephen Kim - Barclays Capital, Research Division James McCanless - Sterne Agee & Leach Inc., Research Division Jack Micenko - Susquehanna Financial Group, LLLP, Research Division Nishu Sood - Deutsche Bank AG, Research Division Buck Horne - Raymond James & Associates, Inc., Research Division

Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the PulteGroup, Inc. First Quarter 2013 Financial Results Call. [Operator Instructions] Thank you. I would now like to turn the call over to Jim Zeumer, Vice President of Investor Relations for PulteGroup. Please go ahead.

Okay, thank you, Jessica. I want to thank everyone for participating in today's call to discuss PulteGroup's first quarter financial results for the period ended March 31, 2013. On the call today to discuss our numbers: Richard Dugas, Chairman, President and CEO; Bob O'shaughnessy, Executive Vice President and CFO; Jim Ossowski, Vice President, Finance and Controller. Before we begin, copies of this morning's press release and the presentation slides that accompany today's call have been posted to our corporate website at pultegroupinc.com. Further, an audio replay of today's call will be available on the site later today. Before we get started, please note that any non-GAAP financial measures discussed on this call, including references to gross margins reflecting certain adjustments, 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 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. With all that said, let me now turn the call over to Richard Dugas. Richard?

Thanks, Jim, and good morning, everyone. We are very pleased to speak with you this morning about PulteGroup's first quarter operating and financial results. As we said in this morning's press release, the company has gotten off to an exceptional start in 2013, with solid improvement in just about every facet of our business. Our much-improved Q1 earnings reflect a sustained rebound in overall housing demand, combined with our progress toward driving better fundamental business results. At this time a year ago, the industry was cautiously optimistic that the then budding recovery in housing was not another false start. Now with 5 quarters of generally improving market conditions in the rearview mirror, I think it's safe to say that a sustained recovery in demand for housing is indeed underway. Given the breadth of our geographic footprint and the diversity of buyers served through our Centex, Pulte Homes and Del Webb brands, it stands to reason that our business trend should mirror many of those seen in the broader industry. As such, it will come as no surprise that we experienced increased buyer traffic visiting our communities, as consumers have grown increasingly excited about the idea of purchasing a new home. You may have read in a recent press release that our own PulteGroup homebuyer index survey showed that even first-time buyers, who many thought would be lifelong renters, remain desirous of owning a new home. According to our most recent millennial survey, 65% indicated that their intention of buying a new home has significantly or somewhat increased in the past year. The drivers of overall housing demand have remained consistent, as favorable demographics are aided by low interest rates, ever-increasing rental prices and the perceived value of owning a new home. These are certainly positive and important factors, but we…

Thank you, Richard, and good morning. As you've heard many times over the last 2 years, we're advancing a number of key initiatives which are focused on improving the company's fundamental operating performance and enabling us to become a more efficient homebuilder. Our first quarter results demonstrate the progress we are making towards running that more efficient and more profitable business. During the quarter, home sale revenues increased 35% over the prior year to $1.1 billion. The increase in revenue was driven by a 23% increase in closings, to 3,833 homes, combined with a 10% increase in average selling price of $287,000. Consistent with our recent results, the mix of closings in Q1 remained weighted toward our Pulte or move-up communities. The actual mix of closings in the first quarter included 46% for Pulte, 28% for Del Webb and 26% for Centex. While the closing mix is consistent with the fourth quarter, the percentage of Pulte closings in the first quarter increased by approximately 700 basis points compared to the first quarter of last year, while Centex's closings were lower by a comparable amount. The $26,000 increase in our average selling price realized in Q1 reflects this continued shift in our product mix from the first-time buyer towards the move-up buyer, as well as price increase that's realized within each of our underlying brand. Land sale revenues in the quarter totaled $26 million, as we continue to opportunistically divest non-core land assets. As always, the uncertain timing of any resulting transactions means that land sale revenues will vary from period to period. In the first quarter, we reported an adjusted gross margin of 22.9%, which represents an increase of 420 basis points over Q1 of last year and 110 basis points over the fourth quarter of 2012. Gains in the…

Thanks, Bob. Before we open the call for questions, let me take some time to provide a few high-level comments on the operating conditions we experienced in the first quarter. As you would expect, given the much improved numbers, demand in the quarter remained strong across the majority of our markets. Generally, we experienced higher traffic and better absorption paces, as well as opportunities to realize higher pricing. By geography, demand for our business in the eastern third of the country was strong, from New England right down through Florida. Sales in the Greater Boston Area were particularly robust, as was the sales pace in the Carolinas, down and through Tennessee and into Georgia. Demand in Florida continue to rebound as inventory levels remain low and buyers continue returning to the market. Market conditions in the middle third of the country also showed continued strength in the quarter. Demand in the Midwest was generally strong, with limited lot supply and the need to meter our sales, often being as big an influence on our sign-up pace as outright buyer demand. Demand across Texas remains strong, although reported sign-ups were little changed as we opted to slow pace and focus on price, while we work to get new communities online throughout the state. In the western third of the country, we continue to experience strong buyer interest throughout our operations, from the Pacific Northwest down through California and into Arizona and Nevada. We have, however, meaningfully limited sales pace in most communities throughout this region of the country as we managed the land pipeline and labor availability. Echoing some of Bob's comments, we are pleased and very encouraged by our first quarter results, as they demonstrate the continued recovery in both the company and the overall U.S. housing market. Every day, we hear questions about the parameters of a housing recovery and whether it is sustainable or what the slope of demand is and how quickly can the industry get back to normal volumes. While these are important questions, they remain out of our control. So we are focusing on PulteGroup and on running a better business. Don't get me wrong, we certainly keep a close eye on demand within our local markets and specific communities, but we see significant opportunities to drive better performance from within our operations, consistent with the value creation work we have been pursuing for the past 2 years. I would like to recognize each of our employees for their contributions to the strong results PulteGroup reported today. While there is work left to be done, you have a lot to be proud of. 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] Jessica, if you'll explain the process, we'll get started.

[Operator Instructions] Your first question comes from the line of Ivy Zelman with Zelman & Associates. Ivy Lynne Zelman - Zelman & Associates, LLC: Richard, I think one of the things you taught me about analyzing your business is that really it's difficult to focus on community count as it's a very different business especially in Del Webb. So maybe if you could just help us going forward how we should be thinking about trying to model order activity, because it sounds like you were pleased across the board with your overall performance and yet, the orders on even a per community basis were a little bit lighter than we'd expected, even when you're trying to push price. So if you can help us going forward in maybe what community count should look like by year end, I think that would be very helpful for everyone.

Sure, Ivy. We're still comfortable with our community count guidance in the range of 10% to 15% down for the year, although it's likely going to be toward the higher end of that range. What I would tell you is that in addition to the community count being a little difficult to analyze for us given our longer positions in some communities, we are really focused on driving price and margin as opposed to pace, and we tried in our prepared comments to really emphasize the degree to which we feel like we're taking price and limiting sales. So while we're not going to provide sign-up guidance, I will tell you that we're very pleased with the overall level of activity in the market, and candidly, we feel like we're executing our playbook exactly as we anticipated. Ivy Lynne Zelman - Zelman & Associates, LLC: And with that playbook in mind, when we think about the superb margin performance in the quarter, I think everyone can see the opportunity. Would you expect that the performance -- because you've mentioned that you've done things structurally that have allowed for some of that margin expansion above and beyond just pricing, can you talk about your outlook as it relates to further margin improvement, and is there a governor on margin improvement on a go-forward basis? Or could we be happy to see if pricing continues and some of the benefits from the structural changes you've made will continue to reap benefits to shareholders?

Yes, Ivy, from a margin standpoint, a couple of things. We feel like we're benefiting from a multiple effect from, not only our construction efficiencies and a common plan in management work that Bob referenced. Clearly the mix shift is helping us. Also, our pricing discipline is evident in a whole number of arenas outside of just what is typically thought of as base price, things like premiums and options, lower discounts. And then land value is appreciating over time, as well. So we do see further margin expansion from here. It's not going to be in a straight line. As we've said before, it can be choppy depending on mix deliveries quarter-over-quarter. But we're confident we've got more in this gas tank.

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

My first question is about traffic and sales pace at Del Webb, and really just about how that's kind of faring if the pickup that you're seeing is kind of been universal into the Del Webb product, and your expectations kind of on a go-forward basis for where demand is going to be in the Del Webb products the next few quarters?

Yes, David, Richard here. As Bob indicated, Del Webb was up about 16% year-over-year. We're pleased with that performance. And it's following the script that we kind of envisioned, where that buyer continues to get more and more comfortable with the housing market, continues to have more opportunities to sell existing homes and are feeling better about their overall financial position as clearly the stock market has continued to perform. So I would say, slow and steady from here is our expectation for Del Webb. It's unfolding about as we expected.

Great. And then my second question was on the 2014 land spend guidance. And really the question is obviously bringing that up is a positive sign, but the question is, do you think you're going to have to bring it up more as you kind of look forward? Just given the sales pace is obviously strong, the market's improving, things are getting better, do you need to spend more than $1.4 billion on land as you kind of look forward? And maybe can you talk about the parameters on what would make you raise the guidance further?

So David, Richard here. I'll start and then turn it to Bob for a second. I think the thing that we realized is that we have a real disciplined process in place today around how we're going to look at land spend. And if you can think of it this way, our current homebuilding operation is getting better and better, and we really like that. So we're getting more and more comfortable putting more money into a more efficient machine, if you will. Having said that, the discipline with which we are looking at land is not changing, and land's not on sale right now. It's expensive. So with that, maybe Bob can give a little more character on how we're looking at it and what might make us change our assumptions going forward.

Yes, I think as Richard said, we're looking at it with a consistent lens as we go forward. And one of the things that we're actually thinking about, I think to your question on sales basis is, what is happening to us for market share in each individual market. So we're looking at the overall business and say, what cash are we generating and how much do we want to invest? And then saying, where do we best invest it? Where are the opportunities to invest based on our view of forward business opportunities? And also where do we need to invest to maintain critical relative market share or market share in general? So I think it's a 2-step process that looks at how do we feel about the business and then specifically in markets, make sure that we're keeping the leverage there that we think is appropriate.

David, Richard. One more follow-up comment to Bob's. We feel we're much better off to stick to A-plus properties, and the discipline we have to really evaluate this continually on an evergreen basis, we believe, is better than plopping a huge amount of money into the market in one shot and then kind of seeing what happens over the year. So as an example, if we were going to invest $100 over the year, we think it's more prudent to do it in $25 increments, giving us the flexibility to see how much further we're driving the current operations, as well as targeting A-plus locations, versus the natural tendency if you allocated that $100 all at once to maybe buy some B and C properties. We made that mistake in the past with a lot of investment in one time, and we don't want to do that again. It's all about ROIC now.

Your next question comes from the line of Michael Rehaut with JPMorgan. Jason Aaron Marcus - JP Morgan Chase & Co, Research Division: This is actually Jason Marcus, in for Mike. My first question is, I was wondering if you could comment on some of the recent trends in raw material costs and labor, and in terms of how much your overall construction costs have increased over the last year, and how that might have impacted your margins during the quarter. And also which markets are you seeing the most in terms of labor issues?

Sure, we have provided, I think, coming into the year, that we were planning for $2,000 to $2,500 in known increases in costs, and a lot of that is labor. What we've seen is that -- if we were to update that number today, it's probably $1,000 or $1,200 higher, and the primary driver of the difference is lumber, obviously, I think everybody is aware that lumber prices have risen pretty significantly, and labor. I think where you're seeing labor pressure the most is in the markets that have had the most rapid increase in production over the last year or 2, so, think markets like Phoenix. Jason Aaron Marcus - JP Morgan Chase & Co, Research Division: Okay, great. And then my next question is, I was wondering if you'd be able to provide any color on the order growth by month. And also, if you could comment on what -- maybe what you're seeing in April, so far.

Yes, Jason, this is Richard. We saw consistent growth through the quarter, although we purposely tamped down sales activity and drove price even more through the quarter. So that influenced our trends a little bit. And we're pleased with the resulting sales pace we've seen so far in April.

Your next question comes from the line of Stephen East with ISI Group.

Just to follow up a little bit on the cost and pricing. If you look at your ASPs right now, how much of that was mix versus true pricing power? And then how much are you getting -- how much is that over your cost that you're seeing right now? And then within that pricing power that you're actually receiving, how much of that is lot premium versus options spend versus your base price?

Yes, it gets a little bit complicated because there's a whole lot of mix involved in all that. But what I can tell you is if you look at the $287,000 average ASP, that breaks down 342 for Pulte, 193 for Centex and 285 for Del Webb. And those are -- so Pulte was up 8% over first quarter last year, Centex was up 2% over first quarter last year and Del Webb was up 4% over last year. So none of those are over 8%, yet our average price is up 10%, that's the mix differential. But again, we're seeing price increases across all 3 brands.

Okay. And if you look at lot premium and options spend, I know you all are putting a big focus on that and...

Yes. What you'd also find is that in the quarter, quarter-over-quarter average -- so we've told you that we raised prices in a significant number of communities, that discount was down 210 basis points versus last year. And so despite those 2 things, what you would find is that our option revenue was up about 18% per unit, which is about $6,000. And our lot premium revenues is up about $2,000 a unit, which is about 40% of lot premium. So we're seeing that we're able to drive increases across all elements of price.

Okay, that's really helpful. And then Richard, just going back to the land spend in the community count, I appreciate what you all are trying to do. And you all -- you are spending a lot of money in -- over the last 18 months or so, you said, "Hey, we've got the land bank, et cetera." Are you at a point now where you talked about buying the A+-type stuff? Are you at the point now where the land that you own is, with the increased demand is now in a good-enough position that as we start moving into the back half of the year and into 2014, your community growth actually starts to improve?

Steven, we had indicated that we thought community count wouldn't turn until '14, given the allocation that we authorized last quarter. And the incremental allocation this quarter isn't going to move the needle on '13. It takes a while to kind of do that. So I wouldn't look for community count to turnaround until sometime in '14. Having said that, I hope you can appreciate it's a substantial increase in our overall land investment, vis-a-vis what we were in '11 or '12 where we are. And you're on the order of roughly 40% increases in overall land investment, which is substantial. So we feel like we're doing a really good job of monitoring our land spend and doing it appropriately. And community count is going to fall in the interim period. That's okay, and as we think we demonstrate this quarter, there's more than one way to get to an earnings number, and to the extent that we continue focusing on our operations, those are good dollars to bring to the bottom line. I know some folks are anxious for more growth, but we're pretty happy with the way things are playing out.

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

Richard, given the focus that you've been talking about on margins and returns, when we try to think about Pulte a couple of years out or Pulte through the cycle, is there an ideal or a targeted size of the company you're focusing on? Not sure what the best metric to ask is. Is it revenues, inventory closings, community count? Can you just share what you think about that?

Adam, as Bob indicated, we do concern ourselves with a relevant market share in markets. So we're very focused on staying to be a large enough player in the key markets we're in to be able to leverage our trade base, to be able to have good land positions, et cetera. Having said that, volume is not the focus for the company these days. We think we've been very consistent about that. It's driving better returns. We certainly are going to remain a very large, if not the largest builder by revenue. And it's all about return on invested capital for us going forward. So I don't know what to tell you regarding a specific size of the organization other than to tell you, we feel like we're running a very smart business. We're delevering; at the same time, we're adding incremental investment. We're driving better business from our current assets. It's a really nice combination overall. So we're pleased, and we think shareholders are going to really benefit over the long run from this focus on return.

Okay. And then just going to spec -- the Centex. What happened with community count in Centex? And what are you finding in terms of the land opportunities there? And how do you expect that mix to -- do you expect it to continue to decline as an overall contributor?

Yes, this has been a consistent fact for us over the last couple of years. You have seen community count dropping. It did drop in the current quarter. And I would tell you it is likely to continue to drop because the majority of the investment that we've made -- and this isn't just in the last 3 months, but over the last 2 years, has been in the move-up category. And we've talked about it a lot. Not that we don't like the business, it's just that given the economics and the velocity that we see, the returns work better on the move-up business. So we're seeing pace is increasing faster there. We see higher returns, and so our investment has been substantially towards that part of the segment.

Your next question comes from the line of Dan Oppenheim with Credit Suisse. Michael Dahl - Crédit Suisse AG, Research Division: It's actually Mike Dahl on for Dan. Just a quick follow-up on that last Centex point. I guess if you just think about your company longer term and the broader housing market, you would expect that the entry level does have to play a much bigger role as we look out over the next few years. So is that something that you will plan to reinvest in the future? Or is this a more permanent shift?

This is Richard, Mike. We definitely plan to invest in this segment in the future. And we are investing in the segment today. It's just being outstripped by our investment in, particularly the move-up category today. As Bob indicated, it's all about driving the best returns for shareholders. And right now, that seems to be in the move-up category, and that doesn't mean that the intra-level category is not a big player in the future. We continue to invest in that brand and are working hard to find transactions that make sense for it. Michael Dahl - Crédit Suisse AG, Research Division: And I guess along the same lines appreciating that return focus. How do you think about your spec strategy, not just today where you're having to actually manage sales lower in a lot of areas. But just on a go-forward basis, do you plan to increase specs as you look out and you have more communities online, or what should we expect there?

I really appreciate that question because it gives me the opportunity to really complement our team for driving specs to their lowest level in years. We currently -- we got less than 400 finished specs about 1/3 of what they were at this time in 2012. And Mike, to the go forward strategy, we love the very limited spec strategy. It's really about limiting finished spec inventory. We're happy to put specs into production, but our teams are keenly focused on selling them at full margin before they final, where we can do that. We're happy to put specs in, but don't look for us to revert to the ways we had a few years ago where we put a lot of spec in the ground. I think Bob indicated about 19% of our business was in spec and 81% presale. I like that percentage, and we'd like to drive it as far as we can because it provides very consistent visibility for our sold backlog. It supports our overall pricing and margin focus. It helps with inventory turns because we're not carrying a lot of finished inventory on spec. And it helps our SG&A because we're not having to cut the grass and heat these homes that don't have buyers in them. So I'd call that a win-win-win-win-win. I have a couple -- I have one more for you. If you look year-over-year, we've taken $75 million out of house. And that's despite the fact that we've got in total, 5% more units under construction. So the ability to drive down final specs and final sold units has allowed us to take all that money out of working capital. We've reinvested it in homes that are sold and despite that, driven a $75 million increase. It decreased our investment in-house.

Your next question comes from Ken Zener with KeyBanc Capital Markets.

The success you've had on your fixed G&A cost is obviously evident. Would you expect your fixed G&A cost to still be trending down in line with, I guess, your incremental community declines this year?

Yes, certainly, if communities close, we do have a relative savings. You don't have the cost of maintaining the model. You may have 1 or 2 less people on staff. But I would suggest that, that doesn't change the landscape very much. Just like we've said, if we scale up on production, we don't have to go hire a bunch of people, invest a lot in SG&A. It doesn't go away immediately either, because we're pretty efficient on how we're structured.

Okay. And then the community count that you'll have at the end of the year given your 10% to 15% decline, can you talk about how much of that is, I guess, legacy as opposed to stuff that you bought in the last 2 years? Just to get a sense of mix, what's closing and perhaps, where we'll be entering '14 from a mix basis?

I don't have that data in front of me, Ken. We can probably get back to you with it. I think in most recent quarters, we had talked about somewhere in the neighborhood of 20%, but I'm not exactly sure. Jim, do you know?

It's about 30% right now.

Roughly 30%.

Your next question comes from the line of Megan McGrath with MKM Partners.

You talked a little bit about some of the headwinds in terms of labor and purposely slowing on the order growth side. Can you just talk us through a little bit? If those things, we should think about modeling them in terms of your ability or your timing in terms of closing backlog and backlog conversion going forward.

Megan, if I understand the question correctly, I think with our focus on presales and lack of specs, we have pretty good visibility into our backlog quarter-by-quarter at this stage. We did indicate on our Q4 call, though, that conversion rates for the backlog are going to be limited because we're carrying a larger backlog. And without a lot of spec inventory to add, "upside," in the current quarter, you're not going to see that. But I guess the best way that I would think about it is to expect us to have a relatively consistent business going forward. I don't know if I'm answering your question, or maybe I didn't understand it right.

No, I think you did. I was just trying to think about going forward if -- backlog conversion was a little choppy last year, so it's hard to get a sense of seasonal patterns there. If we should expect it to continue to slow, and then have sort of a ramp-up in the fourth quarter, which is relatively consistent industry-wide, of if there's anything else going on there we should think about?

Well, I think you're going to have some of that, just the way the natural pace of the business flows. You generally sell more homes in the front half of the year than the back half, so I don't think anything is going to change the trend of Q4 being the biggest closing quarter. Having said that, we're doing our best to not get too far out with our backlog, in order to be able to control the next quarter or 2. And we purposely told our operators, even if you have the ability to sell a year out, we prefer 6, 7 months of backlog to protect ourselves against price increases as well as our cost increases, as well as ability to take price. So we're really happy with how that's going. I would love for us to get to 25% each quarter. I don't think that's realistic, but we're going to push more in that direction, if that can help you.

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

Curious on if you were thinking of expanding in any markets in the next year? If you had your eye on any specific markets.

Joel, this is Richard. We definitely have expansion plans in many markets. It's all based on our current capital position in the market, our relative market share in the market. And in some cases, we're really happy with our overall position and are not adding a lot of capital. In others, we're aggressively growing the business, but when you got a business as big as ours, it's across the board, that authorized incremental land spend is going to play out over time. But yes, definitely, there are markets where we're adding additional capital at a rapid rate.

No, I'm saying specifically on any new markets that you had, that you entered...

I'm sorry, I apologize. No, we're not looking at any new markets that I can think of now. As Bob indicated, we're really focused on driving relative market share within the markets we're in, which last time I checked, we were in the vast majority of all the permits in the country with the MSAs we had covered.

Right, and one last one on the tax valuation allowance. Do you see that coming back on in 2014?

We actually will be filing our Q today. And what we'll say in there is that consistent with I think we said at the end of the year, it's our expectation that if business conditions continue the way they have, that we would likely be able to reverse a large part of it sometime in the back half of this year.

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

I had a question. You had mentioned migrating towards a common floor plan, and that 12% of your deliveries now, are using that. What's the difference from a gross margin standpoint between using a standardized floor plan versus a customized floor plan?

Bob, this Richard. We definitely see better margins in commonized floor plans. It's hard to give you a specific number, but it is part of the margin improvement story that we've had now for 9 consecutive quarters. And the best news there for us is at 12%, you can see that it's kind of in its early innings. We have 6 specific product and purchasing zones around the company. And we're rolling this process out to all of them this year. Some like Texas, are much further along, we'll have much higher percentage of closings there. But as we roll into other parts of the country, it will go up. So to answer your question, better margins. Wouldn't want to give you a specific number on how much better.

Okay, it's helpful. Your average order price, ASP was up 13.3%, which just a test of much better price discipline and favorable mix trends. how do you see that working out during the balance of the year, given your big emphasis on driving ROIC?

Well, I would continue to expect it to get a lot of attention, vis-a-vis letting our operators sell a bunch more homes. To be crystal clear, we could sell a lot more homes in the given quarter than we are right now. But we don't think it will drive the most favorable ROIC effort for us. So the thing to think about, with pricing, as Bob indicates is, it's not just base price. It's options, it's lot premiums, it's base price, it's managing discounts. It's managing all the factors. And best way, if I were you to think about it, is we're really doing a good job at disaggregating the pieces of price. We have very good visibility into that today. And we're focused on driving each one of them as far as we can. We've been real pleased with what that increased visibility has done to all components of price.

Your next question comes from the line of Stephen Kim with Barclays.

Obviously, you guys are talking about a lot of things that are very favorable, particularly as it relates to metering sales for price. This is something obviously we're also hearing from a lot of other builders. But I particularly wanted to understand how the extremely strong demand environment of late, has -- what effect that's having on your strategic repositioning strategy. I would think that the very strong demand should allow you to accelerate the process of restructuring your operations. And so in that vein, it would seem also by extension, that in 2014, when you are ready to begin expanding your community count, that perhaps we might be able to see you expand that more aggressively than your peers. Can you just comment on that thought process, and what it means for 2014 in light of the extremely strong demand that probably is greater than you had originally envisioned?

Yes, Steven. I would say this, first of all, when you talk about strategic repositioning, I assumed you mean with regard to our land investment strategy. And we feel like we've done an excellent job of ensuring that we have a better operating platform before we plow a lot of additional funds in, and particularly, given our long land position as a company. And you've certainly seen the benefits and our quarterly earnings from that strategy. It's important to note that our decisions today are not going to manifest themselves for 18 to 24 months from capital authorized today before they come online. So we feel like we're making those decisions today. And with all due respect, we feel like 40%, plus or minus, incremental increase in capital is a big one. It may not match those of a couple of our peers, but we're doing our very best to stay disciplined on the A+ properties where we can continue to drive great results and not get caught up in let's grow because the market is really strong. It doesn't do us a lot of good to grow if we're not going to grow extremely profitably and driving a lot of that to the bottom line, so...

Right. Richard, but I guess what I'm asking is that when 2014 comes, in light of the very significant ramp in investment that you've been making, can we see that manifest itself in a greater subdivision count growth next year relative to a relatively more depressed 2013 compared to your peers?

I think if I understand, our ability to open communities doesn't get impacted by the work we're doing around commonly managed floor plans and trying to be efficient. At the end of the day, you still have to go through -- and actually, if the land is raw, you have to go through the entitlement process. You actually have to spend development dollars. All that is -- are things that are outside of the purview of we're going build houses more efficiently. So it’s a 2-step process: one is to get the land ready; 2 is to then build on it. And at the end of the day, interestingly, what we're seeing today is more raw land opportunities. Finished lots, you've heard many people talk about it are very scarce and so we're taking bigger land positions. We're going to have to take -- put development dollars to work. So it's not as simple as, Okay, you've spent a lot more money. We're going to see community count because it depends on how you spend the money. And the market dictates that, to some degree.

Your next question comes from the line of James McCanless with Sterne Agee. James McCanless - Sterne Agee & Leach Inc., Research Division: What was the can rate in the quarter?

The cancellation rate was 13%. James McCanless - Sterne Agee & Leach Inc., Research Division: Okay, could you break that out by segment?

Yes, we've got that. We're trying to find it, Jay, hang on just 1 second. James McCanless - Sterne Agee & Leach Inc., Research Division: And the second question I had, while you're looking for that is could you discuss the thought process of maybe buying some private competitors to accelerate the neighborhood count or accelerate the lock count rather than increasing the spending up to $1.4 billion and doing it yourself?

Yes, so on that comment, overall, that's always been part of the land strategy overall. It's just a question of whether the economics work. So that's definitely part of what we would and always do consider candidly. So Jim, I think you have the other number?

Yes, the cancellation rates, it's 11% for Pulte for the quarter; 20% for Centex for the quarter; and 9% for Del Webb.

Your next question comes from the line of Jack Micenko with Susquehanna International Group.

A follow-up, I think, on Megan's question on backlog conversion. Just to maybe ask it a different way. 59% this quarter, net down from, I think, 79% last quarter. Is 59% the right kind of number? Does it go below 59%, I guess to the balance of the year is the question?

Jack, it's not a number candidly that we focus a lot on internally. So we're a little off the cuff trying to answer this, but I wouldn't say it's a bad number. We're pretty pleased with the rate at which we metered out sales this quarter are very limited to drive margins.

The only thing I'd add is and Richard highlighted this before, the sales environment is seasonal. So you're going to see more activity in the front half of the year for sales. And just based on construction cycles, that means you're going to see more construction deliveries in the back half of the year. And so I don't know that you want to look at it on a steady state. It's not going to be the same quarter by quarter, but year-over-year, you shouldn't see significant fluctuations. So if we're 59% in this quarter, first quarter next year, likely should be 59%, absent some significant change in the business environment. So sales accelerated or sales decelerated, for some reason. But what we're trying to do is get production flow more even. So again, we've got roughly 6 months of production in backlog at maximum, so you wouldn't see that change over time.

That's perfect. That's absent seasonality, the numbers are probably where they're at, okay. And on the note redemption side, obviously, there's going to be a lift to margin there. Do you have other redemption opportunities there? And how do you think about going out -- you've got the cash build, you've got profit over volume. Land price is going up. I mean are there other notes we can potentially see this happen with? And is there a point where it's just a better return outlook to do more of this type of transaction versus lands? How are you guys thinking about that?

Yes, I think we look at capital in the aggregate, obviously. And so yes, we have a lot of cash available today. We were looking at the '14 because under the make-whole provisions, we actually can invest the money at more accretive rates than we could invest in the money markets right now. In terms of the impact on margins, that's more of a prospective thing, so that will benefit margins not in '13, but '14, '15, '16 kind of a timeframe. And that's true of all the reductions that we've had over time. And as we look at our total capital picture, we look at the entire debt structure, we look at whether we're -- we've got opportunities to either take things out or refinance them more attractively. And obviously, we'll always think about, if we've got excess liquidity, how might its dividend or share repurchase fit into that. Again, we look at it in total.

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

Wanted to circle back to the increase in the land spend to $1.4 billion annually. Richard, if I listen to a couple of the other things you're saying, obviously, land prices have risen a lot. It's tough to find deals that pencil. You folks have developed this discipline in terms of capital allocation, and you intend to stick to it. You're not going to chase volumes, obviously. The pace of land spend, if I heard you correctly, I think you mentioned it was just over $200 million in the first quarter. So not at quite a pace of $1.4 million. So it sounds like if things remain as they are right now, you may have difficulty reaching that $1.4 billion . So is the right way to think about this $1.4 billion as more just how much your balance sheet allows as opposed to just how much money you're going to force into the system?

It's Bob, sorry. That's exactly right. So we've got visibility, obviously, into most of our spend for '13 already. As Richard highlighted, anything we're doing today is really going to be for future production. So we have pretty good visibility into what our spend will be right now for the balance of the year. Obviously, we have folks spending a lot of time looking for transactions that some may fund this year, some may fund next year. It depends on structure. So if we go out and buy a lot of raw land with 100% purchase, that burns money this year. We're asking people to try and find terms. So even on raw, do we get it on option takes? You've got some spend this year, you've got some spend in the future. How does the development dollar spend fit into that? So again, we've highlighted the fact that we've authorized them to commit us to $1.4 billion in spend. But that we weren't sure they all get spent this year. And it's either because we can't find return accretive things, or because we'll tie up land this year and actually make some of the spend next year.

Got it. And if I remember, that must be the base figure that we've been talking about, the $950 million or $1 billion. I wanted to make sure to get my second question in, but if you can just clarify that. And my second question was on SG&A. Terrific job on SG&A. It only went up 5%, mostly as you mentioned, incentive comp. Your homebuilding revenues went up more than 1/3. So if I think about the variable components of SG&A, the commissions and the co-broke, that implies that on a level SG&A base, against the 35% increase in the home building revenues, that there were parts of your SG&A that were contracting meaningfully. Now you obviously mentioned that the decline in community count is something that helps there. But I just wanted to understand, what is declining so substantially, and what have you been so successful in, in actually reducing outright so significantly?

Nishu, one thing you have to remember is we've actually got commissions up in cost of sales, so that big variable piece that you're looking for is actually going through margin, not through SG&A. So I would suggest there's -- I mean there's lots and lots of moving pieces. But really the primary driver of the change in SG&A was compensation related to the improved performance of the business.

Nishu, to add to that, we have said pretty consistently, we felt like we could ramp the business 30%, 40%, plus or minus, without adding a lot of SG&A. And I think that's what we're demonstrating here very pointedly in this quarter. We've got significant ramp up in revenue and total business without much change in SG&A, so we feel good about that. And the leverage from here, we feel good about. I think you had, had a follow-up question with regard to the land piece. The $950 million to $1 billion was kind of our previous level of spend in '11 and '12. And we had increased that last quarter to the kind of $1.2 billion level and a little more in '14. To be clear, that's now at the $1.4 billion authorized level for '13 and '14. And just to note and highlight something Bob said, a good portion of that's development spend, right? So every single incremental dollar is not into a new land transaction, per se. It's development spend in communities that are running faster, that type of thing. So we feel good about that. And then to your question about whether or not that's the maximum that the balance sheet will allow, I would suggest the balance sheet would allow more than that. But we are being very disciplined around how we're thinking about it. And candidly, you're seeing us redeem some notes. Bob mentioned we're looking at all uses of capital. So gone are the days where every available free dollar's going to go back into development in land for the company. We want to drive the best returns.

Your next question comes from the line of Buck Horne with Raymond James. Buck Horne - Raymond James & Associates, Inc., Research Division: Wondering if you could provide the mix of financing that your buyers use? If you have that data, the splits between FHA mortgages or conforming mortgages? And also if you -- have you seen an uptick in the number of cash buyers recently?

I would tell you that the mix of business is about the same. It's about 1/3, government spec. And in terms of cash buyers, I haven't heard anything substantial around that. And if you think about it, if you look at our mortgage origination, they're up 35% year-over-year. That's -- the builder was only up 23% year-over-year. Again, we had capture rate, so we're getting more of the business, which tells me that there's probably less -- or not less, but not a significant change in cash buyers. Buck Horne - Raymond James & Associates, Inc., Research Division: And do you have the number of finished lots you had on balance sheet? And also, roughly, how many mothballed lots are still on the balance sheet?

The finished lots are about 1/3. It's pretty consistent with where we were last year. And we've struggled with the mothball concept over time again, because of our Del Webb position. So we haven't provided a mothball number.

Thank you. This does conclude today's question-and-answer session. I would now like to turn the call back to Mr. Jim Zeumer for closing remarks.

Thank you, Jessica. I want to thank everybody for their time this morning. We will be around all day if you've got any follow-up questions. Beyond that, we'll look forward to talking to you at the end of next quarter.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect your line.