PulteGroup (PHM)

Q2 2011 Earnings Call

July 28, 2011 8:30 am ET

Executives

James Zeumer - Vice President of Investor Relations

Robert Shaughnessy - Chief Financial Officer and Executive Vice President

Michael Schweninger - Principal Accounting Officer, Vice President and Controller

Richard Dugas - Chairman, Chief Executive Officer, President and Member of Finance Committee

Analysts

Daniel Oppenheim - Crédit Suisse AG

Stephen East - Ticonderoga Securities LLC

Nishu Sood - Deutsche Bank AG

Megan McGrath - MKM Partners LLC

David Goldberg - UBS Investment Bank

Kenneth Zener - KeyBanc Capital Markets Inc.

Josh Levin - Citigroup Inc

Michael Rehaut - JP Morgan Chase & Co

Robert Wetenhall - RBC Capital Markets, LLC

Michael Widner - Stifel, Nicolaus & Co., Inc.

Adam Rudiger - Wells Fargo Securities, LLC

Michael Smith - JMP Securities LLC

Joshua Pollard - Goldman Sachs Group Inc.

Presentation

Operator

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» PulteGroup's CEO Discusses Q1 2011 Results - Earnings Call Transcript
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Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 PulteGroup, Inc. Earnings Conference Call. My name is Kendall, and I'll be your operator for today. [Operator Instructions] I will now like to turn the conference over to your host for today, Mr. Jim Zeumer, Vice President of Investor Relations. Please proceed.

James Zeumer

Great. Thank you, Kendall, and good morning. I want to thank you for participating in today's call to discuss PulteGroup's second quarter financial results. On the call today are Richard Dugas, Chairman, President and CEO; Bob O'Shaughnessy, Executive Vice President and Chief Financial Officer; Mike Schweninger, Vice President 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 also be available on the site later today. Please note that any non-GAAP financial measures discussed on the call are reconciled to the U.S. GAAP equivalent as part of the press release and as an appendix to the call's presentation slide deck.

Finally, today's presentation may include forward-looking statements about PulteGroup's future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.

With that, let me turn the call over to Richard Dugas. Richard?

Richard Dugas

Thanks, Jim, and good morning, everyone. With the first 6 months of 2011 behind us, I can say that the year is developing in line with many of the planning assumptions we used headed into 2011. We continue to believe that the industry is moving along a cyclical bottom and is proving to be fairly stable. Our Q2 results are consistent with this position as our net sign-ups of roughly 4,200 homes were comparable to both last year and the first quarter of 2011. More than the often cited excess of supply of existing housing stock in the market, we view the lack of demand as the bigger issue hurting the industry today. Simply put, we need more jobs and better consumer confidence before a meaningful recovery can occur.

Given this as a backdrop, we'll take it as a positive that demand remains flat. The less positive news is that the industry is operating at very little levels of production with single-family starts around 400,000 and new home sales of roughly 300,000. At the risk of stating the obvious, such low volume makes the business that much more challenging and demands have we reevaluate every facet of our operations. From how we think about local market opportunity and related land acquisition to the homes we design and the materials we source, we are working to deliver improving results in the face of today's highly competitive market conditions.

Many of you are familiar with the project work we had launched toward the end of 2010 to identify and address key issues that were hindering our business performance. The ultimate goal of this work is to drive significant improvement in PulteGroup's operating and financial results, and in turn, long-term shareholder returns. The project work helped to define potential strategies and tactics to meaningfully expand margins, reduce overheads and increase asset turns. The work also looked at opportunities within the company's capital allocation processes, including how best and how much to invest in the business, prioritizing individual markets and how to structure land investment to drive better returns. PulteGroup's Q2 results show that we are starting to make some progress toward improving these key metrics and our overall business performance.

In a few minutes, I'll ask Bob O'Shaughnessy to provide details on PulteGroup's second quarter results, but there are a couple of points I want to highlight as representative of the progress we are making. Reflecting the expiration of the homebuyer tax credit in April of last year, closings on a year-over-year basis were down in the quarter, but adjusted gross margins remained stable at 17.2% and were up sequentially 30 basis points from Q1 of this year. Including these 30 points, over the past 2 years, we have recaptured about 800 basis points of gross margin, but we appreciate there's still a lot of runaway in front of us to continue the rebuilding process.

Accordingly, we expect to deliver additional margin gains through the back half of this year and assuming overall operating conditions remain stable or improved in future quarters as well. Among the opportunities we see to maintain and ultimately enhance margins are: first, preliminary gains from our house cost construction initiatives. Longer term, we see the potential and the need to capture significantly more margin dollars from our core construction operations; second, increase closings of higher margin presale homes with less reliance on potentially lower margin spec sales; third, general stability around pricing and insurance selling incentives; and finally, near-term gains associated with increasing closings from distressed land purchased in prior periods.

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