PulteGroup (PHM)

Q3 2011 Earnings Call

October 27, 2011 8:30 am ET


James P. Zeumer - Vice President of Investor Relations

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

Robert Shaughnessy - Chief Financial Officer and Executive Vice President


Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

Joel Locker - FBN Securities, Inc., Research Division

Rob Hansen - Deutsche Bank AG, Research Division

Michael Rehaut - JP Morgan Chase & Co, Research Division

David Goldberg - UBS Investment Bank, Research Division

Stephen F. East - Ticonderoga Securities LLC, Research Division

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Susan Berliner - JP Morgan Chase & Co, Research Division

Michael R. Widner - Stifel, Nicolaus & Co., Inc., Research Division

Stephen Kim - Barclays Capital, Research Division

Alex Barron - Agency Trading Group

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

James McCanless - Guggenheim Securities, LLC, Research Division

Steve Stelmach - FBR Capital Markets & Co., Research Division

Ivy Lynne Zelman - Zelman & Associates, Research Division

Josh Levin - Citigroup Inc, Research Division



Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 PulteGroup Earnings Conference Call. My name is Tanya, and I will be your conference moderator for today. [Operator Instructions] As a reminder, this conference being recorded for replay purposes. I would now like to hand the presentation over to your host for today, Mr. James Zeumer, Vice President of Investor Relations and Corporate Communications. Please proceed.

James P. Zeumer

Thank you, and good morning, everyone. I want to thank everyone for participating in today's call to discuss PulteGroup's third quarter financial results. On the call with me are Richard Dugas, Chairman, President and CEO; Robert Shaughnessy, Executive Vice President and CFO; and 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 on our corporate website at pultegroupinc.com. Further, an audio replay of today's call will also be available on the site later today.

Please note that any non-GAAP financial measures discussed on this call, including references to gross margins and SG&A expenses 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 made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.

Now let me turn the call over to Richard Dugas. Richard?

Richard J. Dugas

Thanks, Jim, and good morning, everyone. I am very pleased to report that PulteGroup's homebuilding operations, excluding any impact from the goodwill impairment and tax benefit recorded in the period, returned to profitability for the third quarter. The improvement in our operating performance reflects a combination of higher closings and significant gains in homebuilding gross margins and reduction to SG&A cost. The gains in margin and overhead are particularly important as they benefited from success and initiatives we have discussed previously.

More specifically, adjusted gross margins increased by almost 2 full percentage points from last year and 130 basis points over Q2 from our work to lower construction costs, increase presales and rebalance our base house versus option pricing model along with the better mix of closings. Based on ongoing initiatives to drive greater operating efficiencies, we are confident we can continue growing our margins over the long term.

Our third quarter results also shows significant overhead leverage as homebuilding SG&A dropped to 10.6% of sales, which compares to the 14.1% as adjusted in the third quarter last year.

Over the past year, we have taken actions to reduce annual overhead spending by approximately $150 million, the benefits of which are evident in our Q3 numbers. Investors typically focus on homebuilding overheads, but I would point out that on a year-over-year basis, we also significantly reduced our corporate expenses.

For the quarter, we maintained our sign-up pace compared with the last year, but it was realized on 4% fewer communities. With quality land acquisitions being harder to find in today's market, we know we have to squeeze out better performance from our existing asset base and be very focused on how we allocate capital going forward. This will also help to improve our SG&A leverage and cash position over time.

I appreciate that the accounting charge related to goodwill impairment means we showed a loss for the quarter, but that does not discount the important progress we have made in our operations. Given our expectation for business conditions to be relatively stable through the end of 2011, we remain well positioned to deliver operating profitability in the fourth quarter as well.

Looking beyond our 2011 results, we are also completing our planning and budgeting work for 2012. We don't provide guidance, but I will highlight one important change that is influencing the process, namely, how we look at capital allocation in general and how we evaluate investing in the business specifically. For us to deliver a meaningful improvement in our returns, we are reassessing some of our practices, including how we allocate available capital across different investment opportunities, how we evaluate and use our existing asset base to deliver its greatest value, how we prioritize the individual markets and projects in which we invest and how we can more effectively risk adjust project investments given the potential for significant differences in estimated build-out times.

As we have talked about before, the goal is to develop a more capital-efficient operating model with the greater emphasis on margins, asset turns, cash generation and higher overall returns. As with our work on margins and overheads, we will certainly be talking more about capital allocation and investments going forward as all are critical to -- excuse me. As all are critical components to improving PulteGroup's long-term shareholder returns.

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