PulteGroup's CEO Discusses Q4 2011 Results - Earnings Call Transcript

PulteGroup (PHM)

Q4 2011 Earnings Call

February 02, 2012 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 O'Shaughnessy -

Robert Shaughnessy - Chief Financial Officer and Executive Vice President


Michael Rehaut - JP Morgan Chase & Co, Research Division

Nishu Sood - Deutsche Bank AG, Research Division

Ivy Lynne Zelman - Zelman & Associates, Research Division

Daniel Oppenheim - Crédit Suisse AG, Research Division

David Goldberg - UBS Investment Bank, Research Division

Stephen Kim - Barclays Capital, Research Division

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

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

James McCanless - Guggenheim Securities, LLC, Research Division

Alex Barrón - Housing Research Center, LLC

Buck Horne - Raymond James & Associates, Inc., Research Division

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

Jack Micenko - Susquehanna Financial Group, LLLP, Research Division



Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 PulteGroup, Incorporated Financial Results Conference Call. My name is Katina, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Jim Zeumer, Vice President of Investor Relations and Corporate Communications. Please proceed.

James P. Zeumer

Thank you, Katina, and good morning. I want to thank everyone for participating in today's call to discuss PulteGroup's Fourth Quarter Financial Results. On the call today are Richard Dugas, Chairman, President and CEO; Bob O'Shaughnessy, Executive Vice President and Chief Financial Officer; 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 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 risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.

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

Richard J. Dugas

Thanks, Jim, and good morning, everyone. For the last couple of years, we have been on the record as saying that we thought demand for new homes was stable. And at roughly the 300,000 level, the numbers support this position.

Looking ahead to 2012, our planning assumption is that we will experience a similar level of demand. While there are signs this may prove conservative, we are not relying on higher demand to improve our results. Instead, as we have discussed on prior calls, in late 2010, we undertook a comprehensive review of our business to identify those areas offering the greatest opportunity for improvement.

Executing on the findings of this review, we spent 2011 developing and implementing a series of actions to improve our fundamental operating and financial performance in key areas, including margins, overheads and inventory turns with a view to improving our return on invested capital over time.

The underlying initiatives range from value engineering and should [ph] costing to overhead reductions, new pricing strategies and re-weighting some of our market positions.

Over the course of 2011, our efforts gained traction and have supported the steady improvement in the company's results. That trend continued, and in some areas, accelerated in the fourth quarter. In a minute, Bob will review the details of the quarter, but there are a couple of numbers I'd like to highlight, which demonstrate the meaningful progress we have made.

On a year-over-year basis, our Q4 adjusted gross margins expanded by 200 basis points to 18.6%. Much of the gain in the quarter was driven by cycling through some older communities and bringing newer communities online, plus an increase in the number of move-up homes closed in the period.

What makes our results even more compelling is that we expect benefits associated with our 2011 work on house cost reductions and operating efficiency to become visible in 2012 and beyond, allowing us to build on the margin gains we have already realized.

While adjusted margins have been rising, our overhead costs have been falling, as SG&A in the quarter dropped to 10% of revenues. Through the combination of better gross margins and reduced overheads, our operating results improved dramatically in the period. And based on current expectations, we see opportunities for further margin progress in 2012.

Along with our improved operating results, we are making decisions that align with changes in how we want to allocate capital going forward. As we discussed on our last call, we have made changes in how we evaluate assets and prioritize markets and projects and how we can move more efficiently -- more effectively risk adjust project investments.

It takes time to meaningfully move the needle, but we are making different decisions. For example, in the fourth quarter, we completed $64 million in land sales representing about 3,500 lots. Most of these transactions involve projects that weren't coming online for several years and required significant additional development dollars. We made the decision to exit these assets with a view towards redirecting our investments and development spend on more immediate projects that we feel will generate higher returns.

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