PulteGroup, Inc. Presents at 6th Annual J.P. Morgan Homebuilding and Building Products Conference 2013, May-21-2013 08:45 AM

| About: PulteGroup, Inc. (PHM)

PulteGroup, Inc. (NYSE:PHM)

May 21, 2013 8:45 am ET


Robert T. O'shaughnessy - Chief Financial Officer and Executive Vice President

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


Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Okay, good morning, everyone. We're going to continue. If you want to find your seats. So moving right along, we have our second speaker and presentation of the day, PulteGroup, with the CFO, Bob O'shaughnessy. We also have Jim Zeumer of the Investor Relations team present on this. Pulte, one of the leaders of the space and historically, always been one of the most, not only geographically diverse, but demographically diverse builders with its Pulte move-up brands, Centex first time brand, and Del Webb Active adult, and Del Webb really being one of the longtime brand names in the home building industry. Something that even before I followed Homebuilding. When I just picked it up, my dad, a long times Bronx native and Yankees fans said, "Oh, I know Del Webb. They used to get me mails that come out to Arizona." So really a lot of history and tradition with the company. Bob is going to run through comments, I think, hopefully, 15, 20 minutes. There's a lot of time for questions. And I think one of the real interesting elements of since Bob joined the company has been the more aggressive focus on asset management and returns really kind of, I think, in a way leading the charge in the industry, focusing more on margins than pays and the community count declines have certainly been a part of that as the company is managed through a different lens. So thanks in advance for your participation. And I'll turn it over to Bob.

Robert T. O'shaughnessy

All right, thanks, Mike, and thanks, everybody, for coming this morning. We're happy to be here. I'll walk you through some slides, and as Mike said, take some questions at the end. Jim and I will try and do this. So sort of what we're going to try and accomplish today is we'll give you some macro demographic data to show why we think we've got an expanding market, why we think it's a recovery that has some legs. We'll walk through what Pulte is, what it is, how we came to be where we are, our focus on returns, as Mike referenced and the value creation process, which some of you may have heard of. And at the end, we'll walk through our most recent quarterly results.

So first slide, you can see you've got housing starts. And what we've shown is on the top, the red line represents the median housing starts at 1.5 million units a year. And you can see certainly since 2007 that we've seen housing starts significantly below that. So we've under invested as an industry. And so much so that if you look at the bottom of the chart, you can see for the last 3 years or so, we're actually building accumulative deficit relative to that median at 1.5 million units. And so what we've seen, partly because of that is an upturn in housing demand. So if you look, over a period of time, we've seen an almost 80% decline from the peak in new home sales to just over 300,000 in 2011. Certainly, we've seen an increase in demand. Most recently, at the end of March, our annual rate is at about 400,000 units, so certainly an improvement, but significantly below historical norms.

We think the things that are driving that are clearly favorable demographics, 2 big cohorts moving to the system. You've got the Millennials as well as the baby boomers, and as well as low housing prices. Certainly, low interest rates are a big contributor to that, and maybe importantly, a significantly rising rental market. So we've got all things leading towards people saying now is a good time to buy a home, and again, we have pent-up demand. On this chart, what you can see is on the left, the number of share households or relatively recent phenomena. You've seen an increase in the number of people that are living at home, whether it's because they can't afford to move out, don't have a job. They may be living with their folks, or multi-generationally, you've got parents coming home to live with their children. And then the change in the number of households, and what you could see is household formation actually ramped up for the last year or 2 after some pretty substantial declines. So with that, we see a lot of people coming to market or with the capacity to come to market. And certainly, from a new housing perspective, one of the things that we think is beneficial is there's a limited number of units on the ground, and so what we've laid out here is for sale new home inventory. Interestingly, if you take that to a broader spectrum, we've seen that there's a lot of -- with all the institutional investment in foreclosure activity, there's just not a lot of supply available. So in many markets, you've got below 3 months supply of actual housing available-for-sale. So when folks are actually out shopping, new becomes an even better alternative because it's one of the only things around.

So now, turning to Pulte specific. We are among the nation's largest builders. We're in 55 major markets, almost 30 states. We've delivered more than 600,000 homes since being formed in 1950, headquartered in Michigan. And again, as Mike pointed out, I think unique among the builder group that we serve each of the major demographics specifically so we're branded. We've got Centex, which is our first time offering; Pulte Homes, which would be our move-up; and then Del Webb; and then Florida DiVosta, which is for active adult or age-targeted. And again, a little bit unique, and that roughly 1/3 of our business is that active adult space. So it is a differentiator for Pulte.

If you look at the map, you can see where we layout so certainly a big presence in all of the smile states, starting up in the northeast down through Florida and up into the Pacific Northwest. And again, representing where we were formed, we've got a pretty big business in the Midwest. I'll ask you to notice on this chart, you've got different color designations, and I'll talk more about why in a minute. These are the zones that we operate. So we're operating geographically and we're managing our process using the breakout that you see on this map.

So again, Centex, Pulte, Del Webb, being the primary product offerings for first-time move-up and active adult. If you look, you can see 31% of our closings in 2012 were that first time space, 43% from move up and then 26% from Del Webb. If you go back 2 years to 2010, you would see this would look different than you would have seen. Centex would have been about 40% of the business. Pulte would have been in the 30s and Del Webb has been pretty consistent between 26% and 30%. So we haven't seen a substantial mix shift in the business. Part of the reason in 2010 that Centex was so big at portion was certainly the first time homebuyer credit, which created a demand in that space. But also, most of our investment over the last 2 years has been in the move-up space. So we actually think you'll see that 43% continue to increase as a percentage of the closings going forward. We've -- I've talked a little bit about Del Webb and the thing we like to think about is the demographic that we're serving. If you look between 2010, 2020, we expect more than a 30% increase in that demographic so there's a lot of people that are actually coming to that space, and we offer a lifestyle choice. So for folks, whether they are retired or not, so many of the people that live in these communities still work, but they are seeking a different lifestyle, one where they downsize from their house, less maintenance, living with folks that are actually like-minded. They're very active, very social, and so we've got strong demographic demand for that, and they're also our healthiest buyer. 40% of the people that buy Del Webb homes are actually paying cash. And for the portion that don't pay cash, they actually have much lower mortgages so their loan-to-value is higher. They're our most affluent buyer. They're also our most discerning buyer. They're not motivated to buy a house. We'll have to sell a house typically. So over time, they've typically been slowest back to the party in terms of when the market is recovering, and that's been consistent. If you look at our 2012 results, same stores is difficult, but sort of same store comps here are paced. Our absorptions at Del Webb communities are up from a 6% comp in the first quarter to north of 30% in the fourth quarter. So in the first quarter of this year, it was around 17%, so we're starting to see them come back, but it's been more measured than in the move-up space.

So what have we been up too? If you've been following Pulte for the last 2 or 3 years, you'll have heard these words before, but we're focused on return on invested capital. So we did a deep dive. We actually took time to say, in late 2010, early 2011, "What have we done wrong? Let's look back and see what created the paradigm that we just live through." So obviously, the market did what it did. But how did we do relative to our peers, and what are drivers of value from a shareholder perspective? And what the data would show you, we look back over 20 years and if you look at just about any slice of time during that, return for shareholders was driven by companies that generated upsize relative to the peers return on invested capital. So there was a point in time where Pulte, I think just like the rest of the space, was trying to build volume, and chasing that. So as we looked at it, we said, "Okay, we're lagging on returns." And one of the drivers of that, well, we think it's gross margin. We think it's operating efficiency. We think it's asset efficiency. So let's take a look at what we found was over that time, we were a top quartile performer on revenue generation, but we weren't top quartile in any of those other key operating metrics. So we said about, and what we've called as the value creation initiative internally, we said about trying to improve our margins to improve our operating leverage and to improve our asset efficiency.

We saw to expand homebuilding gross margin, the way we did that was to increase our purchasing efficiency and our production efficiency. Internally, we called those should costing, so when you're buying things, what should things costs, a really creative name. But what the idea was to say, "Let's look in each market, what should a commodity cost us?" It might be concrete. It might be lumber. And what are we paying for relative to our expectations? If we're paying more, let's seek to drive that price down, and if it's because of the way we're behaving, we're working with our trades to try and be efficient for them, and we've seen real opportunity there. Similarly, we look behind the walls, and so we've called that Value Engineering. So when be built homes, how did we have the HBAC runs as an example? Did we have 2 runs going up the side of the house? And if we could move it from the center of the house in like a tree fashion, can we reduce labor and input cost? So things that the consumer didn't see, but just trying to be more efficient in how we do business. Obviously, like everybody else, we downsized as the economy softened on us. I think the last major restructuring we undertook was probably in the first quarter of 2011. And we got to the point where we had eliminated cost and could be profitable at the then 14,000 or 15,000 unit production level. And what we said was we can operate at this level, and we can expand from here from a delivery standpoint without driving significant increase in full-time employees or costs. And I think the most recent quarter's are good example of that. We've delivered 23% more unit volume in the first quarter of '13 versus '12. But our SG&A was only up $6 million or $7 million, and most of that was the actually compensation expense reflective of the better operating environment and some start-up costs as we repositioned some products. So we think we've got a pretty good handle on our cost structure. And so unless we choose to invest in something, and maybe it might been an IT project or if we actually started to expand our footprint, so if we went into the new markets or actively open new communities, we think we've got room to run on the overhead side hereto without increasing spend.

We've certainly focused on inventory turns. We were a long land position. We've challenge that. So if you take a look back in time, Pulte was always one of the companies that is buying long land, and we held on to it. We did a really -- a thorough analysis of every asset position that we have and categorized it, and said, "Okay, do we want this land? And if not, what are we going to do about it?" So we've actually started to sell properties that are non-core to us. We don't think we'll build on it for a while. There are markets where we're not a big presence. You can see over the last 24 months or so we've sold more than $200 million in assets, and at the same time, we've actually been restricting on a relative basis the investment we're making in the business, telling people we need to work through our asset base. And so as part of that, we changed the way we're allocating capital inside the business. Our primary driver today is to maintain relative market share in markets where we operate. So that represents how big a builder are we compared to the other builders that are in that market because we can demonstrate that in markets where you're one of the biggest builder, you get the best look at land transactions. You have the best ability to negotiate your input costs, both commodity and labor, and certainly, you can maximize your overhead leverage efficiency. So we've done that. And the way we've done it is say, "Okay, we're going to invest where need to invest." And at the same time, we've stratified how we're investing. So historically, we would have invested if a land transaction, with pro forma at a 21% return, we would invest. Today, we've actually scaled that between 21% for a transaction that we've identified as being lower risk, and think of that in terms of, okay, we've got a finished lot option transaction versus one where we're buying raw land that we're going to develop and be building for 7 years. That would be a higher risk transaction for us, and would require higher return maybe in excess of 30%. So again, these are the core tenets of what been working on for the last 2 years. And if you look at our operating margin over those 2 years, I think you've seen both in absolute terms, and relative to our peer group, solid performance. And so we'd like the results of what we've done to this point.

So we've talked about how do we improve gross margins. The things I talked about, so the purchasing and production efficiencies, what we're trying to do is embed them in a process now that is designed to say, how do we actually design homes? If you go back in time, we had 15,000 closings and 3,000 floor plans. So we're closing floor plans on average 5x a year. Certainly, you can't be very efficient in your manufacturing mindset and your purchasing and production mindset when you have that much diversity. So we're trying to design new product, and we're trying to get consumer orientation involved in that. So we have a 12 step process to design what we call commonly managed plans, and our goal is to increase so that probably 70% of the houses that we sell will be under these commonly managed plans because embedded in that are the should costing and value engineering that we talked about. But also, 4 steps during the process, we've actually got consumers touching those floor plans and validating the thought process behind them.

We're working on how we price things. So we actually have a detailed analysis that shows what's generating our average selling price and margin attribution. We break it down between lot premium cost, what our options are generating, what the base house costs, as well as discounts, and other selling cost. But interestingly, if you look at it, when you start to think of it in those terms, what people want is what they want rather than what we want to build for them. So we've reoriented our product offering to be competitive in the marketplace and then said, "Okay, from there, if you like this lot, we're going to ask you to pay for it. If you want certain options, we'll put them in, but we're going to ask you to pay for it." And it's changed the mindset of how we sell. And interestingly, if you look at the first quarter this year versus last year, we had highlighted, I think, on our earnings call, that we were able to raise base prices in just about 3/4 of our communities during the first quarter. In concert with that, we saw a 40% increase or $3,000 or 40% increase in our lot premium for closing. We saw a $6,000 increase, almost $40,000 in option revenue. We've, again, increased based pricing and interestingly, despite all that, our discount actually decreased by 190 basis points to 3.4%. So we're able to drive all these accretive revenue enhancement tools without having to discount in the marketplace. So real positive momentum there.

And the other thing we're focused on is when we look back in time, again, capital efficiency, we're trying to make sure that when a home finals, when it's actually complete, that we're closing it as quickly as we can because to have that much money invested and sitting without closing is a real drag on our returns. So we are focused on spec production. We've limited it. There are certain markets where it makes sense, or for attached, we're always going to have it. But in the first quarter, less than 20% of our production was speculative. The rest were to be built for people who would sign contracts. The really nice part about this is if you look year-over-year, our spec production was so far down and our finals were so far down to 50%, 60% decreases that we were able to actually take $75 million out of our house cost, our investment on the balance sheet, despite a 5% increase in overall production. And the real win of this is we have found that if you look back historically, if we have final specs on the ground, the discounts that we have to offer and to entice people to buy it can be several hundred basis points. And so what we're doing is we're building houses that people want on a production schedule that make sense for them, and so our total margin actually improves because of that.

Certainly, in today's market, the market helps, and I mentioned that we've got a mix shift to the move-up buyer, which has a higher relative margin than the Centex buyer, but again, all these different prices have led to what you can see on here as year-over-year, 420 basis point increase in gross margin, and even on a sequential basis, 110 basis points. And pleasing for us is that, that actually applies to all 3 brands. So each of them had increases of more than 400 basis points year-over-year.

Again, we've talked about the fact that we are trying to make sure that we're -- our operating efficiency is -- that we're disciplined in how we're spending our SG&A. You can see last year, 190 basis points decrease in SG&A as a percentage of sales. You look at the first quarter of this year, again significant ramp-up and closings. Not a significant ramp-up in SG&A. So you can see more than 300 basis points savings in SG&A as a percent of sales. So as we try and extract more closings out of our existing footprint, again, we think we've got a lot of opportunities to generate leverage their.

So I've talked a lot about capital efficiency as part of this, and that we curtailed the investment on a relative basis. Having said that, we are investing. You can see on the slide here that we've got $1.4 billion in land and development spend authorized for fiscal '13. We're not sure that we'll spend all of that, so we've given the field the latitude to go out and spend that much money. In a market that's getting a little bit more heated, land is becoming more expensive. What we haven't done is decreased our criteria. So what I laid out, where we have the sliding scale of required returns, we didn't minimize those at all, and we haven't given our operators the opportunity to assume price increases or pays increases. So the deals have to depend on today's economic environment. So I think what it's done is it's created a mindset in our field personnel in concert with the change in their compensation plans. So now Jim and I and all the way through the management in the field are compensating on the same thing. So on a short-term basis, it's gross margins, SG&A and inventories turns, again, all the things that you heard me talking about. And on in a longer-term basis, it would be on improvement in return on invested capital. So the mindset that I've been talking about here is shared by people in the field. So as we look to invest, obviously, we're trying to do it intelligently. We've got a bullet here saying we're trying to emphasize options. In today's market, that's a little bit challenging because when we go in and talk to a land seller and say, "Hey, we'd like your position, but we want to buy it. It takes over 3 years." I'll say, "Well, we've got somebody next to you that will actually pay cash today and take it all down." So we've got a big balance sheet. We've got really great land development talent in the organization. So we're willing to do that, and we're actually being pushed to do a little bit more than where we sit 2 years ago, but again, the focus here is let's try and invest in the markets where we maintain relative market share and get outsized returns.

So if you think back 2 years ago, I started with the company, the balance sheet was challenging. We had really high leverage. All these actions that we have talked about have generated a significant amount of cash. We're not a cash taxpayer so our earnings pull straight to the bottom line in cash, and we've been able to rationalize a lot of investment off the balance sheet. So in the first quarter, we actually generated cash, again, historically, a period when builders will invest, net invest, we were actually able to generate $183 million in cash. Our balance was up to $1.7 billion. We announced recently that we're going to call in our 14 maturity stack. So you can see on the chart there, it's shaded in yellow, almost $400 million. We'll fund that later this week. So total debt retirements in the last year, almost $1 billion. Going back beyond that, several billion dollars over the last 3 or 4 years, all with cash generated from the business. So we haven't tapped the capital markets in years and are actually working to try and get to a debt-to-capital ratio below 40%. You can see here, we were 52% at the end of March on a pro forma basis for the take-out of the 14 maturities. That will go down by 400 basis points. So we're making progress on those goals and today, I would tell you with our cash position and our debt maturity profile, we have a lot of flexibility in what we can do going forward.

And so moving on to the highlights, I think we've talked about this $0.21 a share, up from $0.03 loss last year, really proud of that 35% increase in revenues, talked about margins being up and SG&A a being down. New orders, up 4%. Order dollars, up 18%. Backlog is up 52%, and that's -- interestingly, the $2.4 billion, that's on a 35% increase in unit volume, so real price mix differential in that. So a really healthy backlog. We've talked about our debt. Selected data, I think, we've probably touched on all these thing. The only thing I would point out is financial services pretax, $14 million in the first quarter of this year versus $7 million last year. It's a really good operating environment for mortgage originators right now. The rates spreads are beneficial. We're not sure how long that will last, but it's nice to have while it's here. The good news here is that this is actually volume-based. So the increase that we saw this year versus last year is because our volumes are up. Our capture rate, meaning, how much of our own internal business do we do because we don't do third-party financing, is up almost 400 basis points year-over-year. I think it shows the strong service component of how -- what they do and the value they bring to the homebuilding operation by being able to say, "Okay, if the home is going to be ready on January 1, we can close on January 1." Whereas in the third-party market, that can be challenging today.

Balance sheet, we have talked about this, $2.5 billion of senior notes outstanding. That will come down with the pending call. So again, a pretty healthy balance sheet. So where we sit is we feel pretty good about our position in the market. We've made a lot of progress. We think we've got opportunity on margin to expand further. We like the way we're investing in the market. We've got a lot of money at work. We still like the returns that we're seeing, and again, with our balance sheet, have the flexibility to be opportunistic about how we do this and the good news is, if you look through the organization, I am still at 2 years, the new person on of the block. If you lever down through all the operating teams, we've got significant tenure. So folks know how the business can operate, how it can operate efficiently. Certainly, most of them were there back before the market ran up. And so the return and return on invested capital focus that we're now re-propagating in the business, they've lived with and operated with through a long time. So with that, we'll turn it over for any questions.

Question-and-Answer Session

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Great. Thanks, Bob. I'm actually going to ask 1 or 2 quick ones before we turn it over just to make sure that a couple of key topics are hit on. With the overall focus on capital allocation, and you mentioned the large cash balance, the cash generation in the first quarter, so we've talked about recently is a -- the talk in this industry, I think to some degree lacking, is more balanced approach in terms of returning invested capital and need of returning capital. Only a couple of companies in the industry actually buy back stock, bought back stock over the last cycle in a meaningful way, where there is more aggressive reduction in share count as a result. You don't have a revolver in place right now, and certainly, that's a reason for the higher cash balance, but as -- you certainly would expect that to change over time. How could you envision this company 3, 4 years down the road, where, let's say, perhaps, the price appreciation is in as steep as it is today, as you do have very tight supply and strong pricing dynamics, I mean, is a share repurchase program something that could take in more a larger role in terms of the options of capital allocation? And how do you guys think about that in terms of your community, the board, et cetera?

Robert T. O'shaughnessy

Sure. We've been pretty open about the fact that we want to be a more balanced capital company in the future. Historically, Pulte was a dividend payer. It has bought back shares at different points in time in the past. But what we think is that, today, we do have a big non-returning asset on our balance sheet and it's our cash. We think that the best investment option available to us today is to invest in the business, and I think that may continue. But we also think you have to be balanced rather than, say, we have a mandate to go spend x dollars. We want to be more measured in it, because at the end of the day, if you're forcing people to buy, they will stretch, and maybe you buy some physicians you're not going to be crazy about. So again, our first and foremost consideration would be investment in the business. We have spent a lot of our money in the past 2 years, 3 years actually buying down our debt. We now feel pretty comfortable that we've got a very healthy debt leverage ratio. And so as we look forward, we've talked about the fact that return to shareholders would be part of the equation, as the consideration of what we do with our capital. Again, we've been a dividend payer. We have bought back shares. I would tell you, nothing to report today, but it would certainly be something we would consider. I think we have talked about that we wouldn't want to solely be in the mindset of all the cash or capital generation of the business would immediately be reinvested, but there may be something returned to shareholders.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Great. And secondly, you have a lot of focus and exposure to move up buyers, as well as the active adult. The first time buyers is a segment that has a lagged so far. I think, in the previous presentation, the thought came out about maybe will that being pulled forward with the tax credit in 2012 and some timing issues, obviously, it's a tighter mortgage market. How do you see the first-time buyer come back? And if you could talk a little bit about the trends that you're seeing right now in Centex, if there's any easing on the margins in terms of mortgage availability? And what you would expect over the next 12, 18 months?

Robert T. O'shaughnessy

Yes, this is, I think, an important point. That first-time buyer has not participated in the market to this point, at least, certainty not at the levels that the move up buyer has. If you look at our pace, our absorption paces in the first quarter, it was up 29% in the move-up space, only 11 percent in the first-time space. And I think it is all the things you mention. Credit is a challenge, and I've read that people think that the credit market's getting a little bit easier. I don't think that's true for the first-time buyer. The reason you see "losing their standard" is the people in the move up space are actually qualified buyers, and they're getting qualified and approved. But it's still difficult for them to come up with down payments. It's difficult for them to get approved for credit. And so what would drive participation by those folks, we think, would be job creation and wage expansion. We are a believer that most of the real lift -- there's a lot of pent-up demand, but it's in that move up space because that first-time buyer is still challenged, and for this expansion to continue at the some of the levels that some analysts are predicting, we think we're going to actually need to see real job creation, so a healthy first-time buyer space that can then feed that virtuous cycle of they're going to move in to move up. The people who are selling their move-up home can actually sell it, then they'd become a buyer in the active adult space. So again, jobs are important to that.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Great. Thanks. I'm going to turn it over to the audience for any questions. Right here in front.

Unknown Analyst

Bobby, you talked a lot about returns and market share in markets. If you sort of look at the markets where you participate, give us a feel for how many of those markets you feel good about your share, you're making good returns and you've got the lot inventory to sustain that, let's say, for the next couple of years versus how many markets aren't quite up just enough, and what's sort of game plan for those?

Robert T. O'shaughnessy

Sure, the question, I don't know if you could all hear it, was what markets do we feel comfortable with our market share and where returns are? And I would tell you that we are one of the biggest builders in every market we serve. And so on a relative basis, we feel pretty good about our positioning. There are certain markets where we will have to feed that a little bit sooner. So there are, in terms of returns, we're seeing good returns in all of our markets. The one -- people asked, "Well, how is the market behaving?" It's strong everywhere. It's stronger in the states that you have all heard about, Florida, Phoenix -- sorry, I was on California. Illinois has been an outlier for us just or -- and I think everybody it's been a challenging market. But return, the ability to invest and get good returns exist across the portfolio.

Unknown Analyst

Two points. On the first question is on gross margins, you talked about first quarter, you were at about 23% gross margins. Can you tell us what you were at the previous peak in gross margins? And do you have a target, I would presume, to exceed that based upon your new internal goals? Second question is on ROIC, can you tell us what your ROIC was for 2012? And what the specific targets are internally upon which you were being paid going forward?

Robert T. O'shaughnessy

I'll do the second one first and then try to remember the first one, sorry. Return for us, it depends on how you define it. First of all, do you include intangibles, do you include cash? So if you look on an absolute basis, our return was less than 10%. What we are being paid on is improvement in return on invested capital. So what I would suggest is sort of however you do it, as long as you evaluate it on a consistent basis over time, that improvement is what we're being compensated on. And sorry, your first question was on margins. Peak margins, and I wasn't here, but what I've heard is 25.1% is the "adjusted margins." So we probably had 70 basis points of interest expense, and it's an important distinction to make. In today's world, we've got a pretty heavy load. It will be almost 5 points of margin erosion from the amortization of capitalized interest. Historically, it was much lower than that. Going forward, it will be lower than that because of the deleveraging that we've been able to accomplish. But when we talk about 22.9% as an average margin this quarter, that's actually adjusted to exclude interest. So that peak interest, that peak margin of, call it, 25.1%, is compared to the 22.9%, so just to make things relevant. And we have not given any guidance, but I would tell we believe we have the ability to expand margin from here.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Any other questions? I'm just going to throw one more in just to -- in any case, anyone has thoughts before we let you go. On the gross margin point, I think it's important one, and there are builders right now that are at kind of mid-cycle margins of the past cycle even though you can argue or not at mid-cycle today. At Pulte, you have not only a lot of company-specific initiatives, but certainly, additional margin expansion for pricing power. I know you just said, "Hey, the only thing we're going to say is we expect margins to go up, but at the same time, what limits would there be in, let's say, not achieving or not getting back to that peak 25%?

Robert T. O'shaughnessy

Sure. I guess, 2 things I can think of right away. One would be we are clearly focused on driving maximum value for every lot. The one outlier to that would be on our Del Webb positions. So for some of those, we've got really long land supply. We own the land. We have ammenitized the land, meaning, we've put all the infrastructure in and now we're harvesting cash. And so in that case, think of it this way, we can either sell 4 homes or 5, and to sell 4, we can increase price by $1,000, right? Or we can sell the fifth by not raising price. We'll actually make the election not to raise price there which would be a relative headwind to margin to your point, Mike. But ultimately, we think it's a better return because we're harvesting cash there. And then secondly, it depends on how you buy land. And so what we've seen is a market that has changed, but what we've got -- we are agnostic to how we buy land, whether it is finished lots, and so I see every land transaction that the company does. And what we ultimately see is a deal may come across my desk that says, "We're going to take a 16 margin on these 100 lots, but we're going to take them just in time and their turn is 40%. Well, I'll approve that all day long. Alternatively, something may come through that has 27 margins because it's -- we're buying raw land. We have to get it. We have to finish the entitlements. We have to develop it, and so we can still enjoy a very nice return on that, and the margins maybe richer, but depending on how we buy our land could influence what our mix is going forward.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Great. Thank you. One more question?

Unknown Analyst

Bobby, you talked about how you're keeping -- on land deals, you're keeping the criteria the same, but the market is heating up. As you look over the last quarter or 2, have you been equally successful in closing deals? Or is it tougher, given how the market's heating up?

Robert T. O'shaughnessy

It's tougher, and in particular markets, it's tougher. So those more active markets, we're seeing more competition. Certainly, everybody's out buying in the public side. We're seeing a return of private builders, and they're probably more aggressive in terms of price. Having said that, we are still able to find transactions that work. Again, it's important to note that relative market share concept if you are a consistent buyer in the market and perform. So when you sign contracts, you perform on them, that matters, and so we're able -- we're certainly able to see our fair share of traffic and deals.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Great. Well, we're going to have to cut it off there. I appreciate the time again, Bob and Jim. Thanks very much, and we're going to have our next presenter, Hovnanian, at 9:30. Thank you.

Robert T. O'shaughnessy

Thanks, folks.

James P. Zeumer

Thank you.

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