Pulte Homes Inc. Q4 2009 Earnings Call Transcript

Feb. 9.10 | About: PulteGroup, Inc. (PHM)

Pulte Homes Inc. (NYSE:PHM)

Q4 2009 Earnings Call

February 9, 2010 8:30 am ET

Executives

Jim Zeumer – VP of Investor and Corporate Communications

Richard Dugas – Chairman, President and CEO

Roger Cregg – EVP and CFO

Steve Petruska – EVP and COO

Mike Schweninger – VP and Controller

Analysts

Josh Levin – Citigroup

Dave Goldberg – UBS

Carl Reichardt – Wells Fargo

Michael Rehaut – JPMorgan

Megan McGrath – Barclays Capital

Dennis McGill – Zelman and Associates

Ken Zener – Macquarie

Rob Hansen - Deutsche Bank

Alex Barron – Housing Research Center

Joshua Pollard – Goldman Sachs

Dan Oppenheim – Credit Suisse

Joel Walker – FBN Securities

Operator

Welcome to the fourth quarter 2009 Pulte Homes Incorporated earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to presentation over to your host for today’s call, Mr. Jim Zeumer. Please proceed.

Jim Zeumer

Thank you. I want to welcome everyone on the call and listening via the Internet to this morning’s call to discuss Pulte Homes’ results for the fourth quarter ended December 31, 2009.

On the call with me to discuss our results are Richard Dugas, Chairman, President and Chief Executive Officer; Steve Petruska, Executive Vice President and Chief Operating Officer; Roger Cregg, Executive Vice President and Chief Financial Officer and Mike Schweninger, Vice President and Controller.

For those of you who have access to the Internet, a slide presentation available at www.pulteinc.com will accompany this discussion. Given our merger with Centex and the resulting impact on our reported quarterly results, we have expanded the slide content. We believe these slides will greatly assist the understanding and analysis of our quarterly performance and we strongly encourage everyone to review this material.

As a reminder, on August 18th, 2009, Pulte Homes completed its merger with Centex Corporation. Unless otherwise identified, results reported in the release and on this call reflect the inclusion of Centex’s operations for the entire fourth quarter although prior period results have not been adjusted for this merger.

Finally, I want to alert everyone listening on the call must be considered forward-looking statements as defined by the Securities Litigation Reform Act of 1995. Pulte Homes believes such statements are based on reasonable assumptions, but there are no assurances that actual outcomes will not be materially different from those discussed today. All forward-looking statements are based on information available to the company on the date of this call and the company does not undertake any obligation to publicly update or revise any forward-looking statements as a result of new information in the future.

Participants in today's call should refer to Pulte's Annual Report on Form 10-K for the year ended December 31, 2008 and this morning’s press release for a detailed list of the risks and uncertainties associated with the business. Certain statements made during this call also contain references to non-GAAP financial measures. See this morning’s press release which is available on our corporate website Pulte.com for a reconciliation of non-GAAP financial measures to comparable GAAP numbers. As always, at the end of our prepared comments, we will have time for Q&A. We will wait until then to open the queue for questions.

I will now turn the call over to Richard Dugas for opening comments. Richard?

Richard Dugas

Thanks, Jim and thank you to everyone joining us on the call today. From sign up pace and margins to cost controls and cash accumulation, Pulte Homes’ fourth quarter results demonstrate another quarter of improvement in key business and financial metrics.

Our operations are clearly making important strides as we continue to advance on our primary financial priority which remains consistent profitability. Pulte Homes’ fourth quarter results reveal a number of very positive data points. That said, accounting charges related to goodwill, land and merger costs make this quarter more challenging to interpret. As we did in the third quarter we will do our best to isolate the significant charges taken in the quarter in order to provide better insight into the performance of our ongoing operations. Roger will provide more details on the quarterly financial results and at a high level there are several key metrics I would like to highlight.

First, order rates for the quarter were up 113% on a reported basis. The 100+% increase obviously reflects the merger with Centex. If you look at the results on more of a pro forma basis our Q4 signups were also very strong showing an increase of 32% over combined Pulte and Centex numbers for the same period last year.

Along with strong orders, we realized continued expansion in gross margin which was 14.2% for the quarter before impairments and merger related costs. Margins expanded every quarter in 2009 as we worked hard to lower our construction costs while improving our selling position by moving towards a build to order model. There is still much work for us to do but we made steady progress over the course of 2009 and expect further margin improvement in 2010.

Along with reducing our cost of goods, we are realizing similar success in lowering and leveraging our SG&A. Fourth quarter SG&A for the combined businesses was $188 million which is down more than $17 million from Pulte stand-alone last year. SG&A costs as a percentage of homebuilding revenue dropped 170 basis points as we realized meaningful overhead leverage on the volume delivered in the quarter. When you stop to consider we are now running two businesses versus just one last year this absolute reduction in overhead clearly demonstrates how aggressively we are attacking these costs.

Adjusting for the charges taken in the quarter we have significantly moved the needle in profitability through the gains we have delivered in both margin and overhead leverage. We fully appreciate you still have to count all of the other costs but driving the business to and ultimately beyond break-even are critical next steps to consistent profitability.

That brings us to the question that seems to be on everyone’s mind. Can Pulte be profitable in 2010? We stopped providing guidance two years ago but I think it is important we help to set expectations. As demonstrated in the fourth quarter on an adjusted basis we are much closer to being profitable than many expected. Organizationally we have positioned the business to be profitable in 2010 but success ultimately requires ongoing stability in market demand and associated pricing.

Internally we will do our part in that we fully expect to realize targeted synergies and overhead leverage and to capture the benefits associated with the adoption of our build to order model which includes better margins and more consistent closings. Externally while we are cautiously optimistic about housing demand in the year ahead we can’t control macro conditions but can only be prepared to respond as the year plays out. Again in making these comments it is not our intent to open up a financial modeling discussion. Rather, we just want to highlight the fact that our operations have worked very hard to reduce costs and improve their operating position heading into a year in which the macro environment has yet to be defined.

After three plus years of depressed industry sales and recent signs the economy is beginning to gear up there are reasons to be hopeful about U.S. housing demand in 2010. We continue to believe that job growth and improved consumer confidence are needed to drive a meaningful rebound in new home sales. That being said, we appreciate as the economy gets better the government will look to remove industry supports. The tax credit likely won’t be extended, mortgage rates will likely move higher and the FHA has already outlined plans that will result in some limited tightening of lending standards. Over time we believe that all of the government supports for housing will, and need, to go away. Ideally it happens as soon as consumer confidence and job growth return.

Regardless of demand conditions in the immediate future, having the opportunity to be profitable in 2010 was clearly enhanced by the strategic decision to merge with Centex. By running the two businesses with essentially one management team we have the opportunity to save over $310 million in corporate and field costs plus $130 million in interest savings we are realizing from paying down the $1.9 billion in debt. We have already implemented needed actions to generate these savings and remain on track towards our stated goal of capturing the first $350 million in annualized savings by the end of the first quarter this year. We also remain confident in achieving the targeted $440 million in annual savings by the end of 2010.

Beyond these cost savings as a result of the merger Pulte now controls approximately 155,000 lots which means we have a land pipeline that can help drive future sales and cash flow generation. More importantly, the simple fact we control lots and are not under any pressure to acquire additional land positions is certainly an advantage. One of the strategic pillars to the deal was acquiring Centex’s 56,000 lots while retaining our cash position. I think everyone is getting a better appreciation for the current land environment and the limited availability of well positioned, finished lots.

The long anticipated and feared flood of bank owned lots has not and in our view will not materialize. Replacing this fear more recently has been a growing concern that "A" location lots will remain scarce and that lot pricing has already started to rise. We are seeing new land transactions being offered and completed at values that are meaningfully higher than those of just 6-12 months ago.

2009 was tough but clearly a different trajectory than the prior couple of years. We will have to see how 2010 develops but the company’s ample cash position puts Pulte Homes in a very strong position to manage whatever the market has to offer. If conditions become more challenging we can further liquidate our inventory and increase our cash position. If positions get better we have a supported land pipeline to meet customer demand and the liquidity to fund working capital needs associated with any increase in home construction.

In conclusion let me thank our employees and business partners for their efforts and commitments throughout 2009. They have helped to dramatically improve Pulte Homes’ results and its near-term prospects. We are in a much improved position heading into the New Year and as we say internally it is time to get back to winning.

Now let me turn the call over to Roger Cregg for additional details on Pulte’s fourth quarter financial results. Roger?

Roger Cregg

Thank you Richard. Good morning. Revenues from home settlements from the homebuilding operations increased approximately 5% from the prior year quarter to approximately $1.6 billion. Increased revenues reflect the increase in unit closings that were above prior year by approximately 13%.

The average sales price decreased approximately 7% versus the prior-year quarter to an average of $258,000. In the fourth quarter land sales generated approximately $90 million in total revenues which is a decrease of approximately $2 million versus the prior year quarter. The sales in the quarter resulted from the rationalization of our land portfolio and giving consideration to the land acquired during the merger. Specifically, these were assets deemed to be nonstrategic in their respective markets given the positioning and concentration of their portfolios as we look to rebalance the optimized profitability and returns. We sold approximately 40 land parcels of which approximately ¾ were Pulte positions and the remainder was former Centex positions.

Additionally, we eliminated approximately $4 million in annual carrying costs. Homebuilding gross profits from home settlements for the quarter including home building interest expense was approximately $26 million versus a loss of $84 million in the prior year quarter. For those with access to the webcast slides I refer you to slide number seven which outlines our gross margins and the following details: Homebuilding gross margins for home settlements as a percentage of revenues was 1.6% compared with a negative 5.5% in the fourth quarter of 2008. Adjusting the current quarter’s gross margin for land and community valuation charges, interest expense and the acquisition accounting write up for the Centex work in process resulting in a 14.2% conversion compared to 13.1% for the third quarter of 2009 or an improvement of 110 basis points.

As I have mentioned on our prior conference calls we expect a sequential quarterly improvement in gross margin as we work our way through the backlog of higher incentives from earlier in the year and house cost reduction initiatives we executed during the first quarter of 2009 now benefiting margins on home closings in later quarters. Homebuilding interest expense decreased during the quarter to approximately $41 million versus approximately $61 million in the prior year. Included in the interest expense of $41 million is an additional $11 million of expense related to land and community valuation adjustments taken in the current quarter.

Also included in the gross margin for the quarter was a charge related to land and community valuation adjustments in the amount of approximately $140 million. For the fourth quarter we tested approximately 53 communities for potential impairment and valuation adjustments. We recorded valuation adjustments on approximately 40 communities for the quarter of which approximately 34 communities or 85% had been previously impaired. Additionally, we impaired three large projects which represented approximately $99 million or 71% of the total $140 million of impairments.

Of the $140 million of land and community valuation adjustments approximately 49% or $69 million were related to Del Webb communities reflecting adjustments due to current absorption rates and pricing. The total net loss from land sales posted for the quarter was approximately $97 million. The loss is mainly attributed to the fair market value adjustment in the current quarter for land sold and land being held for disposition in the amount of approximately $98 million which is included in the land cost of sales.

Homebuilding SG&A expenses as a percent of home sales for the quarter was approximately 11.8% or $188 million, a decrease of approximately $17 million or approximately 8% versus the prior year quarter. The current quarter reflects the inclusion of the Centex operations after the merger. In addition the fourth quarter includes approximately $7 million for employee severance costs and merger and integration expenses. If we look at SG&A on a pro forma basis our expenses reflect the reduction of approximately $168 million or 45% from the combined Pulte and Centex SG&A expenses from the previous year’s quarter.

In the homebuilding other income and expense category for the quarter the expense of approximately $608 million include the goodwill impairment of approximately $563 million, the write off of deposits and pre-acquisition costs resulting from a decision not to pursue certain land acquisitions in the amount of $36 million and valuation adjustments and unconsolidated joint venture investments with a liability reversal of approximately $5 million. Included in the category for the quarter is approximately $10 million associated with restructuring charges related to overhead expense reductions associated with the lease exit costs and fixed asset impairments related to the merger with Centex.

To further expand on the goodwill impairment, during the fourth quarter and specifically as of October 31 of each year, we perform our annual goodwill impairment test in accordance with ASC 350 where we evaluate the recoverability of goodwill by comparing the carrying value of the company’s reported units to their fair value. Fair value is determined using accepted valuation methods including discounted cash flows supplemented by market based assessments of fair value. Impairment is measured as a difference between the resulting implied fair value of goodwill and the reported carrying value of goodwill.

We had recorded in the third quarter approximately $1.4 billion in goodwill all attributable to the Centex merger. As a result of the test we determined that approximately $563 million of goodwill was impaired. This impairment resulted from a number of factors including the significant decline in the overall market capitalization of the company between the Centex merger date and the goodwill valuation test date, the relationship between market capitalization and shareholder equity and the requirement under ASC 350 to allocate all goodwill to the reporting units even though a significant portion of the goodwill is attributable to the economic value of deferred tax assets and corporate and financing synergies that do not get directly reflected in the fair values of the individual reporting units.

The homebuilding pre-tax loss for the fourth quarter of approximately $867 million resulted in a pre-tax margin of approximately negative 51% on total home building revenues. Adjusting for the impact of the charges related to the goodwill adjustment, the valuation adjustments and land inventory investments, land held for sale, severance and related charges, merger and integration expenses and the Centex work in process adjustment of approximately $884 million homebuilding pre-tax margins converted at a break-even level for the quarter.

The pre-tax loss from Pulte’s financial services operations for the fourth quarter was approximately $36 million or an increased loss compared to the previous year’s quarter of approximately $28 million. The loss in the quarter is mainly attributed to an increase in loan repurchase loss reserves by approximately $37 million during the quarter and integration and severance costs related to the Centex merger of approximately $4 million, partially offset by an increase in loan origination principle volume from an increase in settlements.

Total mortgage principle origination dollars were $906 million, an increase of 7% compared to the same period last year. The increase is related to the volume increase in the home building closing activity in the quarter. Total agency originations were $823 million. Non-agency originations were approximately $6 million and brokered or non-funded loans were approximately $77 million. Additionally within the funded agency originations FHA loans were approximately 45% for the loans funded from the financing line in the fourth quarter compared to approximately 43% in the third quarter of 2009.

Pulte Mortgage’s capture rate for the current quarter was approximately 81% and the average FICO score for the quarter was 735.

In the other non-operating category, pre-tax loss for the fourth quarter of approximately $14 million includes corporate expenses of approximately $11 million and the write off of approximately $3 million associated with capitalized bank fees as a result of our completed amendment to the revolver agreement during the quarter.

For the fourth quarter the company’s pre-tax loss was approximately $917 million. Pre-tax loss includes $928 million for the charges related to the goodwill impairment, valuation adjustments in land inventory and investments, land held for sale, severance and related charges, merger and integration related expenses, loan repurchase loss reserves and the write off of the capitalized bank fees.

The net loss for the fourth quarter was approximately $117 million or a loss of $0.31 per share as compared to a net loss of $338 million or a loss of $1.33 per share for the same period last year. The quarter reflects a tax benefit of approximately $800 million primarily due to an adjustment in the deferred income tax assets related to the enacted Worker, Home Ownership and Business Assistance Act of 2009 legislation which allows for the carry back of federal tax losses. The new legislation extended the net operating loss carry back period from 2 years to 5 years.

The number of shares used in the EPS calculation was approximately 376.9 million shares for the fourth quarter. Total shares outstanding at December 31st were approximately 380.7 million shares.

Now to review the balance sheet for the quarter. We ended with a cash balance of approximately $1.9 billion increasing approximately $340 million from the third quarter of 2009. House and land inventory ended the quarter at approximately $4.9 billion. The total reduction in house and land inventory and land held for sale generated approximately $356 million in cash from the third quarter of 2009.

During the fourth quarter our new investments in land or in rolling lot option take downs and purchases were approximately $90 million and land development spending of approximately $170 million. With the passing of the new legislation extending the carry back period on the NOL we increased our income tax receivable by approximately $917 million to $955 million associated with the expected federal tax refund and the difference of $38 million is associated with state tax refund receivables.

In accordance with ASC 740 or FAS 109, accounting for income tax, at December 31st we had net deferred tax assets of approximately $2.3 billion which were offset equally by a valuation allowance due to the uncertainty of realized deferred taxes. Approximately $1.9 billion in cash at the end of the fourth quarter we had no outstanding balance drawn on the revolving credit facility at the end of the quarter. The company’s gross debt to total capitalization ratio was approximately 57.3% and on a net basis 42.8%. Interest incurred amounted to approximately $69 million in the fourth quarter compared to $54 million for the same period last year.

Pulte’s shareholder equity for the fourth quarter was approximately $3.2 billion. We repurchased no shares during the quarter and the company has approximately $102 million remaining on our current authorization.

I will now turn the call over to Steve for additional comments on the fourth quarter. Steve?

Steve Petruska

Thanks Roger. Again good morning to everyone. Externally the fourth quarter saw a continuation of market conditions experienced through much of the year while internally we successfully advanced key operating initiatives of continuing the integration with Centex.

To that last point we grew increasingly confident in our ability to capture the critical benefits associated with this transaction related to cost savings, brand development and land access having effectively absorbed Centex communities into our tracking and reporting systems. We have already started the process of rationalizing some of the combined land divisions along with redesigning and/or rebranding select communities to better match the targeted consumer profile. At year-end the combined operations of just under 155,000 lots of which 89% were owned and the remaining 11% under option.

Within our land pipeline about 1/3 of the lots are developed which means we are in a great position heading into the selling season and for meeting demand in general. There has been a lot of discussion about the increasing demand for land and it is certainly the case that finished lots in decent locations could have multiple bidders. The obvious result is that land prices are starting to creep up in a number of markets or more specifically sub-markets across the country.

Our existing land pipeline means we aren’t under any undue pressure to complete deals and we can me more selective in acquiring positions that offer the best possible returns. Further, because we still have land development capabilities in-house we can look at alternative transactions where the land is entitled but we may have to rework those entitlements. Builders that have dismantled their land operations no longer have the expertise to change entitlements meaning they are effectively restricted to bidding on projects in the most competitive segment of the land market.

Consistent with the comments above, in the fourth quarter we acquired approximately 2,600 new lots while rationalizing some of the combined Pulte/Centex inventory by selling approximately 12,000 lots. Beyond land our purchasing operations are through the first phase of integration which involves among other things a line by line comparison of the material and labor costs for Pulte and Centex. With the best prices identified we then set about assuring that both organizations were at a minimum paying this lowest price. The purchasing group has now moved onto the next phase which is to capture opportunities to take supply costs down even further.

Given our adoption of key elements of Centex’s build to order model, part of this work involves a detailed analysis of total vendor costs including those specific to how they deliver materials or services to our operations. Home building has historically not been the most efficient business so there are numerous activities to develop over time to increase the time, complexity and/or costs associated with building a home. By partnering with suppliers we can identify these loan value added activities and related products and find ways to eliminate them.

As part of our Q3 results we talked about targeting purchasing synergies in a range of $150-200 million. I am pleased with the progress we have made to date and the opportunities we are seeing to realize ongoing benefits in the future. Cost savings along with reduced spec sales continue to help our margins which increased 110 basis points sequentially to 14.2% before interest, merger costs, impairments and the work in process write up. Further, given the near-term visibility associated with our current backlog, our expectations are that we can realize additional margin expansion in 2010.

Moving onto other data points for the quarter, on a reported basis signups for the quarter totaled 3,748 homes which is an increase of 113% over the same period last year. As Richard mentioned just as a point of reference, Q4 signups increased 32% compared to the combined numbers for Pulte and Centex last year. Our Q4 signups were generated from a community count of 882 which is down approximately 8% from the third quarter 2009. Cancellation rates for the quarter ticked up to 25.9% from just under 23% in Q3 although significantly better than last year’s cancellation rate of almost 50%. The cancelation rates bounced around throughout the quarter with no specific period or region driving the changes.

The higher cancelation rates did roll back our unsold inventory position which at just under 2,800 homes was up 11% from the prior quarter. While up slightly from Q3, this represents a 20% decrease from Pulte stand-along at the end of 2008. Pulte’s reported backlog at quarter end totaled approximately 6,000 homes with a value of $1.6 billion. As with prior conference calls let me provide some comments about how our areas performed during the quarter. The merger makes direct comparisons of sign ups less meaningful so I will try and provide commentary as of the underlying business conditions.

Reported signups for our Northeast area which is essentially Northern Virginia and Washington D.C. up to Massachusetts totaled about 448 homes. The markets have held up relatively well although we did feel the impact of community closings and uncertainty around the tax credit. In our Southeast area signups for the quarter were 649 homes. We have experienced good demand in our South Carolina coastal operations although this was offset by seasonal slowdowns and some pullback in demand out of our Georgia operations. Given the land positions we acquired via Centex, we expect this area to be a solid performer in 2010 and beyond.

Signups in our mid-west area totaled 434 homes and look to be consistent with the typical seasonal slowdown combined with a 6% decline in community count. General economic conditions for the Midwest remain very challenging although it would appear they did not get materially weaker as we ended 2009. Our Gulf Coast operations continued to show very strong performance with signups of 1,337 homes in the quarter. Gains were particularly strong in both South Florida and Dallas. In general, demand in Texas has been fairly consistent across the markets while Florida remains difficult with some glimmers of demand in the single family, detached product.

Market conditions in the Southwest continue to be among the most difficult in the country as both Phoenix and Las Vegas continue to struggle with too much inventory on the ground. Even within this environment we are finding pockets of improvement in markets closer in towards Phoenix. Q4 signups in the area were 429 homes with demand growth in New Mexico being among the bright spots albeit at small volumes.

Finally, signups of 409 homes in our west area reflected relatively stable market conditions. We are excited about the operations we acquired in Seattle and Portland although they may be among the most challenging land markets we face in the country. Moving south into California we experienced a little weakness in the Bay area but it is likely more seasonal than any real change in demand. In general, closer in positions in both Northern and Southern California are holding up well. It is the further out markets in which building expanded during the run up that are still really struggling.

In terms of sales, I will tell you our markets are still working through the integration process as they sort through the existing land positions and community offerings which make the demand picture a little cloudier. That said I feel Q4 was a continuation of the relatively stable environment we saw earlier in the year offset by some seasonal weakness and slowing associated with the off again, on again tax credits.

As I have told our operators I am excited about Pulte’s opportunities heading into 2010. In the month of January we experienced good traffic and conversion rates and we have experienced improvement as each week has progressed which is what you want to see heading into the selling season. With the primary selling season in front of us and the opportunity to create a greater sense of urgency for buyers, we think this bodes well for continuation of these trends.

Our operators have done a great job managing through a challenging year while at the same time successfully integrating another organization. I know I speak for the entire team when I say thank you to our employers, our employees and our business partners who have been instrumental to the gains we realized last year and we will realize in the year ahead.

Let me turn the call back to Richard for an additional comment. Richard?

Richard Dugas

Thanks Steve. I just want to make sure everyone is aware that in the coming weeks we will be moving to our new corporate name of Pulte Group. Shareholders voted to approve this change last year but it is part of a larger branding program we are just starting to roll out. This change will not impact our New York Stock Exchange symbol or trading on the exchange. The name change coincides with this year’s celebration of Pulte’s 60th year in operation which is a tremendous milestone in any industry but especially in homebuilding.

The company has come a long way from the first house that Bill Pulte built himself in 1950 but we are as passionate now about the business as when Bill first founded it.

Let me turn the call back to Jim.

Jim Zeumer

Thanks Richard. We will now open the call to questions. As we have done on prior calls we ask that you keep to one question and one follow-up. If you have additional questions please feel free to get back in the queue or you can follow-up with us directly later in the day. Operator, if you would please give any directions we will now open the call for questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Josh Levin – Citigroup.

Josh Levin – Citigroup

If home prices are stable from here, how should we think of gross margins going forward? You said they would get better but should we assume the fourth quarter was basically the floor in gross margin? Is there a point at which you get a step up in gross margin in the Centex land assets that were written down or will flow through your income statement over the next few quarters?

Roger Cregg

I would say looking at fourth quarter that would be the floor going into 2010 we expect to continue to see an expansion into 2010 with the margin. Again assuming pricing is stable from this point going forward as well. Again, we feel pretty good about that based on the work we have done on the cost side as well as the pricing side also.

Richard Dugas

I will answer your second one. In terms of Centex inventory and how that affects margins I think you ought to think about it as more of a gradual improvement than a step up at any one point in time. I think we mentioned on our third quarter call the assets are coming online and the way the purchase accounting works it is going to take some time to realize the full benefit of that. I think reasonably we won’t get to our full run rate of any benefit for some time yet so rather than expect a step up in any one quarter as a result specifically of that. It is going to be more gradual. Having said that, to Roger’s point, we do expect margins better in 2010 than what we delivered in 2009.

Roger Cregg

The [inaudible] in the fourth quarter was roughly about $17 million on Centex volume.

Josh Levin – Citigroup

If home prices and absorption rates are stable or they rise from here how should we think about impairments going forward?

Roger Cregg

I think what we saw in the fourth quarter, we had three large projects that we impaired to roughly about $100 million out of the $140 million excluding the interest on that. So we are seeing a decreasing level of impairments. The expectation would be stability there on absorption and also the price will bring those down going forward as well. I think we have been seeing that coming through 2009 and except for the three large projects that we had we are seeing that in the remainder of the business.

Operator

The next question comes from the line of Dave Goldberg – UBS.

Dave Goldberg – UBS

I was hoping you could talk a little bit about the sales mix between buyer segments and maybe how sales per community were varying between the different buyer segments you are focusing on?

Steve Petruska

Specifically, I don’t have the details right in front of me…Mike could probably give us those and break out the segments by brand. In general, just as we suspected we are seeing probably a little bit slower absorption rates in our Del Webb brand although our traffic and visitor rates to communities continue to be fairly stable which is a good sign meaning those buyers aren’t buying. We saw some fall off in the Centex traffic levels as you would expect after the tax rebate expired at the end of 11/30 and then was put back in. That was probably temporary. We think those folks will be back out in force.

Centex is making up roughly 1/3 or maybe 40% of our signups in the quarter. Then the Pulte overall demand remained relatively strong although that is where we have seen predominately more community run off over the last two years and so it is tough to get comparisons unless you dig into an adjusted comparison by community count. Relatively stable traffic counts. Relatively stable demand.

Mike Schweninger

If you want to get some specifics on the signup numbers for the quarter, Pulte was approximately 1,000 units. Centex was approximately 1,800 units. Del Webb was approximately 850 and DiVosta was approximately 100.

Dave Goldberg – UBS

Can you give some more detail on the deferred tax valuation allowance and what I am trying to figure out is the split between assets that are subject to 382 limitations of the $2.1 billion that is left and what is not subject to 382?

Roger Cregg

Basically what is limited is roughly about $1.3 billion. That is the NOL side.

Mike Schweninger

If you look at our total of $2.3 billion about $1 billion is related to Pulte and about $1.3 billion is related to Centex.

Operator

The next question comes from the line of Carl Reichardt – Wells Fargo.

Carl Reichardt – Wells Fargo

You talked about the purchasing synergies of $150-200 million and you are pleased with what you are achieving. I am curious, what kind of volume levels or variable do you need to get to run at that full $200 million? Can you just give a little detail about what particular building materials or labor cost savings you are seeing there?

Steve Petruska

That is kind of a loaded question without giving you what our anticipated volume is for the year, but I would tell you that $150-200 million is based on the volume we see in front of us this year. In other words, we are not basing that off some pie in the sky number like 25-30,000 closings. We are pretty confident that we can achieve it based on the volume we see right out in front of us. That said, it depends on the market and it depends on the trade and the synergies we are seeing by marketplace.

I could give you examples at the foundation level in California we are seeing anywhere from $800 to $1,000 per house savings just in the way we have synergized our operations and combined our trade basis throughout California. Likewise, one of our largest savings in a place that we are still working on because it is a very large geographic area is Washington, D.C. and just on our drywall saving there we have seen so far up to about $1,100 in drywall savings. It varies by trade. We bring in our trades. We sit down and literally summit with them and figure out who wants the business, who can service the company best, who has the ability to really allow to work with us, we can peer into their books and they can understand where we are going and it is all across the board.

I would tell you that is what gives us confidence in driving to the $150-200 million is that we are seeing savings across the board. It is not any one particular line item of cost savings.

Carl Reichardt – Wells Fargo

You had another comment about reworking entitlements and your attempts I think to do that along with your peers. Can you give me a little more detail there? Is that largely changing plats over to increased density or changing the products you are putting on [LIBOR]? In any case, is it taking product that was entitled for Webb type of product and moving it to the first time buyer and other types of buyers?

Steve Petruska

It is all of the above but I will tell you primarily it is around projects that are entitled and ready to go with services there for maybe attached product that was entitled during the run up. Not both the city and we feel a better product would actually be taking densities down and going back to single family detached. We have a lot of expertise and wherewithal still to do that. Obviously with our Webb operations we have been able to keep a lot of our land development folks. I will tell you when we have talked to land sellers about those types of opportunities the numbers of builders you are talking to is much shorter than the guy that has 38 developed lots that are ready to go.

Operator

The next question comes from the line of Michael Rehaut – JPMorgan.

Michael Rehaut – JPMorgan

My first question I wanted to focus on was the land part of the equation. You highlighted that given your position and relative to the land market that is being bid up in some areas that leaves you in a relatively more flexible position. At the same time you said you acquired 2,600 lots and so I am just trying to understand where are you short and where are you acquiring? Given that you probably have a lot of land mothballed or communities mothballed what would we expect going forward into the next year in terms of what you might take off the shelf relative to still participating in a land market that is already heating up?

Roger Cregg

Some of the 2,600 were lot take downs out of options we already had. We are in the market as well. We are buying parcels of land and I think we mentioned even on the last call they are not very big positions. We are doing smaller positions around the country where the opportunity to get a quick cash return, high margins and a high return in the product itself, fully developed lots, little money down, all option, give us the ability to continue to run the business in those markets very profitably.

So we are looking for those. They are not again large parcels themselves but we are doing 50 lots, 70 lots here and there and it is spread across the country where we can be opportunistic. Again, not in a very large fashion.

Michael Rehaut – JPMorgan

Focusing on the goodwill you kind of walked through that. Part of that charge was related to the share price and the market cap relative to the shareholder’s equity post the merger date. If possible can you give us a bit more detail in terms of if it works this way how much of the charge was triggered by that? Going forward now your share price has rebounded a bit but what the share price was that triggered the charge; how much of that was related to that and how should we think about the share price relative to future charges going forward?

Roger Cregg

I wish I could spend as much time explaining it because it is extremely complicated in formula. Basically we go back and we look at the share price movement from almost the date of announcement to date of closing the stock went up 15%. From the date of closing to the measurement date which is important here as well because it is October 31st, the share price fell by 27% from $12.33 at the closing to $9.01. So there is an impact on the market cap when you go back and take a look at the fair value of your assets. Again, I guess it would be pretty complicated, I can’t tell you specifically what came from each one of those areas but going forward the biggest impact is definitely going to be the market cap of the company and how that stock price moves around and how it will end up affecting the balance of almost $900 million of goodwill that remains.

There is risk. It is based on generally the market cap that is going to drive that more than anything else.

Operator

The next question comes from the line of Megan McGrath – Barclays Capital.

Megan McGrath – Barclays Capital

I wanted to follow-up a bit on the balance sheet. After you get your tax refund you will have close to $3 billion in cash. Can you talk a little bit about your priorities for allocating that cash over the next year? Whether debt repurchase, more land development, more land purchases?

Roger Cregg

First of all this year we spent almost $750 million in investment in land and land acquisition. Of that we basically had about $200 million in land acquisition and about $550 million in development. Next year in 2010 we are probably looking at right around the $1 billion level. Again you have to appreciate we added Centex. Centex investment was running at roughly about $200 million so if you look at our roughly $700 million and their $200 million we are at the $900 million or $1 billion level. That doesn’t include a lot of new land acquisition although we are continuing to look at that. That could change given the environment.

Demand is going to be the biggest driver when we look at where we end up allocating our capital from that standpoint and if the market begins to turn of course with that much cash finance 101 would say not to carry that cash for the return. So looking at the debt structure of the company and other opportunities will certainly be on the board. In the short run as we move into 2010 it is going to be more about the environment and how comfortable you are with looking at the overall demand in the marketplace.

Megan McGrath – Barclays Capital

A follow-up in terms of your expectations for 2010 understanding that you didn’t want to get into a modeling discussion but we have heard different things from different builders given their expectations for seasonality this year given the tax credit. Do you think not having your crystal ball that will follow similar seasonal patterns this year or could we see for example 2Q be an outside quarter for you more than usual given the tax credit?

Richard Dugas

I think you saw clearly the tax credit impact last year particularly on the whole market including existing homes. It would not surprise us if you see the same thing this year as the April 30 deadline looms. The only caution I would give you is that is not necessarily going to be reflected exclusively in your earnings performance for one given quarter. Depending on the builder’s spec position and the build to order model, etc. it could be different from one builder to another. I think it is realistic to expect a typical spring selling season that is enhanced somewhat this year because of the tax credit. Of course the unknown is what happens after that.

I think we have indicated on the call we have positioned the company to do our part but nobody knows what happens post that. Ideally you have consumer confidence and job growth beginning to return in the late spring, early summer to make up for that but we don’t know yet.

Operator

The next question comes from the line of Dennis McGill – Zelman and Associates.

Dennis McGill – Zelman and Associates

The first question goes back to a conversation we had a few months ago related to inventory and spec count. I think you were pretty firm that Pulte wasn’t interested in building spec similar to what the industry did a year ago and being left with heavy discounts. Can you talk about how you are approaching spec in relation to the tax credit, maybe your view on where the market is from an inventory standpoint and what you are seeing some of the competitors do?

Richard Dugas

We remain firm in our conviction that the large spec build up only leads us to discounting at some point in the future. Admittedly we are going to sacrifice a few signups and closings in the short-term as a result of that. But as you have seen, we just posted our third consecutive increase in margins for the quarter and we indicated we have more in that tank for 2010. That is directly attributable to number one our focus on a pre-sale model versus spec but also the purchasing work and all of the good work that our teams are doing as a result of the merger.

Our long-term business model includes that more predictable process driven pace of our business and we are not going to let the short-term opportunity which may last another quarter or two quarters deter us from that. In terms of the market overall I think most builders are following that same view with one or two notable outliers and admittedly those folks will have an opportunistic position for the short-term. We saw what happened to our margins in the fourth quarter of 2008 coming into the first few quarters of 2009 and we don’t want to repeat that mistake. We got caught with a lot of inventory at a bad time in the market. It depressed our margins dramatically and we are not going back there, God willing.

Dennis McGill – Zelman and Associates

Is it fair to assume you might see a little bit of unit share maybe lost relative to the market but that will come to the benefit of better profitability and maybe a sooner return to profitability?

Richard Dugas

That is obviously out goal. I will also point out as Steve said with close to 3,000 specs it is not like we don’t have anything available to take advantage of the opportunity and whatever portion of those units we might be able to move as a result of the tax credit I think the watch word would be for us not to move them at a heavy discount but to move them at a respectable pace. That is the view.

Operator

The next question comes from the line of Ken Zener – Macquarie.

Ken Zener – Macquarie

You obviously did well on SG&A which was important for you. I wonder with gross margins where they are can you talk about how you are trapping inflation in the system for example, lumber which was up I think 15-20% quarter-over-quarter is there some mix price contracts you have or how are you managing that inflation you are seeing on the hard costs?

Steve Petruska

I would tell you some of the lumber increases are passing through. The way we do our pricing with our vendors is on a real-time basis so we are not buying forwards and fixing and pricing like that. Obviously in this demand environment that is very risky. What we have focused on is where we are getting some of these price increases. We continue to focus on the inefficient side of framing for instance. There is a lot more to be gained from picking up framing efficiencies either through panelization, obviously a lot more trussing and certainly on the labor side in general and certainly in maintaining the proper cadence so you can adjust your framing contractors’ overhead appropriately to the size of the business we have.

Where we have seen some of these cost increases we can isolate it to the cost of the dimensional lumber that is actually going up in price. We have very detailed take offs on every home that we build and the labor market is still pretty soft out there for framers. Net/net I would expect our ability to manage this and keep the framing costs low in spite of some rising lumber prices on an overall basis it isn’t going to be so bad as we continue to manage more through the labor side of things.

Ken Zener – Macquarie

I didn’t hear your units under construction, your finished spec count and your owned lots.

Mike Schweninger

Owned lots 138,273. Finished spec count would be 1,309 and total units under construction is 6,653.

Ken Zener – Macquarie

What led to that higher, obviously the core cancellations, but was there something unique about that given you haven’t been at above 2,400 over the last year? Is it something unique about the cancels you saw?

Richard Dugas

I think a piece of it is we acquired Centex. I think we indicated we are down 20% from year-ago levels on just Pulte stand-alone. That was the majority of it as we continued to rationalize the company’s positions overall. Of course I think the pickup in can rate was pretty minor, about 2% roughly.

Operator

The next question comes from the line of Rob Hansen - Deutsche Bank.

Rob Hansen - Deutsche Bank

I wanted to ask you about the tax refund. I think originally you had targeted around 450. I just want to understand the delta between that the 900 you expect now.

Roger Cregg

Basically it came from losses we incurred in the balance of the year in the fourth quarter. We took some tax planning opportunities, repaid some liabilities and the additional losses incurred from some of the land sales that had created in the fourth quarter gave rise to the differential there.

Rob Hansen - Deutsche Bank

What was the book value of the land prior to it being sold?

Roger Cregg

You saw that we took a write off of roughly $98 million and we had about $90 million in revenue. So that would be the gap there.

Operator

The next question comes from the line of Alex Barron – Housing Research Center.

Alex Barron – Housing Research Center

I was hoping you could help me understand the goodwill charge a little bit. What changed I guess since the time of the acquisition in your assumptions or what led to that charge and can we expect that going forward?

Roger Cregg

Specifically what it was, as I mentioned, the movement in the stock value or the market cap of the company gave rise to the change. It was nothing fundamentally different with the overall business. The business was the same business we had in the third quarter but the difference was the stock price at the closing of the transaction was basically $12.33 and then you have to do the impairment test and basically the date we had because we had chosen it awhile back it was October 31, and the stock price on that date was $9.01. That was basically a drop of about $1.3 billion in our market cap. So there is sensitivity here when you do the analysis on the goodwill impairment to look at what the market cap is and again, now we are basically at a floor of about $9.01 from where we were at $12.33. So really that is the change and that gave rise to the significant part of the write off of the $563 million in the quarter.

Alex Barron – Housing Research Center

So it wasn’t related to sales pace or margin assumptions with the Centex land?

Roger Cregg

No the business is performing the same as we saw in the third quarter. Our expectation is for that to continue.

Operator

The next question comes from the line of Joshua Pollard – Goldman Sachs.

Joshua Pollard – Goldman Sachs

What portion of your lots are finished from the 128 you have in owned and what is the carrying cost in inventory of those lots? Is it $50,000 a home or $60,000 a home at this point?

Mike Schweninger

Of the 138,000 owned lots, 44,755 are finished and there are 1,657 models within that. We don’t have the carry costs on that question. Sorry.

Roger Cregg

Our average lot cost is averaging right around $60,000 per lot. Again in between developing, the timing and everything else like that this has somewhat been the standard after all the impairments we have had roughly right around $60,000.

Steve Petruska

That would be a decent proxy for you but we don’t have it broken down specifically by those finished lots.

Joshua Pollard – Goldman Sachs

How high could we expect your margin expansion to be simply as a factor of the cost reductions you are doing on your base business and the inclusion of Centex ultimately if you are assuming no price improvement or decline, how high could we expect that margin expansion to be from 14 to today?

Roger Cregg

We haven’t given any guidance on that. We have just simply said that it has improved over the past three quarters since we hit our low in the first quarter of 2009 and we expect further improvement. It is not just the COGS piece although that is a large piece of it. It is also the focus on a build to order model and not doing as much spec discounting as we really got caught in the early part of 2009 and then of course a few other factors that flow through but we are not giving any specific number guidance.

Operator

The next question comes from the line of Dan Oppenheim – Credit Suisse.

Dan Oppenheim – Credit Suisse

I was wondering if you could talk about your thoughts in terms of the orders. You talked about how you are trying to avoid the discounting and manage the specs. Clearly there are some other builders out there who are less focused on that and more focused on the volume and the market share. Given the focus on the tax credit how much do you worry through the remainder of this year given there is still a very competitive business do you think you will have to switch the strategy where you are competing more on price just to capture some volume so you aren’t losing market share to others?

Richard Dugas

I can give you a general answer and we’ll see if Steve wants to add anything. A couple of things, I think a 32% order growth over prior year pro forma numbers compared to a couple of other builders who might have been in that range or the 40% range shows that we didn’t give up a whole hell of a lot in volume to drive the business we have. The second thing is we have worked very hard internally to adopt a model that gets us to a more planned production view that ultimately should benefit us in terms of much more level closing volume and much more predictable earnings. We think it is a little irresponsible to chase a tax credit in the short-term for that long-term benefit.

Unless we saw our business going to nothing, which is not the case…I think Steve indicated that January has started out pretty nicely for us, that we think it is the right approach overall. The government is clearly going to lift support for housing at some point in time whether it is as scheduled here in the spring or some time later. It is going to eventually happen. We would rather have a model internally that allows us to operate in a way we are comfortable for the long-run. I would also just tell you one other thing, with 880 communities out there the chances of us losing a lot of market share is not real great.

I have said repeatedly on these calls the first place we are going to see an improvement in business is in same store sales growth and the fact we have 880 communities operational and 2,800 specs out there I hardly think we are in a weak spot to not enjoy whatever business rebound there may be. Steve do you want to add anything?

Steve Petruska

The only thing I would add to that is we don’t go head to head with competitors in every one of those communities. Our operators know where they have to be priced competitive they are and we have continued to show as Richard pointed out not only the sales volume growth but also the margin growth. On a per community basis if we have to go head to head with a very fierce competitor that has a lot of inventory our operators do that and they do it very well. We are not of the mindset if a community operates very well at five or six a month we need to lower the price to try and tweak that demand to 10 a month. We just think that the land control on the ground is a good thing to have and there are margin opportunities by keeping to a proper cadence and we will continue to pursue business that way.

Operator

The next question comes from the line of Joel Walker – FBN Securities.

Joel Walker – FBN Securities

What was the exact tax valuation allowance at the end of the fourth quarter?

Roger Cregg

$2.3 billion. Do you want it exact? Do you want it down to the…

Joel Walker – FBN Securities

While you look for that, your orders per month in the fourth quarter do you have a breakdown of October, November and December?

Roger Cregg

We don’t have that but I think Mike or Roger has the tax number for you.

Mike Schweninger

The tax number is 2.345 billion.

Operator

The next question comes from the line of Michael Rehaut – JPMorgan

Michael Rehaut – JPMorgan

The community count, Richard you just mentioned that as having a lot of stores open which obviously helps you maintain some share with regard to your spec strategy. Can you give us a sense of where you expect that to go over the next 12 months?

Roger Cregg

I think again we are not assuming a lot of land acquisitions next year. We potentially could be down 15% through the end of next year. That would be from end of year to end of year. Again that is going to depend on a lot of things as they go on the demand side.

Michael Rehaut – JPMorgan

Secondly, I think you broke out earlier the mix of orders from the different brand lines so to speak, the different segments. If I am right here it looks like the Pulte business grew about 11% and the Centex business on a core basis grew about 67%. I was just wondering am I looking at that right when you add up Pulte, Del Webb, DiVosta and then look at Centex, can you give us some color as to why Pulte is growing so much slower if that was just due to the continued slower absorption of Del Webb and the better vibrancy at Centex? Are there other timing issues related to maybe sales were a little weaker when Centex was getting integrated or taken online on the Pulte side? Any other color you could give us?

Steve Petruska

The Centex sales were certainly driven by the tax credit that expired. We had a lot of inventory in Centex and they had built up a bit for October and November deliveries before the original expiration of that. That was clearly a motivating factor there. On the Pulte side a lot of it, as I said before, was just driven by pure community count. As we have not invested in new land positions on a wholesale basis over the past few years that has come mostly at the expense of the Pulte community count. Therefore, the lower sales volume.

Operator

This concludes the Q&A session. I will now turn the call over to Jim Zeumer for any closing remarks.

Jim Zeumer

Thank you. We very much appreciate everyone’s time this morning. If you have any follow-up questions certainly feel free to give us a call. We look forward to speaking with you in the future.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. Everyone have a great day.

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