PulteGroup, Inc. (PHM)

PHM 
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Pulte Homes, Inc. (PHM)

Q3 2009 Earnings Call Transcript

November 4, 2009 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

Megan McGrath – Barclays Capital

Michael Rehaut – JPMorgan

Dave Goldberg – UBS

Dennis McGill – Zelman and Associates

Rob Hansen - Deutsche Bank

Dan Oppenheim – Credit Suisse

Carl Reichardt – Wells Fargo

Joshua Pollard – Goldman Sachs

Ken Zener – Macquarie

Alex Barron – Agency Trading Group

Susan Berliner – JPMorgan

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Pulte Homes Incorporated earnings conference call. My name is Katina and I will be your coordinator for today. (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, Katina. And let me welcome everyone on the call and listening via the Internet to this morning’s call to discuss Pulte Homes’ results for the third quarter and nine months ended September 30th, 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 third quarter merger with Centex and the resulting impact on our reported third quarter results, we have expanded the slide content. We believe these slides will greatly assist the understanding and analysis of our third quarter financial performance and we strongly encourage everyone to review this material. The slides will be archived on the site for the next 30 days for those who want to review it at a later time.

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 in the period from August 19th, 2009 through September 30th, 2009. Prior period results have not been adjusted for this merger.

Finally, I want to alert everyone listening on the call and via the Internet that certain statements and comments made during the course of this 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. 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. Back in April of this year, we explained the strategic importance of our merger with Centex and highlighted opportunities around business synergies, land and customer diversification, and branding. In the third quarter, we completed this transaction and I am confident in saying that the rationale underlying this combination has only grown more compelling in the months since the announcement.

At that time, we highlighted the opportunity for us to realize $350 million in synergies by the third year after completion of the merger. In addition to having now raised the target by 25% to $440 million in expected annualized savings, we have already implemented needed actions to capture more than half of these savings. We expect to reach the initial target of $350 million in annualized savings early in 2010, far earlier than originally projected and then achieve the $440 million annual run rate in the back half of 2010.

Once the merger closed, our purchasing team was able to dive much deeper into Centex’s practices and better assess the buying opportunities for the merged company. Based on the team’s initial analysis, they have identified between $150 million and $200 million in annualized synergies that can be realized on future buying volumes. This work is still in the early stages, but preliminary findings point to tremendous opportunities to lower cost and support Pulte’s efforts to return to profitability as quickly as possible.

If the economy rebounds in 2010, these savings can provide great leverage and help accelerate Pulte’s return to profitability. If, however, the economy drifts sideways or even stumbles, $440 million in savings would be even more important. Either way, we are excited about the overall leverage this merger can provide.

Building on top of any immediate savings, we expect the lots we obtained through the Centex merger can deliver long-term value to the company. The recent Wall Street Journal article on the absence of land transactions was similar in tone to some recent research pieces, all of which suggest that we won’t experience an RTC-like purge of A-plus land on to the market like we did 20 years ago.

What is becoming clear is that banks are retaining many of their land parcels, especially the A-rated positions until market conditions improve and they can realize better pricing. Right now, banks are not being pushed to sell their land portfolios. In addition, banks see and hear all the same reports as we do and they understand that some builders may be forced to move bids higher in order to replenish a land pipeline that is running on empty. Giving their – given their low cost of carry, banks can afford to be patient.

Even the recent talk about a big uptick in land transactions maybe a lot more smoke than any real fire. In a number of markets across the country, builders continue to make bids and submit a series of offers, but relatively few of these transactions are meaningful enough to set a new benchmark price for prime land parcels.

As for the deals that are getting done, they are typically for a small number of lots under some form of rolling option terms that allow the builder to walk away if housing demand isn’t there. Clearly, we are a long way from the volume or scale of land transactions that were undertaken in this industry in 2006 and before.

Could conditions change if the economy gets weaker instead of stronger in 2010 and banks find themselves under more pressure? Of course. But given that banks have held on this long, we believe that a few incremental deals might get forced out, but not the flood of lots that many have expected and feared.

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