PulteGroup, Inc. (PHM)

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PulteGroup, Inc., (PHM)

Q3 2010 Earnings Call

November 3, 2010 08:30 am ET

Executives

Richard Dugas - Chairman, President, and Chief Executive Officer

Roger Cregg - Chief Financial Officer and Executive Vice President

James Zeumer - Vice President of Investor & Corporate Communications

Michael Schweninger - Principal Accounting Officer, Vice President and Controller

Analysts

Daniel Oppenheim - Crédit Suisse First Boston, Inc.

Nishu Sood - Deutsche Bank AG

Stephen East -- Ticonderoga Securities

Kenneth Zener – KeyBanc

Michael Rehaut – JP Morgan

Megan McGrath, Barclays Capital

David Goldberg - UBS Investment Bank

Dennis McGill – Selman

Joshua Pollard – Goldman Sachs

Carl Reichardt -Wells Fargo

Susan Berliener – JP Morgan

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2010 PulteGroup, Inc. Earnings Conference Call. My name is Kaitlyn, and I will be your operator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today’s call, Mr. James Zeumer. Please proceed.

James Zeumer

Thank you, Kaitlyn. This is Jim Zeumer, Vice President of Investor Relations for Pulte Group, and I want to thank everyone for joining this morning’s call to discuss our Q3 results, and nine month results, for the period ended September 30, 2010.

On the call with me today are Richard Dugas, Chairman, President and Chief Executive 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.pultegroupinc.com will accompany this discussion. The slides will be archived on the site for the next 30 days for those who want to review it later. As a reminder, on August 18, 2009, PulteGroup completed its merger with Centex Corporation. Results reported in the release and on this call reflect the inclusion of Centex's operations for the third quarter of 2010, although results for the comparable prior period have not been adjusted for this merger.

Finally, I want to alert everyone 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. PulteGroup 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 PulteGroup's annual report on Form 10-K for the year ended December 31, 2009, and this morning's press release for a detailed list of risks and uncertainties associated with the business. Certain statements during this call also contain references to non-GAAP financial measures. See this morning's press release, and the accompanying slide presentation, which is available on our corporate website for reconciliation of the non-GAAP financial measures to the 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. I’ll now turn over the call over to Richard Dugas for his opening comments. Richard?

Richard Dugas

Thanks Jim, and good morning everyone. As this morning’s press release detail, Pulte Group reported a meaningful loss for its Q3, driven primarily by the inclusion of two large charges. Reporting these numbers is disappointing, especially given the tremendous strides our operations have made over the last 12 months. Given the charges and their impact on the quarter, I will hold my comments on the state of the industry and our business until later. Right now, let me turn the call over to Roger for a review of our Q3 results and details on the charges taken during the period. Roger?

Roger Cregg

Thank you, Richard, and good morning everyone. Revenues from the quarter for home settlements, from the home building operation decreased approximately 3% from the prior year quarter, to approximately $1 billion. Decrease revenues reflect lower unit closings that were below prior year by approximately 7%. The average sales price increased by a percent versus the prior year quarter, to an average of $265,000. This increase is contributed to the geographical and product mix of homes closed during the quarter.

In Q3, land sales generated approximately $6 million in total revenues, which is an increase of approximately $3 million versus the previous year’s quarter. The sales in the quarter mainly reflect the sales of lot and land parcels to other builders. Home building gross profits for home settlements for the quarter, including home building interest expense is approximately $72 million versus a loss of $26 million in the prior year quarter.

For those of us with access to the webcast slides, I refer you to slide number six, the adjusted margin analysis, which outlines our gross margins. Home building gross margins from home settlements as a percentage of revenues was 7% compared with a negative 2.5% in Q3 2009. Adjusting the current quarter’s gross margins for land and community valuation charges, interest expense and the acquisition accounting write up for the Centex work in progress, resulted in a conversion of 16.7%, compared to an adjusted margin of 17.2% for Q2 2010. Or, on a sequential basis, a decrease of 50 basis points on an adjusted basis.

This decrease is mainly attributed to the increase in commodity cost, experienced earlier in the year. On a comparative basis versus the previous year’s Q3 conversion of 13.1%, the adjusted increase is approximately 360 basis points. The improved margins versus the previous year’s quarter are a direct result of lower sales incentives, house cost improvements, and relatively stable market prices.

Home building interest expense increased during the quarter to approximately $49 million versus approximately $36 million in the prior year. Included in the interest expense of $49 million is an additional $8 million of expense related to land and community valuation adjustment taken in the current quarter.

Also included in the gross margin for the quarter was a charge related to land and community valuation adjustment in the amount of approximately $50 million. Consistent with prior quarters, we have reviewed all of our communities for impairment indicators. Based on this review in Q3, we identified and tested 48 communities for potential impairments and valuation adjustments. We recorded valuation adjustments on 28 communities for the quarter, of which 14 communities, or 50%, have been previously impaired.

Additionally, the larger impairments for the quarter, which represented approximately $40 million or 80% of the total $50 million impairments were mainly concentrated in central Florida, Las Vegas, and the Tucson markets. Also for the quarter the acquisition accounting work and process charge is approximately $900,000. The total net gain from land sales posted for the quarter was approximately $2 million. The gain is mainly attributed to the sales of lots and parcels of land in the quarter, offset by the fair market value adjustment in the current quarter for land being held for disposition, and land sold in the amount of approximately $600,000, which is included in the land cost of sales.

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