James P. Zeumer - Vice President of Investor and Corporate Communications Richard J. Dugas - Chairman, Chief Executive Officer, President and Member of Finance & Investment Committee Robert T. O'shaughnessy - Chief Financial Officer and Executive Vice President Michael J. Schweninger - Principal Accounting Officer, Vice President and Controller

Michael Rehaut - JP Morgan Chase & Co, Research Division Stephen F. East - ISI Group Inc., Research Division Daniel Oppenheim - Crédit Suisse AG, Research Division David Goldberg - UBS Investment Bank, Research Division Stephen Kim - Barclays Capital, Research Division Nishu Sood - Deutsche Bank AG, Research Division Joshua Pollard - Goldman Sachs Group Inc., Research Division Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division Dennis McGill - Zelman & Associates, Research Division Will Randow - Citigroup Inc, Research Division Adam Rudiger - Wells Fargo Securities, LLC, Research Division Megan McGrath - MKM Partners LLC, Research Division

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 PulteGroup Incorporated Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Jim Zeumer. You may proceed.

Thanks, Frances. This is Jim Zeumer, Vice President, Investor Relations for PulteGroup, and I want to thank everyone for participating in today's call to discuss our second quarter 2012 financial results. On the call today are Richard Dugas, Chairman, President and CEO; Bob O'shaughnessy, Executive Vice President and Chief Financial Officer; Mike Schweninger, Vice President and Controller. Before we begin, copies of this morning's press release and the presentation slides that accompany today's call have been posted on our corporate website at pultegroupinc.com. Further, an audio replay of today's call will also be available on the site later today. Also, please note that any non-GAAP financial measures discussed on this call, including references to gross margins reflecting certain adjustments, are reconciled to the U.S. GAAP equivalent as part of the press release and as an appendix to the calls' presentation deck. Today's presentation may include forward-looking statements about PulteGroup's future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now let me call -- turn the call over to Richard Dugas for a few opening comments. Richard?

Thanks, Jim, and good morning, everyone. I'm pleased to report that PulteGroup's second quarter financial results demonstrates significant year-over-year gains across a number of critical areas of our operations, including sign-ups, gross and operating margins and most importantly, earnings. Maybe equally compelling, our second quarter numbers also point to the opportunities for additional increases in the future. After a tremendous amount of hard work, our second quarter earnings mark a clear milestone in PulteGroup's effort to deliver consistent operating earnings and a much improved fundamental homebuilding performance. You've heard us discuss that a comprehensive analysis of our operations identified fundamental improvements we needed to make to deliver better operating results and in turn, higher returns on invested capital and higher returns for our shareholders. Known internally as our value creation work, the underlying initiatives have been focused on expanding margins, realizing greater overhead leverage, accelerating inventory turns and allocating capital more effectively. Along with the market tailwind the industry has enjoyed this year, our second quarter earnings of $0.11 per share also reflect progress we are making in implementing various value creation initiatives. While still in the early stages, we are starting to see an impact from programs designed to enhance revenue realization, as well as those focused on lowering construction costs. Although it can be tough to isolate, our second quarter adjusted margin of 20.3% shows the positive impact from initiatives we continue to advance, and which include the following: first, a strategic pricing program we have been rolling out where we are moving to more of a base house offering enhanced by an expanded list of options and upgrades that enable buyers to select the features they most value. Along with new pricing practices to capture higher lot premiums, our expanded option strategy is more consumer-friendly, while providing…

Thank you, Richard. PulteGroup reported significantly improved operating and financial results in the quarter, which combined with our first quarter results, leave us well-positioned for the rest of the year and on-track to report full year profitability. While the market has helped, we are particularly pleased with the operational improvements that are being driven in the areas of focus and by the key business initiatives we've been discussing for the past year. Total sign-ups in the period were 5,578 homes, which represents an increase of 32% over last year. As Richard mentioned, this strong increase in Q2 sign-ups was realized from 7% fewer communities. Looking further at our sign-ups, we generated higher year-over-year sign-ups in each brand, but continue to see a shift in mix to our move-up or Pulte brand. During the quarter, sign-ups by brand were 27% for Centex; 48%, Pulte; and 25%, Del Webb, which compares to 33% for Centex, 41% for Pulte and 26% for Del Webb in the first quarter of this year. Looking at our first quarter results, home sale revenues were just over $1 billion, an increase of 14% compared with last year. The increase in revenue is driven by an 8% increase in average selling price to $268,000 combined with a 5% increase in closings to 3,816 homes. During the first quarter, our mix of closings included 33% from Centex, 42% from Pulte, and 25% from Del Webb. In the prior year, the closing mix was 39%, Centex; 34%, Pulte; and 27%, Del Webb. The increase in our average selling price reflects the continued shift in our product mix from the first-time buyer towards the move-up buyer. I would also point out that we continue to strategically prove [ph] our land portfolio. In the second quarter, we generated land proceeds of $9…

Thanks, Bob. As is our practice, before opening the call to questions, let me provide some additional color on the market conditions we experienced during the second quarter. With a 32% increase in sign-ups, it won't come as much of a surprise when I say that most of our markets showed solid improvement during the quarter. Demand up and down the East Coast remains strong in the period. We continue to experience exceptional demand in our New England market, which we think reflects gains driven by new communities we've opened in the Greater Metro Boston area for the past few quarters. In other markets, demand through Northern Virginia, Georgia, the Carolinas and into Florida also remain strong. Moving toward the middle of the country, the modest pickup in midwest demand that we noted in the first quarter continued and even accelerated into the second quarter. Michigan continues to be an amazing story, as the local economy has once again rallied in response to the much improved auto industry. Only Chicago continues to struggle, but even that market seems to have bottomed. That isn't to say a Chicago recovery is in sight, but the market seems to be moving sideways rather than down. We also saw noticeable gains for our Texas operations in the quarter, as those economies remain a bright spot for the country. And finally, out west, demand remains strong across the markets with sustained high rates of demand in Arizona, Nevada and both Southern and Northern California. A number of the communities in these markets are where we have been seeing the highest rates of demand, and have been taking action to ensure that we don't get too far out on our start dates. Given the demand trends through the first couple of quarters, I would say that…

Thank you, Richard. At this time, we'll open the call for questions. [Operator Instructions] Frances, if you'll explain the process, we'll get started with Q&A.

[Operator Instructions] Our first question is from the line of Michael Rehaut from JPMorgan. Michael Rehaut - JP Morgan Chase & Co, Research Division: Great quarter on the reduced -- great orders on the great -- on the reduced community count, by the way. On that, I was hoping to get a little bit of color on the drivers of the North as well as the Southeast and Florida in terms of leading the kind of the range of results. In Florida, as we've heard a lot of strength there, I know you've kind of paired some of your assets and you have a -- the Tampa asset and maybe just kind of review your positioning in Florida, but color on these 3 regions.

Yes, Mike, it's Richard. Thanks for your comments. Here's what I would say, in the first quarter, the strength was primarily Florida, mid-Atlantic, Arizona, et cetera. I think in Q2, it accelerated to more of the rest of the country. Our North areas, we've been putting some additional investment in place, which has helped, Michigan as an example. Believe it or not, even though we don't have a huge investment in Michigan, it's really been a source of strength for us, so that helped in that market. The Southeast, gosh, all I can say is steady as she goes with continued improvement in most markets. Florida continues to be excellent and you didn't mention the Southwest, which is probably our strongest market in terms of overall demand level. So we're very pleased with what we've seen through the quarter, handily beating our expectations. Michael Rehaut - JP Morgan Chase & Co, Research Division: And second, just on pricing, you mentioned expanded opportunity to raise price in many markets. I was hoping to get a sense of number one, how you felt pricing progressed, let's say, company average across the company, across all of your communities? We've heard pricing may be up, let's say, on an effective basis, up 1% to 2% year-to-date for most builders and I'm talking about orders here. Is that kind of what you've been seeing greater or lesser and thoughts as we go into the back half of the year?

Yes, Mike, I don't think I'll comment on a specific number. But here's what I will tell you, with regard to pricing, we have had a pricing initiative in place for some time that's helped us on options as well as lot premiums to capture frankly more price, if you will, in a different sense through those areas. We have seen that, but we've also seen an acceleration in our ability to raise base price in more markets than we certainly were earlier in the year. You may have noted in the commentary we purposely slowed sales in some of our markets and frankly, when doing that, we're partly doing that with price and still pleased with the results we're getting. So I wouldn't put a specific number on it, but I would say it varied across the company, depending on which market you're in, but the general trend is very positive for pricing.

Your next question is from the line of Stephen East from ISI Group.

Bob, you talked about the put back, that was a helpful explanation. Could you do 2 things? Could you explain what that $27 billion is that you're not really seeing any put backs on and then what type of loss rate you are seeing on the other part of your business?

Well, the things -- so what we -- brokered loans, for instance, where we didn't keep the rep and warrant is a good example and on government originations, we're not seeing much exposure, if any. So that's the piece of the portfolio that we're saying we don't see much risk in. And in terms of the others where we do see some risk, again, what I would point you to is, yes, we see a fairly consistent stream of requests. It varies in terms of where the originations were in terms of how much money per loan and again, we haven't given a whole lot of color on that over time. But for the repurchase requests that we're receiving currently, we're not seeing a change in the content of them really. The drivers of our exposure haven't changed much it seems.

Okay, that's helpful. And then if we look at what you all have been seeing on getting back to the homebuilding in the first half of the year, construction costs, I know you don't really have land purchase costs, but construction costs and the value engineering where you talked about only 10% of your volume is going through that now, what type of margin differential you have on that? And then the other thing is cash flow being positive typical in the first and second quarters of the year.

Yes, I'll start, Steven, it's Richard, and then throw it to Bob for some commentary maybe on cost. In terms of the value engineering work that we're doing, the 10% commentary was to try to get everyone sensitized to the fact that as we redo our floor plans, it takes some time. Obviously, you have to get that done and you have to get those homes sold. We typically have homes in backlog anywhere from 3 to 8 or 9 months. So by the time the closings come through, the 10% number is only going to go up from here. So our point there was we got more good news where that's coming from. The differential in terms of margins from that can be substantial, and that's part of what we're seeing in terms of our margin growth and even though it's a small percentage today of that stream of work. A comment on cash flow, we typically are not cash flow positive in Q1 and Q2, but that was before we got a lot more disciplined with regard to our capital allocation. And I'll just point to everyone on the call that not only do we feel great about our cash flow, we also feel good about the business environment, and we're going to invest a little over $100 million incrementally in the business this year versus what we're planning as a result of what we're seeing in the business, while still maintaining positive cash flow and our ability to delever. So we feel extremely good about that. Bob, he had a question, I think, on cost a little bit.

Sure, the construction cost we've seen, consistent, I think, with what we said at the end of the first quarter. We are seeing a little bit of pressure on things like lumber not outside what we expected. In some of the hotter markets, we're starting to see some material cost increase, so for example, concrete, but again, not huge differentials. What we are experiencing, I think, is a shortage of labor in certain markets, and that's going to start to pressure pricing we think. So in certain markets, we've granted some price increases on labor, and so again that's in the markets that are relatively hot right now. So again, for base commodity type costs, consistent with what we saw coming into the year. We have seen drywall stay where it -- is at higher level than last year, but again, not a huge cost component of the house. So overall, not meaningful increases. But again, the watch out is as labor tightens, we could see some price pressure there.

Your next question is from the line of Dan Oppenheim from Credit Suisse. Daniel Oppenheim - Crédit Suisse AG, Research Division: I was wondering if you can just elaborate a bit more and talk about the shift in terms of to more options, aways from standard and such, how -- what are you learning in terms of a better sense of what customers want in the homes and what they're willing to pay for, and how significantly do you think that could be in terms of the impact on the margins there?

Yes, Dan, this is Richard. Frankly, we've done a tremendous amount of research recently, and I would tell you our insight into consumer wants is significantly enhanced from where it was even just a year ago. What we're finding is that the buyer wants the ability to personalize their home, and our previous practices of a few years ago where we're loading up a home with a lot of things was not necessarily what the buyers want. Some people want a base home and maybe 4 or 5 options. Others want to personalize their home with a lot more. We now also internally have visibility to the actual drivers of gross margin. As an example, we can break out for ourselves what we're selling in options, what we're doing in discounts to a much greater degree than we did before, and we are seeing substantial pickups in many markets from that. It's hard to isolate a given number and give you a particular number, but I can tell you it was a mover of margins in the quarter, and I would tell you it will continue to be as people select these options.

Okay, great. And then, I guess, in terms of the mortgage conversations because you talked about conversations and dialogue with the investors, just want to clarify and understand it. Were you talking about recent conversations? Is there anything in terms of something more recent that were just more in general you've been having this conversations. I was trying to understand if that's something that we should be expecting more resolution on going forward or if it's just more ongoing dialogue there.

Well, we obviously have dialogue with these folks all the time. We do business with them. In terms of resolutions of these, I don't think there's anything for us to report at this time.

Your next audio question is from the line of Stephen Kim from Barclays.

Two sets of questions. First questions relate to your comment about certain markets getting a little overheated. The reason why I wanted to ask you about this is because as good as your results have been and as dramatic as the improvement has been, probably, what's most interesting or captivating for investors is the potential for this to continue to grow at extremely strong rates for quite some time because you're still at a very depressed level. And so one of the things that I would love to hear you talk about is your ability to maintain very strong, like 30%, 40% type growth top line going forward, let's say, over the next 2 years. So in that vain, you made this comment that certain of your communities are overheated and you were intentionally slowing things down. So putting those 2 things together, I'm trying to understand, can you give us a sense for what you think your company's maximum growth rate that you're prepared to allow your communities to experience is? Are we talking 50% on a compounded annual basis for the next 2 to 3 years? Or is that level really not reasonable for a bunch of practical reasons that -- within your operations?

Steve, there's a lot loaded in that question. Let me try to break it down a little bit. I think you have to look at the individual communities and the individual markets. As an example, everybody knows we have a lot of inventory on the ground in terms of lots in our Del Webb communities. We would probably be willing to let our Del Webb communities run quite a bit, and potentially a very substantial number of incremental units could be sold there purposely. On the other hand, we have lots of communities, say, for the Pulte brand and even for the Centex brand, where we have limited lot supply. And given our desire to generate cash and delever and selectively reinvest, we would feel on a community like that, it would be a lot smarter to drive price, which is of course what we're doing in some of these overheated situations that I mentioned. I would also point out that the market over all, I would say, is likely to be a little bit labor-constrained as the demand comes back. So from kind of running a smart business in our opinion, it might not be smart to let your backlog run out a year ahead or 15 months ahead. And frankly in a few markets, we could have done that in Q2 and we decided not to. We'd rather take the price. We'd rather take the margin. We're at a 75% presale versus spec mix. We're extremely proud of that and frankly, we think that provides us not only cash flow benefits, but also margin benefits, et cetera. So I'm not trying to dodge your question. It's hard to answer. Do we think business can accelerate and revenue can improve from here? Absolutely. Is that our key goal? No. Our key goal is to drive higher returns and kind of run each community smartly, so I hope that helps.

Yes, it does. But let me follow-up on that. For example, I understand what you're saying at a community level, but there are certain communities where the land is -- you have a certain constraint within that community. On the other hand, my guess would be that in -- when have a community like that, you probably have some near neighbor communities that maybe are not yet open. And so while you may not want to burn through a very successful community today, it would seem that one possibility would be that you would in that market, open up more communities, some which are maybe not quite so well-positioned, but at least you have excess lots in that market. But your commentary about the ability to get subcontractors onto the job site, that suggests that maybe that solution is not really a solution and so therefore, in these markets, slowing things down really is the best option that you have. Can you help me understand in situations where you have a very successful community, you don't want to blow through it. Is there the ability to open up more communities? Are you aggressively trying to do that, so that the net result from a corporate perspective is that you are able to actually continue to grow at a very accelerated rate?

Yes, Steve, we certainly put our fair share in new lots under control and our desire is to take advantage of those market opportunity by investing. And I would tell you, I guess, the general answer to your question is we want to drive the highest ROIC that we can. That's our goal is return on invested capital. So we've got to analyze it community by community. In some situations, it's going to be opening up a new community like you suggested and driving volume. In other situations, it's going to be a real focus on margin. And we've been so, so pleased with our efforts to drive higher margin. We think we have more where that's coming from. I would say our company's bias is going to be more in that direction. I'll just again point you back to the spec comment. We don't have a lot of excess inventory anymore in a given quarter to capture. We're matching production to demand. We like where our backlog is headed overall. So for us, perhaps, not as much of a focus on volume as you might be suggesting, but we're quite confident that we'll continue to drive better results than we have in the past by being more disciplined about how we're running the business versus just the push on volume, which I know was our focus years ago.

And your next question is from the line of Nishu Sood from Deutsche Bank.

So Richard, looking at the first half of the year, obviously, you've put together terrific results. If you look at demand in the first quarter, better than fourth quarter of last year. Second quarter, further acceleration in demand and even some pricing power. Obviously, you've talked about your internal initiatives as well. Now if I listen to what concerns investors at this stage, so looking into the second half of the year, how can housings momentum continue given risks of a recession or I think you called them some discrete event elsewhere, coming and spilling onto our shores and maybe affecting job growth. If I judge from your comments, your comments on the macro as well as your -- increasing your land spend from the $800 million, it sounds as though you have some confidence that the pace of housing recoveries momentum can continue. So I just wanted to dig in to that a little bit. What gives you that confidence that housing recoveries momentum can be sustained in light of all the challenges that face us?

Nishu, part of the confidence is the fact that we're still in a country selling a preposterously low number of loans relative to historical trends. I don't believe for a second people really want to rent the rest of their life. I think they want to own. And so you've got a certain amount of momentum from people that want to get off the fence, and there's a growing sense that pricing has bottomed and that I better get in while the getting's good. I do think that can carry us quite a ways, but our commentary was designed to help say that in order for housing to really take a big leg up from here, we are going to need job growth at some point, and we were kind of pointed in our script commentary around the fact that we believe low levels of inventory is driving the majority of the good results we're seeing. We certainly think that can continue from here. Can housing double or triple from these levels just on the backs of low inventory? My guess is no. It probably needs a stronger economy to come along. So we're just trying to be balanced in our overall outlook there. Having said that, I want to be very clear. We are optimistic about the balance of this year and into next year, if for no other reason, then there's a whole bunch of people that have been sitting on the sidelines that want to get in. I think we can take housing higher from here. The question is how high and gosh, I don't know. I would tell you this, we're more focused on running a good business internally, and are very confident that no matter what the housing market brings, that our operational act is together now.

Great. Now that's very helpful. Second question, just shifting gears a bit to the Centex brand. So since the acquisition, obviously, at the outset, there were some shifting of communities between brands, repositioning them. But since then, even it seems as though the Centex share of your communities has continued to decline, the Centex branded share of communities. So I was wondering what is the future for Centex? I mean, it seems as though there's been more success in the midrange or the move-up buyer. So should we expect the share of Centex communities to continue to decline or at some stage, is there going to be a turnaround maybe some more reinvestment in the Centex-branded type communities?

Yes, Nishu, it's Richard again. It is true that most of our recent investment has been into the Pulte brand, and the Centex brand has accounted for a smaller piece. Having said that, we are hard at work at a new product line we're calling the Independent series of homes, which is a very value-based proposition for that entry-level buyer. I can't predict exactly what the percentage is going to be in the future, but it is not our intention to not reinvest in the Centex brand. Said a different a way, we're very bullish on the entry-level buyer over the long run and we've learned a great deal in the last couple of years about that entry-level consumer. And we continue to rollout new communities and new different service offerings, as an example in our mortgage advisor product, as well as a new retail center concept that we're offering for that buyer category that are very exciting over time. It's just going to take a little bit of time for that to show up in results. So over the near term, I think you're going to continue to see a weighting toward the Pulte brand primarily, but we intend to continue to invest in Centex.

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

Would love for you guys to walk through the normal seasonality of your particular business. Many understand how the market moves, but can you manage -- but you guys can manage the business in deliveries by quarter and by months, so can you tell us what normal seasonality on an orders per community looks like in the third and fourth quarter of a standard year? And then dig in a little bit into July, order growth in comparison to that?

Yes, Joshua, this is Richard. A couple of things. First of all, I would say that the second quarter, we saw a fairly typical pattern as volumes were slightly lower as we moved through the period, and the selling season wound down. In terms of the balance of the year, of course, I have no idea exactly what's going to happen. But typically, we would sell in the range of 60% to 65% of our overall volume in the first half of the year and the balance in the second half. I see no reason why that normal seasonality will not continue to play out this year. So I would expect overall volumes through the balance of the year to trail down from what we've seen, as I indicated in our comments earlier. However, the first few weeks of July are still above our expectations, which is a positive thing. So I think the overall level of demand for new housing this year is clearly up fairly dramatically from last year, but I do think it will follow a fairly typical seasonal pattern. [Technical Difficulty]

Your next question is from the line of Ken Zener from KeyBanc.

Exploring the land and gross margin dynamic versus other builders, so other builders have pitched that they have been purchasing, have a higher share of newer communities that's driving certainly some of their growth. I think for you, and you can certainly highlight how many closings came from new communities, but it's far below others given, Richard, in the past, you've talked about liking your land, which is going to be my second question. But what do you think is really driving -- you talked about the price, the incentives, but within the absence of gross margins coming from new communities, you're still getting better gross margin trends, which are -- do include commissions. So it's kind of surprising. I mean, is it just the fact that your construction side is better because you're seeing such a huge piece from new communities which other builders really are focusing on.

Ken, I very much appreciate you pointing that out. We thought for quite a long time that the reality of our performance the next number of years was going to largely be driven by the large land bank that we already have, and whatever we're able to reinvest certainly will be good and new investment will help and Mike can give you some community countdown on that in just a moment. But the lion's share of our performance is going to be driven by our existing business and frankly, we're not surprised at what we're seeing because we've been hard at work. Late 2010, we underwent a real deep dive into how to drive value in this business and we felt like we were leaving a lot of margin on the table. So yes, our construction practices, what we call value engineering, our focus on something we call should costing, and don't discount these strategic pricing initiatives I mentioned. We're being much smarter frankly with how we're handling options and lot premiums in addition to whatever we can get from the market momentum in lift of base price. So I -- if I sound bullish for the future, that's why I am, it's because it's driven off of what we already have. So with that, maybe Mike can give some color in terms of the new communities.

Ken, it's Mike. In the quarter, about 20% of the closings were what we call from new communities and that's consistent with our expectations. It will trend up slightly for the year at around 25%.

Now I have a -- my follow-up question is about that new community as well as the -- your view on land finish supply, et cetera. The new communities, is that newly opened up from your legacy or from land that you purchased first? If you could highlight the amount of commissions you have in gross margin, I know some builders have been restating that, so it would make it a little clearer for everybody to understand. And then what's your view on land? I know you're buying some, but do you think you're -- given the long legacy land position, do you think in the gross margins you're seeing -- I mean, could stuff be coming in better than you might have marked it to?

So maybe Mike can give you a little commentary on the definition of new communities, and then I can help with the back piece.

When we define a new community, a community that we have purchased after the Centex merger. So it would be anything that's specifically after that. Just real quick on the commission question, it's around 350 to 400 basis points commissions in total.

And so Ken, on your second piece, if I'm hearing it correctly, you're asking about our legacy positions in our -- how we market. In terms of our impairments over the past, we feel like we used the appropriate methodology for that overall. But we've been hard at work outside of what the land is marked to, to improve our results from sticks and bricks and operational side and that's beginning to come through. I don't know, Bob, if you want to add anything there.

Yes, the only thing I'd say is that the model that we used to book impairments would put the post-impairment margins at actually a lower level, low- to mid-teens, whereas, we're underwriting transactions today with a higher margin requirement than that. So in terms of what we're seeing today, it's not being driven by prior impairments.

And your next question is a follow-up from the line of Joshua Pollard from Goldman Sachs.

I wanted to talk about the $100 million that you're investing in your business more than your original plan. Can you talk about what year you're building that for? I think one of the larger investor concerns is that you guys are buying land that inherently has lower margins than what you're currently reporting.

Well, I think, what we've seen is actually -- and because of the increase in sales, we're actually closing on transactions sooner, so the next take on an option transaction and development to put homes into production for '13 and '14. So it's actually the increased demand that we're seeing. And in terms of the recent vintage of acquisitions, I would say we are not expecting a decline in margins as a result of that at all. Our underwriting standards are at least the size what we're generating today, but focused on returns as opposed to margin.

And you next question is from the line of David Goldberg from UBS.

My first question, Richard, getting to your comments on how the macro economy maybe isn't as cooperative, we're not really seeing a good -- a strong turn in the macro, and so do you think a lot of the benefits that we've seen in the new home market are being driven by inventory levels? I wanted to get an idea that -- considering you guys have more of -- you've moved more towards a risk-based pricing model when you think about buying land, how you think about risk associated with potentially pent-up inventory, if that make sense, especially in a market where you might be seeing home price appreciation, how can you factor that into your models?

David, we do our best not to factor in price appreciation in our models, and frankly, we've been criticized some in the past for being "conservative" with our land-buying practices maybe relative to some of our peers. We're okay with that to not get out ahead of ourselves. I mean, as I was answering an earlier question, the vast majority of our success or failure in the future is going to be from our legacy position. So I would tell you, I think, we're being smart about how we're buying land. Bob, feel free to comment there.

The only thing I would add to that is we've talked about that we've got several criteria that we look at in terms of risk management. One of the things that actually factors into our consideration of land transactions today is what's the exit cost? So to your point, if there was excess supply that freed up, whether it's the shadow inventory, we would have expectations of what our exit would be in terms of leaving the transaction if the market got soft on us.

Got it. And then just as a follow-up question, obviously, very good profitability in the Financial Services business, some of which I know you talked about coming from leverage. What's the sustainability of that level of profitability? I mean, in our models, you're back kind of where you were when you were doing a lot more units effectively, in terms of the margins you're able to achieve. Is that pretty sustainable as we move forward and can you kind of talk about how that was achieved?

A lot of it is the interest rate environment, and it's a very select market. There is not a lot of competition. Pricing is favorable for us today. I don't know if that's sustainable over the long-term as -- if and when capital returns to that business, I think you would see margins contract. But until that happens, I think you'll continue to see this kind of performance.

Your next question is from the line of Dennis McGill from Zelman and Associates. Dennis McGill - Zelman & Associates, Research Division: So just one on the capacity, Richard, it sounds like you're, along with other builders running up against being able to start these homes as quickly as you would otherwise like. In an industry where it's down, 60%, 70% in volumes, it's sounds kind of crazy that capacity is going to be a constraint. But how do you think that plays out over the next couple of quarters and into '13 as far as your ability to get back to what you had deemed to be a normal construction cycle?

Yes, Dennis, just to be clear, most of that is in the labor side, so I don't think there's much capacity trouble on the material side. But labor is an issue particularly for some of the unskilled trades, where they're just not as many people in the industry perform in that as in the past. I actually think it's a good thing. I think it will keep the market from getting too far out ahead of itself and frankly, plays in our hands cause we're so focused on margin improvement and higher returns today. Listen, work will find its way and money will find its way to where the opportunity is. So I don't expect it to be a big limiting factor over the long run. If business continues like we've seen at the first half of the year for much longer, you'll see other people coming back in. So could it put a temporary lid on how many homes could get built, perhaps, but I do think it would be temporary, Dennis. I don't see that lasting forever. Dennis McGill - Zelman & Associates, Research Division: Okay. And then another question, you mentioned, I think, it was under 10 that you had done the internal study, and sort of changed some of the metrics that you guys manage the business around. Now you had some time since that, how would you describe sort of the internal morale around these decisions and the change in strategy? Are the people that are in place today fully bought in or that's still a process?

I would say people are fully bought in today and it has taken some time overall, but nothing like results to get everybody excited. Frankly, the whole company's excited. This is our best financial performance in years, and we're doing a few high-fives internally and that generates momentum. So if anything, I think, if anything, I'd say, Dennis, people are excited and pleased that the opportunity is as big as we thought it was, and are excited to help drive it from here.

And your question is from the line of Will Randow from Citi.

Just running some quick numbers. It seems like you might be not fully replenishing lands, but the $100 million increase. I could be wrong, but let me know. And I'm just curious what areas are you focusing in terms of that land spend and where do you think that lot supply is constrained?

Yes, Will, just as a general commentary, I don't know if Bob might have any more details he wants to add. But in terms of not kind of fully replenishing land, candidly, that's the whole point. We have too much dirt and we're doing our best. As we look at our balance sheet, not 100% of our balance sheet is driving our revenue today. We have a whole bunch of lots that are sitting that are not doing a lot for us. So our goal is to continue to pare down our land, while still being able to grow appropriately in the market overall. So yes, I think that's fair. I think we'd like to bring the size of our balance sheet down. I'd just like to point out for everyone that is looking at the numbers, we don't need this size balance sheet to drive this size business, and that's obviously going to be a big driver of improved returns over the long haul. Bob, I don't know if you have anything else you want to add?

No, I agree. Again, if you look at the year, we've changed our controlled lots. It's come down by about 6,000 lots. We have delivered 7,000 lots. So we're still in the game. We're still buying lots, but the goal is to try and drive that investment in land down.

It makes sense, and I was just thinking regarding constraining certain communities just because you don't want them to overheat, can you discuss how we should think about conversion rates and cancellation rates as well as demand in the second half?

Yes, this is Richard. In terms of conversion rates, it's just for what it's worth with a 75% pre-sale business and 25% spec, we don't have as much inventory on the ground as we did to kind of have an outsized conversion rate in any given quarter. Our backlog is pretty robust right now for Q3 and Q4 frankly. So we're happy about that. In terms of cancellation rates, obviously, that's going to be a factor of what happens in the broader economy. We're very happy with where can rates are. They continue to be below the historical norms and no way to kind of predict that going forward. I don't know, Bob, if you have anything else or...

So I think that's our view, Will.

And next question is from the line of Adam Rudiger from Wells Fargo.

I wanted to circle back on some previous questions about the multi-year outlook and I wanted to tie that in into some of the details you provided on your orders by segment. If you adjusted those orders by segment like for your community count by segment, I was curious how that would look. I'm really asking the question in the context of what the strength is of the entry-level buyer right now and how important, Richard, you think that entry-level buyer is in terms of getting us back to a normal level of production in the context of elevated unemployment and difficult mortgage qualifying?

Yes. Listen, one of the reasons we like the multi-branded model is we don't have excess risk weighted into any one category. I will tell you that all 3 of our brands saw sign-up growth in the quarter and we do feel the entry-level category is an important segment. Having said that, I don't think it will come as a shock that if and when rates rise, that business is probably not going to perform as well as say the active adult buyer, which approximately half of pay cash. So from a long-term perspective, I think you can continue to expect a dominant weighting toward Pulte. The Del Webb business did pick-up nicely for us in Q2, which we think is a positive, but the Centex business was also good. We just didn't have as much investment in that category. So I didn't know, Adam, if I'm getting to the essence of your question.

The essence of the question, really, is that you guys have the best view of the full spectrum of buyers and it seems to suggest from your results that the better results are coming from the move-up luxury and the active adult, and I'm just curious if there's this group of buyers right now that consist of those -- that group that is driving the demand and if we don't see a real improvement in the macro economic fundamentals, we're going to exhaust those supply of buyers. I'm just curious what you think about the entry-level buyers coming back and what they need to come back and if they don't come back because of whatever issues, then how sustainable the recovery is?

I would suggest our results right now are more driven by our investment choices. In the past year to 18 months, we've been investing more in the Pulte brand and of course, on the Del Webb side, we haven't had to invest because we have a ton of lots there. So I would say that's the biggest driver is kind of how we've weighted it. And then secondarily, there does seem to be nice some strength in the Pulte side, but I'm not trying to suggest lack of strength in the entry-level. That's been more driven by the investment side.

Yes, the only thing I'd add is, again, our community count makes the numbers a little bit confusing. If you look at just sales per community, what you would see is that sales per community on the first-time buyer are actually up over 30% for us versus the second quarter of last year, which isn't as quick an increase in pace, to Richards point, as the move-up buyer. But again, a fairly robust market, so they're out shopping. They still have the same issues in terms of can they put a down payment together, are they credit challenged, but they are a significant portion of what we're seeing today.

And at this time, we have time for one question and that comes from the line of Megan McGrath from MKM Partners.

Just one quick follow-up, just what -- sorry, if I missed it, but what was your cancellation rate in the quarter?

14%.

14%. And then just as a follow-up to beat this dead horse in terms of your constrained demand. I guess, for those of us who have been following the industry for a while, I'm getting some flashbacks from years past, where a builder would say, "Well, we're concentrating on price or margin". And then the next quarter, you get a big mix in orders or you get -- you end up with a lot of spec. So I guess if you could kind of walk us through maybe processes you have in place or lesson learned, post tax credit, about how to manage this process where you're trying to raise price a little and not end up with too much spec or not end up with demand maybe coming in lower than you thought?

Yes, Megan, first of all, I don't think you have to worry too much about us having too much spec, unless we have a huge spike in can rate, which we do not forecast. We have a lot of discipline in the company around spec. For us, right now, it's about simple calculation around ROIC. And as much as I hate to admit this, in the past, it was more driven around volume. And so whatever provides the greatest return for us in a given community and a given division is what we're going to continue to focus on. So I don't want everyone to get carried away with this idea of constraining demand. It is in select markets that are very, very strong, candidly, Arizona, parts of Southern California, places like that. It's not everywhere we're constraining demand. We're just trying to run a smart business. And frankly, I would see here in '04 and '05 for the heyday, we're not talking about a market like that. What we're talking about is, I think, running a smarter business given what we see on the ground today, and just part of the equation candidly is our backlog. I personally am not comfortable carrying a backlog out for a year as an example. A 6 to 9 month backlog is very appropriate, and if we can continue to manage that versus how hand to mouth we were a few years ago as an industry, where we were dying for sales every single quarter, that's about right. We typically can project and protect our construction cost roughly out 6 months, that type of thing. So that's our view is to try to be balanced in that regard. So I hope that helps.

And I will now turn the call over to Jim Zeumer for your closing remarks.

I want to thank everybody for joining us on the call today. We're certainly around for the remainder of the day. If you have any follow-up questions, we'll be happy to take them and we look forward to talking to you on the next quarter. Thank you.

And ladies and gentlemen, this concludes your presentation. You may now disconnect and have a good day.