PulteGroup, Inc. (PHM) Q2 2013 Earnings Report, Transcript and Summary

Good morning, everyone. My name is Sarah, and I'll be your conference operator today. At this time, I'd like to welcome you all to the PulteGroup Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] Thank you. I'd now like to turn the call over to our host, Mr. Jim Zeumer. You may begin your conference.

Thank you. Good morning, everyone. I want to welcome you to PulteGroup's earnings call to discuss our second quarter financial results for the 3 months ended June 30, 2013. On the call to discuss Pulte's results are Richard Dugas, Chairman, President and CEO; Bob O'shaughnessy, Executive Vice President and Chief Financial Officer; and Jim Ossowski, Vice President, Finance and Controller. Before we begin, I want to remind everyone that copies of this morning's earnings release and the related release on our dividend and expanded share repurchase program, along with the presentation slides that accompanies today's call have been posted to our corporate website at pultegroupinc.com. Further, an audio replay of today's call will also be available on the site later today. I also want to alert participants 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 call's presentation slide deck. Finally, today's presentation may include forward-looking statements about PulteGroup's future performance. Actual results could differ materially from those suggested on our -- 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 turn the call over to Richard Dugas. Richard?

Thanks, Jim, and thank you, everyone, for joining today's call as we discuss the strong second quarter operating and financial performance that PulteGroup reported earlier this morning. As you are aware, we also issued a press release yesterday afternoon announcing the declaration of a quarterly dividend and the expansion of our share repurchase plan. Bob will provide more information on these announcements later in the call. Taken in combination, our solid second quarter financial results; the allocation of capital to fund the dividend, our first in more than 4 years; and the expansion of our share repurchase plan reflect continued progress in our efforts to drive higher shareholder returns through greater operational and capital efficiency. We are very pleased with the strides our organization continues to make. While it is minimally 90 days since our last earnings call, questions and comments about the industry suggest that many believe the operating environment has been significantly impacted by the recent uptick in mortgage rates. Obviously, rates are important, but our internal data suggest that not much has changed so far in the macro housing market. We have been consistent in saying that the recovery in housing has been more about lack of supply than a dramatic increase in fundamental buyer demand. The significant drawdown of foreclosed and other distress inventory, combined with the extremely tight supply of existing and new homes, has done 2 things. First, it provided an environment where selling prices could stabilize and then ultimately begin to recover. Second, these supply and pricing dynamics helped to create a sustained sense of urgency among prospective buyers who are now more anxious to purchase a home. We have also said that measured rate increases, in concert with healthy macroeconomic performance, would be another factor that could increase that sense of urgency among buyers. Recent analyst reports also suggest that demand conditions have not changed materially and that house inventory remains extremely tight in most markets. At the risk of stating the obvious, I would remind everyone that while home prices and rates are higher, they started from such a low base that consumers can still find value in buying a new home today. This is especially true given that apartment rental rates continue to march higher in many markets. Just as market conditions remain on track, so do our business strategies and the tactics as we continue to implement the plan we articulated over 24 months ago. While there are many components to our work, the goals remain to deliver higher returns on investment capital over the housing cycle by focusing on expanding gross margins, driving greater overhead leverage, improving inventory turns and buy more efficiently and effectively using capital. Successful execution of these key initiatives is enabling PulteGroup to drive meaningful and, we believe, sustainable earnings growth, which is critical to the company delivering higher returns on invested capital. We believe that over time our focus on running a better homebuilding operation will allow us to grow the quantity, as well as the quality of our earnings that we generate, while supporting better long-term returns. The improvements in our second quarter earnings results show that these continue to be the right areas of focus as we reported earnings of $0.09 per share, including $0.17 per share of charges, which Bob will discuss. Adjusting for the charges, earnings would be more than double last year's second quarter earnings of $0.11 a share. Among the key drivers of our improved earnings performance is our focus on driving price and margin, rather than simply pushing unit volume, an approach we would have likely employed in the past. Consistent with this focus, our average selling price was up $25,000 to $294,000. Benefiting from the increased selling prices, along with our efforts to lower house construction costs, our adjusted gross margin for the second quarter expanded by 360 basis points over the prior year to 23.9%. This marks the 10th quarter in a row of improvement in our adjusted gross margin. We don't provide formal guidance, but given the strong pricing environment, coupled with trends in material costs and our initiatives to drive construction efficiency, we see opportunities for margins to continue expanding in the future. Certainly, an ongoing shift in product mix to move-up homes is helping reported prices in margins, where we have realized higher selling prices across each of our brands. Further, in the past 90 days, I will tell you that our markets have raised prices in at least 50% of open communities, while many of our divisions are reporting that they actually raised prices in all of their communities during the quarter. The price increases during the quarter, which will benefit future closings, were generally in the range of 1% to 5%. Consistent with this focus on price over pace, we have continued to be very measured in our selling efforts. As we have talked about on prior calls, we continue to purposely meter sales across a number of communities in key markets throughout the country. Based on feedback from our operations, in about 2/3 of our markets, we have purposely constrained sales to some degree in 10% or more of the available communities. In fact, in some of the hotter markets out west, including Arizona, Nevada and Southern California, we have controlled sales in more than 50% of the open communities. In a nutshell, we are effectively maximizing the value of our land assets by selling houses for more money and better margins, while using the resulting strong cash flow to invest in the business, pay down debt and as demonstrated by our action on dividends and share repurchases, returning funds to shareholders. Some of you have heard us say that along with being a more efficient operator, we want to be more balanced with regard to the capital allocation decisions we make in our business. I think the decisions implemented in the second quarter demonstrate that we are committed to this model. Before handling -- handing the call over to Bob, I want to provide a few comments related to the impact of higher interest rates on housing demand. As I said earlier, we view the initial recovery in U.S. housing as being more about changes in supply than demand. Further, we have said that in light of today's tight mortgage lending environment, it is generally the more qualified move-up buyer who is the most active in the market today. Given this combination, over the near term, we continue to believe that the recent rise in rates is likely to have only a limited impact on demand, especially if the higher rates reflect the strengthening economy. Specific to PulteGroup, we can tell you that traffic to our communities remain consistent over the quarter, while cancellation rates were a little changed in the period. We did a quick check on our operations, and about 85% of our divisions believe that the rise in rates has had little impact so far, or may have actually worked to increase buyer activity. As I mentioned, with rates rising from such low levels and uptick can spur more buyers that it eliminates over the short term, although we have to see how this plays out going forward. We are in the camp that if higher rates reflect improving economic conditions, we would expect the housing recovery to remain on track. As an industry, we can sell more houses if more people have jobs even with modestly higher rates. Let me now turn the call over to Bob for more details on our quarterly results. Bob?

Thank you, Richard, and good morning. Building on Richard's comments, I would agree to the gains realized in our Q2 financial results and the capital positions we announced yesterday reflect the successful execution of our value creation program launched in 2011. It's rewarding to see that the hard work by our employees is beginning to payoff. Now let me review some of the numbers. For the second quarter, home sale revenues increased 19% over the prior year to $1.2 billion. The increase in revenue reflects a 9% increase in closing to 4,152 homes, in combination with the $25,000 or 9% increase in average selling price to $294,000. The higher selling price was driven by price increases, as well as the ongoing shift in our closings towards move-up and active adult homes. Specifically, we realized higher selling prices within each of our brands, including increases of 8% in Pulte, 1% in Centex and 10% in Del Webb. And our closing mix included 46% from Pulte, 27% from Del Webb and 27% from Centex, which is consistent with the first quarter of this year. You may recall in the second quarter of last year, our closing mix was 42% from Pulte, 25% from Del Webb and 33% from Centex. Consistent with recent quarters, the contribution of closings from Centex communities has seen a significant decrease. Land sale revenues in the quarter were $20 million. We will continue to opportunistically divest noncore land assets, although timing of any resulting transactions can vary greatly from period-to-period. In the second quarter, we reported an adjusted gross margin of 23.9%, which is 360 basis points higher than Q2 of last year and 100 basis points higher than Q1 of this year. Consistent with prior quarters, our adjusted gross margin continued to benefit from company-specific and industry-wide factors, including better pricing, an increase in the volume of home closings from our Pulte and Del Webb branded communities and our ongoing efforts to lower home construction costs. Gross margins are also benefiting from our strategic pricing initiatives, pursuant to which we are fine tuning pricing and more accurately identifying those items that consumers truly value. Consistent with recent quarters, margin contributions from lot premiums and option revenues increased, and sales discounts dropped 290 basis points to 2.6%. During our last earnings call, we introduced the metric of closings from commonly managed floor plan. As we've discussed, these are homes that have been constructed under the more efficient design, cost and build processes that we are implementing throughout the country. You may recall that in Q1, the percentage of closings from such commonly managed plans was 12%. On a unit basis, the number of closings from commonly managed plans increased from Q1 of this year by roughly 25% to almost 600 homes. As a percent of total Q2 closings, commonly managed plans now account for 13%. We expect this percentage will grow in future quarters as we roll out our processes across the country. Our total overhead spend for the second quarter this year was $151 million or 12.3% of home sale revenues. This includes $13 million or 110 basis points of costs associated with our relocation to Atlanta. This compares to SG&A of $124 million or 12.1% of revenues in Q2 of last year. The current year relocation charges include estimates for severance, retention award and relocation costs. Other than the office relocation charges, the year-over-year increase in SG&A was due primarily to higher variable comp, resulting from the company's improved financial results, as well as volume-sensitive costs. We're pleased to see that after adjusting for the office relocation charges, the company continued to realize leverage on its overhead spend as costs increased by only $13 million against the top line revenue increase of $195 million. Our financial services operations generated pretax income of $16 million in the quarter, which was consistent with the prior year. Total mortgage origination volumes for the quarter increased 8% to 2,812 due to the increase in closing volumes from our homebuilding operations, partially offset by a 200 basis point decrease in our capture rate to 80%. Moving down the income statement. The company reported other expenses net of $57 million for the quarter. This was driven primarily by 2 items. In the quarter, we retired $434 million of senior notes. This includes $399 million in connection with the previously announced redemption of all of our 2014 notes, as well as $35 million acquired note for the market transaction. We recorded an aggregate $23 million loss in connection with these transactions, including the write-off of unamortized discounts, premiums and transaction fees. We also recorded a $30 million charge resulting from a contractual dispute at a previously completed luxury community in a market the company had since exited. This dispute has progressed through various stages of arbitration, but is not yet fully resolved. The charge reflects our best estimate of cost resulting from arbitration ruling and ongoing settlement discussions, but the ultimate resolution of these may -- these claims may be different and could result in additional costs of as much as $40 million. We currently anticipate the majority of these claims will be received -- resolved in 2013. In summary, PulteGroup reported second quarter net income of $36 million or $0.09 per share, which included $67 million or $0.17 per share in charges. For the second quarter of 2012, the company recorded net income of $42 million or $0.11 per share. Overall, our homebuilding operations continued to demonstrate meaningful improvement across all the key metrics we have been focusing on, including price, margins and overhead leverage. Let me now highlight some of the significant strides we've made in our balance sheet. We ended the quarter with $1.3 billion of cash despite paying down the $434 million of debt during the period, as we continued to generate cash flow from operations during a period when we would typically experience a cash outflow to fund our business. The strong cash flow reflects our higher closing volumes, improved profitability and to a smaller degree, further reductions in our spec inventory. At quarter end, we had only 271 finished specs on the ground, which represents a decrease of 55% compared to the second quarter of last year. In total, we ended the quarter with fewer than 900 specs in production or less than 1.5 specs per community. This is down 45% from last year. And at the end of the second quarter, we had 6,539 homes under construction, which means that spec building has dropped to 13% of production. This is roughly half of what it was a year ago and only 25% of what it was at the end of 2011. As we've discussed on prior calls, we typically see better pricing and higher margins on dirt sales than we do on spec units. I would also point out that in addition to supporting better margins and freeing up working capital, reducing our spec production has the added benefit of aiding our house inventory turn, which continued to improve in the period. Looking at land activity. We've put approximately 10,100 lots under control during the quarter and invested a total of $332 million in land acquisition and development. This is up from $206 million in the first quarter of this year and is consistent with our previously announced plans to raise our land investment authorization by roughly 40% this year. As we've discussed, our improving operational capability has given us significant great -- significantly greater financial flexibility. In recent years, we've used this as an opportunity to reduce our leverage, including the debt that we retired this quarter. As a result, our debt-to-cap ratio has declined to 47% from 61% at this time last year. Net of cash on hand, our debt-to-cap has dropped to 26%. I'm pleased to say that our improving flexibility allows us to extend our capital allocation options to include the dividend, as well as potential share repurchases. As we have discussed, we would like to be more balanced with our capital and believe the return of capital to shareholders should be part of our capital decision model. To that end, I'm pleased to report that our board has declared a quarterly cash dividend, our first since the end of 2008. The $0.05 per share dividend will be payable August 12 to shareholders of record at the close of business on August 5. The board also approved the share repurchase authorization for an additional $250 million, raising the company's total repurchase authorization to $352 million. As noted in the release announcing these actions, we believe they illustrate our confidence in the long-term prospects for the company and are consistent with our focus on increasing shareholder value and returning capital to our shareholders. Considering the dividend and repurchase authorizations, our current capital decisions reflect the broader and more balanced approach we have been talking about over the last year. Before handing the call back to Richard, let me cover a few more data points. In the second quarter, net new orders totaled 4,885 homes, which is a decrease of 12% from last year. Given the price increases we've realized, the dollar value of sign-ups is $1.5 billion, which is down only 5% from the prior year. Sign-ups for the period were impacted by a 16% decrease in community count, as well as by the company's decision to purposely close sales in a number of communities, particularly in Arizona, Nevada and Southern California where we've sold too fast at the start of the recovery in 2012. We sold 400 fewer units in these 3 markets in the second quarter this year, which was a major contributor to the year over decline -- year-over-year decline in total sign-ups. Breaking down the sign-up numbers a little further, on a year-over-year basis, sign-ups decreased 20% at Pulte and 18% at Centex, while increasing 8% at Del Webb. Absorption paces per community were up 14% at Centex and 15% at Del Webb and slowed 8% at Pulte, which was impacted by our efforts to maximize the profit opportunity of each house. And finally, we ended the quarter with 8,558 homes in backlog valued at $2.7 billion. Backlog units and dollars are up 13% and 25%, respectively, over the prior year. Now let me turn the call back to Richard for some final comments.

Thanks, Bob. Before we open the call for questions, I will spend just a couple of minutes offering comments on market conditions we experienced during the second quarter. As you would anticipate, based on our comments on this call, we view overall market conditions to be very favorable. By geography, I would offer the following views. Buyer demand on the East Coast was generally strong from the Northeast down to Florida with notable strength in the Greater Boston area, as well as Raleigh and Atlanta. The strength in Atlanta is a positive development and that it was one of the last markets to participate in the recovery. Given the volume and profit potential this city can generate, we're excited to see this turnaround turn into a meaningful and sustained upcycle. Further south, demand in Florida remained strong in the quarter, as inventory levels are contained and pricing continues to move higher. Demand conditions in our Midwest markets continued to be robust. We are even seeing an upturn in demand in Chicago, which like Atlanta was one of the last markets to participate in the housing recovery. Chicago was another city that can generate substantial pretax income, so we're encouraged to see a revival in this key Midwest market. Continuing the trend from the start of the year, demand on the ground in Texas is strong, although we are opting to focus on price and margin, rather than just driving units. And finally, as you read in just about every report, consumer demand out west remains one of the strongest in the entire country. From Seattle to California and the Southwest, demand far outpaces supply. As I mentioned earlier, in hindsight, we likely let sales get out too far in Arizona, Nevada and Southern California in 2012, so this year's strategy is to have a more measured and consistent sales pace in general, but particularly in these 3 markets. I want to thank everyone for your time on this morning's call. Also, I want to thank the entire PulteGroup organization for their hard work and commitment, which is really at the heart of our improved financial results. The U.S. housing market continues to recover, and history would suggest that there's a long way to go before the industry gets back to normal volumes. We will continue to monitor what the impending impact of recent uptick in mortgage rates has in demand. Although as I said earlier, the industry can handle higher rates, assuming they are accompanied by more jobs, better consumer confidence and generally stronger economic conditions. Again, thanks for your time. I'll now turn the call back over to Jim Zeumer. Jim?

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

[Operator Instructions] The first question comes from Michael Rehaut of JPMorgan. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Really appreciate all the color and commentary around your efforts on pace versus price and your comments -- really nice granular comments in terms of feedback from the field, in terms of the recent impact of rates. I guess, the only other thing I'd be interested in is, during the quarter, did you see a change in sales pace? Certainly, the description by brand was also very helpful in some of the more intentional efforts in Pulte, and so it might be hard to parse out seasonality out of these effects. But you said that traffic was consistent during the quarter. Can rates changed little? But any inter- quarter trends by region or by brand, I think, might also be helpful in understanding the recent movement in rates.

Yes, Mike, this is Richard, thanks for the question. Generally, we saw consistent results throughout the quarter and I'll offer that we're pleased with the way July is unfolding as well. So no real change in traffic levels, sign-up patterns in general. You will note from our comments, we're pleased that our Del Webb performance is up. That's an area that we want to see continue to move forward, but pretty consistent throughout the quarter and so far, in July. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Great. And I guess, kind of bigger picture, with regards to your comments and announcement on the share repurchase. Is this something that you expect to implement over the next couple of quarters on a shorter-term basis? And longer term, in the past cycle, there were only a couple of builders really that bought back shares on a consistent basis, really part of their cash flow strategy or free cash flow strategy. And those 2 companies that did that actually had very strong performance. Is that something that you expect to really inculcate into your cash flow approach on a real consistent basis? Or do you kind of see it more opportunistic at different points when -- just more of a -- again, an opportunistic approach?

Yes, Mike, Richard again. I'll start and then throw it to Bob. We're really pleased that we're able to reintroduce the dividend and talk about a share repurchase plan. This is extremely consistent with what we signaled for the last 24 months. We intend to be more balanced with our overall approach to capital. And frankly, part of that includes our overall position on land acquisition. We're pleased that we're able to increase our spend this quarter in land acquisitions, substantially from Q1, that's in keeping with what we told everyone. But the watch word here is balance. I wouldn't want to get into any specifics with regard to share repurchase plans. We wouldn't want to signal any trading patterns or anything like that. But we do intend to be more balanced with our overall capital approach and part of that is returning shares -- or capital to shareholders. So with that, Bob?

The only thing I would add to that is, Mike, we think of it sort of 4 elements, right? We've got investment in the land -- in the business; we've got dividend payments; we've got share repurchases; and we've got leverage that we need to manage against all of those things. So I think -- if you -- against that balance comments that Richard just made, obviously, the dividend that we've just announced is roughly $20 million a quarter, so it would be $80 million a year. We have authorized up to 40% more spend. That would be the first 2 things that we would look at in terms of how we allocate available cash and cash generation. And then, you would look at the others. So I don't know that I would say it's opportunistic or not. It would be how much cash do we have available and what are the other uses that we've used for it and what's the underlying intrinsic value of the equity. So it's a -- something that we'll be looking at continually, honestly.

Your question comes from Stephen East of ISI Group.

If we could just follow on that a little bit. When you look at your allocation into land, et cetera, do you expect to see community count growth? When will that start to turn positive? What do you think it will be like in 2014?

Yes, Steve, we had indicated nothing new on that front. We expect it to be down this year before bottoming some point into '14. We haven't given any further guidance. We intend to on our fourth quarter call as we start to ramp up projections for '14. We're certainly pleased that we're able to increase our land spend from $206 million in Q1 to $332 million in Q2 and you saw the lot count that we put under control in Q2 was a little over 10,000 lots. So a step up in activity. We'll have to see what that does to community count in the future, but no further guidance now.

Okay. And as you look at -- right now, when you look at sort of the best use of cash and you go through -- in this early in the cycle, I would assume reinvestment is, is the highest use of cash and yet you all are already taking a pretty balanced approach. I guess I'm wondering what type of growth in the underlying business should we expect. Or is this going to be a fairly run flat type of business for the next year or so?

Steve, it's Bob. Following on Richard, we're not providing forward guidance, but we have been, I think, clear over time that we think today is the best investment dollar option for us in the business. Again, 40% increase for fiscal '13. And what we do is we actually invest in markets where we think we've got opportunities to enhance our relative market share or maintain it. So I think, no change from us in that regard. The only thing I would add to Richard's commentary a moment ago was, while we are increasing our investment, we are finding that we are buying more raw land than finished lots. And so there's a little bit further delay, obviously, in terms of when communities come online because of that.

And Stephen, Richard. One other thing I'd like to add, our real focus is on growing earnings and growing returns. And we think we've demonstrated nicely that we can grow earnings without relying strictly on unit growth, if you will. And we've done a nice job with that with margins. And as I indicated, we think there's more in that tank, to go.

Your next question comes from David Goldberg of UBS.

Why don't you talk about the absorption pace at Del Webb, specifically, and it's great to see pricing up. Get a little bit of an idea of kind of how much of that was -- if there was any shift, either on product that's being purchased or even geography for Del Webb? And also, kind of how you think about the pace versus price at Del Webb given the kind of higher capital costs in the communities and the longer lives?

Yes, David, this is Richard. Our pace is -- we're up about 15% in Del Webb overall, and we're really happy with that. It is, of the 3 brands, the 1 brand where we are not limiting sales pace, if you will, because we have such an investment. So again, under the mantra of ROIC, our goal is to drive more pace there. At the same time, our margins expanded nicely in that sector as did pricing come up as well. So we are seeing what we expected, that as the longer this recovery unfolds, the more and more Del Webb buyers come back into the overall sector. Our average selling price is up 10% in Webb with sales pace, absorption paces being up 15%, so a nice combination. In terms of geography, we're seeing strength in a lot of markets, and I'm pleased to say that some of the Midwest markets for Del Webb also saw some strength in the quarter, with a notable outside strength in northern California.

That's great. And then just my second question was on cycle times and if you're seeing any extension in cycle times, or if you're able to kind of curb [ph] any potential extensions just through all the efforts you guys have been through on efficiency and trying to drive some process efficiencies?

And David, you’re asking about house construction cycle times or...

Exactly, exactly.

Yes. So we are experiencing some minor delays in cycle times as trade availability is difficult. Having said that, we have a huge effort internally on overall efficiency, and we're real pleased with regards to that. Some of the extension with regard to our cycle times is a result of our option focus on substantial margin that we're driving from options, which is a change in the last 24 months for us as we've talked about. And Bob indicated in his prepared remarks, our option revenue is up. So we'll take that tradeoff. We think from an overall return blend, the incremental margin we're generating even if it's a couple of extra days and cycle times, more than pays off.

Your next question comes from Dennis McGill of Zelman & Associates. Dennis McGill - Zelman & Associates, LLC: Richard, I guess, on the overall kind of balance between growth and units or top line and margin expansion, you guys have obviously done a great job driving the margin improvement and net-net sort of winning on the ROIC side there. But at what point do you see an inflection point where you can do both, sort of a balanced top line growth that may be matches the market or is closer to the market? And also, seeing the benefits of the cost improvements that are in place to drive the margin side? And what do you sort of look for as the key metric that can drive that inflection point? Because, I think, as you've talked about in the past, community count is a driver, but not necessarily the best driver as you guys think about it?

Yes, Dennis, that's a great question. And frankly, we feel like we needed to get our balance sheet in line and we needed to improve our overall capability in the homebuilding side before we got much more comfortable adding a lot more volume. We're at that point, and as you've seen, the 40% increase in authorization, Bob indicated is beginning to get into the business, the $332 million versus $206 million in total land and development spend in Q2 will have an impact in future quarters. There's no question about that. So I would tell you if you think about the business sort of separately, how much do you invest in land to kind of take advantage of the market versus how much do you focus on sort of your core homebuilding operation. We felt for a long time that we have a lot more efficiencies to gain out of our homebuilding operation, and we really, really work hard on that and feel really good about that now. So we certainly are not afraid to incrementally invest in the business, and we've made that decision several quarters ago, and we're beginning to kind of put that to work. Having said that, we are committed to a balanced approach. Don't look for us to go back to the days where Pulte was grow, grow, grow at all cost. We want to be balanced. We think our indication of a dividend and share repurchase authorization is good indications of that. We paid down more debt in the quarter. We really like our position. We're very financially flexible, and we're running a better business. So Bob, do want to add anything to that?

Nothing, no. Dennis McGill - Zelman & Associates, LLC: So as you think about the absolute pace, and this is a -- maybe you can add more color by markets. Do you feel like your absolute pace is in a sweet spot that you prefer between pace and price? Or would you be surprised to see pace slow even further and price accelerate further?

That's a tough question to answer because you got to go by community. I would say this. I feel extremely good about how we ran the business in Q2. I think we did a really nice job squeezing everything we could out of the Pulte brand, which have seen a lot of strength. And we let the Centex and the Webb brand run a little bit more, especially the Webb brand. So it's hard to exactly say. I guess we'll have to look at supply conditions by community, overall. If we continue to see incredibly tight supplies in northern California, Seattle, some of these other markets, I suspect price is going to continue to go up. I mean, you heard us say that we took price from 1% to 5%, pretty much across the board, and that's going to benefit the future quarters, so really pleased with the blend. I felt like last year, as Bob indicated in his remarks, we'd let it get away from us a little bit in the early part of the year in some markets. We don't feel that way this year. I think we're doing a nice job, by asset, of maximizing our opportunity?

Your next question comes from Stephen Kim of Barclays.

The land acquisition that you all talked about, could you give us a sense for what kind of buyer mix is assumed as you're going out into the market? And the background for the question is essentially that you and most of the other builders talk about a mix shift that they've been seeing, whether because of tight credit partially -- and also just where the demand is. They're able to sell to a more of a move-up buyer than they historically done. And I'm curious as to whether your land purchases assume that, that mix continues into the next few years? Or if it assumes a reversion back to a more typical type of buyer in a more open credit situation?

Stephen, it's Bob. It's interesting. We don't actually ask our -- we're agnostic as to buyer group. So what we ask our land acquisition teams to do is focus on return. So which land parcels are they looking at, that can generate the best return? And what we have seen for 24 months now is that the opportunities that we are seeing are largely in the move-up space because that's where credit is more available. So that -- we've talked about that in the first time space, you can't get enough volume through to make the returns work. So most of our investments has been on the Pulte or move-up states. We also actually find that we're in certain markets looking at Webb transactions. We opened a new Webb in Raleigh, which has done very well since it opened. So I think it's really return focus for us rather than demographics when we're looking at land. I don't know if that answers your question.

Well, it does. But if I could push back on that a little bit more. I mean, that would seem to imply that -- an assumption that the move that we've seen, the mix shift that we've seen is not a cyclical phenomenon or is not a phenomenon that will reverse at some point when credit availability improves. But my suspicion would be that most folks, including yourselves, would assume -- would believe that credit availability will, at some point, improve, which would almost de facto mean that you would have more entry-level buyers entering the market. And therefore, all of those return metrics that you use for land investment would then change and make the entry-level look more appealing than it does today. So I just was curious as to why you don't feel it's prudent to maybe introduce an element of that kind of adjustment to the analysis. And then one last question, if I could, is the lumber. I know lumber prices have declined earlier this year. Have you seen the benefit of that yet or is that going to be more of a 3Q event?

On the lumber, it will be -- actually probably later than Q3. It's actually out beyond that because as pricing comes down now it will be closing to see probably first quarter of next year. And then on first time -- to your commentary, I think we believe that, yes, that in an environment where we're getting back to more normal volumes, the first-time buyer will have to be a more important part than they have been over the last 2 years. And so I think, as we see return capability coming, we would invest in that land portfolio. And it might come as, if prices continue to escalate closer to the job core, you might see people moving out just for affordability and that's more of your first-time buyer.

Your next question comes from Bob Wetenhall of RBC Capital.

Without giving forward guidance and, I guess, this is addressed to Richard. How much upside do you see in gross margin going forward? Is it marginal, or is it meaningful?

Yes, Bob, we'll stick with the similar commentary we have each quarter. We see upside from here, and I'm pretty pleased with the upside that we see in our backlog, and that kind of gives us visibility for roughly 6 months or a couple of quarters. So we continue to execute against our common plan management strategy. We continue to drive a bigger percentage of our closings. Bob indicated only about 30% of our closings in Q2 had benefited from that process. I expect that to ramp up on a consistent basis quarter-after-quarter. So I would suggest that the margin opportunity we have in front of us is not insignificant.

Got it. That's helpful. You're increasing your land spend sequentially, which is terrific. Community count continues to go down. New order growth turned negative. Do you expect kind of given the reinvestment in the land and your efforts, which I applied to manage price versus pace, do you see that turning back to the positive territory?

Yes. We wouldn't want to comment on exactly kind of what comps will do over time. I will tell you this. We're extremely focused on earnings growth and return growth, and unit metrics got us in trouble in the last cycle by paying too much attention to that and trying to chase volume. We weren't making as good a land decision. So I feel very good about our ability to grow earnings and grow returns from here. But don't have a lot to say about what sign-up trends may do. It's going to obviously be reflective of what the broader market does and how quickly we can get communities online, which we don't have any update on at this point. But it's about driving earnings and return on invested capital.

Your next question comes from Ken Zener of KeyBanc.

Gentlemen, obviously, Bernanke in the last month or so, builders not necessarily reporting surging candidates or slowing of orders. But if investors are focused on the volume side and the builders, the industry is focusing on price and pace comments, at least for most builders, what's happening is the out-year volumes are getting pushed farther out. Why wouldn't this imply lower overall cyclical volume or kind of a mid cycle slowdown, despite the fact we're below 1 million starts right now? Especially given that the builders have taken share in serve markets, it seems as though the pace and price comments can go so far. I mean, obviously, there's a lot of price. But I mean, why doesn't it just imply lower volume? I mean, is it the labor side, is it -- this isn't what builders historically have done, slow the pace.

I think it's a great change, Ken. Frankly, I think the industry, we've talked about before, has some systemic issues, right, not much land has been entitled over 4 or 5 years of downturn. I think we all gobbled up the opportunistic finished A locations a couple of years ago. Bob just indicated that most of our spend now is going into raw, which extends time frames out a little bit. I don't think anybody here is suggesting that the industry volumes don't come back to normal. The question is, what's the capacity of the industry to actually get us there? And I would suggest land is more of a constraint than anything. I think the labor will continue to come back into the space. It might be a quarter or 2 hiccup here and there for builders. But I think it's an extremely healthy change. I think builders have learned their lesson by focusing too much on volume, volume, volume, and certainly, this company has.

Your next question comes from Dan Oppenheim of Credit Suisse. Daniel Oppenheim - Crédit Suisse AG, Research Division: I was wondering if you can talk a little bit more about July. So the trend was very good, but wondering if there's any color you can give by segment, or just, overall, where -- especially in the Centex segment in terms of the first time where looking at some of the backlogs that was closing in July or is going to close for August. Any issues encountered on the mortgage side of the buyers who hadn't locked in? Just how you're viewing the environments overall there?

Yes, Dan, we're not providing any granular guidance. We're just saying that we've seen a continuation of good trends in traffic and sign-ups through the first 3 weeks of July, so don't have any more detail on that. Daniel Oppenheim - Crédit Suisse AG, Research Division: Okay. And then I guess, secondly, in terms of the capital allocation, you talked about having a much more balanced approach to it at this time. But then, certainly at this point, the best option is continued investment in the business. Assuming [indiscernible] wanting to have the flexibility there, I think in prior cycle we've seen companies where there's more a structure around it, where it ends up being disciplined. The question is this, as you look at the opportunities, as the cycle progresses, how do you sort of shift and say, "Okay, we had thought that this was the best option for reinvestments, but now we should focus more in terms of the share repurchase or dividends here." How is it that you're going to think about that shift? Certainly, it's a good thing to have this flexibility, but how do you look differently about -- at the allocation?

Yes, hopefully, we won't look differently at it over time. It is, again, first and foremost, we think the best return we can generate on our cash are in the business. We've got a criteria that we're using to approve land acquisition. And so I think you can expect to see us continue to invest in the business doing that. And obviously, we've introduced the dividend. And so I think on balance, over time, if we have available cash beyond that, we would consider whether it made sense to put more in the business, pay down debt or repurchase shares or increase the dividend over time. So we have lots of -- Richard said earlier, we have flexibility, so I don't think there's anything concrete that we're going to say, "If this, then that." It will be more of an evaluation as time goes by.

And Dan, just to add to that, to give you an example, just within the land acquisition space, if you're going to appreciate this. If we're looking at 5 transactions in a given market, we are being disciplined to only purchase 2 or 3 of those. And we really like what that's doing to our overall portfolio. We continue to approve high returning transactions, with less risk, with more upside to the company. And we're just having a conversation internally over the last couple of weeks about how the land that we have put under contract in the past 12 to 18 months it's really going to benefit the company, we believe, in the future. Whereas if we had not had the discipline that we have had, maybe we would have bought all 5 things we were looking at. So it extends beyond just the choices of what to do with our capital, but even within each segment, particularly on the land side being smart about it.

Your next question comes from Nishu Sood of Deutsche Bank.

This is Rob Hansen on for Nishu. You mentioned some of the order trends by product line, and I think the pricing that was up 10% for Del Webb. I wanted to see if you could comment on absorption levels and what's that's been trending kind of on by product line, and also the pricing for the other 2 product lines?

Sure, ASPs, quarter-over-quarter, up 9% to $294 million. That's what we talked about in the call. That was up 8% in Pulte to $350,000. It was up 2% to $197 million for Centex. It was up 10% to just under $300,000 for the Del Webb segment. Sign-up -- gross sign-ups were down 20%, as we've talked about for Pulte, 18% -- down 18% for Centex, up 8% for Del Webb. On pace, it was down 8% at Pulte, and again, that's reflective, I think, largely of what happened out with Southwest. Paces were up 14% for Centex as we've talked about up 15%, this absorption basis for Del Webb, so an aggregate 4%.

Okay. And then on the metering of sales comments, you mentioned, I think, 2/3 of your markets, you're metering sales in 10% of those communities. So if you were to look at that kind of on an overall basis as a percentage of your communities, what percentage are you metering sales? And then, what's the kind of average differential in margin on those communities where you're metering versus not metering?

Rob, we haven't gotten into that much detail. I will remind you that we said that in several markets we're metering sales in 50% or more, so we don't have an exact number for you there. And then average margin differential is going to be very asset specific. So even in a market where we're metering sales in greater than 50% of the communities, we could have one asset there that was not well positioned that had low margin. So it's very difficult to answer that. But it's fair to say that we like the way that this is playing out for us. We think we're maximizing return.

Your next question comes from Mike Roxland of Bank of America Merrill Lynch.

As we've had hiring, and given all the various markets who participated, are there any particular markets that you think can best cope with rising rates? And are there any markets that you would consider pulling back from as you perceive there that they're more susceptible to a rising rate environment.

Yes, Mike, I would first go to which segment can most deal with the rising rates and that's the Del Webb buyer. Approximately, 1/3 of our investment and our assets positioned in that business. There tend to be 40% or greater of those buyers who pay cash and those that do take a mortgage, take a very conservative mortgage. So rather than isolate a given geography, I would first lead you to that segment. Then I think, certainly, the Pulte category, the move-up category can probably weather the rate increases next best, if you will. And then, I think the category that would get hurt the most would be the entry-level category overall. In terms of geography, you just have to -- look, excuse me, at where our assets were positioned. So we have a pretty good balance with the vast majority being in Pulte and in Del Webb. So I wouldn't single out any one particular market that I think would be impacted the most.

Got you. Then if I recall, a couple of quarters ago, maybe 1.5 or 2 years ago, you were talking about something like independent series product. Given the rising rate environment, is that a product that you're still pushing? Or are you still more heavily targeting 2 potentially, let's say, first-time home buyers?

Yes, it is. We continue to invest in the Centex brand and the entry-level category in total with our goal being to ensure that the product is very affordable. Having said that, as Bob indicated, we're not finding a lot of land transactions at this point that return exceptionally well in that category. So our future investment has not been geared as much. But it doesn't mean we're not trying to monetize the existing assets that we have and maximize our profitability in those and part of that is a more efficient home construction process due to the independent series.

And your last question comes from Adam Rudiger of Wells Fargo.

Can you elaborate a little bit on what the charge from the contractual dispute is? I mean, that seems like a pretty big charge if you consider the potential for the additional $40 million?

Yes. So this is a luxury community that was built, again, in a market where we're not doing business anymore. And it's a contractual dispute with homeowners that essentially, it relates to the amenity package that was built, their access to that amenity package. Again, we've had arbitrations, ongoing discussions for settlements. So the $30 million that we've provided is what we actually think this is going to cost. The reason we highlighted the incremental $40 million is it will be in our 10-Q. We are required to say is it possible that there will be some bigger number and what's the range of that. Obviously, the range is 0, meaning the $30 million estimate is correct. But depending on how the negotiations go, in theory there could be more. That $40 million would be a, in our view, an absolute worst-case scenario.

Okay, can you -- what is it surrounding in terms of the amenity package. I don't quite understand what the dispute would be.

It is an amenity package that is owned by a third-party and the access rights of the owners of the units within the community was in question and essentially, contractually, they thought they had more access than ultimately they were provided, and so have challenged us on the basis of how the units were sold to them.

I'll turn the call back over to the presenters for closing remarks.

Great. Thank you, operator. I just want to thank everybody for their time this morning. I know it's a busy day for a lot of you. But we certainly will be available for any follow-up questions that you may have, and we look forward to talking in our next conference call.

This concludes today's conference call. You may now disconnect.