Calling current conditions "the worst housing recession in recent history" and seeing no end in sight, on Thursday morning (Oct. 25) Pulte Homes CEO Richard Dugas outlined how the company is hunkering down to survive for the duration.
"Since we are not sure how long this environment will stay this bad, Pulte is prepared for the worst," he said.
Among its biggest survival initiatives is a plan to have $1 billion in cash on hand by year's end, which would be an impressive feat given that the company only had a little more than $101 million in its coffers on Sept. 30.
A combination of cutting SG&A expenses as well as land buying and development costs will get the company to that goal, said Dugas.
Moving more homes by lowering prices further seems to be a strategy that is on its way out at Pulte, said Dugas. Instead, if projections show that a community can't generate positive cash flow, it will be mothballed. That hasn't been happening at many communities that are up and running with model centers and sales underway. At this point it appears to be confined to communities in earlier stages of development.
"We do feel that we are at the point in some communities where pricing reduction is not moving houses," said Dugas, calling the situation "Inelastic."
"We are reducing pricing and using incentives only in cases and in communities where there is substantial inventory," said Dugas. "We are better off mothballing communities."
Instead of lowering prices, the company is using promotions, such as its current "Monster Sale" to generate interest in its homes. "In most cases what our operators were doing with our pricing (in the Monster Sale promotion) was repackaging what (reductions) we had out there anyway," said Dugas.
The company isn't expecting much improvement in its cancellation rates, which were running about 44% for Pulte Homes and 35% in the Del Webb active adult product.
"Unfortunately, until mortgage liquidity returns...we can expect the cancellation rate to continue," said Steven C. Petruska, Pulte's chief operating officer.
Pulte would have turned a modest profit of 21 cents a share in the third quarter if it hadn't taken $1.18 billion, or $3.33 a share, in land related charges as well as impairments in land and goodwill. After those charges were subtracted, the company reported a loss of $787.9 million or $3.12 a share.
That was better than the company executives expected.
"In the midst of these conditions, in the third quarter we were profitable on a pre-impairment basis, which exceeded the higher end of the guidance we previously provided of 10 cents to 20 cents per diluted share, exclusive of impairments or land related charges," said Dugas.
The company was also happy to announce it was able to slightly improve its cash position to $102 million and reduce debt in its revolving line of credit by $148 million, despite the difficult environment.
Still, the third quarter of 2007 was markedly worse than third quarter 2006, when Pulte was still finishing out sales made before the downturn. Revenues from home sales decreased 31% to $2.4 billion compared with $3.5 billion same quarter last year. The change in revenue reflects a 28% decrease in closings to 7,468 homes and a 4% decrease in average selling price to $322,000.
For the nine months ending Sept. 30, Pulte reported a loss of $1.38 billion, or $5.48 a share, compared to income in the same period of 2006 of $697.9 million, or a gain of $2.70 a share. Consolidated revenues for the nine months were $6.4 billion, down from $9.9 billion last year.
New-home orders for the third quarter were 4,582 and valued at $1.3 billion, which is a decline of 37% and 47% respectively from last year. The company ended the quarter with $4.1 billion (12,042) homes in backlog compared to $5.8 billion (6,375 homes) at the end of last year's third quarter.
Pulte has also been able to decrease its SG&A expenses by 15% from the same quarter last year, but that was not fast enough to keep up with falling sales prices. It increased as a percentage of home sale revenues to 9.8% compared to 8% last year.
There was a big enough backlog and a decrease in costs to give the company the confidence to offer guidance for the fourth quarter of 2007.
"In part due to our relatively strong backlog position, combined with our lower overhead spending, for the fourth quarter of 2007 we are projecting income from continuing operations in the range of break-even to 10 cents per share," said Dugas. Of course that estimate does not include any land related charges or impairments to land and goodwill that could occur.
"Due to the lack of longer-term earnings visibility and the difficult market conditions that persist, we are not at this time providing guidance for any period beyond the fourth quarter of this year," he said.