普爾特房屋 (PHM) 2002 Q3 法說會逐字稿

Good day.

All sites are now on the conference line.

At this time I would like to turn the program over to your host, Mr. Jim Zeumer.

Please go ahead.

Thank you, Joshua.

Good morning, everyone.

And I want to welcome you to this morning's conference call to review Pulte Homes' record-setting third quarter results.

The press release issued this morning details another quarter of outstanding performance for Pulte Homes.

The release also highlighted some of the other important events that took place during the quarter.

Participating in today's call are Mark O'Brien, President and CEO;

Roger Cregg, Senior Vice President and CFO;

Richard Dugas, Chief Operating Officer; and Vinnie (ph) Frees, Vice President and Controller.

Before we get any further into commenting on Pulte's third quarter results, let me alert everyone listening on the call and via the internet that certain statements and comments made during the course of this call must be considered forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995.

As such, these statements are subject to risk and uncertainties that could cause actual results to deterior - defer materially from those discussed during this call.

For a detailed discussion of these risks, please refer to this morning's press release on the third quarter earnings.

With all that said, let me turn the call over to Mark O'Brien for a few opening comments.

Mark?

Thank you, Jim.

And good morning, all.

Most of you have already sat through a few of the third quarter calls from within the industry.

So as it relates to hot topics, I'll be very brief.

Yes, big builders are continuing to take market share.

And, no, we don't think there's a housing bubble.

Personally, we believe there are hundreds of local markets that are adjusting and readjusting constantly.

And finally, we think the mortgage industry is fine and will continue to be a source of support for new home construction.

Now as it relates to Pulte Homes, our results clearly reflect gains throughout all of our operations, including success in integrating and advancing the active adult business of Del Webb.

With the one-year anniversary of the merger recently passed, I want to close that chapter and say with confidence that we have realized all of the financial gains we had anticipated, and in many cases even more.

Beyond the targeted cost savings we've achieved we are also adding value to the operations by taking actions to accelerate sales base and land absorptions in a number of Webb communities.

In certain markets such as Las Vegas, we are capitalizing on Del Webb's excellent land positions to introduce Pulte traditional products into existing Webb communities.

We are exploring the feasibility of taking similar actions in other communities in the future.

In several of the Webb communities, we have redesigned the product offerings to get back to the price points that made the communities so successful in the first place.

For example, in Sun City Huntly in Chicago, products have helped increase the pace of signups in this most recent quarter to 220 houses, up from 113 houses for the same period last year.

In Sun City Hilton Head the gains are more impressive with third quarter signups of 112 houses, an increase of almost 200% over the 39 houses sold in the third quarter of last year.

It is very important to understand that we're not talking about simply dropping prices on existing models.

We have totally redesigned the product offering to make sure that we can reach the targeted consumer groups while ensuring we generated acceptable margins and higher overall returns.

At this point, we have fully integrated Del Webb into Pulte's operations, so that our area presidents manage Pulte and Webb communities in their respective geographies.

While the integration is done, we still see a lot of opportunities to further reduce costs and gain building efficiencies, particularly at the local market level.

So we are not done.

We are, however, moving forward on the strategy that made the merger so compelling, namely the opportunity to expand Del Webb and Sun City brands across the country.

Over the past few months, we have opened three new Webb communities - Plymouth, Massachusetts;

Somerset, New Jersey; and most recently North Las Vegas, Nevada.

All of these communities have met with great customer response, with the new Sun City in North Las Vegas, selling almost 100 houses in the first 10 days of operation.

Clearly, the desire among active adult buyers to own a home in a Webb or Sun City community is extremely strong.

With an increase of 48% in Pulte's third quarter signups, demand obviously remains high beyond just our active adult communities.

We continue to see strong demand throughout all of our markets, with most showing solid double-digit gains, and California sales space being up even more dramatically.

Individual markets and consumer segments have different demand drivers, which is why we think Pulte's diversified market and customer strategy is critical, both in terms of growing share and avoiding significant downdrafts.

With three quarters of the year complete, Pulte continues on track to deliver yet another record year of performance.

More importantly, with almost 14,000 homes in backlog, a strong balance sheet, a robust land pipeline, we are in an excellent position as we head into 2003 and beyond.

Before turning to call over to Roger, I want to note one other third quarter accomplishment.

As announced in September, our divisions in Charlotte, Houston, Las Vegas, Minneapolis, Phoenix, San Francisco, Southern California ranked highest in the J.D.

Powers & Associates 20022002 new home builders survey.

In total, Pulte won in 7 of the 16 markets surveyed.

And we're among the top three finishers in 12 of the 16 markets.

We have said it before - that long-term success in this industry requires delivering quality homes to satisfied customers.

I want to say we are very proud of the efforts our associates at Pulte have put forth to achieve these results.

Now let me turn to call over to Roger.

Roger?

Thank you, Mark.

Good morning, everyone.

We have completed three quarters of the year, and continue posting solid operating and financial performance for 2002.

For those of you following along on the webcast, we will be presenting a few slides to facilitate the discussion.

Also just as a reminder for comparative purposes, the merger with Del Webb was effective July 31 of 2001 and thus the previous year's third quarter financials include two months of Del Webb, versus three months in the current year quarter.

For the third quarter of 2002, revenues from home settlements for Pulte Homes domestic home building operations increased 22% over the prior year.

Higher revenues for the period were driven by a 5% increase in average selling prices versus prior year to $241,000, resulting primarily from increased product prices, a modest improvement in overall product mix, and the addition of the Del Webb volume.

Unit closings for the quarter increased approximately 16.4%, reflecting the inclusion of Del Webb volumes and an increase in deliveries from Pulte Homes existing operations.

In the third quarter, land sales generated approximately $29 million in total revenues, which is an increase over the previous year's quarter by approximately $8 million, or 39%.

Domestic home building gross profit for the quarter increased approximately 24% to $353 million.

The gain over last year is attributed to the inclusion of the Del Webb operations for one additional month in the current year, plus an increase in Pulte's traditional volume, and the benefits from the on going initiatives to leverage construction costs throughout the operations.

Purchase accounting adjustments associated with the merger impacted gross profits in the third quarter of 2002 by approximately $350,000 as compared to $9.4 million in the prior year quarter.

Third quarter domestic home building margins as a percentage of sales were 20.2%, as compared to 19.9% in the third quarter of 2001.

Excluding purchase accounting adjustments, domestic home building margins would have been 20.2% as compared to 20.5% for the third quarter 2001.

This lower conversion of approximately 30 basis points versus the prior year quarter is mainly attributed to market and product mix shifts with an overall mix influence of increased unit volumes at slightly lower converting margins.

The gross profit contribution from land sales was approximately $7 million for the third quarter versus $4 million in the third quarter last year.

Of the total asset relief from these land sales, the Del Webb inventory represented approximately $7 million.

Also as I have stated in the past, the gain on land sales may vary significantly from period to period based on the timing of the land sales.

SG&A costs as a percentage of home sales remain flat versus the prior year at 9.2%.

On a comparative basis adjusting for purchase accounting, the SG&A conversion increased 20 basis points versus the prior year, reflecting the inclusion of Del Webb expenses for one additional month in the third quarter of 2002.

Home building interest expense increased during the quarter versus the prior year quarter as a result of the increased debt level associated with the growth of the business.

Domestic home building pretax income for the quarter increased 25% to approximately $180 million with pretax margins at 10.1% on total domestic home building revenues.

At the end of the third quarter, our domestic operations had a backlog of homes to be built of just under 13,700 houses, valued at approximately $3.5 billion compared to approximately 11,800 homes in the prior year quarter.

Third quarter pretax income from our financial services operations was approximately $19 million, an increase of 106%, or approximately $10 million versus the prior year quarter.

The overall improvement in performance was attributed to a 16% increase in production volume as Pulte mortgage's capture rate increased to 78% from 74% last year - in addition, the inclusion of the Del Webb and a continued favorable interest rate environment, plus effective leveraging of overhead expenses.

Mortgage refinancings represented approximately 7.6% of the total originations in the quarter versus 6.4% last year.

Refinancing activity is not major focus of our mortgage operations and this continues to remain a small part of the overall mortgage business.

International operations posted a pretax profit of approximately $400,000 for the third quarter compared to a loss of $1.8 million in the prior year quarter.

The improvement is attributed to lower costs in Argentina, mainly associated with startup expenses incurred in the prior year quarter.

Despite the continuing economic situation in Argentina, we were successful in increasing unit closings for the quarter while keeping our focus on minimizing our risk exposure in the short term.

Mexico's operating performance was even to prior year as the peso to dollar remained relatively stable in the quarter.

Corporate expenses for the third quarter were approximately $13 million versus $16 million in the previous year.

Net interest expense was approximately $700,000 lower in the third quarter mainly as a result of refinancing the higher rate Del Webb debt and a reduction in short term borrowings versus last year.

The decrease of approximately $2 million in the other corporate expense category is mainly attributed to a gain associated with the sale of commercial property.

Net income from continuing operations for the third quarter increased 37% to approximately $114 million or $1.83 per share, as compared to approximately $83 million or $1.53 per share for the same period last year.

Fully diluted shares were approximately $62 million - an increase of 14% over the prior year period - mainly reflecting the issuance of shares related to the Del Webb merger.

Also in the third quarter, we posted an approximately a $10 million gain in discontinued operations.

This gain related to the recognition of income tax benefits resulting from the favorable resolution of certain tax matters that were associated with the thrift operations the company discontinued in 1994 and the related purchase transaction in 1998.

The recognition of these benefits had no impact on cash.

Net income for the quarter reflecting discontinued operations was approximately $123 million or $1.99 per share, versus the $83 million or $1.52 per share in the previous year quarter.

On the balance sheet, the major changes in the third quarter versus the year end of 2001 are mostly attributed to Pulte Homes growth initiatives for 2002.

We ended the quarter with approximately a $212 million cash balance which is mainly attributed to the $300 million 30-year senior note issuance completed in the second quarter.

Inventories have increased in line with our expectations, positioning Pulte Homes for the balance of 2002 and our growth initiatives for 2003.

At the end of the third quarter, the company's debt to total capitalization ratio was approximately 42.5% and on a net basis was 39.7%.

In line with our expectations for the quarter, we continue to maintain a strong and conservative balance sheet.

We look to maintain our debt to total capitalization ratio at the 40% level.

Given our recent issuance, we are targeting a net debt to total capitalization ratio of 40% or below at year end, with a cash balance and revolver availability sufficient enough to redeem the notes that come due in early 2003.

The other asset category of approximately $833 million for the quarter includes major items such as land held for sale of approximately $260 million, receivables, prepaid and deposits of approximately 210 million, and the balance rounded out by all other miscellaneous assets.

Pulte Homes shareholders equity for the third quarter increased to a record of approximately $2.6 billion with a return on average shareholders equity for the latest 12 months of approximately 17%.

In addition, as you read in this morning's press release, Pulte Homes board of directors has authorized a $100 million share repurchase program.

Pulte Homes is committed to shareholder value.

Our stated goal of maintaining a conservative balance sheet has served us well.

And this discipline positions us for opportunities in the future for enhancing shareholder value.

Looking ahead as permissible under the SEC Regulation FD guidelines, we provide the following guidance on our current expectations for the fourth quarter of 2002.

The following comments assume that overall macroeconomic continues remain in a comparable range to what we experienced over the last several quarters of 2002.

Unit settlements in the fourth quarter are likely to increase 10% to 11% over the same period last year driven primarily by additional growth across most major markets.

Average selling prices in the fourth quarter are projected to increase 1% to 1.5% over the third quarter of 2002 depending upon the final product and geographic mix.

Gross margin performance as a percent of sales for the fourth quarter is anticipated to be even with the third quarter of 2002 as a result of, and dependent upon, the product and geographical mix of homes delivered.

As a percentage of sales, SG&A is expected to show a decrease of 10 to 20 basis points versus the fourth quarter last year.

Given a stable interest rate environment, pretax income in our financial services operations is expected to be ahead of the third quarter of 2002 by approximately 8% to 10%.

In the fourth quarter, our international operations are anticipated to post a positive profit performance of approximately $6 to $7 million.

Corporate expenses should be relatively flat as compared to the fourth quarter of 2001.

And corporate interest expense is projected to be even with the fourth quarter of 2001.

Fourth quarter earnings per share from continuing operations are estimated to be in the range of $2.65 to $2.75 per share.

This earnings per share number is calculated based on approximately 62.1 million fully diluted shares.

Based on the fourth quarter guidance, we are raising the full year 2002 earnings per share from continuing operations to the range of $7.05 to $7.15 per share.

This represents an increase of approximately 17% to 19% over the 2001 reported results.

These estimates are based on approximately 62.4 million fully diluted shares.

Now looking forward, we offer the following comments regarding the expectations for the full year of 2003.

We are currently in the planning stages of our 2003 annual business plans, so I'll keep my comments guided to the macro-overview for now.

Given the current operating environment for the home building industry, these comments are based upon the assumption that the overall environment remains in a modest range comparable to what we are experiencing today.

We are establishing an initial earnings target for the full year of 2003 - earnings per share from continuing operations of between $7.85 and $8.25 per share.

Estimates are based on approximately 63 million fully diluted shares.

We estimate that domestic home building unit settlements will increase 9% to 10% over the 2002 projected volume.

We anticipate that the average selling prices will increase approximately 1% to 2% above 2002.

Gross margins as a percentage of sales is projected to increase in a range of 20 basis points to 30 basis points above 2002.

In the SG&A category, as a percentage of sales it is likely to remain flat to down slightly for the full year 2002, reflecting increasing leverage in overhead expenses.

International operations pretax income performance is projected to remain even with 2002.

Financial services pretax contribution is estimated to be slightly below the 2002 full year projection with potential interest rate pressure partially offset by increased volume.

Corporate overhead and interest expenses are estimated to be even with 2002.

We expect the 2003 tax rate to remain at the 39% level for the year.

As I mentioned earlier these comments and guidance are based upon the assumption that the overall macro-economic conditions remain in somewhat modest range comparable to what we are experiencing over the last several quarters of this year.

With that, I will now turn the call back over to Jim Zeumer.

Jim?

Thank you, Roger.

Roger has provided guidance with regard to Pulte Homes current operations, business initiatives, and a range for expected financial performance.

Where possible and appropriate, we are prepared to answer questions about the business and our expectations for the remainder of 2002.

Keep in mind that we are still completing our detailed plans and budgets for 2003, so we won't have many comments beyond the general guidance Roger has provided.

As we have in the past, we will give more details as part of our fourth quarter earnings announcement in January of '03.

At this time we'll open the calls to questions.

So, Joshua, if you can cue everybody up, I'd appreciate it.

Very good.

At this time, if you would like to ask a question, please press the one on your touch-tone phone.

You may withdraw that question by pressing the pound key.

Again to register your sire for a question, please press the one on your touch-tone phone.

It will be one moment while we cue up our first question.

We'll take our first question from the line of Margaret Whelan (ph) with UBS Warburg.

Please go ahead.

Good morning, guys.

Congratulation on the quarter.

Hello, Margaret.

Thank you.

Thank you.

Just a housekeeping question.

Would you give us your lot position for the quarter - owned versus options - please.

Sure, Margaret.

This is Vinnie (ph).

I'd be happy to do that.

As of September 30, 2002, we are -- our lots owned were 84,373.

Our lots optioned were 34,093.

So that's a total of 118,466.

As you know, we have included in our 10-Q disclosure, there are all lots that are controlled that are pending feasibility approval, and they number 39,857.

OK.

And then in terms of the land position, I guess the goal for the year was to increase that by about $400 million, which you've already done.

So could we assume for the rest of the year that you'll be focused on debt paydown and share repurchasing?

And, if so, what order?

Yes, Margaret.

This is Roger.

Just back to that.

So far, our inventories have increased about $600 million...

Yes.

... through the third quarter.

Of that increase, about $250 million of that increase is land.

Oh, OK.

So we would anticipate that land will probably be in the $300 to $400 million range as targeted.

And, you know, from that focus, that's where our capital investment strategy is to this point.

OK.

And then in terms of buyback versus debt paydown?

Yes.

Basically from a debt side of it, you know, we had no plans to actually reduce our debt levels.

Certainly, you know, we did the 30-year $300 million in the end of the -- or beginning of the second quarter.

Yes.

Or end of the second quarter, I should say.

And that was really to - anticipation of some of the debt that's coming due in the first - the second quarter of 2003.

Yes.

Our focus on the share repurchase, of course you know, is something we're going to be opportunistic with.

It's not something we're going to chase aggressively.

Again, we'll trade off investment in the business with certainly what the returns are given stock prices at various times.

OK.

And just finally, the community count?

Vincent Frees ? (ph): Sure, Margaret.

Let me help you with that.

Let me give you an absolute number first and then provide some perspective.

At the end of the third quarter, our average number of active selling communities were 463 communities.

Now, you might recall that we had provided guidance at the beginning of 2002 when we ended 2001 at a count of 440 communities.

That guidance was that we would have a 10% increase over the course of the year.

We achieved that in the first and second quarter.

I guess we've been blessed with some very positive order activity.

Our community count has declined slightly.

We do anticipate that we will be back in the 480 level in the fourth quarter.

OK.

Thank you.

Thanks, Margret.

We'll go next to the line of Michael Rehaut with J.P. Morgan.

Please go ahead.

Hi.

Good morning.

A couple of questions.

If you could first comment on how the order strength progressed throughout the quarter.

Maybe perhaps give a little color month by month.

And secondly, if you could talk about how you're seeing pricing in your different regions, home prices.

I'm sorry.

Can you repeat that second part, Michael?

If you could just talk about home price strength.

If you're seeing increases or declines in home prices across your different markets.

Michael, this is Mark.

You know, generally the activity throughout the third quarter was pretty robust.

I can't tell you with any specificity that any particular month was a lot greater than another one given the vagarities sic (ph) of project opening and clozing, and that kind of thing.

In the current environment, we - there are some very competitive markets.

Most of that is generally focused on the high end.

You know, it's a very broad general statement not to be interpreted beyond that.

The high end is softer than the intermediate pricing and the lower pricing.

You know, there's some obvious places where that has occurred.

The high end in the San Farncisco Bay area is still relatively soft, at least for us.

Parts of Colorado, Denver, Atlanta.

But otherwise we see the market as continuing to be robust.

Vincent Frees ? (ph): Hey, Mike, I can probably give you some relative data points on the net new order activity for the quarter to put some of our footnotes on our press release in perspective.

You know, we do have several activities that are noteworthy during the quarter when you compare the third quarter '02 to the third quarter '01.

For instance, as noted in our press release, the third quarter of '01 included the way that we would recognize the acquisition of the Del Webb backlog.

And that was 3,823 units.

Roger also mentioned in his remarks that 2001 included two months of Del Webb activity, not the month of July.

If we were to give some pro-forma comparison excluding the acquired backlog and including what Del Webb actually signed up in the month of July, that would show that we had a 35% increase in our signups during the quarter.

So I hope that's a little helpful.

That's great.

Thank you.

Our next question comes from the line of Chelsea Inginito (ph) with Merrill Lynch.

Please go ahead.

Hi.

Good morning.

Great quarter.

Morning.

Hi, Chelsea (ph).

Just following up on that previous question.

Would you give us the Pulte and Webb breakout for orders for the third quarter of -- for this year.

Roger Cregg ? (ph): Yes.

We actually can't break those out, Chelsea (ph).

I mean we've opened new communities, and we've sort of mixed and matched.

So to try to break out what's Pulte versus what's Del Webb, it just - it doesn't work any more.

OK.

And then telling on that, how have orders been going in the Webb communities kind of from, you know, from this quarter and going -- from third quarter and going forward considering that, you know, from a seasonal perspective this seems to be a good quarter for Del Webb.

Chelsea (ph), this is Mark.

We are very satisfied with the performance of all of the Webb communities.

As we said in our remarks, we repositioned the Huntly and South Carolina project.

Both are responding very, very nicely.

We have enhanced the returns significantly, and that work continues.

That's not -- that's a work in progress.

That's not a completed project.

And the ones in the northeast that we've opened, we're very satisfied with the results there.

And the ones - the larger projects in the west continue as they have historically with probably some modest increases.

Great.

Yes.

I'm looking forward in seeing that Jersey community.

I haven't seen it.

Roger Cregg ? (ph): Good.

Vincent Frees ? (ph): I'm not sure you qualify.

Your age won't qualify you yet.

But we will welcome you as a guest.

I'll just window shop.

Vincent Frees ? (ph): OK.

Then just from a follow up for the 2003.

I know that you said you'll probably give more guidance going forward.

But just from the operating goals - does the 785 to 825 range does that include any assumption of share repurchase?

I know you gave the shares, but I didn't know if there was any creep in there.

And then, also do you have any community count goals end for 2003?

Roger Cregg ? (ph): Yes.

Number one, Chelsea (ph), the numbers do not include or anticipate share buyback.

So the numbers, I think - was 63 million for the year...

Yes.

Roger Cregg ? (ph): ... of 2003 did not include that.

OK.

Roger Cregg ? (ph): And at this point, we don't have a community count projection for 2003.

OK, great.

Well, thank you very much.

And keep it up.

Roger Cregg ? (ph): Thank you.

We'll go next to the line of Stephen Kim with Salomon Smith Barney.

Please go ahead.

Thanks very much.

Strong quarter, gentlemen.

Roger Cregg ? (ph): Thank you.

Mark O'Brien ? (ph): Thank you.

A quick question - two quick questions for you, really.

Number one, related to the subdivision count in the third quarter, I know Vinnie (ph), you indicated you've been blessed with strong sales.

I was curious, though, whether or not you also may have run into any zoning issues in terms of having some difficulty starting up some communities?

Or whether, in fact, this was all just simply just adhering to the opening schedule you had planned but just stronger volumes in the third quarter?

Steve, this is Mark.

Stephen, I am embarrassed to say that we haven't opened - we've opened very few communities on time this year.

We continue to run into all kinds of bureaucratic environmental and zoning issues that attend the marketplace that we're in today.

We've been delayed for, you know, considerable periods of time on almost all the projects.

We've tried to factor those time delays into our budgetary process.

I don't think we've been conservative enough.

Most of the - most of the differences in our projections and the actuals with respect to community count evolve around various delays and not anything else.

And this, of course, is something that I suppose is fairly endemic to the industry and obviously is not a Pulte-specific issue, right?

That's correct.

Great.

A second question relates to the units which you - I'm sorry, the lots which you have optioned.

Can you give us an indication of the 34,000 lots which you have optioned.

Number one, what you think the investment you currently have in those options is?

And if there's any carrying costs associated with the - I think you said 39,857 - other lots which are sort of pending approval - whether you have any sort of commitment or financial investment in those lots.

Roger Cregg ? (ph): Yes.

Stephen, as you well know, we have deposits down that you would put, you know, on options.

And we do carry that.

And I don't know the exact number, but it's been ranging in the $80 to $100 million range.

So, yes, there's an investment in that and that's on the balance sheet as we've stated before.

And, you know, as you put those deposits down, certainly there's, you know, a risk of walking away from that if you decide not to exercise those options.

And typically we've had very, very few of those, you know, over time.

Great.

Do you all have option deposits on the 39 - on the 40,000 lots which are sort of pending approval, also?

Is that also included in there?

Roger Cregg ? (ph): Some of those we would.

Yes.

OK.

Great.

Thanks very much, gentlemen.

Thank you.

We'll go next to the line of Dennis Magil (ph) with Credit Suisse First Boston.

Please go ahead.

Good morning, guys.

Good morning.

Good morning.

I was just wondering if you could give us an idea of what the trend in the land costs have been?

Have you seen any markets where costs have been rising a little bit faster than prices?

Or it's been a little bit more difficult?

Or just an idea of how the overall trends are.

Dennis, this is Richard.

Yes.

We have seen land costs relatively stable to the previous quarters.

I don't think it's fair to say that prices have come down much.

It's still very competitive out there in pretty much all of our markets.

So that would be the general statement there.

And any markets that - where we might see land costs outpacing the increase in prices that you're seeing?

Mark O'Brien ? (ph): Yes.

I think we have to be careful with that, Dennis, because there are two aspects of land.

One is what - the absolute cost on an acreage basis.

And then the fully developed cost.

And without getting into, you know, an awful lot of detail, I'll answer the question that I think you're driving to.

You know, a piece of land that requires two miles of offsite work or development of a lot of amenities - the fact that it costs $500 an acre less, or per unit less, isn't really significant at the end of the day.

As a very general statement, there are some markets - California being the one that comes immediately to mind - where, you know, we are seeing entitled land prices accelerate.

There are others more in the heartland of the country where pricing is relatively stable.

The northeast - parts of the northeast has been relatively stable, if I would categorize it over the last year or so, certainly since September 11 - but recalling it had accelerated pretty rapidly in the '99 to '00 period.

So while there's still pressure on land - the land prices - most of that occurs after the value's been added at entitlement.

OK.

Very good.

And lastly, do you have any estimates for '03 as far as your investment in mind?

Roger Cregg ? (ph): Yes.

We typically say, you know, we're looking to generate in that range of the 785 to 825 - certainly, you know, close to $500 million at this point.

You know, I would say looking to invest incrementally, if we were to stay at a 40% debt to cap we would be able to leverage that up as we end the end of this year.

So the growth in our business potentially investment could be $900-plus million year on year.

And that's going to be based on what the market conditions are at that point in time.

And, you know, we'll see how that evolves.

But if we're to continue to grow the business and stay focused on investing the capital that we have available to us and maintain the balance sheet ratios, you could easily see $900 million to $1 billion next year.

Dennis, let me point out that any investment we make in land in the calendar year '03 will largely influence units that we'll deliver in '04, and '05 and beyond.

OK.

Very good.

Thank you.

Our next question comes from the line of Jim Wilson with J.P Securities.

Go ahead.

Hi.

Good morning, guys.

My question was, can you differentiate - I know you've blended them together, but differentiate maybe a little bit - the margins between the active adult and your conventional housing business?

And then my second question is just kind of looking at the active adult business and how the competitive landscape is.

Obviously Webb's got a great brand name.

Does that seem to be providing you with a big advantage in that market?

Yes, Jim.

This is Roger.

I'll take that.

The margins typically in the active adult segment are generally on average probably 100 to 150 basis points higher than the traditional side.

Now, again you have to take that with a grain of salt because there are different markets with different rates.

But on average I would say 100 to 150 basis points higher.

Jim, this is Mark.

We are not disappointed.

In fact, we've been quite excited by the reception of the Del Webb and Sun City brands in the marketplace.

As we expected, we believe that it's a clear advantage.

There's nothing changed in the last year to 15, 18 months that would indicate that that's not the case.

In fact to the contrary, where we have opened Webb branded communities in our traditional market - traditional Pulte marketplaces, the reception has been very, very satisfying.

We are quite pleased as I said in our remarks.

We believe the assimilation integration phase is over.

You know, we are now getting after one of - what we believe is one of the real carrots in the business combination, and that is the ability to lever the Webb brands across the 44 markets where Pulte exists and create some real penetration against the demographic comparatives in the country.

Jim, this is Jim Zeumer.

One other point, I think.

We're also discovering now as each one of our local markets does its own research into, a, the active adult segment and, b, the power of the Del Webb slash - you know - Sun City brands, they're getting extremely excited about, you know, just how much visibility and strength it has in their local markets.

We've indicated there are a number of markets going forward where we want to bring the brands in.

So, yes.

We're continuing to see the value of the brands.

OK.

Very good.

Thanks.

Our next question comes from the line of Todd Voight (ph) with Cliffwood Partners (ph).

Please go ahead.

Good morning.

Morning.

Good morning.

I was wondering if you could disclose what the loan to value is on your loans that you originated this quarter?

Roger Clegg ? (ph): Yes.

I don't have the specific quarter.

But on a year to date basis we're slightly below 80%.

OK.

Roger Clegg ? (ph): We're running on a year to date basis in the range of about 78% to 80%.

And what has the trend been over the last couple years on the loan to value?

Roger Clegg ? (ph): Well, actually for us it's slightly down from where we were probably on a comparative basis, you know, year to date in the prior year.

So it's actually strengthened.

Oh.

Good.

Thanks.

We'll go next to the line of Steven Fockens with Lehman Brothers.

Please go ahead.

Good morning, guys.

One quick question.

On the guidance you gave for the fourth quarter in '03 you talked about sort of a similar market environment to now.

If you can comment at all, is there any kind of area where you would really get spooked one way or get really excited another - i.e. overall market dropped X percent, or was up X percent?

Roger Clegg ? (ph): You're referring to the fourth quarter of '02, correct?

Yes.

And even for next year.

Roger Clegg ? (ph): Yes.

I would say right now where we are in the quarter at this particular time, we've got a lot of backlog we need to deliver.

And, you know, just looking at what could spook it, I would say there's not a lot right now.

Certainly, you know, as you say that, there's a lot of crazy things that go on in the world.

But right now, I'd say we feel pretty good about where we are and where we're positioned for the quarter.

Richard Dugas ? (ph): And as we look at the world, I mean, unless there's some kind of crazy external event that none of us can predict, the obvious thing is rising interest rates.

It's our belief that we won't see rising interest rates without a corresponding increase in economic activity, which will put more buyers, not fewer of them, in the marketplace.

So unless something very, very unexpected occurs, we think the plans we've made can be executed.

So - if I put something around that.

If housing sales were to be flat or down slightly next year, that's not the kind of thing that would spook you?

Richard Dugas ? (ph): No.

Roger Clegg ? (ph): No.

You'd have to see a pretty relatively significant drop in housing?

Roger Clegg ? (ph): That's correct.

Great.

Thank you very much.

Thanks, Steve.

We'll go next to the line of Matt Moyer with A.G. Edwards.

Good morning, gentlemen.

How would you characterize your acquisition plans or consolidation plans going into '03?

Mark O'Brien ? (ph): Well, you know, the numbers that Roger's given you are based on organic growth.

As we've said before, we've been acquisitive in the past.

We need to see a strategic value before we'll act on it.

I once again remind all of us that in order to do something, that's economically -- that makes economic sense, somebody has to say yes.

We can't unilaterally do it.

So our first order of business is to plan our growth on an organic business.

So we've done that.

We are not ignorant of how we can grow by acquisition.

And that's another arrow in the quiver, much like share repurchase and other things that could enhance our business.

OK.

And would it be safe to say that your business, given kind of your active adult exposure, would be stronger if you were in an environment, say, that had a stronger stock market, that had stronger consumer confidence and job growth, but mortgage rates were, say, back up to 7.5%?

Mark O'Brien ? (ph): You know, that's really hard to predict.

The question you're obviously asking is does that segment buy housing based solely on wealth?

You know, one of the things that I think we're seeing is that the concentration of wealth in the people who are buying our offerings are coming out of their existing homes and some of their real estate assets, and not so much out of their financial assets.

So while the stock market falling 2,000 or 3,000 - the Dow falling 2,000 or 3,000 points has not been a happy event for most of our portfolio, I don't think it's been the end of the world either.

OK.

Thank you very much.

Mark O'Brien ? (ph): Thank you, Matt.

We'll go next to a follow-up from Todd Voight (ph) with Cliffwood Partners (ph).

Please go ahead.

Yes.

Sorry.

I was asking about the loan to value.

And now is that - your - roughly 80% is your loan to value.

Do you have a sense for the buyers of those homes that you're originating the loans - how many piggy backs they used or second mortgages?

Mark O'Brien ? (ph): We wouldn't think that's - we don't see much of that.

And in fact, most of the mortgages prohibit that as a general statement.

Now, many of them have authorities in there to permit some of that.

But our sense of it is that we're not seeing much of that.

We don't have any specific data, but I can tell you anecdotally we don't expect there's a lot of that.

When you say your mortgages specifically prohibit second mortgages ...

Mark O'Brien ? (ph): No.

I said many mortgages specifically prohibit it.

What about your mortgages?

Mark O'Brien ? (ph): Many do.

All do not.

And where there's prohibitions, there are exceptions to it.

Roger Clegg ? (ph): Clifford, just so you now, we do not determine and define the criteria of the mortgages that we place.

We end up actually working with the buyer of those - Fannie Mae, Freddie Mac.

They define the criteria for those.

So we work on flow basis and we don't determine what the standards are for those.

OK.

Thank you.

We'll go next to Larry Horan with Parker Hunter.

Please go ahead.

Yes.

I would wonder if the acquisition environment is getting even more friendly for buyers such as your firm, particularly in what I would call middle market builders that might have revenues that measure in the hundreds of millions.

Well, more friendly compared to recent past?

Yes.

I guess you could categorize it that way.

You know, we obviously have the capacity to do about what we want to do in that arena.

We are continuing to be confronted with the expectations of the sellers.

And I don't have to tell you guys that when our shares are trading at $40, it's hard to justify paying a huge multiple of book to a seller when we're only being awarded book value or slightly above.

So in one sense it is a friendlier environment, and in another sense it's much more difficult.

So I don't know that there's any real simple answer to that, Larry.

Well, the reason I brought it up is just for the first time in almost two decades watching this industry, there are now articles that go over all of the issues about selling your company and talking about all the -- how the industry is consolidating, et cetera.

So there seems to be a real, you might say capitulation on the part of the smaller builder that it's just not worth it because of your size and the companies of your size have such great advantages that it's just not worth competing any more.

I got that sense from the way these articles were written in "Big Builder" and other magazines.

I don't think there's any question that our advantages continue to accelerate.

Then you just get down to the question of timing.

When is the - you know - when is the time to buy and when is not the time to buy?

But I also remind you - or remind ourselves, not so much you - that the consolidation goes on daily at the land purchase -- in the land purchase arena.

So you - the question you ultimately have to ask yourself is, if you buy a business, or do a business combination what you have to pay for that, and the time it will take you, as opposed to what you would have to pay to duplicate those lots in the marketplace.

We are in almost all of the big markets we want to be in.

And we have the capacity, the human resource and the financial resource, to gain most of those lot positions.

And we are also have a stated strategy to attack all the market segments.

So in almost any market that you can name in the country, we have the ability to attack both the segment and the geography on a non-marked up basis.

So that's the analysis we do all the time.

And terms of acquisition flow, to pursue this question a little deeper, as you are talking about, there's two ways to acquire.

One is simply to acquire the assets and continue to build up the communities and acquire the land they haven't started building on yet.

And another is to buy the ongoing concern where you're generally going to pay more than - you might say book value for.

Do you see -- where do you see the sellers going?

Is there a trend towards one or the other?

Mark O'Brien ? (ph): You know, we're -- where the sellers go doesn't matter a heck of a lot to us.

We have our own plan, our own vision and our own strategy to execute.

You know, clearly our advantages are widening over the smaller builders.

There's no question about that.

What the sellers want, and an analysis of our situation don't always marry up.

I don't speak for any other company.

We can only speak for Pulte.

We are very satisfied with our strategy.

We will execute against it, you know, as we see it develop appropriately.

For us all acquisitions are not necessarily good.

We can -- I can describe scenarios where - in our own analysis that we've done that wouldn't have been as beneficial as the other actions we've taken.

We can only ask you to judge us over time.

In terms of talking to potential investors in your stock over the last several months to almost a year, what are the concerns that they voice?

Because you've now got a six-year track record of phenomenal earnings growth in a lot of different economic environments.

And I'm wondering what they fear now that would keep them from buying your stock.

Mark O'Brien ? (ph): All I can tell you - I'd be speculating.

History is the only answer I can give you.

We're constrained by the multiples of the past.

OK.

Thanks.

That does end the question and answer period.

At this time I'll go and turn the call back over the management.

James Zeumer ? (ph): Thank you, Joshua.

Thanks, everybody.

I appreciate your time this morning.

If you do have any follow-up questions, certainly feel free to give us a call.

That does conclude today's audio conference.

You may now disconnect your lines and thank you for participating.