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Operator
Good day. I'd like to turn the program over to your host, Mr. Jim Zeumer. Go ahead, please. Thank you. Good morning. This is Jim Zeumer, vice president of investor relations for Pulte Homes. I want to welcome you to review the company's fourth quarter and full-year results.
Jim Zeumer - Vice President of investor relations
Pulte Homes delivered yet another year of record financial results as revenued increased 39% to 7.5 billion and income from continuing operations surged to 445 million. 2002 represents Pulte's 52 52nd consecutive year of profitability, and a 10-year span where Pulte Homes has grown its earnings per share at a compound annual rate of 22%. Joining me on the call today to discuss Pulte Homes' record 2002 results are Mark O'Brien, president and chief executive officer, Roger Cregg, senior vice president, CFO, Richard Dugas, executive vice president and chief operating officer, and I have Vincent Frees, vice president and controller. A slide presentation will accompany this call. The presentation will be archived on the site for those who want to review at a later ti0e. As with prior calls, I want to 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 and ask that -- subject to risks and uncertainties. At this time, let me turn the call over to Mark O'Brien for a few comments. Mark?
Mark O'Brien - President and CEO
Thank you, Jim. And good morning, everyone. As Roger will detail in a few minutes, Pulte Homes reported another record performance for both its fourth quarter and the full year of 2002. Driven by domestic closings of approximately 29,000 homes, Pulte Homes' revenue increased almost 40%, exceeding $7 billion for the first time in the company's history. This strong performance helped Pulte deliver full year earnings of $7.20 per share from continuing operation, an increase of 20% over last year, and it was slightly above the increased guidance we offered you last quarter. Among some of the other numbers we would highlight are Pulte's fourth quarter orders. They were up 23%, confirming that demand has remained strong. Later in the call, Rich will give more color into local market conditions. We would also point out that our domestic home building margins expanded during the period, suggesting that the broader pricing environment remains favorable.
That's not to say that there are not some challenging markets or price points. The fact is that there are always some markets that are better than others, but our local operations are finding ways to be successful. Part of Pulte Homes' success is the result of our earlier strategy to diversify the company's markets and product offering. We now operate in 44 markets across 25 states, and we are the only builder with the stated strategy of serving all major customer segments, first time, first and second move-up, and the active adult segment. While overall demand conditions may be soft in one of our markets or at a particular price level, demand is likely to be ahead of plan in another city with a different customer segment. Pulte's success in the year also reflects the improved performance we realized from Del Webb, following a successful integration into Pulte Homes.
As we talked about during the last call, Del Webb has been fully integrated so that our local operating managers manage both Pulte and Del Webb communities. The merger with Webb delivered everything we wanted more in terms of cost savings and market leadership in serving the active adult buyer. Buyers respond to the -- response to the Del Webb name is even stronger than we anticipated, so we are very excited about expanding the brand to a number of new markets in the years ahead. And finally, we ended the year with a record backlog approaching 11,000 homes and $3 billion in value. This gives us good visibility and tremendous momentum heading into the new year.
We also ended the year with a net debt to cap of 32% and a balance sheet that has over a billion dollars of liquidity. This strong financial position gives us a lot of flexibility to take advantage of market conditions as they develop over the coming year. Pulte's fourth quarter and 2002 results suggest a lot of positive things about the health of our company and of the broader industry. None of us can know how events will unfold on the global stage, nor what impact they will have on the company, the economy, or, in fact, our industry. What we can do is plan for success, but be prepared to react if market conditions change. In this regard, Pulte Homes is ready to do its business. Now let me turn the call over to Roger Cregg for some specific comments on the fourth quarter and full year results. Roger?
Roger Cregg - SVP and CFO
Thank you, Mark, and good morning, everyone. As Jim mentioned, for those of you following along on the webcast, we will be present ago few slides to help facilitate the discussion. Also just as a reminder for comparative purposes, the merger with Del Webb was effective July 31st of 2001, and thus the previous year's fourth quarter financials include three months of Del Webb versus three months in the current-year quarter. We completed the fourth quarter and ended the year posting record operating and financial performance in just about every area. For the fourth quarter of 2002, revenues from home settlements for Pulte Homes domestic home building operations increased 24% over the prior year. Higher revenues for the period were driven by an increase in uniclosings for approximately 14% or 1185 units over the prior-year quarter. Average selling prices increased by approximately 8% to an average of $247,000, resulting primarily from increased product prices in an overall improvement in product and market mix. In the fourth quarter, land sales generated approximately $90 million in total revenues, which is an increase over the previous year's quarter by approximately $24 million, or 36%. Domestic home building gross profits from home settlements for the quarter increased approximately 27% to $472 million. The gain over last year is attributed to an increase in unit volume and the benefits from the ongoing initiatives to leverage construction cost throughout the operations.
Purchase accounting adjustments associated with the Del Webb merger in 2001 impacted gross profits in the fourth quarter of 2002 by approximately $470,000, as compared to $3.7 million in the prior-year quarter. Fourth quarter domestic home building margins from home settlements as a percent of sales were 20.1% as compared to 19.5% in the fourth quarter of 2001. Excluding purchase accounting adjustments, domestic home building margins would have been 20.1% as compared to 19.7% for the fourth quarter 2001. This increased conversion of approximately 40 basis points versus the prior-year quarter is mainly attributed to product price increases, market and product mix shifts, with an overall mix influence of increased unit volumes at relatively higher converting margins. The gross contribution from land scales was approximately $27 million for the fourth quarter versus $14 million in the fourth quarter last year. Of the total asset relief for these land sales, the former Del Webb inventory represented approximately $20 million. Also as I've stated in the past, the gain on land sales may vary significantly from period to period based on the timing of land sales.
SG&A cost as a percentage of home sales improved to approximately 8.4% versus the prior year at 8.7%. On a comparative basis, adjusting for purchase accounting, the SG&A conversion improved by 10 basis points versus the prior year. Improved overhead leverage for the quarter was offset by increased community start-up expenses, resulting in the net 10 basis point improvement versus prior year. Home building interest expense increased during the quarter versus the prior year quarter, as a result of the increased debt levels associated with the growth of the business. Domestic home building pre-tax income for the quarter increased 40% to approximately $279 million with pre-tax margins at 11.4% on total domestic home building revenues. This represents an increase of approximately 130 basis points in conversion over the prior year quarter.
On a comparative basis, adjusting for purchase accounting, the pre-tax income margin improved by 100 basis points versus the prior year. At the end of the fourth quarter, our domestic operations had a backlog of homes to be built of just over 10,600 houses, valued at approximately $2.9 billion, compared to approximately 8700 homes in the prior year quarter. Fourth quarter pre-tax income from our financial services operation was approximately 19 million dollars or an increase of 42%, or approximately $6 million versus the prior year quarter. The overall improvement in performance was attributed to a 19% increase in production volume as Pulte mortgage's tap you're rate increased to 80% from slightly below 77% last year. The continued favorable interest rate environment and effective leveraging of overhead expenses all contributed to the improved performance in financial services. Mortgage refinancings represented approximately 11% of total originations in the quarter versus 11.3% for the same period last year. For the total year of 2002, refinancings represented approximately 7.7% of total originations versus 10.2% for the full year of 2001.
Refinancing activity is not a major focus of our mortgage operations, and this continues to remain a small part of the overall mortgage business. International operations posted a pre-tax profit of approximately $3 million for the fourth quarter, compared to a loss of approximately $300,000 in the prior year quarter. The improvement is primarily attributed to the increased profitability in Argentina, which is mainly associated with increased unit deliveries in the quarter versus start-up expenses incurred in the prior-year quarter. Despite the continuing economic situation in Argentina, we're successfully 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 pay sew to dollar remained relatively stable in the quarter. Mexico's mortgage fundings continue to constrain the overall market's a ability to increase closings on a consistent basis. Corporate expenses for the fourth quarter were approximately $19 million versus $18 million in the previous year.
Net interest expense was approximately $1 million lower in the fourth quarter, mainly as a result of an increase in our cash position versus last year's short term borrowings, resulting in interest income offsetting interest expense. The increase of approximately $2 million in the other corporate expense category is mainly attributed to compensation-related expenses. Net income from continuing operations for the fourth quarter increased 44% to approximately $172 million, or $2.78 per share, as compared to approximately $120 million, or $1.99 a share for the is same period last year. Fully diluted shares were approximately 61.8 million for the quarter. On the balance sheet, the major changes in the fourth quarter versus the previous year-end are mostly attributed to Pulte Homes' growth initiatives heading into 2003. We ended the quarter with approximately a $613 million cash balance, which is mainly attributed to the $300 million 30-year senior note issuance completed in the second quarter for which the proceeds were in anticipation of the scheduled and optional purchase of approximately $430 million of senior and subordinated notes coming due in 2003.
The additional cash was generated from the normal year-end closing activity. Inventories have increased in line with our expectations, positioning Pulte Homes for our growth initiative force 2003. At the end of the fourth quarter, the company's debt to total capitalization ratio was approximately 40.9% and on a net basis was 32%. In line with our expectations for the quarter, we continue to maintain a strong and conservative balance sheet. We target to maintain our debt to total capitalization ratio at the 40% level. The other asset category of approximately $873 million includes major items such as land held for sale of approximately 220 6 million -- $226 million, receivables, prepaid deposit of approximately $234 million, and all miscellaneous assets to round out the balance. Pulte Homes shareholder equity for the fourth quarter increased to a record of approximately $2.8 billion, with a return on average shareholder equity for the latest 12 months of approximately 18%. In addition, under the company's authorized $100 million share repurchase program, we repurchased in the fourth quarter approximately 100,000 shares for a total of $4.3 million.
Looking ahead as permissible under the SEC regulation FD guidelines, we provide the following guidance on our current expectations for the first quarter of 2003. The following comments assume that the overall macro economic and geopolitical conditions remain at a comparable range. Unit settlements in the first quarter of 2003 are likely to increase 5 to 6% over the same period last year, driven primarily by additional growth across most major markets. Average selling prices in the first quarter are projected to increase 1 to 2% over the fourth quarter of 2002, depending upon the final product and geographical mix. Gross margin performance from home settlements as a percent of sales for the first quarter is anticipated to be 20 to 30 basis points above the fourth quarter of 2002, mainly as a result of and dependent upon the product and geographical mix of the homes delivered.
As a percentage of sales, SG&A is expected to show an increase of 20 to 30 basis points versus the first quarter last year. The increased conversion rate is mainly associated with start-up expenses for new communities. Given a stable interest rate environment, pre-tax income in our financial services operation is expected to be even with the first quarter of 2002. In the first quarter, our international operations are anticipated to post a break-even to modest profit performance. Corporate expenses should be relatively flat as compared to the first quarter of 2002, and corporate interest expense is projected to increase approximately 10% over the first quarter of 2002. First quarter earnings per share from continuing operations are estimated to be in the range of $1.15 to $1.25 per share. This earnings per share number is calculated based on approximately 62.5 million fully diluted shares.
Our guidance for the full year 2003, earnings per share from continuing operations is targeted in the range of $7.85 to $8.25 per share, or 10 to 15% over our 2002 performance. Estimates are based on approximately 63 million fully diluted shares. Our outlook and guidance for the full year of 2003 is based on the assumption that the overall macro economic conditions remain in some modest range comparable to what we have experienced over the last several quarters. With that, I will now turn the call over to Richard Dugas for some market highlight comments. Richard?
Richard Dugas - EVP and COO
Thanks, Roger, and good morning. Let me take just a few minutes to talk about the market conditions we experienced during the fourth quarter. For the quarter, we saw about a 20% increase in traffic coming to our communities. What's interesting is that a lot of the increase was in California, especially Sacramento and Southern California. The increase reflects a combination of improving demand across most major California markets, and Pulte's ongoing efforts to improve its positions in the state. Beyond California, traffic levels were up in the 1 to 5% range across our other markets. With the 23% increase in new orders for the quarter, it will come as know surprise to hear that Pulte experienced strong demand across most of its markets. Sign-ups in the northeast increased by 60%, led by strong gains in the D.C. and Delaware valley markets.
We're very excited about both markets heading into 2003. Sign-ups in the southeast were up 6% in a very tough local economy. Most of the market showed modest gains for Pulte in the quarter, despite overall weaker demand in Atlanta, Charlotte, Raleigh and Nashville. We always get a lot of questions about our Atlanta operations, which held up well during the quarter and the year. Sign-ups for Atlanta were up for the year but down slightly in the quarter. The slight fourth quarter decrease is in line with the lower number of communities we had open for sales. We've opened several new communities in January, and are off to a strong start. The Atlanta market is a little soft at the higher price points, but we're being successful. Our Midwest operations are extremely strong, posting a 31% increase in new orders in the quarter. Both Detroit and Chicago are just knocking the cover off the ball with super land positions and the right product offerings. Our central region also posted a nice increase, with new orders up 16%. Everyone is talking about Texas being tough, but Pulte was still able to increase its sales by over 11% for the quarter. Even in Austin, Pulte posted very strong sales in the quarter.
The Texas market is always highly competitive, but we think this is where Pulte's superior land positions and veteran management team are demonstrating their skills. Another market of interest in the central region is Denver, where there has been a lot of talk about slower market conditions. Well, Pulte's sales for the quarter were up almost 30%. Our Denver operations have done an outstanding job in strengthening and growing Pulte's position in the market, which helped drive an 80% increase in 2002 net orders. -- new orders, excuse me. With our multi-community creek development coming on line in 2003, we're even more excited about the opportunities for the year ahead. Finally, out west, we saw increases in new orders coming from Arizona and Nevada, as well as the aforementioned northern and Southern California. The very high end in northern California north of $1 million in pricepoint is still really tough. Fortunately, we don't have a large presence in that segment. At the lower price points, roughly below $600,000, the sales space has held up well. For the quarter, our cancellation rate was 24%, which is below last year's rate of 27%, and consistent with historical trends.
Pulte's cancellation rate for the year was 18%, down 100 basis points from 2001, and very much in line with our stated range of 20% or lower. Overall, demand is holding up well. It's tougher in some markets and better in others, but that's the way it always is. That's one of the reasons Pulte has worked so hard to diversify its markets and product offerings. Even in those markets that are experiencing reduced sales for the market overall, Pulte Homes can and is increasing its sales. Pulte's strategy of buying the best land positions in the market that are specifically tailored to individual buyer groups, even if it means paying up a little, really pays off when the buyers are being even more selective. We're very excited about 2003. With that, let me turn the call back to Jim.
Jim Zeumer - Vice President of investor relations
Thank you, Richard. One last point before we open the call to questions. I hope that most of you saw the press release issued a couple weeks ago regarding a housing industry report co-sponsored by Pulte Homes Amasco corporation called "the housing boom, another 20 years of growth." the report offers some great insights on demographics, immigration and other factors that should help support high levels of housing demand for the next 20 years. For those that are interested, can you obtain a could copy at Pulte.com or contact me via e-mail and I'll send you a copy. We've provided clear direction with regard to business initiatives and financial expectations as it relates to key areas of our business. Where possible and appropriate, we are now prepared to answer questions and to assist in your understanding of Pulte's operations and our opportunities. At this time, we'll open the call to questions, oh, if you can give some direction, we'll be happy to take questions at this time.
Operator
All right. At this time, if you'd like to ask a question, please press "*1" now on your touch-tone telephone. To withdraw yourself from the queue, press pound. Once again, to ask a question, press "*1" now on your touch-tone telephone. We'll take our first question from the site of mar Margaret Whelan, UBS Warburg.
Margaret Whelan
Good morning, folks. Congratulations observe on the quarter.
Unidentified Participant
Thank you.
Margaret Whelan
My first question is about the margin. We were surprised the gross margin was bait higher given that revenue numbers are so high now. Could you give us some details on the Del Webb integration and what you would be expecting over the next couple of years?
Mark O'Brien - President and CEO
Hi, Margaret. This is Mark. You know, we don't focus specifically on gross margin. We operate our communities focused on a return basis, so the revenue line coupled with the margin line obviously dealing with overhead is what we pay attention to, and so when you ask where gross margins are liable to be, I think that's a tough one for us to answer. I can tell you what we do try and achieve something well north of a 20% return on our capital in any one of those markets, but as you can imagine, we could jet up the revenue line and lower the gross margin line and have a higher net operating income, and have what we believe is a better result. We look out two or three years, we think that positioning or that strategy better protects us against the economic cycles.
Margaret Whelan
Okay. But in terms of taking out sustainable -- do you see further opportunity?
Mark O'Brien - President and CEO
I think what we --
Roger Cregg - SVP and CFO
This is Roger, Margaret. On the Del Webb side, specifically to your question, we gave a range of 50 to $75 million of cost that we took out of the business. We're very comfortable with the high end of that range that we've already taken. I think the greatest benefit for us going forward is the expansion of the brand throughout our markets as we've integrated Del Webb throughout the markets we're in now from just running on a standalone basis. We think we've got a lot of the cost out and certainly the ability to grow the business and leverage the overheads is where we're trying to drive the business going forward from there.
The margins, as Mark mentioned, are going to be specific by market by region, and what goes on in those competitive areas, and as we've mentioned before, we've pushed a lot of efforts on the purchasing side to continue to reduce house cost and then still fighting the overall land cost increases as you move forward. But from that standpoint, certainly looking for more margin expansion as we continue to focus on the efficiencies of our operations.
Unidentified Participant
Margaret, let me give you an example, specific example. In Hilton head, as an example, as we told you in a prior call, we had a very specific focus of lowering the pricepoints to enhance the absorption pace in that particular project. When you looked at the enabling marketing, what had happened was there was some price creep going on, not meaning the houses they were bigger than they needed to be and the prices were too high. If you determine value of that project based on a discounted cash flow, then obviously to the extent we can increase the we revenue line, we add value to the project. We introduced a much lower pricepoint in mid summer, and as we reported to you, I believe, at the end of our third quarter result, we had more than doubled our unit rate. We didn't suffer any margin erosion, but we didn't get any improvement.
Margaret Whelan
Okay. I understand. Would you just give us the community and the lot count in the owned versus optioned lots?
Unidentified Participant
Sure, Margaret. I'd be glad to help with some of those data points. During our fourth quarter of 2002, our active selling communities numbered approximately 460 communities. Now you might recall that throughout 2002, our guidance that we had provided had been an expected increase of about 10% over where we ended 2001 of 440, so we fall in slightly short of that objective. It's really related to the very positive flow of sign-ups that we've enjoyed, somewhat offset by some of the difficulties encountered in getting our communities up and running, and in getting the right entitlements, et cetera. I'd Reik to give you a little guidance for 2003.
We project a 10 to 15% increase in 2003 over where we've ended in 2002. Let me just turn to lots, Margaret. So as of December 31st, 2002, we owned 84,300 lots, and we have options on 43,008 hundred lots -- 43,800 lots. That's approximately a 66/34% split favoring owned versus optioned. That's a slight increase in the number of options from what we had been running at, the level we had been running at throughout 2002, which was more like 70/30.
Margaret Whelan
But that's in line with your corporate goal, if I remember right.
Unidentified Participant
We're happy with that range, yes.
Margaret Whelan
Okay.
Unidentified Participant
Now in addition to the lots that I mentioned, we have 48,700 lots that are in our pipeline and they are pending our approval. And that is 48,700 lots.
Margaret Whelan
And then just a final question on use of cash for the year. Are you going to increase the land position?
Unidentified Participant
Yes, for 2003, we are looking for additional investment in the business, and as we've mentioned before, we're looking and planning for an additional incremental investment in the business of close to about $900 million for 2003. That's incremental over 2002, and roughly about 60% of that or close to $500 million, slightly more would be for new land purchases, and about 40% of it would go into development dollars on land.
Margaret Whelan
Okay. Guys, congratulations. Thank you very much.
Unidentified Participant
Thank you.
Operator
Our next question comes from the site of Mike Rehaut of J.P. Morgan.
Mike Rehaut
Good morning.
Unidentified Participant
Morning.
Mike Rehaut
Just wondering if you could give us a little color on the trend within the quarter and perhaps into January if that's possible in terms of the order and pricing trends by region, and specifically, you know, throughout the different markets, and I guess particularly in the southeast and central, you know, good growth despite tough markets. I was also wondering about incentive levels and if incentives and discounts, you know, have increased in those markets as well.
Jim Zeumer - Vice President of investor relations
Mike, this is Jim Zeumer. We really don't provide monthly data. I will tell you that during the quarter, we did see positive increases in order rates for every month of the quarter, and you'll get -- again, because we don't do monthlies, I can't give you much color on January. And with regard to the pricing changes within each market or within each region, I'm going to ask you to give me a little bit more detail on what you're looking for.
Mike Rehaut
I guess more on ASP's and also like the last part of my question, incentives and discounts throughout the quarter in the southeast and central in particular, you know, if those -- if that that has risen to help keep order growth at solid levels.
Jim Zeumer - Vice President of investor relations
You know, I think we can probably do better answering that last part of your question. We'll try to get some detail on average sales price and things, but I think it's more the incentives and things like that. I think, Richard, you could probably address that.
Unidentified Participant
Mike, we did have a little bit of incentives used in the southeast and Texas. A lot of it is seasonal given the fourth quarter, as we entered into a little bit of a slower selling season, but as previously mentioned, we're very happy with our order trends in both those regions of the country.
Mike Rehaut
Okay. So year over year, you wouldn't characterize the incentives as that much more but sequentially, you know, incentives have risen?
Unidentified Participant
Mike, let me try it this way. Understand that the way we operate our business, and indeed, every home builder operates, I assume, in a similar fashion. Each community has its own competitive sphere, and while you may have one community in parts of Texas that is very, very competitive and you have no discounting and price adjustments, you may have another one that -- in a different fashion that might be more aggressive. I would tell you that from our perspective, at a corporate office, we looked at those two regions. I would not describe the fourth quarter of 02 as being dramatically more competitive than the fourth quarter of 01. I would say it was about the same. And what distinguishes those two markets perhaps from the rest of the country is land is still readily available on a comparative basis with the rest of the world. So they tend to be a bit gamier and always have.
Mike Rehaut
And last question -- thank you for that. Last question, in terms of the year-end inventory number, 4.3 billion, wondering if you could break that out between backlog or homes in construction versus actual land, and also give us some color if you're going forward over 2003, if you're going to be concentrating in certain geographies versus others with your future investment.
Unidentified Participant
Basically if we looked at year on year here, -- bear with me, Mike. Just trying to find that level of information for you.
Mike Rehaut
No problem.
Unidentified Participant
Mike, while we're looking up the specific numbers on it, the second half of your question with regard to where we're looking to make additional investments?
Mike Rehaut
Mm-hmm.
Mark O'Brien - President and CEO
Mike, this is Mark. We analyze our business pretty granularly. The additional investments described as it turns out are pretty broadly spread. We obviously want to continue to accelerate our pace in California as an example, but as a general statement, it's pretty broadly spread across most of our regions. Obviously -- and as you saw as part of the press release -- we've got some -- we've had a lot of success selling units in some particular regions, and we'll have to finance the construction of those sold houses.
Unidentified Participant
Mike, I'll give you a data point of about $3.2 million is our domestic home building land position at 12/31/02. And we currently have just approximately 10,300 homes under construction as of 12/31/02 as well.
Mike Rehaut
Okay.
Unidentified Participant
Were you just looking for the inventory breakdown house versus land?
Mike Rehaut
Yeah, actually.
Unidentified Participant
It's about 3.2 billion land and about $1 billion in house.
Mike Rehaut
Great. Thanks very much.
Unidentified Participant
Thank you.
Operator
Our next question comes from the site of Carlos Castanho (ph) of Credit Suisse First Boston.
Carlos Castanho
Good morning. Most of my questions have been answered. Jim, can you give us a spec inventory update in terms of what you had at quarter-end?
Unidentified Participant
I'm not allowed to do numbers anymore, so Vinny has to give them.
Carlos Castanho
Oh, great. Thanks.
VD
Thanks for that incentive, Carlos. Here we go. At 12/31/02, our spec units were under 4,000. 3,988 to be specific. And that represents about an 11% decline from where we were at the end of fiscal 2001.
Carlos Castanho
Okay. Your land sales obviously you guys are still working some of that land that you acquired from Webb that you had to sell off, and it looked like you sold a big chunk of it this quarter. What are you projecting for land sales in 03? I know it's a difficult number to project.
VD
Bear with us one minute here. Carlos, do you have any other questions?
Carlos Castanho
One tidy up item in terms of the share repurchase, you guys have about 95 million left on your share repurchase, is that correct?
VD
Yes, that's correct.
Carlos Castanho
Have you bought any shares back here in 03?
VD
Wait no 03 (ph)?
Carlos Castanho
Yeah, the first couple weeks in January?
VD
We're not allowed to make comments during the period. We only comment at the end of the quarter.
Unidentified Participant
Carlos, I think we had a gain in 2003 of about roughly $27 million, if I remember the number. I think we'll have to follow up on that one, but I think the gain we talked about for 2003 was close to $27 million.
Carlos Castanho
Okay. How about on the revenue side?
Unidentified Participant
That's hard to predict on the revenue side, so we'll just go with the gain.
Carlos Castanho
Fair enough. Thanks, guys.
Unidentified Participant
Thanks.
Operator
Our next question is from Armando Lopez of Morgan Stanley.
Armando Lopez
Good morning, everyone. Two quick questions. I guess first, on the community counts of the 460, I was just wondering if you could comment maybe how many of those communities are Del Webb versus traditional Pulte communities, and where you expect that to go.
Unidentified Participant
Armando, we really don't break out the business between Del Webb and Pulte. In terms of where the numbers go, as Vinny indicated, we look for community count growth this year probably in the 10 to 15% range versus where we ended 02.
Armando Lopez
Okay. And then as you think about like the active adult, though, I mean, is that more focused on the active adult side or the traditional side?
Unidentified Participant
I think it's going to be a combination. I think more of it's certainly on the traditional side than on the active adult side, and to be specific, I mean, when we merged with Del Webb, they had 12 major communities, and certainly, you know, we've added a couple more which we put out press releases for up in the northeast, one in the Boston area and the other one in the central New Jersey area.
Armando Lopez
Right.
Unidentified Participant
We certainly continue to plan to expand the Del Webb brand throughout the country, and those are the plans that are being worked on now for purchases beyond 2003.
Unidentified Participant
Armando, again, keep in mind what you see with Del Webb are a small number of very large communities, so as Roger indicated, the vast majority of new communities are going to be in the more Pulte traditional business.
Armando Lopez
Okay. And then one other quick question. In terms of the pricing on year over year, how much of that do you think is from actual mix versus, you know, getting pricing in the different markets?
Roger Cregg - SVP and CFO
I'll tell you -- this is Roger -- when we take a look at it, we try to break it down, I'd say probably a third of it is price, and, you know, the other two-thirds of it are going to be mix and cost.
Armando Lopez
Okay. And then as you think about, like, for 03, like what should we -- how should we think about pricing going forward like for the year?
Unidentified Participant
Well, for the full year, we gave guidance for the full year last quarter.
Armando Lopez
Okay. And is that -- and when you thick think about that guidance, is that more related to mix or are you expecting, you know, incremental pricing in the market?
Unidentified Participant
I think there's a combination of price in there and mix again.
Armando Lopez
Mm-hmm. Okay.
Unidentified Participant
And I think, know, again, we're looking at, you know, about a third of the margin was, you know, again, you've got to take volume off of that and then take a look at the remaining piece of it, about a third of the remaining piece would be price.
Armando Lopez
Okay. All right. Great. Thank you.
Operator
Our next question comes from Stephen Kim of Salomon Smith Barney.
Jay
It's Jay for Steve Kim. Congratulations on the quarter.
Unidentified Participant
Thank you.
Jay
Couple of questions. First, the subcount increase of 10 to 15% that you're talking about for this year, is that going to be fairly evenly spread across the year, number one? Number two, any particular markets where you're expecting to open more subs than others?
Unidentified Participant
Yeah, I would say, you know, we expect them to probably be spread evenly across the year, and that's always our hope. Certainly when we run into the issues of opening them up and getting the entitlements and everything on time, there's always a lag in there that we experience. From specifically w I think general generally, again, we're looking across the country pretty evenly in most of our markets to expand our presence there, so there's no particular area that sticks out more than any other on the expansion for 03.
Jay
Great. Secondly, on the gross margin again, it sounds like you were looking for some sort of an increase in year. I was just trying to get a sense for what type of a level perhaps of gross margin that you're seeing in backlog currently and the level of gross margin that is implied in your 785 to 825 range for zero -- 03.
Unidentified Participant
Specifically when we were talking the fourth quarter going into the first quarter, we were looking, I think, 20 to 30 basis points above the fourth quarter or the first quarter. So that would imply that there is expansion in there coming into the first quarter from our backlog, ending the year.
Jay
Okay.
Unidentified Participant
I think you gave guidance, Roger, for what margins would look like for the year. We thought there was some margin opportunity?
Roger Cregg - SVP and CFO
Yeah.
Stephen Kim
Guys, this is Steve Kim. If I could get in there with another question, with respect to the issue of share repurchases, you indicated you didn't want to sort of comment on sort of if you've been active this year, but could you give us a sense for, you know, what you look for in terms of timing of share repurchases, whether or not it's something which you view as sort of opportunistic and, therefore, maybe valuation-driven or if it's something that it's more of a regular program given the overall cheapness of the stock here.
Roger Cregg - SVP and CFO
Stephen, this is Roger. It would be inappropriate to tell you exactly what we look for this that. Certainly, you know, what kind of complications that would create. So typically we like to look at being opportunistic in there from time to time. I can't tell you exactly what the criteria is, but, you know, we're certainly looking at values, how they trade and what we look at from an investment standpoint within the business. If we think that we can continue to, you know, grow the business and get a better return than buying a share back, then we'll do that.
If we see a better return by buying a share back, then we'll do that. You know, as I mentioned before, Pulte over the last five to six years bought back close to 17 million shares in the open market which represented more than a third of the company at that point. And then we subsequently in 2001 issued about 17 million shares for the acquisition of Del Webb, and, you know, that 17 nil mill yon shares that we repurchased was an average of around $15 a share, and then we issued at close to $42 a share and you can see where the value is today. So we try to balance off the growth of the business, how we manage our business for the long term, not the short term, and again, you know, financial engineering is one view and then certainly running the business for the long term is a view that we take seriously, so we try to balance all of those.
I'll tell you, coming through 2002, our goal was to get our debt to cap down. We ended with the merger of Del Webb at just around 48% debt to cap, and ended 2002 just slightly above at 40.9% on a gross basis and 32 on a net. So we accomplished our goal and that was our objective. We didn't buy back a lot of shares in 2002 because we had a goal of really driving the balance sheet and the conservatism there on the debt side of it, and I think we're in a different position going into 2003 as we look at our opportunities for investment in share buybacks, growth of the business or even debt reduction.
Stephen Kim
I agree. That's very helpful. Thanks.
Unidentified Participant
I was going to answer his question. He'd asked about the gross margins. We had given some guidance as of the end of the third quarter of last year when we were looking overseer owe three, which thought gross margins had some opportunity in the area of 20 to 30 basis points.
Stephen Kim
In 03 overseer owe two?
Unidentified Participant
Correct.
Stephen Kim
Great. Thanks very much.
Jay
One other follow-up question if I could. You talked about the fact that you look at the business on a return on capital basis, Mark, I think to open up the Q and A session and I think that's definitely -- I really appreciated your response, I think that's something that sometimes gets overlooked. Over the last five or six years, we've seen a dramatic increase in the returns, not just for your company but across the industry. One of the things that I think is sort of the key in people's minds is trying to figure out whether or not that's a function of land or if that's a function of the process of actual what you might consider the sticks and bricks part of the business. You've sort of talked about and laid out significant competencies you have on the land side relative to competition. Can you talk about the sticks and bricks side, what kind of an advantage you might have over your peers of whom you're gaining share and any initiative focus focused on zero three.
Unidentified Participant
Obviously this is a subject that could go on for a while. We can do financial engineering with the best of them, but our business has grown to the point now we're paying attention to operations, it's very, very important, and you don't have to be a rocket scientist to figure out that 50 odd percent of our cost of sales are in our house. So that's an area of focus. As you know, we've been focused on it for five or six years now, we've made a lot of progress.
On order of magnitude, I think -- as a dream, there may be another 20% that we the company are looking out over the next 10 or 15 years. As a practical matter, we're looking to get -- out in 03, and we've got a number of initiatives focused on that, many of which we've talked about in the past, continuing initiative. We are continuing to focus on more fabrication methods and those kinds of things as well as some logistics and the like. I don't think it's a topic we can get into in any great detail at this conference, but certainly at some future date, we would be glad to give you an exhaustive look at some of the things we're doing.
Operator
We'll take our next question from Carl Reichardt from Bank of America. Go ahead.
Carl Reichardt
Morning, guys. I had a couple of follow-ups. I think Vinny, you mentioned something about lots, I think it was 48,700 lots in the pipeline pending feasibility. I'm a little confused of where those are. Are those prior to being optioned? What am I missing? Or was that owned and getting ready to then be built on?
Vincent Frees - VP and controller
The company is constantly looking at land position, and while they're under the due diligence process of evaluating the environmental and other as aspects of this property, we prepare a feasibility analysis to show the economic justification for the purchase. So until that feasibility is approved in a very formal process here at the company, it's kind of on hold, so we have land that has been purchased, land for which we've actually entered into formal option contract, and we have this land that's currently under review. We've tied it up so there are some initial option deposits made but not of any consequence or substance.
Carl Reichardt
Okay. That's fine. So it's just split between owned and optioned. That makes sense.
Vincent Frees - VP and controller
We own them, Carl. I mean, we control, have them under option. We can buy them at our discretion.
Carl Reichardt
And then you guys mentioned this 4,000 units in spec. What percentage roughly of that is finished standing unsold?
Vincent Frees - VP and controller
It's the company's guidelines to have finished units at below 7.5%, and our position in final units is well below that at 1231.
Carl Reichardt
That's 7.5% of total spec?
Vincent Frees - VP and controller
That's 7.5% of our spec inventory.
Carl Reichardt
Okay because that's the number that really matters. And then I had one other question just about average selling price for the order side. I kind of backed into a pretty large number like $270,000 or something per order this quarter. I mean, that seems like, if I'm right, that seems like a fairly big jump. I think it was about 247 or 250 last quarter, and the mix doesn't look like it shifted enough to the coast that it would have driven it that high. If I'm right, what's the cause for that big jump in average selling price per order? And the backlog number, by the way, per unit, too, is like 270 three. It's very high.
Roger Cregg - SVP and CFO
Correct. It is mix, and if you take a look at when the timing of that rolls out, it's certainly been growing over time as well depending on where it is in the marketplaces. And again, if you take a look at the northeast, the average selling prices are higher there. If you look at the Great Lakes area, you know, in the Midwest, the average selling prices are higher there. So it's based on the mix that's in there, and typically when it rolls out in the next quarter, what you have is a dilution from other homes that are sold in there that get produced in a shorter period of time, so for instance, about a third of what's in backlog may roll out, you know, into the first quarter, so it will be diluted and you won't get that through the closing of the first quarter.
Carl Reichardt
Okay. But you're saying Roger it's basically geographic mix as opposed to pricepoint, IE and market mix, who you're targeting the houses for in terms of buyer base.
Roger Cregg - SVP and CFO
That's correct.
Carl Reichardt
Okay. I think that's it. Thanks, guys.
Roger Cregg - SVP and CFO
Thanks, Carl.
Carl Reichardt
Are there any other questions?
Operator
There are. We have a question from Joseph Sroka from Merrill Lynch. Go ahead.
Joseph Sroka
Good morning, everyone. Roger, that 5 to 6% up units you quoted for the first quarter, that's just your domestic units, right?
Roger Cregg - SVP and CFO
That's correct.
Joseph Sroka
Okay. Then based on your answer to Steve Kim's question, can we assume that that 785 to 825 earnings guidance you talked about, that that doesn't include any share repurchase?
Roger Cregg - SVP and CFO
That's correct, it does not.
Joseph Sroka
Okay. Fair enough, guys. Thanks.
Roger Cregg - SVP and CFO
Thank you.
Operator
Our next question comes from Greg Nejmeh of Deutsche Banc. Go ahead, sir.
Greg Nejmeh
Good morning, everyone. Mark, you touched on some of the purchasing initiatives that I think you said could drive costs another $50 million this current year. Could you just take us back and define more broadly what you think the size of that opportunity is and how much of the savings that, you know, you've identified from the years of supply analysis you've conducted have been realized to date?
Mark O'Brien - President and CEO
I guess the best way for me to try and grapple with that is on a fairly contemporary basis. We think probably over the last 18 or so months, we've taken about $60 million out of the cost of goods sold part of the business. As I said, we're targeting another 50-odd for the next period. The low-hanging fruit was obviously leveraged purchasing and those kinds of things. We have done an awful lot of specification rationalization to limit unnecessary variability in our product. As I said, we're doing a lot of fabrication work. How big is the project? I think it's as big as your imagination, frankly. We have to be fairly disciplined about how we go at it, so that we can keep the business running efficiently while we attack it. So I can only be specific in the near term, you know, in terms of the dream, I think it can be as big as any of us want it to be.
Greg Nejmeh
You said 60 million had been realized over the last 18 months, and you're hopeful you can realize 50 this year. The 60 million was realized largely on the basis of Pulte on a standalone basis. Is the opportunity now proportionately larger given the web acquisition or is there something unique on how webb goes to market such that the savings of webb related units would not be as great?
Mark O'Brien - President and CEO
There's nothing unique as to Del Webb units. In fact, the 60 million I described would include some significant savings out of Webb. We've seen some considerable amount of that 60 has come from the Webb production. Obviously in some of the 50 we're targeting will continue to come from that as those houses cycle through their inventory stage.
Greg Nejmeh
I guess just one follow-up there. From a strategic pricing standpoint, are those savings likely to be manifest in the company trying to achieve a lower pricepoint and, thereby passing some portion of that savings on to the consumer and raising your share as a consequence or is it more likely to boost your margins and raise your profitability more so than any savings that you might share with the consumer?
Mark O'Brien - President and CEO
If we look at other industries and the historical trends, markets always will become efficient over time. I think early on, it will enhance our margins and then over time, the consumer will get more value.
Greg Nejmeh
And are there any other major competitors that you see in the marketplace that have developed a similar program or, you know, are as far along on some of these initiatives as you?
Mark O'Brien - President and CEO
I can only spec speculate. If they're not, I think they're making a terrible mistake.
Greg Nejmeh
Okay. Thank you.
Operator
Our next question is from Leslie Goldstein of Merrill Lynch (ph).
Leslie Goldstein
Thank you. My questions have been answered.
Unidentified Participant
Thanks, Les.
Operator
Our next question comes from Paul Puryear of Raymond James. Go ahead.
Paul Puryear
Thanks. Good morning.
Unidentified Participant
Hi, Paul.
Paul Puryear
Could you just comment on your product strategy for 2003? Are there any changes in terms of pricepoint or target market in light of what's taken place in the economy?
Richard Dugas - EVP and COO
Paul, this is Richard. Good morning. As we stated, our goal is to have a broad strategy in each of our markets and really to attack growth opportunities within each of the markets that we're in, focusing on all the different buyer groups. And obviously those are the ones that make sense that we see opportunities, but I don't think it would be fair to say that any one segment, you know, we're specifically pushing harder than others. We want to grow in each of our markets as broadly as we can, and we have initiatives underway to try to expand share. The one piece that obviously we want to capitalize on with Del Webb with the expanding their brand presence even more aggressively than we've done in the past and we'll continue to look at that. Roger mentioned a couple new communities in the northeast, and, you know, our goal is to continue to expand Webb as it relates to each of our existing markets.
Paul Puryear
And then one follow-up question. You mentioned earlier that you were targeting to spend 900 million in 2003, I think, 540 million on land and then 360 on development. Is that an incremental number or is that the total number?
Richard Dugas - EVP and COO
Yes, I had mentioned that it was incremental from 2002.
Paul Puryear
And so what's the total number?
Richard Dugas - EVP and COO
The total number, if you take a look at the overall business, we probably in 2003 amortized close to $2 billion worth of land that we had purchased in previous years, and you add another $900 million to it incrementally, we're looking at spending close to $3 billion in 2003, probably split 50/50, half what would be considered land and the other half would be development.
Paul Puryear
District. Thanks.
Operator
We have a question from Jim Wilson of Jolson Merchant Partners. Go ahead, please.
Jim Wilson
Good morning. Could you maybe contrast, if you could for me a bit, the returns that you're now seeing in sort of some of your better segments, if you will, either regional or pro product versus the rest of your business? Are you getting any kind of color like how much better you're seeing margins or returns in California versus other parts of the country or alternatively, the retirement business? What I would also be interested in is just how much you feel and however way you want to characterize it even proved returns on the retirement business since you've taken over Webb and integrated it?
Unidentified Participant
Jim, let me try the last part 1st because I think that's more specific and I've got a better chance of articulating our position. When we looked at the Webb assets, and as anybody would look at them, and you value them using a discounted cash value basis, obviously to the extent you can delay investments or accelerate revenues, have you a better opportunity to add value. It is our belief we've added hundreds of millions of dollars in value to those projects over the last 18 or so months. That will be borne out over the life of those projects, but the fact of the matter is that we have, in fact, brought up the revenue stream in almost all of them and been able to retire the additional investment. So in that regard, we're pretty satisfied.
As a general statement, the active adult sec sector or segment is less influenced by interest rates and probably more influenced by the wealth and life stages of the buyers. You don't get a lot of opportunities at age 68 to postpone decisions, so you've got a darkened at the end of the tunnel, so decisions get made anyway. So we don't underwrite any particular segment of our business differently than we would. We still expect the same level of returns. We might look out a little further and anticipate the demographic comparative coming on an active adult business, but generally speaking, we look for the same kind of returns on capital regardless of the segment. I think that's the best way I've got to answer your question.
Jim Wilson
Okay. So maybe the best way to look at it is as you took over the Webb assets, they were operating well below your targeted return on capital and you've now generally been able to bring them up for the foreseeable future to more normal Pulte return on capital level?
Unidentified Participant
As a general statement, that's right. It would be unfair to characterize it as all operating below our expected returns. Some are operating very nicely, all were not.
Jim Wilson
Very good. Thanks.
Operator
Our final question comes from Esther Cho.
Esther Cho
Good morning. I'm sorry to be asking this again, but I just happened to miss the first part of your March guidance. I was wondering if you could quickly go over the earnings and domestic units guidance you had given.
Unidentified Participant
Yeah, one minute, please.
Unidentified Participant
Stand by a minute, Esther.
Unidentified Participant
Basically for the first quarter, we said settlements for the first quarter would be 5 to 6% over the same period last year.
Esther Cho
Okay.
Unidentified Participant
Average selling prices, we looked 1 to 2% over the fourth quarter's average selling price. Gross margins, we looked for 20 to 30 basis point improvement over the fourth quarter of 2002.
Esther Cho
Okay.
Unidentified Participant
SG&A, we're looking for about a 20 to 30 basis point increase over the first quarter of 2002.
Esther Cho
Mm-hmm.
Unidentified Participant
And that's driven mostly by start-up costs.
Esther Cho
Okay.
Unidentified Participant
And that was the home builder. So relatively stable in the mortgage company. Interest expenses in the corporate lineup about 10% year over year from the first quarter of 2002.
Esther Cho
Okay.
Unidentified Participant
And we're looking for about 1.15 to $1.25 for the first quarter.
Esther Cho
Okay. Thanks.
Jim Zeumer - Vice President of investor relations
Since there aren't any further questions, I want to thank everybody for their time this morning. We'll be around all day if you do have any other follow-ups, and thanks very much.
Operator
This concludes our conference call for this morning. You may now disconnect your line, and thank you for participating.