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Operator
Good day.
All participants are in a listen-only mode.
If you require assistance during today's conference press the star and zero on your touchtone phone.
At this time I will turn the call to your host James Zeumer.
James Zeumer - VP, IR
Thank you, good morning everyone.
I want to welcome you to Pulte Homes conference call to review the company's first quarter results for 2003 .
As this morning's press release detailed , Pulte Homes has gotten off to an excellent start posting record first quarter results with consolidated revenues up 13% to $1.6b and income from continuing operations up 26% to $86m or $1.39 per share.
On the call today to discuss Pulte Homes’ results are Mark O'Brien, President and Chief Executive Officer, Roger Cregg, Senior Vice President and CFO, Richard Dugas, Executive Vice President and Chief Operating Officer, and Vincent Frees, Vice President and Controller.
For those of you on the internet, slide presentation will accompany this call.
It will be available for reviewing at a later time.
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 as such are subject to risk and uncertainties that could cause the actual results to differ materially from those discussed during this call.
At this time let me turn this over to Mark O'Brien for a few opening comments.
Mark O’Brien: Thank you, Jim.
Good morning, everyone.
As Jim stated, Pulte Homes has gotten off to a strong start in 2003 and is in a position to deliver yet another year of double digits top and bottom line growth.
The results reflect our company's success in continuing to control critical land resources and expanding our product offerings to serve more customer segments at the local market level.
Last week's Wall Street journal reported on a subject that you have heard Pulte Homes and other large builders commenting on for several years.
And that is that land is growing increasingly difficult to source and entitle.
You have heard us say the time it takes to get land parcels through the entitlement gauntlet has roughly doubled in each of our markets.
That means going from three months to six months or 12 months to 24 months but the end result is the same.
Builders have to work harder every day to keep sufficient land in our pipelines.
Contrary to viewing those conditions with a lot of anxiety, however, we see this environment as offering a real competitive advantage to Pulte Homes.
Land is a zero sum gain.
If we control it, someone else does not.
Between our financial resources, our entitlement expertise and capacity to use a wider array of land position hiss because of the variety of products we build we can use land control to expand our market share.
Mergers, acquisitions, business combinations make the headline, but industry consolidation and sustained market share gains happened at this fundamental land control .
At he end of the first quarter, Pulte Homes controlled approximately 190,000 lots of which 48% were owned and rest under option.
We also continued to implement our strategy of expanding the product offerings and buyer segment serves within each of our local markets.
Pulte Homes is the only national builder with the stated business strategy of serving all customer segments, first time, first move up, second move up and the important active adult segment.
We are also the only builder who has the management capacity to execute communities directed at each of these customer segments.
Targeting multiple buyer segments offers Pulte Homes a number of important advantages.
First, we add the potential to serve the largest universe of buyers within any local market we serve.
There are only a finite number of buyers for any given price point or product type.
By continuing to extend our product offerings to all price points, we have the greatest potential to expand our local market share.
Second we build condos, townhouses, as well as large and small single family homes.
We can utilize a higher percentage of the land parcels available today.
Given the scarcity of land, the ability to utilize more of what's available gives Pulte Homes a competitive advantage and a tremendous amount of flexibility when working with land sellers.
With record first quarter results in $3.6b in backlog Pulte Homes is on track to deliver another strong year of financial result.
Equally important through initiatives around land control and customer segmentation we continue to strengthen our market position to deliver these results over the long term.
Now let me turn the call over to Roger Cregg for more detailed comments about Pulte Homes first quarter results.
Roger.
Roger Cregg - SVP and CFO
Thank you, and good morning.
As Jim mentioned, for those of you following along on the web cast, we will be presenting a few slides to facilitate the discussion.
We are pleased to report we completed the first quarter with very strong operating and financial performance.
For the first quarter of 2003, revenues from home settlements for Pulte Homes domestic home building operations increased 11% over the prior year.
Higher revenues for the period were driven by increase in unit closings of approximately 5%.
Average selling prices increase to 5% to $250,000 resulting primarily from increased product prices and an overall improvement in product and market mix.
In the first quarter, land sales generated approximately $33m in total revenues which is an increase over the previous year’s quarter by approximately $9m or 39%.
Domestic home building gross profits from home settlements for the quarter increased 16% to $303m.
The gain over last year is attributed to an increase in unit volume and the benefits from the ongoing initiatives to leverage construction costs throughout the operations.
First quarter domestic home building margins from home settlements as a percent of sales were 21% compared with 20.1% in the first quarter of 2002.
This increase conversion of approximately 90 basis points versus the prior year quarter is mainly attributed to product price increases, market and product make shifts, with an overall mix influence of increased unit volumes at relatively higher converting margins.
In addition, on a comparative basis, the first quarter of 2003 reflected approximately a 10 basis points improvement over the prior year conversion as a result of lower purchase accounting adjustments associated with the Del Webb merger that carried over into the first quarter of 2002.
The gross profit contribution from land sales was approximately $9m for the first quarter versus $8m in the first quarter last year.
The gain on land sales may vary significantly from period to period.
Included in the other income and expense category for the first quarter, the income of $4.7m is primarily the result of equity income recognized in two Nevada base joint ventures related to the sale of commercial properties and residential lots.
SG&A costs as a per cent of home sales for the quarter was approximately 11.5% versus the prior year at 10.9%.
On a comparative basis, adjusting for purchase accounting, the SG&A conversion increased by approximately 80 basis points versus the prior year.
The increased overhead conversion for the quarter was mainly attributed to increased start up expenses and additional expenses incurred in the northeast and midwest due to weather conditions during the quarter.
Home building interest expense increased during the quarter versus the prior year quarter as a result of the increased debt levels associated with the continued growth of the business.
Domestic home building pre-tax income for the quarter increased 19% to approximately $138m with pre-tax margins at 9.4% on total domestic home building revenues.
This represents an increase of approximately 70 basis points in conversion over the prior year quarter.
On a comparative basis, adjusting for a purchase accounting, the pre-tax income conversion improved by 40 basis points versus the prior year.
At the end of the first quarter, our domestic operations had a backlog of homes to be built of just over 13,000 homes, valued at approximately $3.6b compared to approximately 11,300 homes in the prior year quarter.
First quarter pre-tax income from our financial services operations was approximately $17m, an increase of 40% or approximately $5m versus the prior year quarter.
The overall improvement in performance was attributed to a 22% increase in production volume as Pulte mortgages capture rate increased to 80% from 75% last year.
Continued favorable interest rate environment and effective leveraging of overhead expenses contributed to the improved performance in financial services.
Mortgage refinancings represented approximately 12% of total originations in the quarter versus 7% for the same period last year.
In the international operations, posted a pre-tax loss of approximately $1m for the first quarter to loss of $500,000 in the prior year quarter.
The loss primarily to lower unit volumes in Mexico offset by increased profitability in Argentina and Puerto Rico.
Corporate expenses and interest expense for the first quarter were approximately $15m and basically even with the prior year.
The effective income tax rate for the first quarter has been adjusted down from the prior year rate of 39% to 38%.
The rate adjustment reflects certain state income tax assumptions and the anticipated shareholder approval of the proposal to make the Pulte Homes senior management annual incentive plan compliant with section 162M of the internal revenue code .
Net income from continuing operations for the first quarter increased 26% to approximately $86m or $1.39 per share as compared to approximately $69m or $1.12 per share for the same period last year.
This was based on using fully diluted shares of approximately $62m for the quarter.
On the balance sheet, the major changes in the first quarter versus year end of 2002 are mostly attributed to Pulte Homes growth initiatives heading into 2003.
We ended the quarter with approximately a $480m cash balance.
This is mainly attributed to the $300m note issuance in the first quarter.
The proceeds from this offering were in anticipation of the scheduled and optional retirement of the approximate $430m of face value senior and subordinated notes, callable and coming due in 2003 in addition to positioning Pulte Homes for our growth initiatives for 2003.
The company on April 1 defeased the Pulte 9.5% $175m senior notes due on April 1, 2003.
In addition, we have called the Del Webb 2009, 9-3/8 senior subordinated notes for redemption on May 1, 2003 in the amount of approximately $155m.
At the end of the quarter, the debt to total capital ratio was approximately 43.8% and on a net basis was 37.9%.
In line with our expectations, we continue to maintain strong and conservative balance sheet as we target our total debt to capitalization ratio at 40% level .
Included in the other asset category of approximately $823m are major items such as land held for sale of approximately $228m, receivables, prepaid and deposits of approximately $235m and all other miscellaneous assets to round out the difference.
Pulte Homes shareholder equity for the first quarter increased to approximately $2.8b with a return on average shareholders equity for the latest 12 months of approximately 18%.
In addition, under the company's authorized $100m share repurchase program we repurchased in the first quarter approximately 395,000 shares for a total of $18m.
Under the authorization, we have repurchased a total of approximately 495,000 shares for total of approximately $23m .
Looking ahead, as permissible under SEC regulation guidelines, we’re going to provide the following guidance on the current expectations for the second quarter of 2003.
The following comments assume that the overall macro economic and geopolitical conditions remain at a comparable range to what we experienced .
Unit settlements in the second 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 .
Our average selling prices in the second quarter are projected to increase 2% to 3% over the first quarter of 2003.
Again, I'll repeat that. 2% to 3% over the first quarter of 2003.
This projected increase is primarily being driven by product and geographic mix for the quarter.
Gross margin performance from home settlements as a percent of sales for the second quarter is anticipated to be 20 to 30 basis points below the first quarter of 2003.
Again, 20 to 30 basis points below the first quarter of 2003 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 be even to slightly higher with the second quarter last year .
Given a stable interest rate environment, pre-tax income in our financial services operations is expected to be even with the second quarter of 2002.
In the second quarter, our international operations are anticipated to post a break even to modest profit for the quarter .
Corporate expenses should be relatively flat as compared to the first quarter of 2003 and net corporate interest expense is projected to increase approximately 25% over the first quarter of 2003.
That’s primarily driven as a result of the lower net cash position.
We are projecting an effective income tax rate 38% for the second quarter and full year 2003 .
Second quarter earnings per share from continuing operations are estimated to be in the range of $1.70 to $1.80 per share.
This earnings per share number is calculated based on approximately 62.5m fully diluted shares for the quarter.
Our guidance for the full year 2003 earnings per share from continuing operations is targeted in the range of $8.15 to $8.45 per share .
Estimates are based on approximately 62.5m fully diluted shares .
Our outlook and guidance for the full year of 2003 is based on the assumption that the overall macro economic conditions 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 a few comments about market conditions we experienced during the first quarter.
Richard.
Richard Dugas - EVP and COO
Thanks, Roger.
Good morning, everyone.
Given Pulte Homes strong first quarter results, it's easy to forget about the difficult weather conditions we experienced across many of our markets with record snows up and down the east coast and prolonged period of severe cold in the Midwest.
It is difficult to quantify the impact all of that had on traffic and sales, but it is reasonable to assume that it delayed some purchases.
Traffic to our communities was up about 6% for the quarter.
The only real patterns we saw during the quarter were that weather conditions caused temporary disruptions and when we opened new communities customers showed up to buy our homes.
In short, where we had product available during the quarter for the most part we experienced solid demand.
Drilling down a little deeper, demand conditions varied from market to market across the country.
Sign ups in the northeast were down about 7% for the quarter.
Although we had tough weather conditions and 10% fewer communities opened during the quarter, demand for the period was strong.
Our local managers have been telling us that demand held up extremely well and that any order variation period to period is almost completely from having viewer communities open and the result of weather and processing delays.
Sign ups in the southeast were essentially unchanged for the quarter, but there are some changes as to mix.
We saw a nice improvement in Raleigh as we have finally gotten some land positions in place.
These gains, however, were offset with slower sales in Tampa and to a lesser degree Fort Myers.
In Tampa we have fewer communities in place reloading our line pipeline and Fort Myers product availability and softness in the second home market.
Our Midwest region saw a decrease in house sales of about 14% with gains in some markets such as Chicago offset by a decrease in sales in the Michigan area.
Traffic patterns were stable, but we have experienced some slow down at higher price points in Michigan above 400,000, associated with continued weakness in the automotive business and to a lesser degree the harshest winter Detroit has experienced in the past two decades.
Our Michigan operations also had very tough comps versus 2002, when we opened a number of vary successful communities.
We are continuing to monitor demand locally and based on order trend and outstanding land positions remain optimistic about remainder of 2003.
In our central region, we realized fewer sales during the period.
Most of the markets were stable as compared to prior year results although our Denver operation is continuing to realize nice growth trends with sign ups for the quarter up almost 25%.
Our Houston operation, however, was weaker than planned driven by significant development delays caused by a combination of slower approvals and a very rainy winter.
Finally, out west we hit a grand slam with improved sign ups in northern California, southern California, Arizona, and Nevada.
Demand was strong just about across the board except in very high end in northern California where homes above roughly $1m in price continue to be very challenging.
Fortunately, we don't have a large presence in that segment.
We are very comfortable with the current business trends.
Based on feedback from our field operations, we believe that any sign up pressures more often are a reflection of development delays than weakening demand.
During first quarter demand overshadowed by weather, war concerns and product availability, but still managed to increase our sign up pace.
Margin gains further evidence of strong market demand.
We’re experienced enough to know that not every comparison issue is related to supply but overall it does appear that where we have supply available we are doing well.
Obviously, getting the communities open is a critical part of our business and it is a challenge and an opportunity that would be part of Pulte Homes business for years to come.
We are working hard on it.
On another note for the quarter, our cancellation rate was 16% which is at the low end of our range and consistent with historical trends.
So, we’re still seeing quality buyers who are serious about buying a home.
Overall we are optimistic about our business and will diligently monitor our operations for any signs of issues developing.
Finally, I want to comment on Pulte's continued expansion of the Del Webb brand.
We are in the middle of plans to open up to 16 new Webb communities during 2003 including recent opening of Corte Bella in Phoenix and a new Philadelphia area planning to open this summer.
We are expanding our Del Webb presence in traditional strongholds such as Phoenix and Las Vegas and also pursuing expansion up east coast and mid west.
Numerous planned communities are working through land acquisitions and entitlements.
Look for more to come in the future.
The majority of our new Webb communities will be more intimate in size but contain the active lifestyle amenities that Webb has done such a great job with.
We are also pursuing selected larger communities where it makes sense in sunbelt states, but as mentioned the lion share of our new openings will be for communities of a more modest size.
New home orders for Del Webb brand communities hit an all time high in March and Pulte continues to capitalize on this trend.
Del Webb is far and away the strongest name in the active adult sector and very excited about the future.
Now, let me turn the call back to Jim.
Jim?
James Zeumer - VP, IR
Thank you, Richard.
In the spirit of fair disclosure, we've provided clear direction with regard to business initiatives and financial expectations as it relates to key areas of our operation.
Where possible and appropriate we are now prepared to answer questions to assist you in understanding Pulte Homes’ results for this quarter.
At this time, I'd ask the operator to give direction to open it up for questions and answers.
Operator
If you would like to ask a question press star 1 on your touchtone phone.
To register for a question please press star 1 on your touchtone phone.
If your question gets answered, you may remove yourself from the queue by pressing the pound key .
The first question is from Margaret Whelan of UBS Warburg.
Margaret Whelan - Analyst
Nice quarter.
First thing is housekeeping.
The other income was a lot higher than expected.
Could you address that?
Roger Cregg - SVP and CFO
Yes.
I mentioned in the other income we had two Nevada related joint ventures that we had a commercial land sale out of and also some residential lot sales out of that as well so that was a swing from year inform year.
Margaret Whelan - Analyst
Can you give us a breakdown at all?
Roger Cregg - SVP and CFO
I don't want to get specifically into the land but roughly those ventures the gain was $7m between the two.
Margaret Whelan - Analyst
Okay.
And then in terms of the gross margin improvements which was excellent and seems to be a trend from the builders reporting this week.
Can you give us a breakdown on where the surprise would have come from and how sustainable it is, please?
Roger Cregg - SVP and CFO
Yeah.
I would just mention looking at it, it seemed to be more mix driven and I'll tell you in a lot of markets we saw pretty good increase in the northeast, the mid Atlantic, in the Florida markets, in the Great Lakes , and also in Southern California.
So I would say in just about most of the markets we saw pretty significant increases.
Again, a lot of that was driven by mix, again, we are looking at the first quarter being roughly about 18% of the year on deliveries so as you look at that, again, the mix seemed to swing more towards the higher margin products.
Margaret Whelan - Analyst
But in terms of the higher margins not just based on pricing or is it lower construction costs or procurement costs for you also?
Roger Cregg - SVP and CFO
It is a combination of all of them.
We continue to push hard on the construction side for efficiencies, certainly on the purchasing side on materials and contract waiver as well and in some markets pricing is still pretty good there so there's not a lot of rotation on the pricing side that we see.
In combination all of it.
The mix is driving it as well in the quarter.
Margaret Whelan - Analyst
Got it.
Thank you very much.
Operator
Our next question today comes from Mike Rehaut with JP Morgan.
Charles Grom - Analyst
Charles Grom on behalf of Mike.
The SG&A levels higher than our estimates.
Some of the increase was the higher upfront community costs, but I was wondering if there's any discounting going on in the quarter relative to last year and in the prior quarter?
Mark O’Brien: The discounting wouldn't fall in the SG&A category, but most of it is driven by the start up expenses in the quarter.
That was pretty much would have been flat year to year without that.
Charles Grom - Analyst
Okay.
Great.
Thank you.
Operator
Next to the site of Armando Lopez with Morgan Stanley.
Armando Lopez - Analyst
Good morning, everyone.
Couple of quick questions.
First, you talked a little bit about in the beginning of the conference call about how it is becoming more difficult to entitle land and get land zoned.
That's been going on for a while now.
Could you comment on what you are seeing from some of the smaller private players at the margin in this type of environment?
Are you seeing more than looking for potential exit strategies or if you could just comment on what's happening there?
Mark O’Brien: Armando, this is Mark.
I think, obviously, the pressures of the significantly widening competitive advantages of Pulte Homes and the other large builders are becoming more acutely felt by the small private guys.
Obviously, some are pretty well capitalized and have a fair bit of expertise, but they all do not.
This condition, the difficult entitlement environment has been around for a long time.
It's continuing to be aggravated.
We don't see it getting any better anytime soon.
In fact, I think it's more likely to become even more difficult and challenging.
And while that's frustrating, it also provides some protection for values for the homeowner and protection for values for people like ourselves.
So I can't put myself in everybody's shoes emotionally, but our advantages are accelerating.
Armando Lopez - Analyst
And then one other quick one.
You mentioned what was happening with traffic in the quarter.
Could you just maybe give a little bit update on what you're seeing currently and also you talked a little bit about in communities in areas where you had product available.
There was good sell through.
Could you talk agents bits about your community count and has that come on slightly slower than you would have expected?
James Zeumer - VP, IR
Armando, this is Jim.
To the first part, we really don't provide updates in terms of what we're seeing through the month of April but in terms of the community count let me throw it over to Vinnie to give you some numbers there.
Vincent Frees - VP and Controller
Sure, Armando.
During the first quarter of '03 our active selling community numbered 477.
As compared with 460 during the fourth quarter of '02 .
James Zeumer - VP, IR
We should point out, Armando, we count those at period end.
Armando Lopez - Analyst
Okay .
Mark O’Brien: From guidance standpoint we would reiterate our guidance for 2003 that we gave in our January teleconference.
We project a 10% to 15% increase over to where we ended in 2002 and we would also expect there would be a gradual ramp up across each of the remaining quarters throughout 2003.
Armando Lopez - Analyst
Right.
Okay.
So, I mean, the order rate in the first quarter was up a couple percent.
You obviously had weather working against you.
You would expect that to accelerate ?.
Mark O’Brien: We would expect it the order rates would be normal, I think.
Obviously, war, SARS, weather, all contributed to dampening some elements of demand.
I think that's been seen in other industries as well.
We are not terribly concerned about the order environment that we're in today.
Armando Lopez - Analyst
Okay.
Thank you.
Operator
Our next question comes from Joseph Sroka with Merrill Lynch.
Go ahead.
Joseph Sroka - Analyst
Good morning, everyone.
Follow up on that last question .
You said 477 communities versus 460 sequentially .
First quarter a year ago, I have it down at 483.
Is that correct?
James Zeumer - VP, IR
That is the correct data point for a year ago.
Joseph Sroka - Analyst
So actually year-over-year community comp was down and order comp was up.
Mark O’Brien: Correct.
Joseph Sroka - Analyst
Okay.
And then on the change in the capture rate on the mortgages, I guess two questions.
One, was there anything significant that drove it up that high and then when you do the calculation on that is that of people seeking mortgages, as if to say do you have a lot of cash Del Webb buyers?
Are you not including that in the calculation?
Richard Dugas - EVP and COO
Joseph, this is Richard.
I can answer that.
Cash buyers are not included in the calculation.
So the capture rate is excluding those buyers.
Joseph Sroka - Analyst
Okay.
So literally it could go to a hundred.
Mark O’Brien: We would like it.
Joseph Sroka - Analyst
No.
I meant to say if you weren't would kind of 80ish be a cap because cash buyers or something?
Richard Dugas - EVP and COO
No.
Based upon opportunity, if they are a cash buyer they are not an opportunity to get a mortgage.
Joseph Sroka - Analyst
Any reason for the increase?
Mark O’Brien: It is fair to say that we are pursuing aggressively and pushing hard capture rate as we want to continue to drive business in that direction.
It's a strong focus of ours internally from operational perspective and I think that's driving most of what you are seeing.
Joseph Sroka - Analyst
Okay.
Fair enough.
Thanks.
Operator
The next question today comes from Larry Horan with Parker Hunter.
Go ahead.
Lawrence Horan - Analyst
Yes.
I was wondering if you track the spread between your final sales price and your base price on your homes which obviously represent lot premiums and options and whether that percentage of the final sales price has been going up or going down or staying about the same?
Mark O’Brien: We don't really track that on a very specific basis, Larry.
We have different pricing strategies in different communities around the country.
In some everything's included .
In others there are many options .
It depends on the local environment and how we've positioned our products and our communities to a very great extent.
Lawrence Horan - Analyst
So what's behind this question is if you have seen a trend since rates have come down over the last year, whether people have been spending more on the general space house or whether they've been loading it up with options and paying lot premiums?
Any sense?
Mark O’Brien: Low rates are good for our business.
When we have that I think the consumer spends more in dollars because the cost to carry that is lower.
Lawrence Horan - Analyst
You don't get a sense whether it is showing up in larger base prices or more into options and lot premiums.
Mark O’Brien: I think it is both.
In some cases we have been more lavish in our specifications and may be included in our base price but pretty clearly the new homes that we are selling and the marketplace is selling are better appointed than they would have been, say, seven years ago.
Lawrence Horan - Analyst
Thanks a lot.
Operator
The next question today comes from the site of Carlos Ribeiro.
Carlos Ribeiro - Analyst
Community count question.
Can you give us a change in your community count question.
Was that a positive change?
Mark O’Brien: Are you asking the community count out west?
Carlos Ribeiro - Analyst
Yes.
Mark O’Brien: We don't have that here but maybe Jim can follow up with you on that one.
Carlos Ribeiro - Analyst
Okay.
Great.
And just one other question, can you give us an update on your Pulte Homes sciences and whether or not you've been able to quantify the benefit of that project for your margin.
Mark O’Brien: the efforts at Pulte Homes science is embedded in the $50m to $60m which we are projected to get out of your costs for this year that Roger alluded to.
It's baked into that number.
We continue to be satisfied with the progress we're making.
We were delayed in the Virginia, Maryland area with the project we've got there because of weather.
It is not a serious delay.
We think we are set back on the order of 30 days.
So we still look for late year, late '03 opening.
Roger Cregg - SVP and CFO
Again, Carlos, with Pulte Homes science being operational really just up here in Michigan, again more almost a skunk works in terms of what it is trying to do improve the concept and things like that.
We'll see much bigger gains and get a much better sense of the real contribution from that once we get the Virginia plan up and operational and market said that'll be a little later this year.
Carlos Ribeiro - Analyst
Great, guys.
Thank you .
Operator
Our next question comes from Steven Fockens.
Steven Fockens - Analyst
Hi.
Good morning guys.
Can you tell us what the plans are for gross and/or net land investments for the full year 2003?
Roger Cregg - SVP and CFO
Yes.
We talked about increment ally investing about $900m to $1b in year in 2003.
If you would to take a look, number one, the whole year and look at what we amortized we will probably amortize close to $2.1b this year out of inventory and then incrementally invest basically another $900m to $1b.
We will put in $3b worth of land and investment costs in 2003.
Replacing what came off and incrementally adding to it.
Steven Fockens - Analyst
Great.
Thanks.
Lastly, in terms of community count can you guys kind of e pneumonia rate a somewhat longer term.
You thought by the end of the year you'd be up 10% to 15% year-over-year.
Is that the kind of number you think of in the next several years?
Roger Cregg - SVP and CFO
As we talked about 10%, 15% for 2003 we talked about targeting if you recall our 2004 targets to get to $10b in revenue and $10 per share.
We are looking to grow our business in the community count anywhere from 600 to 700 communities to reach that level by the end of '04.
Steven Fockens - Analyst
Great.
Thank you very much.
Operator
We move next to Paul Puryear with Raymond James.
Go ahead.
Paul Puryear - Analyst
Thanks .
Could you just comment on the sales trends in in your for your first time buyer, your first and second move up and active adult?
Richard Dugas - EVP and COO
Paul, this is Richard.
I don't know that we have a lot of specific data for that.
We did mention that our web communities for the active adult buyer had an extremely strong month in March and generally a strong quarter.
I think it's fair to say that our sales trends are more reflective of where we had communities open than specifically across the buyer segments.
We saw good demand in all segments.
Paul Puryear - Analyst
Is it fair to say though you've continued to see some rotation in price point sort of down the price point scale.
Richard Dugas - EVP and COO
I think if you look at our average prices, they are heading up.
Again, it is going to be dependent on the mix on where it is.
So I would tell you that, again, because we're so well diversified across the country and targeting all four points relative to where the mix is in the product.
If you look at the first time home buyer, we are at roughly 18% of our overall business and then probably move up 20ish and then second move up about 20ish percent of the total and active adult 27%.
That mix moves within there based on the pricing in that particular categories.
Paul Puryear - Analyst
Okay.
Thanks.
Operator
The next question today comes from Steven Kim with Smith Barney.
Go ahead.
Stephen Kim - Analyst
Thanks very much.
Congratulations, guys on a strong quarter.
I have two questions.
First, I thought I heard you say in answer to a previous question about your inventory investment that you anticipated to add a net $900m to $1b?
Roger Cregg - SVP and CFO
Yes.
Stephen Kim - Analyst
I want to make sure I understand how that relates to history.
I have between the end of '01 and the end of '02 your domestic land and land development inventory amount grew about $400m to 3.2.
Are you suggesting that that number is going to by the end of this year be closer to 4, 4.1?
Roger Cregg - SVP and CFO
Yes.
Stephen Kim - Analyst
Okay.
Great.
Roger Cregg - SVP and CFO
Steve, I think what you don't see in the numbers is the fact that a lot of the Del Webb large properties rolled off the lot during 2002 and we built up on the conventional side.
So, we didn't replace the 10,000 unit communities Del Webb has and we were able to do it on the conventional side.
Stephen Kim - Analyst
Good point.
Okay.
Great.
That's helpful.
Net of those investments do you anticipate to be free cash from operations to be positive this year or negative?
Roger Cregg - SVP and CFO
If I ran it down, I would probably look at trying to be even at the 40% so if you were to take the guidance at 40% debt to cap, considering we started the year with close to $600m in cash, repaying properly $430m down in debt for the notes that come due, investing $900m to $1b additional generating $500m in income on average, we would look at potentially be in the market for couple hundred million dollars to be at a break even.
As a rule of thumb, we are trying to target 40%.
We can make a case for being slightly below that depending on the pace of the investment opportunities.
Stephen Kim - Analyst
Okay.
Great.
Second question I have is a little more of a general one, though, and I guess it relates to a perception that I seem to encounter a great deal in the market that housing because of the low interest rates is really at a point where it can't get significantly better.
This is something we have lived with for the past four or five years, but it really seems to be present in the marketplace a perception that housing really hasn't weakened at all, demand hasn't weakened at all and about as good as things can gets right now.
The question I have I put to you in your opening comments you talk about the fact that SARS and weather, you don't know what's going to happen but you sort of talk about things maybe not likely to get significantly weaker, but can you talk about the potential that things could get materially better?
Mark O’Brien: Steve, this is Mark.
I think the position that we are taking strategically is that the market is not liable to expand an awful lot and that this is about a market share play.
And we are prepared to take market share.
I think some of our competitors are prepared to take market share.
We are, in fact, gaining market share.
Our growth I think is going to depend on somebody else's diminishment and not on a macro market growing any significant degree.
In fact, it may even shrink but in that environment we continue to grow market share indefinitely.
Stephen Kim - Analyst
I agree.
Great.
Thanks very much.
Operator
Once again if you would like to ask a question today, press the star and one on your touchtone phone .
Our next question comes from John Stodden with Bank 1.
Go ahead.
John Stodden - Analyst
Thank you very much.
Congratulations again.
And just couple questions, one just housekeeping.
Do you have interest incurred?
Mark O’Brien: Yes, yes, I do .
Let me turn to that .
Interest incurred in the first quarter of '03 was slightly more than $44m.
John Stodden - Analyst
Thanks very much.
A follow-up to Steve's question.
A number of your competitors are moving downscale to lower priced homes and of course as you cited very strong demographics to active adult.
In terms of growing market share and opportunities overall for expansion, is there room for you?
Are people kind of vacating certain portions of the market with this emphasis on moving down in price and then the dynamic to higher income retirees?
And would we see that reflected longer term in margins?
Mark O’Brien: Gosh, let me try to answer it this way.
I think to look at the country or the marketplace globally is hazardous.
Each market has various opportunities at various price points.
And various times and that's obviously some result of some supply and demand analysis.
As a general statement , I would tell you that we would not be moving helpful into heavily into the low price points in the cycle.
We are not abandoning them either.
We are simply look at each marketplace on a stand alone basis .
If you were to imagine which sector gets hurt the worst when interest rates go up, you would find the lower price points would be the most influenced by rising rates.
Conversely the people who benefit from rising rates would be the active adult.
They are more disposable income.
As we have stated , we continue to push the active adult sector.
We don't push it necessarily at the expense of any other sector but as we view the world we think that is a nice place to play on a go forward basis for an in indefinite period.
John Stodden - Analyst
Thank you.
Operator
Jim Wilson with JP Morgan securities.
Go ahead.
James Wilson - Analyst
JMP Securities; that's fine.
Good morning, guys.
As you look at the community roll out and 10% to 15% growth could you give regional color on where your both opening communities and seeing some meaningful community growth and conversely anywhere that you sort of pulling capital out of from a regional standpoint?
Richard Dugas - EVP and COO
Jim, this is Richard.
I would tell you I don't think we would see any particular area pulling capital out of with the possible exception of not adding a lot of new capital to the million dollars plus business in San Francisco.
As we mentioned, we are seeing some weakness there.
It is fair to say we are adding capital smoothly across all of our markets.
We look at things very specifically by some market within each municipality.
Our local operators do that.
When they are submitting products for approval, they provide us the detail there.
So in all areas of the country, we are investing aggressively in.
James Wilson - Analyst
Okay.
Very good.
Thanks .
Operator
We have no further questions today.
I'll turn it back over to management for any concluding comments.
Mark O’Brien: Thank you very much for your time.
We will be available if you have any follow-up questions during the day.
Thank you .