普爾特房屋 (PHM) 2003 Q2 法說會逐字稿

Please stand by for realtime text.

The pulse pulse conference call The Pulte Homes conference call will begin shortly.

Good day.

All sites are on the conference line in a listen-only mode.

I would like to turn it over to your host, Mr. Jim Zeumer.

Thank you Leo and Good morning everyone.

I appreciate you joining Pulte Homes conference call to review it's record setting results for the second quarter ended June 30,2003.

On the call today to discuss Pulte Homes' results are Richard Dugas, President and Chief Executive officer;

Roger Cregg, Executive Vice President and Chief Financial Officer; and Vinny Frees, Vice President and Controller.

For those of you who have access to the internet a slide presentation accompanies this call.

The presentation will be archived on the site for those of you who would like to review it at a later time.

And of course, as with prior calls, I want alert everyone listening on the call and via the internet that certain statements and comments made during the course of this call must be considered forward looking statements and as such are subject to risk and uncertainties that could cause actual results to differ materially from those discussed during this call.

At this time let me turn the call over to Mr. Richard Dugas for a few comments.

Richard?

Thank you, Jim and good morning.

This is such a positive and exciting time for Pulte Homes.

Our financial results are excellent.

Our operations are delivering homes with industry leading quality and most recently the transition from Mark O'Brien to myself has gone very smoothly.

I want to publicly thank Mark for his many contributions over his long and distinguished career with Pulte Homes.

Looking to the future I can also say with confidence that our competitive position has never been stronger.

It is this strength that will enable the company to deliver on our committment to long-term profitable growth.

Let me expand for a moment on that thought.

Given the market opportunities we see, Pulte's strategy is and remains focused on growth, profitable growth driven by expanding share within the company's existing markets.

Supporting this objective are four business initiatives that guide our day-to-day activities.

These initiatives are market segmentation, operational excellence, people development and financial discipline.

I would like to take a moment to expand on each point.

First is our innovative approach to market segmentation.

That truly differentiates Pulte Homes from the competition.

As the only national builder with the stated business strategy of serving all buyer segments, first time, first and second move up and active adult, Pulte Homes can reach the largest universe of potential buyers within each market.

When growth is about market share gain reaching more buyers is vital to sustain business expansion and to delivering long-term consistent earnings growth.

I lived this process in Atlanta and I can tell you from experience that it works.

While we can typically expand our existing operations organically to reach additional buyer segments, acquisitions can sometimes help accelerate the process.

When we identify a builder with a strong market position, serving a customer group we may not be reaching and that builder has land assets we can utilize, then acquisitions may make sense, assuming the pricing works.

In buying the Kollrich assets we established a much bigger presence in San Diego.

Whereas the Sivich Thomas positions give us access to the first time buyer segment in Phoenix, Tucson and Albuquerque.

As part of the segmentation strategy we will continue to build on our leadership position in serving the active adult buyer.

Primarily through the web brand.

Web is on its way to having its best and biggest year ever.

In fact, we are driving toward record results in the web properties we acquired including the Flagship Sun City communities in Phoenix, Las Vegas and California as well as delivering much improved results in Chicago, Hilton Head and Georgetown.

Within all these communities, I would point out that there has been a major change in performance measurements particularly with regard to the timing of cash flows.

In other words, return on invested capital matters.

We are working to aggressively grow the active adult business as well.

We have a potential 100 new web branded communities at some stage of assessment, acquisition, entitlement and/or development.

These communities represent positions consistent with moderate to large destination properties in traditional sun belt locations, plus a healthy mix of smaller properties designed to serve the in place buyer who isn't planning to move across the country.

Many of these smaller properties will be 800 to 1500 unit communities which are under written at the same return hurdles as our traditional Pulte Homes developments and are targeted at the active adult buyer who wants to experience the web lifestyle but closer to where they live today.

Whether it is growing or active adult business or expanding into another customer group, market segmentation enables Pulte Homes to grow its business in cities where we already operate.

We are able to leverage our knowledge of the market, the local jurisdictions and are in place management teams.

It is simply good business.

Our next area of emphasis is operational excellence.

We must continuously monitor all the gauges of our business, not focusing on one metric at the expense of others.

Part of this effort involves optimizing our design, purchasing and construction processes to make more money on every house we build.

When you are delivering 30,000 plus homes and more each year, saving hundreds of dollars per house can add tens of millions of dollars to the bottom line.

Our internal target is to save 50 million or more annually in the areas of design, procurement and construction efficiencies.

Whether it is buying lumber cheaper through regional purchasing agreements, creating more efficient home designs or by achieving shorter build times it all adds up.

Innovation plays an important role here as well as we experiment with new construction techniques designed to reduce cost while helping to deliver a superior product and home ownership experience to our customer.

Along with delivering more to our shareholders, operational excellence is about delivering the finest homes in the industry.

Pulte Homes long-term commitment is to deliver the best home and buying experience to our customers.

No other national builder even comes close to our level of customer satisfaction as measured by the industry's only objective voice, JD Power and Associates.

Customer satisfaction is a long-term commitment and not one easy to quantify in any given month or quarter.

Over time, however, Pulte Homes is becoming the builder of choice not only for the customer, but also in the tough game of land entitlement where our commitment to quality means getting projects approved when others can't.

In summary, operational excellence is about running a balance business and running a business for the long-term.

Our third initiative is around the critical function of human resource development.

Pulte homes success has always been about our people.

When your business is expanding as rapidly as ours, attracting, developing and retaining qualified individuals is vital.

Pulte Homes accomplishments in this area are industry leading.

Our commitment to college recruiting, mentoring programs, technical training for sales and construction professionals and development programs for future leaders add up to a strong organization that we feel is the industry's finest.

Pulte takes developing our team very seriously and all our efforts in this arena are designed to ensure Pulte has a healthy organization for the long term.

That's right, long-term.

We don't think you can have a part-time commitment to building your organization.

And ours is one that is and will continue to pay dividends for many years to come.

Let me wrap up my comments with the fourth and last piece which is financial discipline.

Today more than ever investors and employees have to believe in the integrity of the management team and the financial results we issue.

Pulte Homes has always been about maintaining a solid balance sheet, one that honestly reflects the assets and commitments of the company.

At the same time, we must adhere to the strict underwriting principals we have always used to assess a project's potential financial return.

There are no short cuts.

And most importantly, it is about building the best business we can to deliver long-term shareholder value.

So as I suggested at the start of my comments, Pulte Homes' focus is very clear and consistent.

Growing our business through market share expansion supported by market segmentation, operational excellence, human resource development and financial discipline.

The opportunities are clearly there for Pulte Homes and we are capitalizing on them every day.

Let me now turn the call over to Roger Cregg.

Roger?

Thank you, Richard and good morning.

As Jim mentioned earlier, for those of you following along in the web cast we will be presenting a few slides to facilitate the discussion.

As outlined in our press release we completed the second quarter with excellent operating and financial performance.

For the second quarter of 2003, revenues from home settlements for Pulte Homes domestic home building operations increased 17% over the prior year to approximately $1.8 billion.

The higher revenue for the period was driven by an increase in unit closings of approximately 8%.

Average selling prices increased by approximately 8% to an average of $259,000.

Resulting primarily from increased product prices in an overall improvement in product and market mix.

For the second quarter, land sales generated approximately $31 million in total revenues which is a decrease over the previous years quarter by approximately $3 million or 8%.

Domestic home building gross profits from home settlements, for the quarter, increased approximately 28% to $401 million.

Second quarter domestic home building margins from home settlements as a percentage of sales were 21.8% compared with 19.9% in the second quarter of 2002.

This increased margin conversion of approximately 190 basis points versus the prior year quarter is mainly attributed to product price increases and market and product mix shifts.

The gross profit contribution from land sales was approximately $9 million for the second quarter versus 11 million in the second quarter last year.

The gain on land sales may vary significantly from period to period and based on the timing of land sales.

SG&A costs as percentage of home sales for the quarter was approximately 10.3% remaining even to the prior year quarter.

In the other income and expense category for the second quarter the expense of approximately $6 million primarily includes the amortization of intangible assets in all other miscellaneous expenses from domestic home building operations.

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

Domestic home building pretax income for the quarter increased 37% to approximately $198 million with pretax margins at 10 1/2% on total domestic home building revenues.

This represents an increase of approximately 150 basis points in conversion over the prior year quarter.

At the end of the second quarter, our domestic home building operations had a backlog of just under 15,200 homes valued at approximately 4.2 billion compared to approximately 13,000 homes in the prior year quarter.

Second quarter pretax income from our financial services operations was approximately $21 million.

An increase of 29% or approximately $5 million versus last year.

The overall improvement and performance was attributed to a 36% increase in production volume as Pulte mortgages capture rate increased to approximately 83% from 77% last year.

In addition, the favorable interest rate environment and effective leveraging of the overhead expenses all contributed to the improved performance of financial services.

Mortgage refinancings represented approximately 11% of total originations compared to about 3% in the same period last year.

International operations posted pretax income of approximately $400,000 for the second quarter compared to a pretax income of approximately 1.9 million in the prior year quarter.

The loss is primarily attributed to lower unit volumes in Mexico and Argentina.

Other corporate net expenses for the second quarter were approximately $13 million or an increase of approximately 8 million versus the prior year.

This increase is mainly associated with higher compensation related expenses to include performance base incentive and the expensing of stock options.

Net income from continuing operations for the second quarter increased 35% to approximately $122 million or $1.95 per share.

As compared to $90 million or $1.45 per share for the same period last year.

Fully diluted shares were approximately 62.5 million for the quarter.

Moving over to the balance sheet, the major changes in the second quarter versus the year-end of 2002 continue to be in support of the company's growth initiatives as planned for the year.

We ended the second quarter with approximately a $391 million dollar cash balance.

This is mainly attributed to the 400 million dollar 30 year senior note issuance completed in the second quarter.

The net proceeds from this offering were in anticipation of the continued investment in the business and the scheduled retirement of the approximate $200 million dollar face value senior and subordinated notes coming due and callable in the fourth quarter of 2003 and the first quarter of 2004.

During the second quarter the company defees the Pulte 9.5%, $175 million senior notes and redeemed the del web, 2009, 9 and 3/8 senior subordinated notes in the amount of approximately $155 million.

At the end of the second quarter the company's debt to total capitalization ratio was approximately 43.2% and on a net basis was 38.6%.

Included in the other asset category of approximately $901 million are major items such as land held for sale of approximately $241 million dollars.

Receivables, prepaid and deposits of approximately $285 million.

The category also includes fixed assets, investments in joint ventures, deferred compensation and all other miscellaneous assets for the remaining $375 million from the corporate, home building, international and financial services operations.

Pulte Homes shareholder equity for the second quarter increased to approximately $3 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 Sharri purchase program, no shares were repurchased during the second quarter.

Under the authorization to date we have repurchased a total of approximately 495,000 shares for a total of approximately 23 million.

As you are probably aware by now, in January 2003 the financial accounting standards board issued an interpretation on the consolidation of variable interest entities commonly referred to as fin-46.

Fin-46 requires the consolidation of variable interest entities with which we have land acquisition option contract meeting certain criteria.

Included in the June 30th balance sheet, you can see we introduced a new category for the land option contract entered into between February first and June 30, 2003, that we have determined our subject to the consolidation standards of fin-46.

The line item category is land under option agreements not owned and we have recorded $60 million in this category which includes deposit and remaining option exercise price.

The offset to this is recorded in the accounts payable accrued in other liabilities category.

The application of fin-46 on June 30th had no impact on cash flow or earnings during the quarter.

And in addition is immaterial to Pulte Homes.

In compliance with fin-46, the company is currently reviewing all contracts entered into prior to January 31, 2003, and during the third quarter.

And will reflect those subject to consolidation in the September 30, 2003, balance sheet accordingly.

On July 10, 2003, the company reported that the U.S. federal court of claims issued an opinion finding that Pulte Homes has been damaged by approximately $48.7 million by the U.S. government's breech of its contract with the company.

The award follows the court's August 17, 2001, ruling that held that the United States breeched the contract related to the company's 1988 acquisition of five savings and loan associations by enactment of the greeny legislation in 1993.

We expect the court to issue a final judgment in the near future and should the government choose to appeal it is uncertain when the judgment would be paid.

Looking ahead as permissible under the SEC regulation FD guidelines we provide the following guidance on our current expectations for the third quarter of 2003.

Unit settlements in the third quarter of 2003 are likely to increase approximately 14 to 15% over the same period last year driven primarily by additional volume across most of our major markets.

Average selling price foreclosings for the 3rd quarter are projected to be slightly below to flat with the second quarter of 2003.

This projection is primarily being driven by product and geographical mix for the quarter.

Gross margin performance from home settlements as a percent of sales for the third quarter is anticipated to be in the approximate range of 20.8 to 21% depending on the product and geographical mix of homes delivered.

As a percentage of sales, SG&A is expected to be 40 to 50 basis points higher than the third quarter last year.

The anticipated increase versus last year is mainly a function of new community start up expenses.

Given no material change in interest rate environment, pretax income in our financial services operations is expected to be even with the third quarter of 2002.

In the third quarter, international operations are anticipated to generate a pretax profit in the range of $2 to $3 million dollars.

Corporate expenses should be below the second quarter of 2003 by approximately $1 to $2 million dollars.

And net corporate interest expense is projected to increase $2 to $3 million dollars over the second quarter of 2003.

Primarily as a result of a lower net cash position and higher debt levels.

We are projecting the effective income tax rate to be 38% for the 3rd quarter and the full year of 2003.

Second quarter earnings per share from continuing operations are estimated to be in the range of $2.25 to $2.35 per share.

This earnings per share number is calculated based on approximately 62 1/2 million fully diluted shares.

We are increasing our guidance for the full year 2003 earnings per share from continuing operations which is now targeted in the range of $9 to $9.25 per share.

Estimates are based on approximately 62 1/2 million fully diluted shares for the year.

Our outlook and guidance for the full year of 2003 is based on the assumption that the overall macro economic conditions remain in a somewhat modest comparable range to what we have experienced over the last several quarters.

With that I will now turn the call over to Richard for a few comments about market conditions during the second quarter.

Richard?

Thank you, Roger.

We thought it would be helpful to provide some additional color on the market conditions we experienced during the second quarter.

Beyond the information given in this morning's press release.

First, we are starting to get our new communities open which is important to maintaining strong orders in the future.

For the quarter, our community count was about 510.

That's up from about 460 at the end of last year and up from 480 at the end of the first quarter.

The biggest gains in terms of new communities were in the central and west areas of the country.

Traffic to our subdivisions was up roughly 16% for the quarter with about a third of this gain driven by our expanded presence in Southern California as well as the new del web communities that draw very large traffic numbers.

What these numbers tell us is that where we have product we are seeing strong buyer interest.

As is always the case, demand varies from market to market and among the different buyer segments within a given market.

With that said we experienced higher net sign ups in each reporting area of the country.

More specifically, sign ups in the northeast were up a strong 38% for the quarter.

Even with the continued wet weather, buyer traffic was clearly much better than in the first quarter of this year with the Delaware Valley, Baltimore and Northern Virginia markets showing particular strength.

Sign ups in the southeast were up 7%.

We experienced particularly strong sales in our Raleigh and most of our Florida operations.

Our midwest team had a great quarter with sign ups increasing 14% over the prior year.

Sales were strong throughout most markets including Chicago, Indianapolis and Cleveland.

Sales were down in Minneapolis due to limited product availability as community count in the market was down about 20%.

Sales in our central region were essentially unchanged for the quarter.

The Texas markets remained very competitive but our local managers have done an outstanding job positioning the operations to effectively serve the first time and first move up buyers segments of the market that have remained strong.

Out west our communities are well positioned in markets that are experiencing accelerating demand.

Sign-ups for the quarter were up 12% with Arizona and Nevada realizing very strong demand.

Sign ups in California were also strong with a modest mix shift in Southern California as we picked up some new supply in San Diego, but we were limited in our active adult communities as they are winding down in their existing positions in the market.

We will be opening two new replacement active adult communities in Southern California later in the third quarter or early in the fourth quarter of this year.

Our cancellation rate for the quarter was down about 20 basis points versus last year with both periods being slightly under 16%.

In summary, we are very comfortable with the demand conditions we saw in the quarter and with the feedback we are getting from our field operations.

We'll answer the question now by saying that we don't talk about interim period demand, so we aren't in a position to comment about sign ups in July.

It appears the market is anxious about interest rates moving higher, but modest mortgage rate increases from these low-levels are not all that troubling.

With the pieces we can control in terms of community locations, land pipeline and selling propositions, we are very excited about our overall market opportunities.

In closing, let me say that I look forward to working with you in my new role.

Now let me turn the call back to Jim.

Jim?

Thank you, Richard.

That concludes our formal comments for the quarter.

Earnings guidance and key initiatives for the future.

Where possible and appropriate we are prepared to answer questions to assist in your understanding in Pulte Homes operations and opportunities.

So at this time we will open the call to questions and Leo if you can get back on the line and explain the procedure, we would appreciate it.

Yes.

At this time if you would like to ask a question press the star and 1 now on your touch-tone telephone.

To withdraw yourself from the queue, you may press pound.

Once again to ask a question, please press star 1 now on your touch telephone.

We'll take our first question from the site of Margaret Whelan of UBS Warburg.

Go ahead, please.

Good morning, guys.

Good morning, Margaret.

Nice quarter and really solid guidance.

I missed the community count if you gave it?

Margaret we said we were at 510.

Can you just give us an idea of the markets you are going into more recently.

I know that gross margins improved, I think that most is based on the price mix, but what should we expect going forward given the new communities you have opened?

In terms of community count, Margaret?

No, the markets you are in and so the selling price, the mix.

As far as, what?

The new communities that you have opened.

Where are they?

Yes, where are they, exactly and what surprise pricing should we expect?

As we kind of indicated, most of the increases were in the west and central parts of the country, particularly in the Rocky Mountains Denver areas as well as the southwest and in California.

That's primarily where our new community counts have opened since the last quarter.

In terms of pricing in those communities, some of our California markets would be at higher price points, but the southwest and rocky mountain areas, more of the moderate range I would suggest.

And so what gross margin should we forecast going forward?

I think we are giving the guidance in total on those Margaret,which is included in the numbers I gave you for the third quarter.

Okay.

And can we get a cancellation rate?

Yeah, it was 16%.

What's that versus last year and last quarter?

Let's see.

Let me just go back to my comments.

I think it is down slightly, about 20 basis points from last year.

And sequentially?

We'll go back and look at it, Margaret.

I believe it has been relatively flat though, Margaret.

And this is the effort you are making at dell web and smaller communities, can you give us an update on that?

Yeah, basically what we see is a mix of moderate and larger communities in the some of the Sun Belt locations but the lion share of the new communities being smaller sites in areas of the country where expanding the brand.

And as we indicated on the call, the range of 800 plus -- plus or minus unit communities would represent an approximate average as we go and as we indicated we have several new communities that we're planning in that size range across the country in various markets.

So thats our thinking.

Okay.

Thanks, guys.

Thank you.

We'll take our next question from the site of Ivy Zelman of Credit Suisse First Boston.

Good morning gentleman.

Actually Dennis McGill on behalf of Ivy.

Just to touch on a few things you didn't cover at the start there.

Could you elaborate a little bit Roger on what is driving the product mix you mentioned in the gross margin maybe by area or -- because you guys had pretty strong pricing last year as well?

Yeah, I would say what we are generally seeing is pricing in the 2 to 3% range.

What looks like in some markets is pretty strong.

And other markets -- the strong markets are certainly in the land constrained areas.

We talked about Southern California, Northern California.

We are seeing the northeast as well and Central New Jersey area, Washington, D.C. markets.

You know, they seem to be pretty strong.

Other markets we talked about, Denver is again coming back and Dallas, you know, the Texas markets as well, Austin and Houston coming back as well.

But not as robust as some of the other areas.

I think what you have got is certainly influence in the mix on the margin side of it and again from quarter to quarter depending where you are, we are seeing certainly California come back as we made investments in there in the last couple years, so we are seeing somewhat of a stronger mix there and we saw that in the second quarter.

Moving into the third quarter I think what we will see is dancing of the robust margins.

In the third quarter, just because of the mix and the influence coming across the different markets in the U.S..

Okay.

Very good.

When you guys mention that the financial services benefited from the lower rate environment, are you just inferring the impact on re-fi there, or is there actually a revenue recognition in relation to where mortgage rates are?

There is an income recognition because of how you basically hold it.

So basically we hold it for 60-days on average and in that time, you know, you get the servicing on that for the 60-days.

So if mortgages are at 5% and you are borrowing at 2% for instance, you get an arbitrage on that.

Okay.

That's part of it, and then the opportunity to, again, hedge -- your rate locked mortgages and then the ones you don't rate lock you get hedging gains on those as well.

So as your selling those into the market you got some volatility in there that creates opportunities to get an arbitrage.

Can you give us an idea since rates did drop so low during the quarter what that might have benefited?

Is it relatively small as far as the total growth in the financial services?

Yeah, I would say it is relatively small.

It could impact $2 to $3 million dollars in a given quarter depending on how rates move.

Okay.

It is not significant overall, but it is when you get to that one line.

Okay.

And lastly, the corporate expense you mentioned was driven by some increased compensation.

Is part of Mark O'Brien's retirement or anything in relation to that also in that number?

Yes, we had a small true up in there for contractual agreement with Mark, yes.

Okay.

Thank you very much, guys.

Our next question comes from the site of Stephen Kim of Smith Barney.

Go ahead.

Thanks very much, guys.

Wanted to say obviously a very impressive quarter here.

Congratulations on that.

Thank you.

I have a few questions.

One, just picking up on the previous question about Mark's comp, we are not getting unnecessarily without getting into all the specifics can you give an idea of whether or not the blip we saw this quarter if we might start to see that give back anything noticeably on a year over year basis so that you might be more in parity with where you were last year by the time you get to the fourth quarter, or is this something that is going to be with us for a while?

Nope, it's gonna, there was a one time charge for that so thats behind us.

Okay.

And it is incentive based on the rest for the way the operations have been running.

I did hear you saying in your guidance then the corporate expense in the third quarter is going to be up $1 to $2 million dollars year over year or was that sequentially?

I said that corporate expenses would be below the second quarter of 2003 by $1 to $2 million.

Oh, below.

Okay, so that is what I missed.

Okay.

Great.

Okay.

Great.

The second thing I wanted to ask you about was you mentioned return on capital.

I think Richard actually did.

I was wondering whether you felt comfortable setting out any kind of target for return on capital.

Whether it be a long-term target or something you feel you can put out for, let's say 03 or 04.

Yeah, I would tell you, this is Roger.

I think on the return on capital, certainly we have been in -- a couple things driving return on capitol for us.

One is we are conservative which means we don't have a lot of joint ventures.

We don't have a lot of off balance sheet financing.

I know others do that to basically juice the returns.

For us, I think we are probably one of the more conservative ones in the industry where we have it all on balance sheet.

With that we have a slight drag on that and I think our range right now is probably we are in the 11 to -- say 11 1/2 to 12%.

I think with the guidance we just gave for this year at 9 and 9 and a quarter you will see that driving up to potentially 12, 12 1/2.

I think our goal is certainly to continue to drive that going forward.

I don't think we will do anything foolish as bringing a lot of stuff off balance sheet.

We don't have sale lease back on our models.

We elected to maintain those on our balance sheet just on a conservative basis.

So, yes, we do continue to see ourselves driving the return going forward.

Great.

And lastly a big part of the Pulte story is the fact you cater to a lot of different price points and obviously that should theoretically allow you to achieve greater penetration in terms of market share in all your markets.

I actually think that is a very good strategy.

However, I guess I am also interested in whether or not you think there is an opportunity for the builders to substantially increase their market share over the longer term by building other types of product, whether it be other kinds of communities or in the case of some builders, you know, build on your own lot.

In fact, I am actually out in Cleveland right now taking a look at an operation like that now.

And I was wondering whether or not you thought that was something that longer term was going to be able to allow you to you grow significantly your market share beyond where I think some people might believe today.

Steven this is Richard, we are experimenting with a number of different product types.

We actually take the four consumer groups that we outlined in the call and we break those down more specifically internally into 11 targeted groups for our operations.

And, our goal is to penetrate each of those as much as we can.

And what we have learned is that in some cases it is different product.

As an example, in the some of the urban areas, it is more attached product and possibly even moderately vertical product.

Specifically to your comment.

So, yes, we do see different product types helping to drive that.

One of the things we know is each of those different buyer groups has different preferences for product type and community type.

The other thing Stephen is that it also gives us more flexibility in terms of land usage.

If it is a constraining market place and the land is tight, we can look at potentially land where you need higher density and lower densities, (inaudible) more urban.

There is a lot of flexibility that we have to put a land position together with a buyer segment, together with a product type.

Sounds good.

Great.

Congratulations on a good quarter.

Thank you.

We'll take our next question from the site of Michael Rehaut of JP Morgan.

Hi, good morning.

Nice quarter.

Thank you.

Just had a couple quick questions, first on the web communities you mentioned hundred being underdevelopment or in plans to be developed.

I was wondering if that's - what the number of active selling communities are right now and of that hundred number, I guess, what percent -- I understand it might be a rough basis, is going to be the -- represent the sort of newer, slimer type web community versus the existing one?

Yeah, Michael what we said is the hundred number represented sites under consideration, sites under acquisition, entitlement and development.

It is a combination including the things we are looking at.

In terms of your question on how many we have today, the number of sites today would be far less than that.

Probably in the 20 plus or minus range around the system.

In terms of the potential new hundred communities we are taking a look at around the system, I would estimate that on the order of 2/3 to possibly 75% of them would be of the smaller variety versus the larger destination sites.

Great.

That's very helpful.

In terms of the balance sheet and I apologize if you went through this, but the 5 feeling in inventories if you could break that down between backlog, you know, land underdevelopment and also if you have an idea what the dollar value is of the land that you have under option, what that underling value is.

This is Roger, I'll just give you a break down of the 5 billion houses, roughly about 1 billion and land is about 3.8 billion of it.

Okay.

And land underdevelopment don't have broken down to that level.

Okay.

And again, we do it a little different than some of the other builders.

In our house, it is pure house.

There is no land in that.

The land that really the house is sitting on is that's under construction is actually sitting in our land category.

It is part of the roughly 3.8 billion.

Okay.

And the 60 million thats added because of vin-46, was that - was there - I assume there was a certain amount that was already on the balance sheet of that 60 that was reclassified in that line item because of deposits?.

Yes.

And what was that roughly?

It is very small.

It is immaterial on the total.

And also on fin-46's, do you have an idea the majority of your options are refundable or non-refundable and what the average deposit you have on an option might be roughly?

Uh, no I don't.

Typically they are all different.

But we probably carry in somewhere $100 to $120 million dollars in deposits on our balance sheet.

And so those would be at risk if we were to walk away.

Right.

I would say the majority of them aren't refundable on the deposits, but, there is a time period when you go hard that they are and the longer you are into it, the less likely it is returnable.

Great, thanks.

Thank you.

We'll take our next question from Carl Reichardt from Wachovia Securities.

Good morning, guys.

I may have missed this, did you give the total lock count in the owned and option split?

Carl, I can help you with that.

The total lot count under control is 212,700 of which 94,600 is owned.

The remainder is options in both approved or pending (inaudible) approval.

Okay, great.

Thanks.

And then just to clarify on Michael's question, you have 20 plus or minus web communities out of the 510 that you have open now, is that right?

Yeah, Carl this is Richard, that is correct.

Great.

And then just following up on a comment you made, Richard earlier in the call about Georgetown and Hilton Head web especially, you mentioned that the improvement - you had seen some improvement in the performance there.

Can you expand on that?

Just, have you done some things differently over the last couple of three quarters that have improved returns or turnover unit turnover in those two regions?.

Yeah, Carl actually we have done some very specific things.

What we found in all those properties is that price points had gotten too high in the communities and the actual level of demand in the communities had fallen off significantly because pricing had excelarated through the target range for those communities.

So we repositioned a lot of the product with some more efficient home designs as an example and effectively when we did that, introduced some new product line-ups in each of those communities.

And we have seen sales in most of those areas, roughly doubling from prior levels in the communities.

And thats really accelerated obviously the return on the projects as well as, you know, brought a lot of life into the job.

So, yeah, thats what we specifically did.

It was primarily a product shift to help with the price points.

Also in a couple of the areas, specifically in the Huntley project in Chicago, as an example, we introduced some additional incremental product commenting on what Jim was mentioning earlier on one of the questions.

We were able to take the land use and a couple of the larger products and introduce some incremental product that was not being offered before and thats also added again incrementally on top of the earlier comments.

So thats what we have done.

Good deal.

So do you have a rough idea guys of what the percentage decline and average selling price or call it asking price was in those communities where you made those changes?

Just off the top, something rough.

We can go back and look at it.

Okay and the last question I think you mentioned 240 million in land held for sale, over the next couple quarters what should we expect in a decline in that number or would there be any net change?

This is Roger.

It goes -- it goes from quarter to quarter and not all the contracts are out there, but last year at this time I think we were looking at 260 million.

So it (inaudible) and flows based on what we end up buying and what we can do with trying to sell part of the parcels that we end up taking down a large piece with.

So, I don't have a number that I can tell you specifically that will come down over time.

Okay, fair enough.

Great.

Thanks so much, guys.

Thank you.

Our next question comes from the site of Greg Nejmeh of Deutsche Banc.

Good morning.

Good morning, Greg.

Question really on affordability for starters.

Recognizing the variety of your price points, can you comment on the degree to which a -- each 100 basis point change in rates affects the affordability of your, quote, typical customer?

Greg, this is Richard.

What I would tell you is -- what we anticipate with rising rates is a significant shift into arm products, adjustable products for our customer.

So many people particularly at those price points solve for a monthly equation versus the total purchase price of the home.

So our anticipation and what we have seen as an example in 2000 when rates rose in some cases fixed rates over 8%, we saw a shift into the arm product.

So we would anticipate a similar reaction if rates rise at this point.

Have you seen evidence of that yet Richard, in terms of application activity?

Not much.

My personal opinion is that rate movement has not been strong enough yet to where people have really jumped into those products yet.

But that would be the anticipation.

Second question with regard to market shares.

I realize that one of the things that distinguishes Pulte is the degree to which you segmented your markets by price point, by geography and I think you said on the call that you actually disaggregate it into 11 different sub markets.

Could you share with us where you believe some of your greatest opportunities lie with respect to market share gains and what gives rise to that optimism within that specific sub segment.

Clearly one of the biggest areas is the active adult sector.

Primarily because we have active adult penetrations in so few of our total markets.

Less than half of our total markets.

We see a great opportunity there, specifically the reasons for, depending on who you talk to the numbers indicate somewhere between 30 and 40 million incremental adults 55 to 75 years of age over the next 16, 17 years coming through the U.S. population on top of the already large segment thats there.

When you look at those demographics combined with the fact that we have what we believe to be the strongest active adult brand in the business we are very optimistic about that segment as we expand web across the country.

I would also say that we see optimism in the first time buyer market.

As we want to continue to drive that segment.

Most of our markets around the country have done very well.

Primarily out of the four major categories in say one or two of those.

So we see a lot of opportunity in each of those, but specifically I would say active adult and entry level.

I think you have shared with us before the fact that on average your share of served market in most cases is less than 5%.

In fact, in some cases quite a bit less than that.

Could you share with us what you think your share of the identifiable market is with regard to active adult, where you just suggested your opportunity is quite large as well as the entry level product?

That's a tough number to quantify, Greg.

I honestly don't have a number on that for you.

We could look into that.

What I would tell you is that where we have web properties across the system, we tend to dominate the active adult sector in that particular market, given the power of that name and brand.

In some areas of the country today we have zero active adult presence.

That is something we intend to get into.

So a little bit tough depending on which markets your talking about.

Is the competitive landscape, Richard, in that particular product niche different?

That is to say, is it infiltrated to a lesser degree by a large public builders.

And is that one of the dynamics that gives rise to your optimism?

I would say it is competitive as any arena?

A lot of folks are interested in the active adult sector.

Frankly our optimism is driven by the leadership position of web.

It is a tremendous franchise and it is a terrific brand.

Name recognition for web branded communities are phenomenal.

Frankly we think we have the best execution, the best combination of brand with execution out there.

Web has done just a tremendous job of catering to the lifestyle elements of the active adult buyer.

We've learned a tremendous amount in the two years that web has been part of the Pulte family.

A lot of the web folks have taught us a lot about the business.

So thats the primary reason for our optimism.

You combine that with the pure demographics.

The numbers point in the direction of active adults being a huge factor in new home purchases for years and years to come.

Great.

Thank you.

We'll take our next question from Steve Fockens of Lehman Brothers.

Hi, good morning guys.

Just a couple questions.

First in terms of your outlook over the next couple quarters and maybe even a little longer term what does tend to imply for order of sales growth?

Relative to?

Are you expecting over the next couple quarters and into next year seeing similar double-digit growth in orders?

Yes.

Okay.

And secondly on the -- on holding the mortgages, I think you guys said you hold them for around 60-days.

I know I've heard some other builders say they hold for 30 days.

Is there any specific reason for doing that?

Do you have flexibility around that?

How exactly does that work?

It is the timing on average.

There are some months they are longer and some months that are shorter.

On average we say 60-days until we move them off.

Okay.

And then lastly and this is a longer term question, how much flexibility do you have in changing product relative to the land that you have developed?

I guess that one reason -- you guys can see what your land is going to cost you years before you actually build on it.

You know your cost structure going in.

But if you are finding in a particular market that a certain product type isn't selling that well or may not sell that well long after you bought the land, how much flexibility do you have to change the product for a particular plot of land?

Steve,s that actually a key strength of Pulte's given the buyer segments and product type we offer.

That does happen from time to time and I would say we have a large degree of flexibility on moving around lot sizes, product types et cetera.

And we have done that in the past and will continue to do that in the future.

As we see which product your point is moving faster.

And I know this will change obviously from community to community, but from a zoning perspective, when you get Parcels approved does it tend to approve for a type of home or just for the broader, general type of use for the land?

It varies from project to project.

That's such an individually specific question it is tough to answer.

I would tell you that on some of the larger properties the unit counts, if you will, tend to govern things and the use types.

But not as much specificity on specifically exactly what lot size in a given area.

Some other properties it may be a little bit different.

So it does vary from location to location.

But we have had very good success in being able to maneuver things around as necessary particularly to suit the needs of a larger project.

Great.

Thank you very much.

Thank you.

We have a follow-up question from Ivy Zelman of Credit Suisse First Boston.

I have two quick ones, gentlemen.

One, did you repurchase any shares during the quarter?

We did not repurchase any shares in the second quarter.

Okay.

And can you give us an idea what the sivige transaction added to your back log to start the quarter?

There was back log we had close to 1,000 units coming in from Sivige.

Okay.

But they are not in any numbers for the second quarter.

Right.

Great.

Thank you.

We have a question from the site of Barbara Allen of Natexis.

Go ahead.

Thank you.

I was wondering in your new guidance what's the number of deliveries or the range of deliveries that's incorporated in that 9 to 9.25 number?

I would say we are -- we didn't give a number for that, but roughly we are in the 32,000 range.

And in your inventory, what's the approximate number of homes under construction?

Under construction it looks as though we have about 13,000 homes currently under construction.

Barbara, are you asking spec units?

All homes under construction including the ones under contract which is, what, 12,500 or something?

Well, all homes under construction are about 13,000.

Our spec units are in very good shape currently at 3,800 units and specs actually represent a decline of about 6% from where we were same quarter last year.

And you count specs as completed and unsold or --

Started and --

Any place started.

Yeah, that's right.

Okay, thanks very much.

Thank you.

Leo, are there any other questions?

Yes, we do have a follow-up from Michael Rehaut from J.P. Morgan.

Hi, just the community case that was 510 versus 460 two quarters ago and 481 a quarter ago.

What was the year ago?

The year ago was also 480.

Okay.

Okay thanks.

Thank you.

We have a follow-up from Stephen Kim of Smith Barney.

Hi, it is Jed Baron for Steve Kim.

Just wanted to make sure we heard you correctly, did you say that the sivige is going to add roughly a thousand units to backlog?

Yes.

And that compares to around the same number in closings they did last year?

Yes.

Okay, great.

Thanks.

We have no more questions at this time.

I'll go ahead and turn it back over to our host for any concluding remarks.

Thank you very much for your participation in this morning's call.

We certainly will be available if you have any follow-up questions.

Thank you.

Thank you.

This does conclude our call for this morning.

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