普爾特房屋 (PHM) 2003 Q4 法說會逐字稿

Good day.

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

I'd like to turn the call over to your host Mr. Jim Zeumer.

Good morning everyone.

I'd like to welcome you to Pulte Homes conference call for the father quarter 2003.

On the phone today are Richard Dugas, President and Chief Executive Officer, Roger Cregg, Executive Vice President and Chief Financial Officer, Vinnie Frees, Vice President and Controller and also joining us on the call today is Steve Petruska, Chief Operating Officer.

For those of you who have access to the Internet a slide presentation will accompany this call.

This presentation will also be archived for you to review later.

I want to alert everyone listening that certain statements made during the course of this call must be considered forward-looking and as such are subject to risks and uncertainties that could cause actual results to differ materially from those discussed during this call.

At this time let me turn it over to Richard Dugas for a few opening comments.

Thank you Jim and good morning everyone.

I'm not sure how many of you saw the arm in the current builder magazine, titled Land Wars.

The focus of the article is how it is becoming more and more difficult fro small builders to acquire lots.

I think the opening line from this article says it best, for small builders in many parts of the United States, the battle to control land has already been lost.

The article makes a lot of the points about land scarcity and the difficult entitlement environment that Pulte homes has been talking about for several years.

In many of our recent meetings with investors and the media land supply is one one of the issues that we cite as the critical yet often least visible piece of data needed to properly evaluate builders and the industry.

I am hearing from more and more of our markets that they are controlling the release of lots for sale in any specific period.

I have also heard similar comments from the senior management of the other big builders in investor presentations and other public forums.

A decade ago, this industry could be accused of selling everything we could when the market was hot because we never knew what tomorrow would bring.

The objective was to take the customer out of the market so that they didn't buy from someone else.

A constrained land supply is clearly changing this dynamic as builders aren't and in many cases simply can't crank up supply to meet current demand.

Pulte's ability to control and entitle land provides us significant competitive advantage and rather than fearing this kind of environment we believe that it plays into a number of our competitive strengths.

First with almost 260,000 lots currently under control we have a strong pipeline upon which to build our business in 2004 and beyond.

Second, we have the balance sheet to support needed land acquisitions, as we ended the year with a net debt to cap below 34%.

Without exceeding our target level of 40% debt to total capital Pulte plans to invest well over $1 billion into land and development in 2004.

We have to balance this investment to ensure we maintain acceptable returns, but the capacity is certainly there.

While I wouldn't say that taking down a 30, 50 or $70 million land position is an everyday event, it is happening with more frequency thus limiting the number of companies that can realistically bid on the position.

Having the financial strength and in turn the credibility to bid is critical.

Third, our segmentation strategy provides unmatched flexibility with regard to land use and helps us to make better investment decisions by identifying underserved market segments.

With products and community designs to serve the first time first and second move up and active adult buyers we can select the best product and customer mix to maximize the return associated with the a given piece of land.

With larger land positions Pulte often has the opportunity to develop multiple communities and sell a variety of product to our different targeted consumer groups.

We are also starting to see where Pulte's superior quality and customer satisfaction are paying dividends in the area of land acquisition.

Customer satisfaction and the third party endorsement provided by Pulte's success in the J. D. Power and Associates customer satisfaction studies is reaping added benefits.

In several markets we have experienced situations where the land seller and or local municipality wanted to work with Pulte because of its reputation for quality and happy customers.

Intuitively this makes sense.

The land seller wants to work with a partner that has the greatest potential to get the land entitled or in other words to be able to monetize the land.

At the same time, review boards are comprised of local individuals and politicians who want happy neighbors and constituents.

Of course we continue to realize the other benefits of quality, premium pricing, reduced customer acquisition cost, lower service cost and a reduced risk profile.

And finally Pulte has the expertise and people skills to get a land parcel through the entitlement gauntlet.

Land transactions are becoming increasingly complex, which means our people have to be up to the challenge.

With local municipalities that may meet only once a quarter to review proposals a few poorly handled council meetings can quickly end up to a delay of a year or more assuming can you get the entitlements at all.

Since I get the question about scarcity versus continued strength on housing starts let me clarify something about land that was also hinted at in the builder article.

As you move further and further out from a given metro area, land does become a little easier to find.

This is where smaller builders are heading with the hopes of if they build it someone will buy it.

This strategy can work when demand is strong but these are the communities that get hit first and hit hardest if demand softens.

The fact is that all investments are not created equal and we are confident that our segmentation and land acquisition process help us to be the best -- help us to the best land positions in a given market.

In the fourth quarter, Pulte Homes reported a 31% increase in signups.

For the year signups increased more than 13% to a record 35,000 homes.

Land investments made over the past several years and our ability to get new communities open were a big contributor to the company's strong new orders and expanded market share.

We expect this trend to continue as no one is making any new land and what is available is getting more and more difficult to entitle.

We also believe that the incredible power of our segmentation strategy is becoming an important factor enabling Pulte to accelerate faster than its competitors in expanding share within existing markets.

One last point I would make is Pulte Homes is delivering on earlier guidance of improved returns on equity and invested capital.

Having implemented the needed operating changes, and worked through some longer land positions associated with the Webb merger, we are now seeing the expected improvement in returns.

After bottoming in 2002 at around 11%, returns on invested capital climbed to better than 13% with return on equity approaching 21% in 2003.

We are working to deliver similar improvements in 2004, as we are targeting another 200 basis point gain in returns on equity and invested capital.

Given our conservative business practices we will likely not lead the pack in this measure but we certainly see opportunities to drive our results much higher.

We'll drill a lot deeper into all these areas and much more at Pulte's investor conference in New York on February 26th.

I hope that you will all register to attend.

Let me now turn the call over to Roger Cregg for our guidance for 2004.

Roger.

Thank you Richard and good morning everyone.

I'm pleased to report a solid fourth quarter of operating performance and a completion of another year for Pulte homes and the home building industry.

For the fourth quarter of 2003 revenues from home settlements for Pulte Homes domestic home building operations increased approximately 24% over the prior year quarter to approximately $2.9 billion.

Higher revenues for the period were driven by an increase in unit closings of approx. 17%.

Average selling prices increased just below 6% to an average of $261,000 resulting primarily from increased product prices and an overall improvement in product and market mix.

For the fourth quarter, land sales generated approximately $115 million in total revenues.

Which is an increase over the previous year's quarter by approximately $25 million, or 28%.

Domestic home building gross profits from home settlements including home building interest expense for the quarter increased approximately 34% to $610 million.

Fourth quarter domestic home building margins from home settlements as a percentage of sales were 20.9% compared with 19.4% in the fourth quarter of 2002.

This increased margin conversion of approximately 150 basis points versus the prior year quarter is mainly attributed to product price increases and market and product mix shifts.

We continue to see market pricing power in most markets but especially in the West to include Nevada, Arizona, northern and southern California.

Home building interest expense increased during the quarter to approximately $28 million, versus the approximate $16 million in the prior year as a result of the continued growth of the business.

As we noted in our press release, domestic home building interest expense has been reclassified to home building cost of sales.

The gross profit contribution from land sales was approximately $41 million for the fourth quarter, versus $27 million in the fourth quarter last year.

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

SG&A cost as a percentage of home sales for the quarter was approximately 8.6% increasing approximately 20 basis points over the prior-year quarter.

During the quarter, we realigned our field operations and organizations to meet the challenge and opportunity for future growth.

With this we incurred an additional expense of approximately 50 basis points related to compensation and relocation.

In addition, we had higher costs in the quarter associated with the startup of new communities.

In the other income and expense category for the fourth quarter, the income of approximately $1 million is primarily the net result of joint venture income generated from the sales of land during the quarter of approximately $11 million, offset by expenses that include the amortization of intangible assets and all other miscellaneous expenses from the domestic home building operations.

Domestic home building pretax income from the quarter increased 43% to approximately $400 million, with pretax margins at 13.2% on total domestic home building revenues.

This represents an increase of approximately 180 basis points in conversion over the prior year quarter.

At the end of the fourth quarter our domestic home building operations had a backlog of just under 14,000 homes valued at approximately $4.1 billion compared to approximately 10,600 homes in the prior-year quarter.

Fourth quarter pretax income from our financial services operations was approximately $17 million, a decrease of 9% or approximately $2 million below the prior-year quarter.

The decrease in performance was attributed to the unfavorable market conditions to sell loans resulting from a volatile interest rate environment.

In addition a product mix shift towards adjustable rate mortgages during the fourth quarter decreased profitability per loan compared to the prior year quarter.

Additional operating expenses were incurred in the quarter in anticipation of the success and growth of the business projected for 2004.

Mainly in the area of recruiting, training, systems and facility costs.

Pulte mortgages capture rate increased to approximately 83% from 80% in the same period last year.

Mortgage originations increased in the quarter approximately $271 million or 20% when compared to the same period last year.

The increase in originations is a result of higher production volumes and the higher capture rate.

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

For the full year of 2003, refinancings represented approximately 8% of total originations, compared to approximately 8% in the full year of 2002.

International operations, posted pretax income of approximately $3 million for the fourth quarter, compared to a pretax income of approximately $3 million in the prior year quarter.

Increased operating performance in Mexico which posted increased volumes and higher margins were offset by lower margins in Argentina.

As we previously announced we are in the process of evaluating various long term strategic alternatives with regard to our international operations.

Total corporate expenses for the fourth quarter were approximately $20 million for an increase of approximately $1 million versus the prior year.

The increases associated with higher net interest expenses in the current year quarter.

Net income from continuing operations for the fourth quarter increased approximately 44% to approximately $248 million or $1.95 per share as compared to approximately $172 million or $1.39 per share in the same period last year.

Fully diluted shares were approximately 127.5 million for the quarter, reflecting the company's announced two for one stock split that became effective as of January 2nd, 2004.

On the balance sheet for the fourth quarter the major changes versus the year end of 2002 continued to be in support of the company's growth initiatives as planned for the year and into 2004.

We ended the fourth quarter with a strong cash balance of approximately $404 million.

Inventory increased to $5.5 billion in the support of 2004, with approximately 85% of the increase associated with incremental land investment during the year.

Included in other assets category of approximately $950 million are major items such as land held for sale of approximately $251 million, and receivables, pre-paids and deposits of approximately $239 million.

The category also includes fixed assets, investment in joint ventures and all other miscellaneous assets for the remaining $460 million from the corporate home building international and financial services operations.

At the end of the fourth quarter the company's debt to total capitalization ratio was approximately 38.4% and on a net basis 33.6%.

This was in line with our expectations and our continued commitment to maintain a disciplined and flexible balance sheet while investing for the future growth of the business.

Pulte Homes shareholder equity for the fourth quarter increased to approximately $3.4 billion with a return on average shareholder equity for the last 12 months of approximately 21%.

This is an improvement of approximately 240 basis points over the same period last year.

In addition, under the company's authorized $100 million share repurchase program, no shares were repurchase during the fourth quarter.

Under the authorization to date we have repurchased a total of approximately 990,000 shares on a split adjusted basis for a total of approximately $23 million.

Now looking ahead as permissible under the FCC regulations FD guidelines, we provide the following guidance on our current expectations for the first quarter of 2004.

Unit settlements in the first quarter of 2004 are likely to increase approximately 17 to 19% over the same period last year.

Driven primarily by additional volume across most major markets.

Average selling prices for closings in the first quarter are projected to be above the fourth quarter of 2004 by approximately 3%.

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 first quarter is anticipated to be 20 to 30 basis points above the first quarter of the prior year.

Dependent upon the product and geographical mix of the homes delivered.

As mentioned earlier this conversion now includes the reclassified home builder interest expense which is projected to be approximately $22 million for the first quarter of 2004, as compared to $11 million in the prior year quarter.

We are projecting land sale gains in the quarter to be approximately two to $3 million.

You will note this is well below our gain in the first quarter of 2003, which was approximately $9 million.

As mentioned in the past, land gains may vary significantly from period to period based on the timing of the land sales.

As a percentage of sales, SG&A is expected to be even with the first quarter last year, as a result of increased startup expenses and selling expenses associated with new communities and the continued growth of the business into 2004.

In the other income and expense category for the first quarter, we are projecting an expense in the range of one to $2 million.

The variance versus the prior year first quarter of approximately $6 million is mainly attributed to a $5 million gain associated with the sale of a commercial property former Del Webb joint venture.

Given no material change in the interest rate environment, pretax income in our financial services operations is expected to be approximately 20 to 25% below the first quarter of 2003.

Higher volume is being offset by a shift in product mix to adjustable rate mortgages, increased operating expenses and higher volumes in the coming quarters and interest rates are projected to remain relatively flat in the quarter as compared to a declining interest rate environment in the previous year quarter.

In the first quarter international operations are anticipated to be a break-even.

Other corporate expenses and net interest expenses are projected to be even with the fourth quarter of 2003.

We are projecting the effective income tax rate to be 38% for the first quarter of 2004.

First quarter earnings per share from continuing operations are estimated to be in the range of 75 cents to 85 cents per share.

This earnings per share number is calculated based on approximately 28.6 million fully diluted shares.

Now looking forward we offer the following comments regarding our expectations for the full year of 2004.

Given the current operating environment for the home building industry these comments are based on the assumption that the overall macroeconomic conditions remain in a modest range comparable to what we are experiencing today.

Based on the strength of our fourth quarter sales orders, backlog and financial performance, we are revising our initial earnings target for the full year of 2004 earnings per share from continuing operations to be between $6 and $6.25 per share.

Estimates are based on 129.6 million fully diluted shares.

We are projecting that unit settlements for the full year 2004 are likely to increase approximately 21 to 23% over the full year 2003.

Driven primarily by additional volume across most major markets as a result of our focus and strategy in serving all buyer segments within our existing markets.

Average selling prices for closings are projected to be slightly above the average 2003 selling price by approximately 1%.

This projection is primarily being driven by product, geographical mix throughout the year of 2004.

Gross margin performance from home settlements as a percent of sales for 2004 is anticipated to increase in the approximate range of 40 to 50 basis points dependent upon the product and geographical mix of the homes delivered.

As mentioned earlier this conversion includes the reclassified home builder interest expense which is projected to be approx 140 to $150 million for the full year.

We are projecting land sale gains for the year to be approximately 30 to 35 million.

Land sales are an important component of our home building operations and the gain on land sales may vary significantly from period to period based on the timing of these land sales.

As a percentage of sales SG&A is expected to be below 2003 conversion rate by approximately 50 to 70 basis points, reflecting greater leverage as we expand our volume penetration over the course of the year in existing markets.

In the home builder other income and expense category for the year we are projecting a slight gain of approximately one to $2 million for the year.

Given no material change or volatile swings in the interest rate environment pretax income in our financial services operations is expected to increase by approximately 13 to 14% over the full year of 2003.

The increase in pretax income is mainly the result of increased volume in 2004.

International operations are anticipated to post a pretax profit of approximately five to $7 million for the year.

In the corporate category, other corporate expenses are projected to increase by approximately ten to $12 million over 2003 as a result of increased corporate overhead expenses and no anticipate corporate commercial land gains in 2004 as we experienced in 2003.

Net corporate interest expense will increase approximately 14 to $15 million over 2003, associated with the anticipated increase in debt levels to support the growth in 2004.

We are projecting the effective income tax rate to be 38% for the first part -- for all of 2004.

Once again for the full year 2004, earnings per share from continuing operations is estimated to be in the range of $6 to $6.25 per share representing an increase of between 22 and 27% over the 2003 performance.

Again, this earnings per share number is calculated based on approximately 129.6 million fully diluted shares.

From an investment perspective we anticipate increasing our invested capital in the domestic home building business in 2004 by an additional approximate 1.5 billion.

Our goal for 2004 is to maintain our strong balance sheet with a debt to total capitalization ratio at the 40% level.

Improve our return on invested capital by approximately 200 basis points and increase the return on equity by approximately 200 basis points.

We believe we are well positioned for success to grow our business and to take advantage of the market opportunities in 2004 while continuing to add shareholder value.

I will now turn the call over to Steve Petruska for a few comments.

Thanks Roger and good morning everyone.

I had a chance to speak with some of our investors last week at the builders show, and look forward to meeting many more of you in the coming year.

For those of you that didn’t visit the show, attendance was up an estimated 40% over the prior year with a lot of enthusiasm from the builders that were at the show.

Before we open the call for questions Richard asked that I provide some more detail on the sign up numbers in the business environment we experienced during the fourth quarter.

Traffic to our subdivisions was up about 27% for the quarter.

As is typical as the weather gets colder traffic to our warm weather markets out west and down south starts to pick up.

That was certainly the case again this year.

Beyond that seasonal trend demand conditions varied from market to market across the country but overall remained very strong.

The 14% increase in signups in the Northeast was consistent with what we experienced in the third quarter.

Tough weather conditions throughout the first half of 2003 slowed development but we are seeing great customer response now that we're getting our stores open partticularly in the Northern Virginia market.

Signups in the Southeast were up 9% for the quarter with a strong results throughout Florida and a big pickup in business in Raleigh.

In Georgia, we continued to shift the local operating model to focus a little more on margin and less strictly on sales pace.

As a result unit signups for the quarter were down a bit but were realizing better margins.

Our Midwest markets are building on the momentum discussed last quarter.

All the markets continue to experience stable to very strong demand.

Only Illinois showed a little weakness but this appears more a reflection of product availability than demand weakness.

Signups in our central region remain very strong up almost 50% last year adding to the 19% gain we saw in the third quarter.

We realized increase in each of our markets except for San Antonio, where unit sales were essentially flat year over year.

Finally, demand in the West remains very strong as Pulte signups were up an increased 57% for the quarter.

Arizona, Nevada and California are all realizing increasing unit sales and rising prices.

Even some of the higher price points above the million dollar mark in northern Cal are showing signs of life after almost two years of soft demand.

I'd like to repeat a comment that Richard made last quarter, we are continuing to push pricing in all markets especially where lots are in short supply.

While it's true that some markets are more land constrained than others we do have opportunities to take price increases in selected segments in all of our markets.

Our segmentation strategy pays off here as we continue to invest in better and better sites.

Having just recently come out of the field I can tell you that Pulte segmentation strategy enables us to identify the best investments that over time lead to increasingly better results.

Finally attesting to the quality buyers we are seeing and our cancellation rate for the quarter came in 19%, which is down five percentage points above this time last year.

We are proud of the results we delivered in 2003 but certainly not satisfied in that we believe Pulte homes has tremendous opportunity to deliver even greater financial performance in the future.

I'd like to turn the call back over to Jim at this point.

Thank you Steve.

Before we open the call for questions, I want to get one more plug in for Pulte’s investor conference February 26th in New York, presentations at the conference will cover a wide array of topics including our initiatives to drive increased sales, better margins, innovative building practices and long range expectations for the growth of the business.

You do need to register to attend.

You can register online within our investor relations section.

With that said I want to thank everyone for their time and attention and we're prepared to open the call for questions for the quarter and the company's guidance for 2004.

At this time Leo if you wouldn’t mind explaining the rules.

If you would want to ask a question press star and 1 now.

To withdraw press the pound key.

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

One moment while we queue.

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

Good morning, this is William Lam.

I wanted to ask a question, in terms of your use of the segmentation strategy,,are you seeing pickup or slow down among the 11 segments you look at?

This is Richard, I'll take that one.

We are seeing strength in all the different segments.

As we stated before a big piece of our business is invested in the active adult sector and as expected as the boomers continue to age we are seeing strong demand particularly in the active adult area.

But I would tell you based on our segmentation process as we continue to pick the best parcels for each segment in our business we're getting strength across the board.

And it might be a little early but can you give us an update on Pratte and what type of benefits are you seeing there and also to what extent can that be used in other markets?

William, this is Roger.

It is early to talk about it but our projections basically from an overall standpoint is really to use that type of building concept throughout the country.

We are starting out with it as we mentioned in the press release in the Nevada and Arizona market.

Las Vegas and Phoenix, we are dealing with Ron Pratte and his company.

What we talked about the past about Pulte Home sciences, building home cycle, quality, value engineering, those types of things are really what we are embarking on in this venture.

Maturities 150 to 200 basis points, the ability to control all of that in a way that we would be satisfied with.

Again that is very early, that is not anything we project for 2004 at this point because it is a venture.

But from the standpoint we are looking for, you know, margin expansion to be able to add value to the process.

And finally, can you give us an update on spec levels?

Sure, I can provide some spec details for you.

At the point in time, 12-31, 03, our spec units were 4508 units.

Now, that compares against 3988 for the same time in 2002.

Although the absolute number of spec units under construction is up roughly about 13%, the 12-31- 03 level is well within our operating metrics.

And does that help with some details, William?

That does.

And well, congratulations and thanks again.

Thank you.

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

Nice quarter.

Couple of questions, first on the goals return on capital return on equity improving in '04.

I was wondering if you could explain how much of that might be coming from the turn around in Del Webb, as you guys, you know, are phasing out or working through the larger, you know, several thousand lot size communities, and trying to shift that towards the smaller communities.

In particular, if you could give any detail in terms of how many of those larger Del Webb communities you have remaining, and what you're doing there.

And then I had a question on pricing.

Okay, Mike, this is Roger.

Specifically, you know, I can't give you any detail on you know, exactly what the contribution is on the return on equity and return on capital in the total corporation.

But certainly since we acquired the Del Webb company and the larger communities, they are becoming less and less of a percent of our total business as we continue to expand our model into traditional and active adult.

But certainly not in the 10,000 plus unit type communities.

So certainly we've seen the opportunity that they're contributing from a return standpoint.

Again, when we acquired them, they had pretty much fully invested in the infrastructure of those operations in those communities.

Certainly three of them that we talked about back then were, you know, what we would consider were below par.

The Chicago market, the Hilton Head market and Texas market on their communities there.

We've repositioned price and product, we have seen significant increases in the sales of those operation we've talked about well over the last 18 months.

So as we look at what are returns and how they continue to grow, it is a combination of you know moving away as a percent of the large communities being diluted if you will by adding on other communities that are 800 to a thousand type units in the active adult type area.

Just on that can you give me an idea of how many of those 800 to 1,000 unit communities are on line now, you know, versus the larger Webb communities and how many expect on line over the next couple of years?

Yes, this is Steve, I can answer that question right now for you.

Right now we have approximately 25 20 to 25 on line.

We are anticipating opening another 23 Del Webb branded communities over the year but have over 100 plus under consideration as we continue to expand the brand.

And that 20 to 25 online includes the larger older communities?

Correct.

Okay.

Just finally on price, you guys mentioned 1% ASP expectation, ASP gain for '04.

You know, that's a little bit of a deceleration from '03.

And I just want to know if that was just more conservative.

You talked earlier about your ability to still extract good pricing from some of your markets.

And you know, how that plays into, you know, the gross margin expansion, since you're talking about your expectations for a lower ASP gain, does that mean that your gross margin expectations are more built on operational efficiencies?

Yeah, Mike, again this is Roger.

I think our expectation is that we've got a mixed shift moving throughout the year.

And we would anticipate that you know, pricing would be up, as I mentioned, relatively about 1% year on year.

But margin expansion would still be there.

Now of course you know we're not building into future price increases that we haven't experienced today.

That's what we know today.

We think the environment is pretty good and you know, there may be opportunities in the future.

But today we haven't put those in, you know, to our projections.

So there may be upside.

Again I think in the range that we gave there is a little movement in there.

There is a little movement for you know, less volume.

There is a little movement for higher expenses or lower expenses.

So we try to capture as much as we can today knowing what we know, looking out.

But certainly, if the market remains hot in certain markets around the country there's still opportunity as Steve had mentioned to increase our prices you know certainly we will show the benefit for that.

Okay, and so then the margin expansion goal that you have for '04 is more driven off of you know, operational efficiencies, mixed shift, you know, volume?

No, there is a combination of what we know today or prices that we've increased over 2003, so naturally you get you know, year on year the annualization of those.

That's built into that as well.

And there is some efficiency certainly from the purchasing side and the supply chain side we're trying to tackle but again there's not a lot built in for expected future price increases.

Right, thank you.

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

Yeah, congratulations on another great quarter, guys.

Thank you.

I was very interested in what you had to say about the land, Rich.

I absolutely agree, that is critical in order to understand the home link strategy.

Maybe we should get you guys to speak at our conference in February.

I had a follow-on question with respect to that land.

You had mentioned in your comments about the fact that in the builder article there was the suggestion that smaller builders were needed to go out to further out side the larger metros to get parcels, that had some drawback.

I'm sure you heard that from investors, I'm sure I have, the perception it is precisely the further-out parcels where you know, the larger builders have to go because that's where the larger parcels are.

And you know, closer-in is where more in fill and more of a dogfight and that's where actually the smaller builders can have some advantage.

You obviously would not agree with that latter statement.

Could you expound on why that isn't true and why there is a misconception there?

I think the issue goes to the heart of segmentation.

We have this visibility into these 11 customer groups that we target.

And we know very clearly that all these buyers do not want the same thing.

There are certain family groups, a few of those are family groups that might live in the same area.

But an urban entry level buyer versus active adult have total location needs different for their housing.

What our segmentation strategy allows us to do is to pinpoint the land for the buyer based on their needs.

I think the answer lies truly in the customer segment and the reason I made the comment that all investments are not created equal is just because of the fact that I'm not sure if a competitor doesn't have the same visibility we do in terms of what the buyer is looking for, they're more likely to try to keep up with the market, if you will, and maybe play on a hot market, whereas our discipline process allows us to make that investment.

So I wouldn't say it's necessarily bad to be, you know, in a more suburban location for a given group.

Conversely, we may be in a very urban location like we are doing in some of our Northern Cal projects we've mentioned in the past for an urban buyer.

So the bottom line, I think entitled land in most of our markets is getting very scarce, there is no question about that.

The key for us is investing where our buyers want to be.

And you know, by doing so we continue to hedge any potential downturn that we don't see by investing in better and better parcels than others may be doing.

Okay.

Getting also to the question of competition between the large builders, currently, I don't get the sense that the large builders perceive one another as their serious competition.

In quite the way that I think they might in five years.

Right now you guys are having a lot of fun together taking share from a lot of the builders you know, who are smaller than yourselves.

At what point do you see that sort of camaraderie, if you will, and joint purpose, turning inward and leading to a need on the part of the larger builders to consolidate the market at the top, to avoid -- to basically maintain your market share gains?

That's a tough question to answer in terms of, you know, when it's going to happen.

My suggestion would be that it will be different depending on market, depending on which markets you have and all the dynamics there.

That is very difficult.

I will point out that all else being equal that I believe a higher quality product will get selected first.

And frankly Pulte's J. D. Power wins and continued success in that area I think gives us a leg up in the long run.

I think consumers are going to be willing to pay for the best quality product out there and that's certainly something we're investing a lot of time and energy to preserve our long term future if the point comes a few years from now where we're banging heads more and more with the bigger guys.

But frankly don't see that with a national market share in the 3 to 3.5% range, it is a long way out I would suggestion.

Do you think it's longer than five years out?

Again it's a tough call.

It will vary by market.

There could be a market or two possibly less than that but I doubt it.

It's probably more than five years out.

And do you perceive that the opportunity exists for the larger builders to perhaps consolidate the industry by buying out some of the competition or do you anticipate that there's going to be opportunities to squeeze them out through more, I guess, organic or ongoing needs?

My opinion is, there's going to be a combination of both, probably you'll see more and more attrition, frankly, from the builders as opposed to the buyout scenario where those guys can't literally compete.

We're seeing it more and more.

Frankly it is evidenced by the fact that we get calls more and more every day for lots, little guys come to Pulte for lots because they can't find them themselves.

A large percentage of that is going to happen there.

You'll see continued acquisition here and there, in our case to meet our segmentation needs.

We ask our operators out there to tell us where the best opportunity to invest is.

And if they've got the opportunity locally to get land supply through an acquisition that makes financial sense we'll certainly go that route.

And I would just point out that our goal in every market is to invest where the gap between demand and supply is the greatest and that's what we're focused on.

Great.

And do I have time to squeeze out one more question?

If it's fast.

Okay.

Basically everyone asks you about interest rates and I know you guys get asked that all the time as well.

Rising rates 200 basis points should not squeeze off demand like a spigot.

There is a knee jerk reaction when interest rates do enter a secular rise, interest rates stay strong for a quarter or so, in other words you may not actually seep seize a drop in your demand, there is a period where rates are rising, demand is very good but then it kicks in as weakness.

My question to you is if you become convinced that we are entering a secular increase in interest rates how are you going to position the company strategically with respect to your incremental deployment of capital?

Are you going to anticipate that you can't trust the data that is coming in the door contemporaneously and get ahead in what may be a slack thing in demand by ratcheting back your capital outlay or would you rather wait until you see the whites of the eyes, the weakness in the traffic and order volume?

Steve, we'll read all the signals we have day to day.

Frankly, I'm inclined to say we'll pay attention to what's happening in our business as opposed to the projected business.

I don't think people understand the gap between supply and demand, driven by the shortage of entitled lots.

I think it would take 3 or 400 basis points before we would see a significant slow down in demand because I think the gap is that large today.

No question when rates rise you'll eliminate some buyers out of the picture but I still think there's many, many more buyers out there.

Having said that if we see signs of softening we will certainly take the prudent action and not take on [indiscernible] investment strategy.

I think we're an awful long way from that, though.

We're just not seeing it and frankly I'd point to a 31% order rate increase after some significant rate increases, you know, at the end of the third and into the fourth quarter last year as evidence of that.

Right.

Thanks very much.

Thanks Stephen.

Next question cops from Joseph Sroka from Merrill Lynch.

That's a tough act to follow.

I wanted to know what the community count was from the year ago and where you take the community count on year end?

Sure, this is Vinnie, I'd be happy to give you data points on that.

During the fourth quarter of '03 the active number of selling communities was 535 communities.

And that compares with 459 communities in the fourth quarter of '03.

As far as commentary on guidance for 2004, I'd say we project an increase in the range of 15 to 20%, and that would also be spread across the year, of course.

Right, but it's sort of year end to year end versus the 535 you would be up 15 to 20% without gradually increasing over the course of the year?

Right, that's right.

Thank you.

Next question comes from Ivy Zelman from Credit Suisse First Boston.

I have a couple as well.

Continuing on with the land constraints, a lot of people think of it as an East Coast West Coast issue and not applicable to the middle of the country.

Could you give us an estimate of your business, how much of it would you consider to be in markets you considered to be land constrained?

This is Richard.

We'll have a lot more to say about that in our February conference.

To give you a flavor, it is not an East Coast West Coast type of thing.

A majority of our markets have land constraints, I'll go so far as to say every market we do have land constraints, in the submarkets where we want to invest.

And I think that is to your point a misconception outs there.

It is not just the East Coast and West Coast.

I'd prefer to wait to give specification at our investor conference, we'll have some detail on that and detail by market but it's the majority of our markets.

And by the way, excuse me, that was not the case five or ten years ago.

It's clearly gotten more constrained over time.

I look forward to hearing it.

Thank you.

Just looking at your cash on hand, and factoring in the bond deal you just did, even with the type of growth you're looking at for '04, seems like you'll have some excess cash to utilize.

Do you see any step up in your purchases or little more acquisition activity than happened in '03.

This is Roger.

We try to constantly balance where the best investment is for shareholder value.

I think if you actually take a look at you know the cash on hand what we anticipate in investing this year we do have a couple hundred million dollars worst worth of notes maturing in '04 which will be part of the bond deal that we just accomplished in January plus the additional growth going forward.

So I think if you take a look at it you won't see a huge robust cash balance based on our investment plan for 2004.

Again, saying that, given the opportunities, we're constantly looking at you know, where the best value is.

The $200 million you're speaking of, that's inclusive of the Del Webb notes you're calling and another $100 million notes coming due?

Yes.

When are the '04 notes due?

In August and at the Del Webb in February.

You expect the same result as this year?

To end 2004?

Cash balance?

Similar to the '03 level?

I would anticipate we would invest that and so you know, we constantly try to take a look at not sitting around with a lot of cash.

And again, the balance sheet's a picture at a point in time you have to remember as well.

So as investment levels you no ebb and flow, you take a pike chur of that at twe-31 and that looks like the cash balance, but a lot of the investment is in front of us as well.

I appreciate it guys.

Thanks Dennis.

Next question comes from the site of Carl Reichardt.

What is the investment tonight?

Hi Carl, I'd like to respond to that. 47% of the 260,000 lots are owned.

If you wanted an exact number on that, it's 120,422.

Great.

And then as you look out at the investments you're going to make in land going forward, do you feel like you have '04 and '05 potential absorbed lots under control now, or any of the land investments you're going to make for '04 or more likely '05?

Yeah, Carl, I think '04 we're in pretty good shape today.

Usually what you're doing is working on '05, '06, '07, right now I'd say probably 99.9% of what we need for '04 is already on.

And you know we wind up with probably slightly less than that in the 75 to 80% for '05.

That's what we're working at today, the '05, '06 and '07.

Two other quick things.

One to fold together a couple of the other questions, if we look at pricing power by type of product, if we divide it up into entry level active adult and then everything in the middle move up oriented stuff, where was pricing power strongest for you in Q4.

This is Steve Petruska.

Difficult to a.

Appraising power, Richard talk about this, the appraising power.

Very strong pricing power, where there is a big gap between supply and demand in the entry level product.

You know, in some of our other markets it is the pricing power strength is in our active adult business because we own the market there and we have a huge gap between what we can actually -- what we can supply versus what the demand is so I can't give you an exact answer on that I mean but on an overall basis we saw significant strength in all 11 of our consumer segments and you know, but it did very, you know based on where we had supply versus demand.

It is going to be continued geography versus price points?

Certainly.

International, second or third quarter we talked about potential for strategic something or other related to that, can we expect an announcement some time soon about your announcements?

All I can say is we are assessing our investment strategies in those particular you know countries and right now we're not prepared to talk about anything going forward.

Would you say you made significant progress over the last 90 days?

I would say we made significant progress in trying to look at you know, where we are, where we're making money and what potentially our go-forward strategies in those countries might be.

Thanks.

Thank you Carl.

Our next question comes from Mike Kender of CitiGroup.

Just quick numbers questions.

You gave the total spec numbers.

Do you have finished spec numbers?

We refer to them as spec finals, and spec finals at 12-31 31-03 were 988 units, that compares to 969 for a similar period at the end of last year.

Okay, great.

And also do you have an interest incurred number for the year?

Sure do, Mike.

Let me flip to it.

Our interest incurred in the fourth quarter was $47,553,000.

Okay, great, thank you.

Our next question comes from the site of Jim Wilson of JMP securities.

Thanks, good morning.

Was wondering, just looking at Del Webb, a couple of things.

If you've looked at the expansion that you planned for '04, do you have any sense of, given all the sites you're looking at, how much that could potentially grow in '05, and then sort of the die tie-in question, how many markets do you think can support Del Webb communities and can -- many of them are a decent number of them support more than one Del Webb community?

This is Steve Petruska, I can take that one.

I'll answer your question backwards.

We're looking at expanded Del Webb brand in every one of our areas.

So that's from East Coast to West Coast.

Obviously we have strong brand strength on the West Coast where the Webb name is known but the brand strength is also strong on the West Coast.

So I would refer you back to what I said before, we have over 100 Del Webb branded communities under assessment right now.

What actually pans out for the continued growth of that brand in 2005, that's a tough call, because these land deals take some time to put together.

Richard talked about how constrained the markets are and getting the entitlements is difficult.

We see confident about the additional 23 Webb communities we'll open this year.

And how many come to fruition out of the 100 remains to be seen.

But obviously our goal is to continue to grow that brand aggressively throughout the country.

And the percentage of cash buyers today versus a year or so ago?

It's been pretty consistent Jim around 50-50.

This is Richard.

I want to make one other comment.

You asked how many, could we sustain more than one Webb community in a couple of cities, is that what you asked?

Yeah.

Our belief is absolutely yes.

I would point out though, that it would more likely be two or 3,000 lot communities as opposed to two or three 10,000 lot communities in a given market.

I think that's an incredible opportunity for you so just wanted to get some color.

Thanks.

Thank you.

We have a question from Mr. Rick Murray of Raymond James.

Go ahead.

Good morning, gentlemen, great quarter.

I wanted to follow up along the branding issue.

We have heard from several sources that in some of your markets, particularly the ones where you would rank very highly in the J. D. Power survey, that you are commanding a higher price for your product or a similar product relative to your peers.

Can you give any comment on that either quantitatively, and/or perhaps elaborate on trends that you're seeing along this line?

Yes, this is Steve.

I can answer this one.

Unequivocally, yes.

We are aggressively seeking price increases in the markets where we've demonstrated to our consumers that we supply a premium product, and we're really asking for that premium price.

And quite frankly, you know, coming from Las Vegas where we won J. D. Power four years in a row, I can tell you we're getting it.

How far do we push it, that goes to what the consumer can afford in those individual markets and segments.

There is no doubt about it, we are getting a brand premium in the markets where, you know, we have aggressively pursued our quality initiatives, and you know, we're comfortable that we can continue to get that premium over our competitors.

Rick, this is Richard.

I'll add a little color to that.

You got to remember we are in the relative infancy of J. D. Power's being a recognized name in the home building industry.

This is the sixth year they surveyed.

Over the time, it can become a bigger and bigger factor for us, number one market share like builders like us continue to grow, giving us a larger potential universe of people to expose our name to.

But J. D. Power hasn't gotten to a lot of the markets yet.

As they continue to expand, a builder like ourselves who does well will have more and more opportunity to get that premium Steve talked about.

Great, thank you.

Our final question is a follow-up from Mr. Ivy Zelman.

Dennis again.

If you guys will provide it in full year '03, what percentage of your cost was represented by land and land development?

Roughly, on expense basis, it probably ran between on average maybe say 26% of the selling price.

Roughly.

Okay.

That's it for me.

Thanks guys.

Thank you everyone.

Appreciate your time this morning.

And we'll certainly be available throughout the day if you have any follow-up questions.

Hope to see you all on the 26th of February.

This concludes our conference call for today.

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