普爾特房屋 (PHM) 2004 Q1 法說會逐字稿

Welcome to today's Pulte Homes first quarter 2004 earnings release.

Mr. Jim Zeumer.

Go ahead, please.

Thank you and good morning, everyone.

I appreciate your time this morning to join us to discuss Pulte Homes financial results for the first quarter ended March 31, 2004.

I'm Jim Zeumer, VP of Investor and Corporate Communications.

As you read in our press release, Pulte has gotten off to an excellent start for the year with record operating financial results for the quarter, the company's $5.4 billion backlog and strong land pipeline positioned us well for this year and beyond.

On the call to discuss Pulte's performance are Richard Dugas, President and CEO;

Steve Petruska, EVP and COO;

Roger Cregg, EVP and CFO; and Vinnie Frees, VP Controller.

Those of you who have access to the Internet, a slide presentation will accompany this discussion.

The presentation will be archived on our site for those who want to review it at a later time.

As with all conference calls, I want to alert everyone listening on the call and via the Internet that certain statements and comments made during the course of this call must be considered forward-looking statements 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 over to Richard for few opening comments.

Thank you, Jim, and good morning everyone.

During the first quarter, we hosted an investor conference in New York to talk about the industry, about Pulte's operations, and about our long-range plans.

I would like to quickly recap a few points made during this conference.

Demand is expected to remain stable over the course of the next decade with household formations around 1.2 million annually.

No one knows if stable means new home sales will be 1.1 million or 950,000 in any given year.

However, given current industry dynamics and the market share gains we are continuing to take.

I don't know that it matters much to Pulte or, likely, a few of the other large builders.

Land supplies are constrained and also are getting tighter.

Can small builders find land miles beyond the primary building zones in a given market?

Yes, and that is likely the only place they are finding land these days.

If for any given reason demand does slow dramatically, these outline communities will get hit first and get hit hardest.

As we have said before, all land investments are not created equal.

Next, Pulte is continuing to expand market share as we leverage our competitive strength.

Our great balance sheet, lower capital cost, efficiencies of scale, and most importantly, the ability to control and title and develop plan.

We look at stable demand, constrained supply and control over critical land resources as a great operating environment.

So what are we doing to take advantage of the industry dynamics to ensure our continued success?

We remain focused on improving our business through our key initiatives -- market share growth through segmentation, operational excellence, people development and financial discipline.

Let me provide a little more detail for each.

We are focusing on organic growth within our existing markets where we have local market knowledge and operating expertise and the opportunity to drive higher profitability and overhead leverage.

We are the only builder implementing a customer segmentation strategy to serve all major buyer segments.

First time, first and second move-up, and active adult.

Our markets are getting land in position and communities open to diversify into new price points and customer segments.

Several new segments supported our 31% increase in net new orders for the first quarter and a resulting backlog of almost 18,000 homes.

It is also part of our strategy regarding land pipeline, and we now control an industry-leading 287,000 lots.

I would point out that we've continued to prudently manage this critical asset as 58% of these lots are controlled via options.

As part of our segmentation strategy, we continue to extend our commanding lead in active adult through our Del Webb brand.

Our recently new-opened community in Reno met with great demand.

We have a number of communities scheduled to open around the country this year.

If you are anxious about this factor of rising rates, remember that the active adult buyer is the most stable with about 50% of these buyers paying cash.

In fact, you could reasonably argue that increased rates actually help this buyers given their higher allocation and fixed income investments.

Land has been and always will be critical to success in homebuilding.

When you are building 40,000, 50,000 or 60,000 homes, there is a tremendous opportunity to drive profits by reducing cost in-house and construction.

This is exactly what our operational excellence initiative is about and what will enable us to deliver the 50 basis points and improved margin annually, exclusive of price that we detailed at the conference.

We are already lowering cost through more value engineering and smarter construction practices, but we still have a lot of ground to cover.

We also have the added opportunity to capture margin by vertically integrating select functions in certain high volume markets.

Our new vice president of supply chain who recently joined us from Wal-Mart is already hard at work in this important area of our business.

And, of course, we always have the opportunity to benefit from our industry-leading quality and customer satisfaction which support premium pricing, lower customer acquisition cost, and reduced future service expense.

Over time, I believe that quality will become not just a matter of differentiation within the industry, but a matter of survival.

We can get capital and land, but we also need great people to run our growing operations, which is why people development is so important.

As part of our staffing plans for this year we expect to hire well over 1,000 college graduates.

We have a long-term focus for this business and we see college recruiting and other industry-leading development programs like Top-Gun and Emerging-Leaders as initiatives that can help Pulte differentiate itself and gain an even stronger position within the industry.

And finally for Pulte it's about financial discipline.

We are delivering forecast and improvements in margin, SG&A leverage and other key measure that has help to drive return on equity and invested capital for the most recent 12 months to almost 21% and 14% respectively.

I went through this information as background to addressing investors' fears of rising interest rates.

First I don't shy away from our stated belief that the industry has undersupplied the market relative to demand for years and that it could take a substantial rise in rates to have a material impact on the industry and in turn Pulte Homes.

With that said, we are well-positioned to handle higher rates given our customer segmentation strategy.

By serving all major buyer groups, Pulte is not overexposed to any single customer segment.

Of course we have a largest presence with active adult buyers who are less rate sensitive.

While many people are pointing to a shift in mortgage products as as a sign that system is stressed, I think this shift is been misinterpreted.

Data suggests that arms have being used by higher-end sophisticated buyers who are putting more of their cash flow to other uses and not by first-time buyers stretching in the more house than they can afford.

Looking at data for our company arm product in Q1 accounted for 29% of loan originations for Pulte Mortgage as compare to 15% last year.

Our average loan-to-value however actually improved 100 basis points to 77.9%.

This data paints a different profile for today's user of adjustable rate mortgages.

Contrary to what is often reported, most customers selecting ARM products are quality buyers using adjustable rate mortgages for financial planning purposes.

If you need more proof of this, just conduct a survey in your office and you may be surprised by how many of your peers are closing on an adjustable rate mortgage right now because it makes good financial sense.

Regardless of how rates play out, we are focusing on what we can control like managed pricing, more efficient building practices and lowering supply chain cost so we can improve fundamental business performance.

Although no one expects this, if rates spike 300 basis points in the next 6 months, can we offset potential margin impact to lower cost?

I will say this, over the next few years I think we can capture hundreds of millions of dollars associated with the process of designing, selling, building and servicing our homes.

In short, we are focused on running a better business.

As we discussed at our conference, I think we are reaching a point in the industry's development where a small number of builders, maybe only one or two will truly differentiate themselves and begin to distance themselves in terms of operating and financial success.

I am confident we are on the road to making Pulte one of those companies.

With that said, let me turn the call over to Roger for detailed comments about the quarter.

Roger.

Thank you Richard.

Good morning, everyone.

I am pleased to report a very strong first quarter of operating and financial performance driven by strong demand for new homes and the continued load interest rate environment.

The year has gotten off to a tremendous start with our first quarter order rate posting approximately 31% increase over the first quarter last year.

The first quarter of 2004, revenues from home settlements for Pulte Homes domestic home building operation increased approximately 34% over the prior year quarter to approximately $1.9 billion.

Higher revenues for the period were driven by increase in unit closings of approximately 22%.

The average sales price increased approximately 10% versus the prior year quarter to an average of $276,000, resulting primarily from increased product prices and overall improvement in product mix and market mix.

In the first quarter, land sales generated approximately $23 million of total revenues, which is decrease compared with the previous year's quarter of approximately $10 million or 30%.

Domestic homebuilding gross profit for home settlements including home building interest expense for the quarter increased approximately 46% to $426 million.

First quarter domestic homebuilding margins from home settlements as percentage of sales were 21.9% compared with 20.2% in the first quarter of 2003.

This increased margin conversion of approximately 180 basis points versus the prior year quarter is mainly attributed to product price increases in market and product mix shifts.

We continue to see strong pricing power in both markets that included the Northeast and Florida but especially in the West to include Nevada, Arizona and northern and Southern California.

Home building interest expense increased during the quarter to approximately $22 million versus approximately $11 million in the prior year as a result of continued growth of the business.

The gross profit contribution from land sales was approximately $4 million for the first quarter versus $9 million in the prior year quarter.

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

SG&A causes, as percentage of home sales for the quarter was approximately 10.6% decreasing almost 100 basis points over the prior year quarter.

In the other income and expense category for the quarter, the expense of approximately $2 million is primarily the net result of joint venture income generated from sales of land during the quarter of approximately $5 million offset by expenses that include the amortization of intangible assets, insurance expense and all other miscellaneous expenses from domestic homebuilding operations.

Domestic homebuilding pretax income for the quarter increased 61% to approximately $223 million.

With pretax margin at 11.3% on total domestic homebuilding revenue, this representing increase of 200 basis points in conversion over the prior year quarter.

At the end of the first quarter our domestic home building operation had backlog of 17,700 homes valued at $5.4 billion compare to 13,100 homes in the prior year quarter.

First quarter pretax income from financial services operations was approximately $10 million, a decrease of approximately 41% or approximately $7 million below prior year quarter.

Despite the increased origination unit and dollar volume versus same quarter last year the decrease in pretax income performance was attribute to the continuing changes in the market place to sell loans.

The shift in product mix towards the adjustable rate mortgage products during first quarter of 2004, as Richard mentioned, increase from approximately 16% of origination dollars fund from our warehouse line last year to 31% this quarter, which has led to decreasing profitability per loan compare to the prior year quarter.

In addition, operating expenses were incurred in the quarter in anticipation of the success and growth of the business projected for the balance of 2004, mainly in the area of staffing recruiting, training, systems and facility costs.

Multi-mortgages capture rate increased to approximately 86% from 81% in the same period last year.

Mortgage origination dollars increased in the quarter approximately 286 million or 33% when compared to the same period last year.

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

Mortgage refinancing represented approximately 4% of total unit originations compared to about 12% for the same period last year.

International operations posted pretax income of approximately $200,000 for the first quarter compare to a pretax loss of approximately $1million in the prior year quarter.

Increased operating performance in Mexico, which posted increased volume and higher margins were partially offset by lower unit volume necessary Puerto Rico.

As we previously announced, we continue to evaluate long-term strategic alternatives with regard to our international operations and at this time we have no further update or comment to provide to you.

Total corporate expenses for the first quarter were approximately $20 million or increase of approximately $5 million versus the prior year.

The increase was associated with higher net interest expense and expensing of stock options in the current year quarter.

Net income from continuing operations for the first quarter increased 53% to approximately $132 million or $1.02 per share as compared to approximately $86 million or 70 cents per share from the same period last year.

Fully diluted shares were approximately 128.8 million for the quarter.

On the balance sheet for the first quarter the major changes versus year-end of 2003 continue to be in support of the company's growth initiatives as planned for the year and into the future.

We ended the first quarter with a strong cash balance of approximately $464 million.

Inventory increased to $6 billion in support of 2004 and beyond planned growth opportunities.

The increase in outstanding debt for the first quarter of approximately $423 million over the fourth quarter is associated with the issuance of $500 million of 5.25% unsecured senior 10-year note offset by the redemption of the final remaining Del Webb 10.25% senior subordinated.

Included in the other asset category of approximate 920 million are major items such as land held for sale of $239 million and receivables, prepaid expenses and deposits of approximately $255 million.

The category also includes fixed assets, investment to joint venture and all other miscellaneous assets from the remaining $426 million from corporate, homebuilding, international and financial services operations.

At the end of the first quarter, the companies debt to total capitalization ratio was approximately 41.5% and on net basis was 36.8%.

This was in line with our expectation and our continued commitment to maintain disciplined and flexible balance sheet while investing for the future growth of the business and delivering greater shareholder value.

Pulte Homes' shareholder equity for the quarter increased to approximately $3.6 billion with return on average shareholders equity for the latest 12 months of approximately 21%.

This is an improvement of approximately 280 basis points over the same period last year.

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

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

Looking ahead under FCC Regulation FD guidelines we provide the following guidance on our current expectations for the second quarter of 2004.

Unit settlements in the second quarter of 2004 are likely to increase approximately 17% to 18% over the same period last year driven primarily by additional volume across most major markets.

Average selling prices for closings in the second quarter are projected to be above the first quarter of 2004 by approximately 1%.

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

Gross margin performance from home settlements as a percent of sales for the second quarter is anticipated to be 10 to 20 basis points above the first quarter of 2004 dependent upon the product and geographical mix of the homes delivered.

Despite the higher material cost beginning to show up in the second quarter, our price increases established in the fourth quarter of 2003 and first quarter of 2004 will allow us to exceed the cost increases and continue to expand margin in the quarter.

We are projecting land sales gains in the quarter to be approximately $10 million to $11 million.

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

As a percentage of sales, SG&A is expected to improve over the second quarter of last year by approximately 50 to 60 basis points, resulting from the increased sales prices and the additional leverage associated with the increased volumes.

In the other income and expense category for the second quarter we are projecting net break even to approximately $1 million in income.

Given no material change in the interest rate environment, pretax income in our financial services operations is expected to be approximately 55% to 60% below the second quarter of 2003.

Again that's 55% to 60% below the second quarter of 2003.

The increased income generated from higher volume is being offset by a shift in product mix and related market pricing in addition to the increased operating expenses in anticipation of the volume growth in the coming quarters.

For the second quarter of 2004 we anticipate interest rates to remain in relative range, as we are experiencing today as compared to a rising then declining interest rate environment in the previous year's quarter that led to lowest interest rates in 2003 and opportunity for our mortgage operations to generate greater income potential in the previous year's quarter.

In the second quarter international operations are anticipated to be at break even.

Total corporate expenses are projected to be $3 million to $4 million over the second quarter of 2003.

This increase is a result of higher interest expenses associate with higher debt levels in the quarter.

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

With that second quarter earnings per share from continuing operations are estimated to be in the range of $1.30 to $1.40 per share.

This EPS number is calculated based on approximately 130.7 million fully diluted shares.

As we announced in our press release we are again increasing our outlook for 2004.

We offer the following comments regarding our expectations for the full year of 2004.

Given the current operating environment for the homebuilding industry, these comments are based on the assumption at the over all macro-economic conditions remain in a modest range comparable to what we are experiencing today.

Based on the strength of our first quarter sales orders, backlog and financial performance, we are revising our earnings for the full year of 2004 EPS from continuing operations to be between $7 and $7.25 per share.

Estimates are based on 131.1 million fully diluted shares.

This represents an increase of approximately $300 to $330 million in net income over ourfull year 2003 actual performance, or approximately in the range of 50% increase.

Now, for some of the line item guidance.

We are projecting unit settlements for the full year 2004 are likely to increase approximately 22% 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 now projected to be above the average 2003 selling price by approximately 7%.

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

Gross margin performance from home settlements as percent of sales for 2004 is anticipated to increase in the approximate range of 160 to 170 basis points over 2003.

The margin expansion represents excess price realization over the expected material cost increases for the year.

The actual margin realized will be dependent upon the product and geographical mix of the homes delivered.

We are projecting land sales gains for the year to be approximately $35 to $40 million.

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

As a percentage of sales, SG&A is expecting to be below 2003's conversion by approximately 80 to 90 basis points, reflecting the increased selling prices and greater leverage as we expand our volume penetration across the course of the year in our existing markets.

In the homebuilding other income and expense category for the year, we are projecting a slight gain of approximately $3 to $4 million for the year.

Given the current environment in the mortgage markets and significant changes in mix of product preferences from consumers, our pretax income in our financial services operations is expected to be below the full year of 2003 by approximately 10%.

Despite the increased volume, our drive to increase capture rate and our efforts to improve customer service levels the product mix shift is moving toward less profitable loans versus what we delivered in 2003.

International operations are anticipated to post pre-tax profit of approximately $5 to $7 million for the year.

In corporate category, other corporate expenses are projected to increase by approximately $10 to $12 million over 2003 as result of increased corporate overhead expenses and no anticipated corporate commercial land sale 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 level to support the growth in 2004.

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

Once again the full year of 2004, EPS from continuing operations is estimated to be in the range of $7 to $7.25 per share representing an increase of between 49% to 53%, over our 2003 actual performance of $4.91 per share.

The 2004 EPS performance is calculated based approximately 131.1 million fully diluted shares.

With that, I will now turn over to Steve Petruska for a few comments.

Steve?

Thanks, Roger.

Good morning everyone.

As we did last quarter we thought it would be helpful to provide color on the sign-up numbers we experienced during the quarter.

For the quarter we operated on 541 communities, which compare to 477 in Q1 of last year.

Total traffic to our communities was up about 36% for the quarter.

Once again the East Coast experienced another tough weather quarter, which slowed traffic and also delayed some sommunity openings.

This is reflected in year-over-year sign-ups that are essentially flat for northeast regions.

We did experience increased demand in our New England markets and Del Webb communities .

The Northeast is one of the toughest regions in the country to get land entitled.

So, getting a new community opened is always a challenge.

The good news is that once open demand is very dependable as region is undersupplied for new housing.

Sign-ups in southeast were up 22% with notable strength in Florida, particularly in Orlando and Fort Myers.

We also realized a very strong sales pace in our Webb Communities in Ocala, Florida and Hilton Head, South Carolina.

Outside of Florida, primarily in the Georgia and the Carolinas we continued to successfully shift our strategy to better balance price and margin with our sales pace.

The result, we've maintained sign-ups while driving sizable margin gains.

Over time, this more balanced approach should result in better returns.

Our Midwest markets have gotten off to an excellent start in what is a seasonally slow period normally for this time of year.

Sign-ups increased 33% for the quarter and our Michigan market is doing a great reaching several new buyer groups while Illinois and Minnesota are really performing well.

Signups in our central region continues to be strong, up over 33% from last year.

People often point to Houston and Denver as markets that have been tough, but through our segmentation process, we've identified customer segments with stronger demand and experienced nice growth in both cities.

We certainly won't be the first builder to tell you the West is very strong.

Our signups increased 43% per quarter.

Arizona, Nevada and California are realizing increasing unit sales and pricing.

Through strong sales pace and changing selling strategy in several markets we ended the quarter with just over 3600 unsold homes, this is down 2% from last year and down about 19% from the end of 2003.

Finally, we continue to see high quality buyer interest in our homes as reflected in our cancellation rate, which dropped 13% for the quarter down from 16% last year.

I spent a lot of time in the local market, and I can tell you that our operators are excited about new communities, land positions we have coming through the pipeline and program to raise Pulte's overall performance.

As Richard stated we believe our next few years, a couple of builders will pull away from the pack and we working to be sure that Pulte will be one of these builders..

Let me turn the call back to Jim.

That concludes our formal remarks.

I want to thank everyone for your time and attention on the call this morning.

We are prepared to open up to questions for the company guidance for 2004.

At this time we'd like to open the call for questions.

Thank you.

[OPERATOR INSTRUCTIONS].

We will take our first question is from Margaret Whelan from UBS Warburg.

Go ahead, please.

Good morning, guys.

Good morning, Margaret.

Tough quarter.

And I guess the primary question I have is I am very excited about the profit surprise.

Where was the biggest driver of the swing versus your own estimates?

This is Roger, Margaret.

I think what we had was little bit more price, but more than anything it became product mix.

We had a shift in some of the markets with lower margin and a shift of higher volume closing from some of the higher priced areas.

Specifically they were in the West versus some of the lower priced products in the Southeast and in Florida.

OK.

And then how was that then -- what was the kind of percent of the surprise based on mix versus the cost cutting assets you have in place?

Again, cost cutting -- I don't know, we don't have a specific number on that.

I will tell you that probably more of it came from the pricing opportunity in the market expansion side than cost reductions for the quarter.

Again, our efforts are on both the national side of purchasing, but material cost increases there don't leave us a lot of opportunity and the engineering side certainly we continue to focus on that, as well.

I know at your conference a couple months ago you said that lumber would cost you about 50 basis points in the gross margin.

Is that still the run rate?

Yeah, I think we are looking at lumber totals probably when it matures this year to be between $3000 to $4000 depending on the size of the house.

I mean average house will probably run us right around $4000.

Yes, I think we are still projecting that.

OK.

And then just finally, Richard a bigger picture question.

If the margin surprise is coming from pricing and price inflation turns to segmentation or deflation how soon do you think you will start to act - take the course at and when you see it in the margin?

Margaret, what we have done so far, our new VP of Supply chain is of course just getting started with the work that he is going to, he's been charged with.

So far most of the work we've been able to do more value engineering, more consistent floor plan, reduced specification levels.

Effectively what I would call simplifying our business.

And we're pretty happy with that initiative, but it's too early to say our new VP of Supply chain has really been able to dive into the some of the more sophisticated things that we want to do.

So, we're very confident that regardless of the pricing environment we're going to take cost down.

As you know, we gave 50 basis points annually for the next three years.

I think we are well on our way of getting there.

Some of the early work this gentleman is involved in, involved really understanding vertical integration and paying attention to what we have with our Pratte operation out in the South West and Pulte Homes science work.

It's likely you will see more of that kind of thing from us in the future.

So, stay tuned.

We plan on having lot more to say about that in coming quarters as we get more a little more meat on the bone there but, I am very confident that whether the pricing environment continues to be very strong or whether it gets a little bit softer that we'll be able to take price out.

Richard.

Thank you.

Thank you.

Our next question comes from Greg Gabber, AG Edwards.

Go ahead, please.

Good morning.

I want to follow-up on this increase in average selling price, which apparently did come from regional mix and product mix.

Do you have any sense what would have happened to your pricing on just a constant unit basis if there had been no mix change, would it have been up slightly?

How much did you get from pure pricing power, that is?

Well, you know, it's always difficult.

I think to answer the question number one, if you basically stratified our product mix across the country and look at average selling prices and you know went back and took a good look at those that are above and those that are below the average.

The average of below the average is about $200,000 average selling price per unit.

And those that are above the average are roughly $375,000.

So, the mix plays pretty significantly on the pricing.

I think our guidance that I gave for first quarter was roughly around 270 to 271-ish in that range if you followed the guidance and the numbers that I gave.

So, coming out in 275-ish range was just slightly above where we were.

And again as we saw price increases really tagging along with the material cost increases in the fourth quarter, certainly rolling into the backlog in the fourth quarter and beginning of the first quarter that's what gave us the rise to that.

So, holding it constant probably wouldn't have been something we would have looked at only because of the rising material cost that we wanted to try to offset with rising prices.

OK.

You look at your orders that you had during this first quarter.

Anyway you can break that down into what percent of your increase in your orders came out of Del Webb and also if you look at your just inventory of lots, what percentage of that is allocated to Del Webb or retirement communities?

This is Roger.

We don't track our business by Del Webb any longer.

I mean it's you know it's a part of Pulte and it's part of the markets we're in.

We don't segregate it by what is active adult in that regard.

So, would be very hard for me to break that down for you.

OK.

And one final question.

I think your point on the where you are seeing the rise in arms was rather interesting.

Do you have the FICO scores on the arms for the quarter versus the fixed rate and ARM FICo scores from a year ago handy?

Greg, this is an increase.

Maybe I can respond to some of that.

You know, we don't really break out FICO scores between ARMs and fixed, but I can provide you some of that information just on an overall basis for all of the origination that is we took during the quarter.

OK.

OK.

In the first quarter, first quarter of '04, our average FICO score was 734.

And that is versus 723 from the first quarter of '03.

Hopefully that is helpful.

Yes, it is.

Thank you very much and honestly very nice number.

Thank you, Greg.

Next question comes from Michael Rehaut with J.P. Morgan.

Hi, Good morning.

Just couple of questions here.

First can you give us a sense, if possible, how April is coming along in terms of order trends and also what you're seeing in the market in terms of pricing?

Well, Michael.

This is Roger.

Again you know we don't speak to the current quarter.

So I can't give you guidance on that or any outlook of where we are through April.

Same thing, I had just may be the pricing situation is pretty much what we've seen in the first quarter.

OK.

And just a point of clarification in terms of forward-looking guidance, you had talked earlier about 50 basis points from margin expansion and I just wanted to make sure that's sort of in the line with from your annual meeting a couple of months ago, where the 50 basis points was I believe more on the gross margin side and that you had been giving out pre-tax margin guidance over the next couple over the next three years of roughly a 100 basis points per year with the remainder coming from SG&A leverage and other areas of leverage and perhaps the mix.

Is that still the case in that 50 basis point just more concentrated on the gross margin?

Yes, Michael.

This is Roger.

We gave 50 basis points a year in gross margin.

So, we would expect 50 basis points the first year and another 50 basis points the next year and another 50 basis points by '06.

Then we are looking for about 20 basis point improvements in SG&A each one of those years, as well.

We are still targeting that.

Again, I repeat the numbers get a little bit skewed as you see the dramatic increases in the prices as that affects the ratios.

But we're still on target with that focus.

That hasn't changed our approach here.

So yes, we're still on target to achieve what we talked about in February.

Michael, this is Richard.

Just to add to that, the 50 basis point guidance we gave on the margin line was exclusive of price.

So, to Roger's point as price comes in it takes that number of off for any given year.

And lastly, I was wondering if we could just get an update on how Pratte is coming along?

In terms of the savings that you hope to achieve there and I believe remember hearing about something on the order of $1500 to $2000 a home and wanted to get a feel for the timing and how things are developing out there out west.

Michael, this is Steve Petruska.

I will answer that one for you.

First of all integration with Pratte, the joint venture is going great.

We sent Alan Lang (ph) who's one of our corporate VP's out there to help manage the relationship between Pratte and Pulte in Arizona and Nevada.

The process of aligning our building operation in that joint venture is actually going a little faster than what we had planned.

Everyone is involved, everyone that is involved is very excited about where it is going and I will tell you that some of the savings that we expected to see, we are seeing from a vertical integration standpoint, certainly the commodity market hasn't helped us at all.

But on an overall basis what we are focusing on is the value-engineering of our product in those particular markets and we think in the long-run that's where we are going to see most of our savings.

So it's going very well.

Thanks a lot.

Thank you.

Our next question comes from Ivy Zelman, Credit Suisse First Boston, go ahead please.

Hello Jim, actually Dennis on behalf of Ivy.

Just a couple of questions, first on the guidance in the second quarter.

What were your assumptions on closing and gross margin one more time?

In the second quarter, on closings we were looking for about 17% to 18% over last year and gross margins we are looking for 10 to 20 basis points over the first quarter of 2004.

OK.

First quarter, OK.

What type of leverage were you looking at in the SG&A line?

SG&A we are looking for about 50 to 60 basis points over last year.

Last year.

OK and what you have mentioned on the cost increases is that most of that will not go through until the third and fourth quarter or is that even -

There's a little bit of margin, I would say pressure although the, again the margin is going up 10 to 20 basis points from the first quarter.

So without that it would have gone up higher, so there's roughly may be $10 million to $15 million roughly coming through the second quarter.

A lot of our materials and a lot of our markets were price protected and how we basically position ourselves.

We won't see as much in the second quarter as we see in the third and fourth quarter.

What would that $10 million or $15 million run to in the third or fourth?

Roughly, I think if you, I will take you back to the whole guidance where we went from $6.25 up to $7.00, $7.25.

Roughly the dollar per share increase is really coming from the homebuilder side where we broke up the gross margin, gross margin roughly going up $250 million, about $425 million would be coming from price increase and cost increase is expected, it would be about $145 million and the balance of it is basically mixed about $30 million to get up to about $250 million.

So, I expect to pick up about the total year from the last guidance we gave, 4.25 in price and 145 in cost.

Well and than just touching lastly on the ARM issue one more time.

Do you have a sense of what is driving the affluent buyer to the ARM product so much more presently than really have any comparable rate period maybe last year or even going back to rising rate environment in 2000?

Dennis, this is Richard.

If you look at it, the actual shift began in the third quarter of last year in terms of the ARM products moving in that direction and that's the last time if you remember back to the summer of last year we had about 140 basis point spike, I think in the July to early August timeframe, and what's happened is with a lot of the commentary we believe what has happened with a lot of the commentary and in the press relative to financial benefits of ARMs, even Chairman Greenspan making a couple of comments about that.

People are getting more educated about the ARM product and the financial benefits of it.

So that's when we believe it began in the third quarter and that may be a shift that's somewhat related to rate and also may be a shift, we believe, based on overall financial planning purposes, that these more sophisticated buyers are saying why do it.

The average American tends to move every six or seven years and if you are not looking to lock into the home for 30 or 40 yeasr or may be a opportunity for you.

It's fair that I want to say that six to seven years span probably hasn't changed much in the last few years.

Fair, I agree.

There is a lot more information out there today about the benefits of ARM products versus what it used to be.

First there is lot more product out there and there's also more information out there to help educate these folks.

Well we were just telling you what we see with our own portfolio.

Sure.

Lastly, does it allow you to push prices anymore given that the monthly payment comes down with the ARM product?

We are, we have seen a very nice pricing environment.

I don't know if you can say that you are able to push it more based on ARMs versus fixed rate.

I think that might be stretching it.

I think the pricing is going to be more driven by demand versus supply and as we have said many times we are very happy with our segmentation process allowing us uniquely, I believe, to ferret out the best opportunities in the market and I would just go back to something that Greg asked earlier about Del Webb.

I mean anecdotally, Steve pointed out in his comments, we are seeing strong performance in our Del Webb communities.

That is an area today where this demand-supply gap is great so we are happy with the pricing performance and we are able to get based on that segmentation work.

Great, guys.

Thanks again.

Thank you.

Our next question comes from Steve Fockens, Lehman Brothers.

Go ahead please.

Hello, good morning, guys.

Two quick questions, given higher 04 outlook, are you still staying with the outlook that you announced back in February in terms of 06, I think you said $10 back then?

Yes Steve this is Roger.

I don't think we have focused on 06 at this point.

I guess when we get back down to see how this year actually runs out, we will come back and certainly adjust ourselves for 05 and 06.

But right now we are not going to address 06.

OK, fair enough.

In terms of as you look to at least for next year, would you expect pricing to come down somewhat or are you expecting the kind of pricing you've gotten over the last few years to be continued, whether it's your actual pricing or mix?

Right I think right now we don't see it sliding back again given the demand and supply dynamic in the market place.

So we have no expectation that it will slide back at this point and again it's all based on availability of land in the markets that we are in today we are able to get those prices.

And I am -- Roger, when you say slide back, you would mean actual lower prices or actual a diminution in the pricing growth?

If, again looking back at 2004 from 2005, again assuming there is no rollback in pricing because of anything that drives pricing down.

OK, fair enough.

One last question on lumber and input cost.

Did you say it was just lumber or all commodities that were driving the average cost per home up $3000 to $4000?

I said it was only lumber, that would have been framing OSP, but we are looking at probably anywhere between $4000 to $6000 a house on average.

The larger the house could go to $7000 depending on the size of the house.

OK and I saw some, to follow up on that, I saw some data recently.

I think it's that of NHB for a smaller builder who wanted $240,000 home and was paying $7000 or more per home and if I just assume that the number you gave me is on your average $270,000 home, is that an example of better purchasing vis-a-vis smaller builder or other factors that could draw that conclusion?

Well I would say there are a lot of factors but I can't speak to how they put that together for an average builder but I would say that again we are still advantaged because of the size and volume that we buy in all these different categories.

OK fair enough.

Thank you so much.

Thank you.

Our next question comes from Steven Kim from Smith Barney.

Hello this is Jeff Baron for Steven Kim.

Congratulations for a good quarter.

Just a couple of things, first of all on the SG&A improvement year-over-year were pretty solid about 100 basis points.

Could you just talk a little bit where I assume obviously some from the leverage there but just the components of that decrease in SG&A?

Couple things.

If you recall last year we had a pretty much a hard winter with pretty cold temperatures in the northern states.

We wound up with more costs in the SG&A area basically because of hard dig issues and that type of thing in the Chicago market, in the Great Lakes area, in the Northeast.

We didn't experience those this year.

We did work a little differently about our spec inventory, specifically putting in foundations versus trying to work on just in time in the month of December, January and February.

We're able to reduce cost on that year-over-year just on being able to put in foundation in anticipation of not having to go through the dig process in the winter months.

The rest is certainly the average selling price being able to drive more prices helped out leverage a little bit but I would say a good part of it was just the operating performance year-on-year.

Sure.

OK.

Great.

And just confirm I think going back to what you said in your annual conference 20 basis point year-over-year improvements in SG&A out through '06 is that -

Correct.

Lastly if I could, just to confirm the guidance you had given previously in terms of subdivision count for this year, are you still looking in 15% to 20% range through '04?

Yes, we are.

Great.

Thanks again.

Thank you.

Our next question comes from Rick Murray, Raymond James.

Go ahead.

Good morning, guys.

Outstanding quarter.

Just real quickly, I guess given that the strength of your sign-ups in the quarter and you know the corresponding increase in new home sales, which has been about 20% clearly you guys are gaining market share and much more so than some of your piers.

Do you have comments any trends that you identified that pertain to perhaps specific consumer groups or product types that you feel are outperforming or allowing us to gain more market share?

Well, you know.

Rick this is Steve Petruska.

On an overall basis, first of all I'd point back to our segmentation strategy.

We are going after all consumer groups, which is really helping us make some inroads.

But specifically, our Webb brand our proliferation in the Webb brand mostly to our eastern market has really helped us drive market share, where we had relatively low market share in the some of those markets before.

OK.

Great.

And I guess the other question I had was, your cancellation rate at 13% is about as low as I can ever remember.

Would you say that's more a function of perhaps a more optimistic buyer and perhaps better employment prospects generally speaking?

Yes, it would speak to that.

It would also speak to, you know, probably the pricing environment that we're in.

A lot of our buyers are seeing significant price increases from the time of the contract through the time that they close.

And that ability to bake in equity while you're in the build process certainly diminishes some buyers who may get cold feet during the process.

Rick, this is Richard.

Over time, if you look at long period of history, cancellation rates are somewhat driven by the quality of the buyer you see.

We certainly have seen a strong quality buyer come in, which has helped.

I think there are a lot of factors, but one is that the Webb piece of our business tends to attract a high quality buyer, one of the benefit of doing business with the active adult.

Once they make a decision they tend to stick with it.

Great.

Thank you.

Great quarter.

Next question comes from Jim Wilson JMP Securities.

Go ahead.

Thanks, good morning.

Most of my questions have been answered.

But just quickly in the community count growth plan for the year, can you give a little color on mix with active adult?

I know you have been targeting a significant amount of Del Webb-type openings, but the active adult mix.

This is Roger.

I cannot.

We talked about where those areas were in our conference.

You know we're looking for about 20% increase in active adult, you know, communities.

But specifically again we're staying with that.

Again, we talked about it in our February conference.

Sounds like growth rates should be fairly similar between the two?

Yes.

And just tell one other lending question.

Even with the mix shift and everything, loan to value shift at all over the last 12 months?

You are looking at loan to value, Jim this is Vinnie Frees

Yeah.

Let say our first quarter '04 was at 78%.

When you look at where we were last year in the first quarter, we were at 79%.

Great.

Thanks.

Great quarter.

[OPERATOR INSRTUCTIONS]

Next question form Carl Reichardt, Wachovia Securities.

Go ahead.

Good morning, guys.

I wondered if you could tell me if you are characterizing any of your price increases as material surcharge increase to your buyers?

No, this is Steve Petruska.

I wouldn't tell you we are getting a surcharge increase.

We have been real successful in covering cost increases, but relative to surcharge, no, I wouldn't characterize it as that.

You are not telling your customers you are raising prices because lumber's up or materials are up?

No, it has been well publicized.

I think they know that is going on.

Fair enough.

Just in terms of the segmentation targets.

Richard, if you look at your metros, what percentage of them do you think you rolled out all of the segment strategy that you would like?

In other words are you hitting every price point you want to in any market?

Carl, the answer is 0.

We don't have a single market where we have penetrated all segments we want to be in.

Most of our business, even big strong businesses where we do a lot of volume in a city, I would tell you we probably cover half to maybe slightly over half of the TCGs that we want to be in.

That is the beauty of our strategy and frankly that is of the strong markets.

Most of our markets are characterized by I would say good penetration in three or four of the TCGs that we've outline.

We've identified as you know, 11 specific customer groups.

So tremendous amount of headroom for, not only with Del Webb, but a lot of areas, so the answer is 0.

We're not satisfied or near penetrated anywhere.

Great.

Thanks a lot.

I'll turn the call back to management.

Go ahead, please.

Thank for your time this morning.

We will be available for follow-up questions later on.

We look forward to talking to you next quarter.