普爾特房屋 (PHM) 2004 Q3 法說會逐字稿

(OPERATOR INSTRUCTIONS) At this time I would like to turn the program over to your host, Mr. Jim Zeumer.

Go ahead, please.

Thank you, operator, and good morning to everyone joining on today's call to discuss Pulte Homes' financial results for the third quarter ended September 30, 2004.

Pulte Homes reported strong operating and financial results for its third quarter, including an 11 percent increase in signups and earnings per diluted share showing a year-over-year increase of 55 percent.

On the call to discuss Pulte's results are Richard Dugas, President and Chief Executive Officer;

Steve Petruska, Executive Vice President and Chief Operating Officer;

Roger Cregg, Executive Vice President and CFO; and Vinnie Frees, Vice President and Controller.

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

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

As with prior 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 and as such are subject to risk and uncertainties that could cause actual results to differ materially from those discussed during the call.

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

Richard?

Thank you, Jim, and good morning.

In a couple of minutes I will turn over the call to Roger and Steve to break down the numbers and provide more insight on the quarter, including a few more details about Pulte's Las Vegas operations.

While I appreciate the circumstances surrounding this call, I wanted to take a few minutes to put some context around Pulte's business and that of the broader industry.

No surprise that on the conference call earlier this month, and in hundreds of subsequent conversations, the most common questions have been how did Vegas happen and why couldn't it happen again?

As we discussed earlier this month, the Las Vegas market saw significant price appreciation over the past year.

Pulte sold into the strong market environment, raising prices as demand conditions allowed.

With the clarity of hindsight, we moved prices up too quickly.

With that said, we've taken action to correct our market position in Las Vegas, and we have put additional checks in the pricing process to ensure this doesn't occur again.

Steve will give more details in a minute.

It is still most appropriate for pricing decisions to be made at the local level.

But we're confident that increased focus on the part of the community manager, the VP of sales, the division president, and the area president in each market, combined with reviews by our regional presidents and our Chief Operating Officer that we have enough attention on pricing strategies and tactics that we can avoid any similar issue.

Beyond Las Vegas, if you just picked up Pulte's third-quarter earnings report, you would likely conclude that the numbers were excellent and that this Company's business is extremely strong.

And you would be right.

Orders are up; operating performance was excellent; and expectations about the next quarter, the next year, and the years after that are positive.

Okay, now insert Las Vegas back in, and the picture doesn't change very much.

Our overall business is still strong and growing; operating performance is still excellent; and expectations about the future are still positive.

But we have what is a single-market issue that we have moved aggressively to address.

Our assessment is that Las Vegas is a company-specific event.

Pulte's local pricing got ahead of the market.

We've taken action to correct the problem.

It is worth saying that since our price changes were put in place, that traffic and signups have turned much stronger.

More on that in Steve's comments in a moment.

While there may be a period of adjustment as Pulte elbows its way back into the mainstream, the reality is that the Las Vegas economy remains strong with excellent job growth and migration into the state.

In this type of environment, we and likely the other builders can go back to implementing the programs and tactics needed to attract buyer traffic and generate sales.

Occasionally, this means reaching into the standard sales and marketing toolkit for a buyer incentive to create a sense of urgency and turn a home shopper into a customer.

One side effect of Pulte's announcement 2 weeks ago has been an increased focus right down to the community level on conditions and sales activities in just about every major market across the country.

The result is that every shift in price, incentive, or selling position can get ballooned out of any sense of proportion.

I would like to read something to you.

I will remove the names to protect the innocent.

A $25,000 base price reduction on a $300,000 home, 8 percent of average price, in Atlanta offered by builder X. In Denver, for homes priced in the 200 to $400,000 range, builder Y is offering significant rate buy-downs plus incentives on select homes.

In Charlotte, C builder listed multiple homes with price reductions ranging from $2500 to $20,000, constituting 2 to 8 percent off selling price.

Do these quotes sound like any of the e-mails or voice mails you have received over the past few weeks?

Actually, these quotes were pulled from a research report issued by a leading brokerage firm in 2002.

And the financial impact of these and a variety of other incentives offered at the time?

Record results for Pulte and most of the other big builders in 2002, 2003, and continuing on into 2004.

It is a reality within our business that market conditions change all the time, and even when they aren't changing that there is competition at the community level in which every builder is engaged.

Mortgage rate buy-downs, free upgrades, design center credits, or similar incentives are just some of the tools we use.

Clearly Las Vegas was a different case.

But I wanted to raise this point, because from the comments we have been hearing it sounds like there may be some overreaction to what is the normal jockeying for position that happens in homebuilding -- and by the way in probably every other retail business.

Finally, while I recognize that this point may have a slightly less resounding ring, market shifts and jockeying is why we have worked hard to build the most diversified homebuilding business in the industry.

The markets and the customer segments move differently, so while one may be red hot another might be slowing, while another is gearing up for a dramatic increase in demand.

In total, we see a strong new home market in this country, and we're confident about Pulte's ability to continue to grow, to expand market share, and to be successful.

We think our projections for 2005 as outlined in our press release speak to that confidence.

With that let me turn the call over to Roger, who will provide details about the quarter.

Roger?

Thank you, Richard, and good morning, everyone.

I am pleased to report for Pulte Homes a solid third quarter of operating and financial performance.

The quarter order rate posted approximately an 11 percent increase over the third quarter last year.

For the quarter, revenues from home settlements for Pulte Homes Domestic Homebuilding operation increased approximately 24 percent over the prior year quarter, to approximately $2.8 billion.

Higher revenues for the period were driven by an increase in unit closings of approximately 12 percent.

The average sales price increased approximately 11 percent versus the prior year quarter to an average of $291,000, resulting primarily from increased product prices and an overall volume-driven improvement in product mix and market mix.

In the third quarter, land sales generate approximately $69 million in total revenues, which is an increase compared with the previous year's quarter of approximately $29 million.

Domestic Homebuilding gross profits from home settlements, including homebuilding interest expense for the quarter, increased approximately 42 percent to $661 million.

Third-quarter Domestic Homebuilding margins from home settlements as a percentage of sales were 23.5 percent compared with 20.4 percent in the third quarter of 2003.

This increased margin conversion of approximately 310 basis points versus the prior year quarter is mainly attributed to product price increases, and market and product mix shifts, as well as our ongoing initiatives to improve operational efficiencies.

Our margins have continued to expand sequentially from quarter-to-quarter, as a result of increased pricing actions associated with rising material cost and the overall supply and demand dynamics for new homes in certain markets.

As a result, our margins from home settlements in the third quarter continue to see stronger pricing power in most markets, but especially in the West, to include Nevada, Arizona, Northern and Southern California, and also in the Northeast and Florida markets.

Homebuilding interest expense increased during the quarter to approximately $36 million, versus approximately $22 million in the prior year, as a result of the continued volume growth of the business.

The gross profit contribution from land sales was approximately $20 million for the third quarter, versus approximately $7 million in the prior-year quarter.

This was in line with our guidance given for the quarter.

Our land sales ranged anywhere from single custom lots, commercial parcels, to large parcels associated with our purchase of larger land positions in select markets, all in line with our land acquisition strategies.

The profit on land sales may vary significantly from period-to-period, based on the timing of land sales; and they are an important part of our land acquisition programs.

SG&A cost as a percentage of home sales for the quarter was approximately 8.9 percent, improving approximately 40 basis points over the prior-year quarter.

The conversion improvement versus the prior-year quarter was a result of increased selling prices and better overhead leverage with the increased volume over the prior year.

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 during the quarter of approximately $12 million, offset by expenses that include the amortization of intangible assets, insurance expense, and all other miscellaneous expenses from the Domestic Homebuilding operations.

Domestic Homebuilding pretax income for the quarter increased 63 percent to approximately $430 million, with pretax margins at 14.9 percent on total Domestic Homebuilding revenues.

This represents an increase of approximately 350 basis points of conversion over the prior-year quarter.

On an additional note, we estimate that our pretax income for the third quarter was negatively impacted by approximately $13 million as a result of the 4 hurricanes that hit the Florida and Southeastern areas of the United States in August and September.

We experienced minimal property damage, but encountered delayed closings and additional overhead expenses related to the lost workdays and the cleanup efforts undertaken as a result of the storms' impact.

At the end of the third quarter, our Domestic Homebuilding operations had a backlog of 20,400 homes valued at approximately $6.4 billion, compared to approximately 16,600 homes in the prior-year quarter.

Third-quarter pretax income from Pulte's financial services operations was approximately $11 million, a decrease of approximately 16 percent or approximately $2 million below the prior-year quarter.

Offsetting the increased origination unit and dollar volume for the quarter versus the same period last year, the decrease in pretax income performance was attributed to the continuing changes in the marketplace to sell loans versus the prior year.

As you will note, the third-quarter comparisons this year have narrowed significantly versus last year.

This is a result of the market changes in the interest rate environment and product mix preferences that occurred starting in the third quarter of 2003.

The shift in product mix towards the adjustable-rate mortgage products during the third quarter of 2004 increased from approximately 27 percent of origination dollars funded from our warehouse line last year to 45 percent this quarter, which has led to decreasing profitability per loan compared to the prior-year quarter.

In addition, operating expenses occurred in the quarter associated with the future growth of the business projected for the balance of 2004 and beyond, mainly in the area of staffing, training, and facility costs as we hire and train ahead of current business requirements.

Pulte Mortgage's capture rate increased to approximately 87 percent from 83 percent in the same period last year.

Mortgage origination dollars increased in the quarter approximately $366 million or 27 percent when compared to the same period last year.

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

Mortgage refinancings represented less than 2 percent of total unit originations compared to about 9 percent for the same period last year.

International operations' pretax income of approximately $1.6 million for the third quarter increased approximately $800,000 compared to a pretax income of approximately $800,000 in the prior-year quarter.

Improved operating performance in Argentina and Puerto Rico were partially offset by a lower margin conversion in Mexico as a result of product mix during the current quarter.

As I have noted in our prior calls, we continue to explore and work through various longer-term strategic alternatives with regard to our international operation.

At this time we have no further update to provide to you.

Total corporate expenses for the third quarter were approximately $25 million or an increase of approximately $7 million versus the prior year.

This increase is associated with increased compensation-related expenses, with the growth of the business, and higher net interest expenses in the current-year quarter as a result of the increase in debt funding.

Income from continuing operations for the third quarter increased approximately 61 percent to approximately $259 million, or $1.99 per diluted share, as compared to approximately $161 million or $1.28 per diluted share for the same period last year.

Fully diluted shares were approximately 130.5 million for the quarter.

Also in the third quarter, we recorded a non-cash after-tax gain of approximately $11 million in discontinued operations.

This gain is related to the recognition of income tax benefits resulting from the favorable resolution of certain tax matters that were associated with the thrift operations the Company discontinued in 1994 and a related purchase transaction in 1988.

Net income for the quarter reflecting discontinued operations was approximately $270 million or $2.07 per diluted share, versus approximately $169 million or $1.34 per diluted share in the previous-year quarter.

As for the balance sheet for the third quarter, a review of the major changes versus year-end of 2003 continued to be in support of the Company's growth initiatives as planned for the year and going into the future.

We ended the third quarter with a cash balance of approximately $116 million.

Inventory increased to $7.7 billion, or an increase from the beginning of the year of approximately $2.2 billion, in support of the 2004 and beyond planned growth opportunities.

Of this $2.2 billion increase, 50 percent or approximately $1.1 million is related to home construction in progress, to include house and land related to house.

The balance of the increase is related to land under development and held for development.

The increase in the outstanding debt for the quarter of approximately $728 million over the second period of 2004 is associated with the issuance of a $400 million 4 7/8 unsecured senior 5-year note completed in the third quarter, offset by the redemption of the Pulte $112 million 8 3/8 percent senior unsecured notes, plus the utilization of short-term borrowings under our bank revolver of an additional $440 million.

Included in the other asset category of approximately $1.2 billion for the third quarter are major items such as land held for sale of approximately $307 million, receivables, prepaid expenses, and deposits and capitalized pre-acquisition costs of approximately 448 million.

The category also includes investments in joint ventures for $177 million.

Net fixed assets and all other miscellaneous assets for the remaining $293 million from the corporate, homebuilding, international, and financial services operations.

At the end of the third quarter the Company's debt to total capitalization ratio was approximately 45.5 percent and on a net basis was 44.7 percent.

This was in line with our expectations for the third quarter, as our inventories peak, with over 20,000 homes under construction in progress.

With the seasonal buildup for deliveries in the fourth quarter, we anticipate the net debt to total capitalization ratio to be back to the 40 percent level at the end of the fourth quarter.

As I have stated before, we're committed to maintaining a disciplined, conservative, and flexible balance sheet while investing for the future growth of the business and creating greater shareholder value.

Pulte Homes' shareholders equity for the quarter increased to approximately $4.1 billion with a return on average shareholder equity for the latest 12 months of approximately 23 percent.

This is an improvement of approximately 362 basis points over the same period last year.

Pulte Homes return on invested capital for the latest 12 months increased to approximately 14.9 percent, an improvement of approximately 250 basis points over the same period last year.

In addition, under the Company's authorized $100 million share purchase program, no shares were repurchased during the third quarter.

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

Now, looking ahead as permissible under the SEC Regulation FD guidelines, we're providing the following guidance on our current expectations for the fourth quarter of 2004.

Unit settlements in the fourth quarter of 2004 are likely to increase approximately 20 to 21 percent over the same period last year, driven primarily by the growth of additional volume across most major markets.

Average selling prices for closings in the fourth quarter are projected to be even to an increase of one-half of 1 percent above the third quarter of 2004.

This projection is primarily being driven by price increases in addition to product and geographical mix for homes anticipated to be delivered during the fourth quarter.

Gross margin performance from home settlements as a percent of sales for the fourth quarter is anticipated to be approximately 10 basis points below the third quarter of 2004.

This is dependent upon the product and geographical mix of the homes being delivered.

We are projecting land sale gains in the fourth quarter to be approximately 20 to $23 million.

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

As a percentage of sales, SG&A is expected to improve over the fourth quarter of last year by approximately 80 to 90 basis points, resulting primarily from increased sales prices and the additional leverage associated with the increased volumes.

In the other income and expense category for the fourth quarter, we are projecting approximately 2 to $3 million in income.

Given no material change for the current interest rate environment, pre-tax income in our financial services operations is expected to be 14 to 16 percent above the fourth quarter of 2003.

The increased income generated from higher volume is being offset by a shift in product mix and related market pricing, resulting in lower profitability per loan.

Additionally, increased operating expenses are anticipated with the volume growth in the coming quarters.

In the fourth quarter, international operations are anticipated to be even with previous year's quarter.

Total corporate expenses are projected to be 3 to $4 million over the third quarter of 2004.

This increase is primarily driven by higher interest expenses, associated with the higher debt levels in the quarter to support the greater unit volume growth.

We are projecting the effective income tax rate to remain at 38 percent for the fourth quarter.

Fourth-quarter earnings per share from continuing operations are estimated to be in the range of $2.94 to $3.24 per share.

This earnings per share number is calculated based on approximately 130.5 million fully diluted shares.

As we highlighted our press release today, we're maintaining our outlook for 2004 as announced in our press release on October 4 and the subsequent conference call.

Based on the strength of our third-quarter sales orders, backlog, and financial performance, our earnings target for the full year of 2004 earnings per share from continuing operations is projected to be between $7.40 and $7.70 per share.

Estimates are based on 130.7 million fully diluted shares.

This represents an increase of approximately 350 to $390 million in net income from continuing operations over our full-year 2003 actual performance, or approximately in the range of a 57 percent increase.

Looking forward, we offer the following comments regarding our expectations for the full year of 2005.

We're currently in the planning stages of our 2005 annual business plan process, so I will keep my comments guided to a macro overview for now.

Given the current operating environment for homebuilding 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.

Our earnings target for the full year of 2005 earnings per share from continuing operations are between $9 and $9.50 per share.

Earnings are based on 131.9 million fully diluted shares.

We're projecting that unit settlements for the full year of 2005 are likely to increase to approximately 46,000 to 49,000 units 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 above the 2004 selling price in the range of approximately 1 percent.

This projection is primarily being driven relatively flat product prices, product mix, and geographical mix of homes delivered.

Gross margin performance from home settlements as a percent of sales for 2005 is anticipated to increase in the approximate range of 80 to 100 basis points over the actual performance of 2004.

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

In addition, we anticipate our earnings spread by quarter in 2005 to be relatively comparable as a percentage of the total with the actual quarterly performance spread in 2004.

We will provide greater detailed guidance for the full year and the first quarter of 2005 on our fourth-quarter earnings conference call to be held in January of 2005.

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

Steve.

Thanks, Roger, and good morning, everyone.

Okay, let me start with the basics.

For the third quarter we operated out of 607 communities, which is up from the 541 in the third quarter of last year, and from the 554 we reported in the second quarter.

This is on track with the guidance we gave at the start of 2004 targeting a 15 to 20 percent increase in selling efforts.

We ended the third with about 5,700 specs, which is 28 percent of the total homes under construction.

This is down from 31 percent in the third quarter of last year.

The growth in absolute units is consistent with the growth in new communities.

Finished specs at the end of the period totaled approximately 700 homes, which is down about 10 percent from last year.

You have seen the signup numbers that showed an 11 percent increase for the quarter; but let me give you a little more commentary on the market conditions we experienced.

As we have discussed on some prior calls, demand in the Northeast has been and remains extremely strong.

For the quarter, signups in the Northeast were up 11 percent.

Our New England and Long Island operations opened several new communities, and we're seen the positive impact of these new selling efforts.

The Northeast is a great demand environment but extremely challenging with regard to getting new communities through an entitlement process which remains one of the toughest in the country.

Year-over-year net new orders in the southeast were up a strong 23 percent.

Signups were particularly strong in Atlanta, Nashville, Sun City Hilton Head, and -- surprisingly given the weather conditions --throughout Florida.

These strong sales are despite the fact that hurricane-related problems delayed the opening of several new communities and reduced signups by an estimated 200 homes.

As reported in the press release, new home orders for the Midwest were up 18 percent during the quarter.

As we have talked about on the past couple of calls I would characterize overall demand in the region as stable.

The big order drivers for period were the markets of Chicago and Indianapolis, where we have gotten new communities open; and our active adult communities in Chicago also experiencing strong sales.

Our Central region posted another good quarter of net new orders with a year-over-year increase of 9 percent.

Orders in Texas were solid as San Antonio and Dallas were very strong, offset by slower signups in Houston mostly as a result of delayed community openings.

We continue to successfully implement our strategy of moving our Texas operations towards a better balance between sales pace and margin; namely, more margin and maybe a little less pace.

A few of the e-mails Richard referred to earlier in the call noted Pulte offering incentives in Texas.

This is part of our repositioning effort where we're working to move through several land positions acquired a couple of years ago and into new communities that offer higher margin opportunities.

Further north in our Central region sales were strong in Minnesota and essentially unchanged in the other markets, including Denver and Colorado Springs.

Now we come to the West where there is a lot more going on than the 2 percent increase in signups would suggest.

Going alphabetically, Arizona is very strong throughout the area and across the different buyer segments.

Northern California is solid although our signups were down slightly as we closed out of a large active adult community that contributed 140 signups last year.

From San Diego right up through Orange County and the North Inland Empire, Southern California was very strong during the period.

Southern California is a great market, but our expectations are that sales and price appreciations will likely moderate going forward.

Finally, Las Vegas.

As we discussed during the earlier call, signups during the third quarter totaled almost 500 homes on a gross basis.

But cancellations were extremely high.

Cancellation rate is what created the issue we have spoken about.

Given the unusual circumstances surrounding Las Vegas this quarter, we will provide a few extra details on the market.

We ended the third quarter with 1,550 homes in backlog.

Based on our conversations with these buyers, we expect that approximately 77 percent will complete their purchases under our revised pricing.

About 23 percent of the September 30 backlog have elected to cancel their contracts.

Said another way, the huge task of contacting our backlog is largely behind us and the overall results have been better than our expectations.

Beyond the response from our backlog, the market's initial response to Pulte's revised pricing has been very solid and actually a little better than our expectations.

Traffic for the month through October 24 has more than doubled versus the full month of September.

In fact, traffic exceeded the comparable period of 2003 and is running at rates approaching those experienced we saw earlier this year.

Through October 24 we have written almost 300 new contracts as compared to approximately 500 for the entire third quarter.

Traffic and sales pace suggest we've gotten our pricing into alignment with the broader market, so that we expect the majority of this issue is behind us.

We will obviously continue to monitor the situation closely, but we're optimistic that the situation is on a path to improvement.

As we talked about on the call earlier this month, reviews of our other markets suggest we are in line and that Las Vegas was a single-market issue.

These reviews have also served to refocus each of our operations on consistently implementing the critical market analysis needed to ensure that their pricing is appropriate for the local market conditions.

While we have implemented some new reporting procedures, namely exception reports, better focus by managers at every level -- from the community, to the market, to the area, to the region, and to me as the COO -- is what will prevent an issue like Las Vegas from ever repeating itself.

One last statistic for the period.

The third-quarter cancellation rate was 17 percent as compared to 17 percent last year.

If we excluded the 60 percent cancellation rate in Las Vegas, however, the companywide rate drops to 16 percent.

In closing let me just reinforce Richard's comments, that I believe the U.S. housing industry including Las Vegas is very strong.

Further I believe that we've implemented the actions needed to get our Las Vegas operation back on track, to help ensure this issue can't occur again, and to continue Pulte's track record of success.

I would like to turn the call back over to Jim.

Thank you, Steve.

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

As appropriate we're prepared to answer your questions.

So that everyone gets a chance, participants will be limited to 1 question and a follow-up after which they will have to get back into the queue.

At this time we will open the call questions.

So, Kevin, if you can explain the process we would appreciate it.

(OPERATOR INSTRUCTIONS) Margaret Whelan, UBS.

Nice job; you gave us a lot of detail.

I guess since we just have 1 question mine would be, just looking at the balance sheet, you are clearly investing in land more quickly than your peers there, if we look at it maybe as inventory as a percent of sales is rising quickly.

Which I am comfortable with.

I was just wondering, a lot of people are concerned about the tough comps in California, which is kind of stating the obvious.

We know that market is slowing.

But where do you really think you're going to get the best growth and the best margins over the 12 months?

And how are you investing in these markets?

We have actually taken a very balanced approach to our investment across the system.

We have put a lot of money into Florida.

We have put a lot of money into the Northeast.

But frankly we have continued our investment philosophy in the Midwest, Texas, and across the board.

I would tell you that we've been very balanced with it, with no 1 market accounting for a large percentage of our investment.

Steve, I don't know if you have any additional color there?

No, Margaret.

In fact probably what we see is some of our opportunity -- like I talked about in my comments in Texas -- remain in the markets where we really had poor performance because of some poor locations.

We're trying to move through those, and to do that we have got to make investments in the better properties in those markets.

So that is what we have been doing.

One other comment.

Del Webb continues to be a big piece of our go-forward strategy.

I will just point out that you will see through '05 a lot more Del Webb communities open up in the, quote, in place retiree locations.

A good example would be here in Detroit.

We're going to open up our first 1 at the end of '05.

We're ready got a very large list of people interested in that community.

As we spread that to Atlanta, Charlotte, etc. around the country, that is where we're going to get a lot of growth.

My second question is just around the community count.

I guess you had about 100 (inaudible) communities open second quarter.

So (inaudible) in the third quarter?

Also, Steve, do you have any sense of how many communities will be opened each quarter over the next -- or through '05?

Through '05?

We're projecting 15 to 20 percent increase for '05 as well.

To go community quarter by quarter is a little difficult based on the entitlement process that we face from market to market.

But I think that the 15 to 20 percent growth is a safe number.

As Richard suggested, many of those will be Del Webb communities, so we're going to continue to see the growth there as well.

So more than 15 percent will (multiple speakers) you think?

Probably a bit of a disproportion of share, yes.

Okay.

Thanks very much.

Stephen Kim, Smith Barney.

You guys have done a good job of laying out for us what you expect in terms of next year's earnings and in particular the margin.

I guess my question is, if you accept the fact that, at this point, all the builders are probably generating somewhat higher than normal -- let's call it -- profitability due to the fact that you're building on land that has appreciated significantly in value.

Let me say at the outset that I don't actually agree it is a major factor, but it is a factor.

The question I would have for you is, if you look out let's say 3 years, assume an environment where the interest rate is not quite so favorable, assume a situation in which demand has probably moderated a bit but the supply constraints remain intact.

What kind of gross margin do you believe would be prudent to estimate that you would be able to achieve in that kind of environment?

A sort of a more normalized margin in let's say 3 year's time?

Just to take a look at typically what we end up doing when we put our projection together, we would keep it relatively flat.

Certainly there is a mix movement in there when you work your way across the country for different product segments, whether you're in the first-time or the active adult.

All of those are going to have an influence on the overall margin percent and the ability to convert on that.

But if we ended up keeping that flat, our view would be that we still have opportunities in the overall supply chain management side to continue to leverage our size throughout the way we run our business.

That is not just through purchasing, but that is the overall value equation.

The value engineering side, the logistics that we have talked about throughout this year.

So we would see moderate rise in that.

We still think there is opportunity to expand there.

Again given the opportunities of what happens in the commodity pricing even going out to next year.

We raised prices this year to cover commodity price increases.

And even getting out further, will they stay up or will they go down?

And you see those ebb and flow.

So those things will be in there, the vagaries of that movement.

But if we kept all of that out of it, price out of it and costs out of it, we would continue to feel confident that the things we're doing internally to run a better business from a management side are going to result in margin growth.

Again we talked 50 basis points this year.

We would still stay with that at this point.

So the net of your answer was basically that you are saying you would expect margins to grow 50 basis points sort of on a normalized basis?

Yes.

My second question then relates to what you articulated about the opportunity for supply chain management and so forth.

I actually agree with that.

I think it is a big opportunity.

However, it appears that the way the Company or Pulte is gearing itself at this point in terms of land growth and unit volume expectations, that the Company feels that now is the time to really pursue those initiatives very aggressively, relative to your peers.

Which seems to make the assumption that there is a strong benefit to being a first mover or having first mover status in the development of these efficiencies.

I guess I was curious as to if you could explain to us why you're so confident that there is a real strong first-mover advantage in developing these cost savings and process improvements, versus let's say being a second mover?

This is Richard, and then I will flip it to Steve for more color commentary.

A big piece of the reason that we're aggressively pushing this is the complication that is built into our business inherent through the land process.

This business is getting more and more complicated on the land side, and frankly on the processing side of our business.

How we sell homes, how we build them, what specifications go in, what floor plans we use.

We have got to simplify that process in order to be able to be a builder that is delivering 50 or 60,000 or 70,000 or more units 1 day.

We believe that getting there first is going to be important for us, A, in order to achieve the sort of industry-leading position with our suppliers on where we are going with supply chain; but also as a matter of -- I won't call it survival -- but as a matter of literally putting ourselves in a position of being able to deliver on our projections with regard to getting homes built.

Our venture with Pratte as an example out in the Southwest has been very beneficial to us, not only financially but importantly -- and a lot of people missed this -- getting our homes delivered.

We believe that for those reasons it is important.

Maybe Steve can provide a little more detail.

Steve?

What I would tell you is that first of all from a volume standpoint, we believe critical mass has been achieved.

In other words, it doesn't matter if you go up to 50,000 or 60,000; our manufacturers and suppliers understand that today where we're going and where we have been.

So the critical mass component has been achieved.

To Richard's point, the first-mover advantage for us really does lie in fact that it is a heck of a lot easier to try to do this when you are delivering 40 to 50,000 homes a year versus 60, 70, 80,000 homes.

This does not get any easier as you move forward and try to change the way that we're doing business.

So it is those 2 key things.

As to a first-mover advantage, I think there's a lot of things that we're working on for that.

We're not far enough down the line with the manufacturers to be able to demonstrate anything that we could sit down and talk to you about in there.

But understanding the process, designing systems and processes, both internal and then with our vendors and material suppliers, is critical at this point so that we can get to the numbers that we want to get to.

Lorraine Maikis, Merrill Lynch.

You spoke a lot about the product mix shift throughout the country.

Could you just talk about some of your key initiatives there?

Which specific consumers you're targeting, and how that will change your margin and pricing mix?

Specifically what is happening is, each of our markets today, we have identified 11 specific consumer groups.

We call them the TCGs, that you probably heard about.

Specifically most of our markets have really built the business they have today serving 3 or 4 of those groups primarily.

So what we're doing is expanding their focus within each of those markets to serve the groups that they have yet to hit.

A good anecdotal example would be right here in Detroit.

We primarily built our business on the first and second move-up buyer in Detroit.

But the active adult sector or even the entry-level sector we have not done as much with.

Those are the areas in Metro Detroit we're pushing.

So the answer to your question depends on where we are in each market.

On an overall basis I would say you're going to see more of a shift to the active adult sector as the boomers continue to age and we really hit the sweet spot with our Del Webb brand of that buyer.

That would be the sort of a 1 group that I would highlight getting maybe a disproportionate share of the attention.

But it's going to depend on the individual market and where they're serving it today.

Just following up on the active adult business, you had talked a lot about the in-place communities.

Can you speak a little bit about your sales pace for community versus a destination?

And the success that you have been experiencing in some of your Northeastern, Midwest markets for Del Webb?

On an overall basis, what I can tell you is that our sales pace in targeting our in-market active adult retirees have typically exceeded those of our standard Pulte Home community.

A perfect example of that is our Falls Run community in Virginia.

When we had that community branded as a Pulte community a couple of years ago, we were achieving very moderate sales paces.

We rebranded it as a Del Webb community, and basically increased our absorption pace 2-fold and 3-fold.

So it is certainly a great business for us.

No doubt about it.

We're seeing sales paces that do exceed what we typically do in our standard Pulte Home communities.

Wayne Cooperman, Cobalt Capital.

I guess I am not going to congratulate you for Las Vegas, but I guess someone should mention that at least you kind of figured out the problem and dealt with it rapidly.

So I commend you for that.

The second question is -- I am a little confused and disappointed that the share repurchase in the quarter was zero and we haven't been very aggressive buying back stock.

We're now projecting 9 dollars of earnings for next year.

The stock is below a 6 multiple on that projected low end of your range.

I am extremely hard-pressed to see why a repurchase of shares is not incredibly -- we all know it is accretive.

A $500 million repurchase adds about 60 cents in earnings for next year.

On that anybody can do the math.

But it seems to me that your best is that '06 is better than '05, and I have a very hard time understanding why this is not a good use of shareholder capital to some extent, given you're into 1.2 billion of net income next year, why some percent of that is not earmarked for share repurchase.

I would like to understand why you're not repurchasing shares.

And if necessary I would like to take this to the Board level to understand that decision.

I will just respond to that.

Thank you for the question.

We didn't buy back shares in the third quarter.

If you recall our share price was in the $63 range and hit an all-time high.

I recall that very well.

Yes, and the announcement we came out with was October 4, which was the beginning of the fourth quarter.

So as we look at, and as we talked many times, our approach here is to continue to look at what are the best opportunities for growing shareholder value.

Our approach has been long-term, not short-term focused.

And we continue to be long-term focused, that investing in the business with the growth and the numbers that we continue to post here are the best value for the investment at this point in time.

Now certainly I'm not going to talk about what we're doing in the fourth quarter here, but we continually look at trading that off.

So to react to quick movements in the stock generated by fears that are driven by interest rates or whatever the news report is of the day, is typically not the way we're trying to run the business.

Again, we're trying to stay focused on the long-term strategy, not the short-term strategy.

Can I add one thing?

Can I say one thing about that?

Yes.

When you repurchase a share of stock it is gone forever, and therefore that is a long-term strategy, not a short-term strategy.

So I think you guys are missing that point.

Thank you.

Gary Freeman (ph) from Gem (ph) Value.

I just wanted to the previous sentiments of the caller who commended your for being very, very forthcoming about Vegas and dealing with that issue head-on.

Just as it relates to Vegas, I wonder if you could elaborate a little bit on, now that you have put those aggressive pricing actions in place, what do you see as potential upside coming out of Vegas as you look to the future?

Regarding the future, I don't know if you mean like current month or quarter or beyond that?

I will speak to the long term.

We view Vegas as a great market.

I think we have announced at our October call, the October 4th call, that we are going to make more than twice as much money there this year as we did in prior years.

So we are very bullish on the market and we continue to see great long-term prospects.

Once we got our pricing back to where it needed to be, as Steve echoed in his comments, our activity has been good.

So we are bullish on the future.

We don't what to give a lot of specific detail on a go-forward basis, but I would expect that we're going to be a big player in Vegas for many many years.

Thanks, Richard.

My second question relates to -- I just wanted to be clear about your pricing assumptions in your '05 guidance.

Am I right in assuming that you have assumed that prices stay flat from here on out, but just as it relates to mix, there may be some slight movement upward?

Yes, this is Roger, Gary.

We left prices relatively flat, and what we'll see is just actual movement in the mix overall throughout the country.

So as there are shifts in mix from one area to another area where maybe prices are higher, that is going to be the influence.

That would not be considered, quite frankly, price increase.

And then is there an assumption that you will pick up 50 basis points in terms of supply chain refocusing, etc.?

Yes, that is all included in our view of next year as well; to continue to be able to capitalize on those initiatives.

Right, got you.

Okay, thanks.

Steve Fockens from Lehman Brothers.

Good morning, guys.

First, hypothetically, if in '05 you guys faced another call it Vegas and Florida event in the same year, how much risk do you think there would be to the kind of guidance you put up?

In other words, what sort of assumptions around markets maybe not performing as well as you expected have been baked into your outlook?

I will give you a general answer and then I'll throw it back to Roger for a couple more specifics.

I just want to point out that we have undertaken a review of every market across the country and do not believe we have any situation around the system where our pricing exceeds that of the market like we did in Vegas.

So our belief would be the chances of something like that occurring again are extremely minimal.

I think it is worthy to note that it was a company-specific issue there where we got too aggressive, quite frankly, and we've kind of detailed that ad nauseum.

So I just wanted to point that out.

With regard to assumptions for '05, I will flip it to Roger.

When we take a look at the overall approach to how we end up forecasting, I can tell you we are very conservative when we take a look at this.

This is not a very aggressive view of what next year looks like.

And you can go back and take a look at what we did in 2004.

When we came out in 2004 we gave guidance of $6 a share.

Now we are giving guidance to end up the year at $7.40 to $7.70.

So we use the same methodology when we are taking a look out.

Taking a look at volume, from what we think the operations could do, we end up hedging that back.

When we look at our overall margin opportunities, we may hedge that back.

When we look at what our SG&A runs, we may hedge that upward.

So we look at all these things.

I can tell you we are not aggressive when we put these together.

I have seen some of the research that came out.

We are conservative the way we took a look at it.

Certainly going back to the circumstances that just happened in October with Vegas, those were the numbers we were selling homes out.

And quite frankly to not have put that in a forecast certainly would not have been an appropriate thing. 20/20 hindsight now, maybe you could say that was better off not to put that in.

The reality is, we take a look at where we are, and we're looking out, we do -- we use a lot of conservatism in pulling our numbers together.

Put another way, your initial outlook for next year does not explicitly assume that -- and not just the Vegas; you could not control Florida; and obviously that hit you; and obviously in any given year things will come up that nobody can control.

But if you are feeling pretty conservative about your outlook for next year, that is maybe not explicitly but implicitly assuming that maybe some market doesn't go exactly the way you thought it might.

That is true.

When you ended up looking at this, I did not anticipate we would have 4 hurricanes in the quarter in Florida this year.

So we absorb that; basically still in the range of guidance.

That is why we give a range, is to account for some of that.

Now, if people want to drift to the high side, and there are good things that happen in a quarter that get us to that high side, that is fine.

But we are not trying to always beat our forecast by coming down low and then coming above it.

We are trying to give a pretty good view of the things we think we see at that point of time.

Yes, we are conservative in some aspects.

There are a lot of vagaries in this business that happen every single day that your costs go up-and-down.

Certainly there are things that you don't control.

In Las Vegas we did control that.

We controlled the prices going down and the action against our P&L in the performance for 2004.

We were very aware of that.

But when we're looking out as well, yes, I think that we are conservative.

There are opportunities to weather downside as well as upside opportunities as well.

Jim Wilson, JMP Securities.

Just 1 more question;

Las Vegas question, of course.

Now it is pretty amazing numbers, but maybe not surprising now that you have lowered prices (inaudible).

I am sure it got a lot of press in Las Vegas and that your trapping (ph) contracts picked up tremendously.

Do you think this is sort of typical of the market?

That you are now generating comparable volume to what others in your price points etc. in the market might be seeing at these price points?

Or how would you characterize it?

Or do you think it is just part of the follow-up to having cut your prices recently?

We have elbowed our way back into the mainstream of the business.

As Richard talked about, as I talked about, the Las Vegas market was selling a lot of homes when we were canceling a lot of homes.

That was part of our problem.

Inventory supply came on that did not exist before; and our buyers had opportunities to go someplace else at a price that was a better economic decision for them.

We have put our prices right back in line with where the market is.

I think what you're seeing and what we're certainly seeing is that we are getting our fair share of new contracts as we had throughout the first half of the year.

So, like I said before it is not an indictment of the market.

The market was always solid.

Our pricing just got out of line; we got our pricing back in line; and we are getting our fair share of signups.

The follow-up, just for your '05 community thoughts, do you expect growth?

Or growth of what type generally in California and Las Vegas in terms of community count next year?

Specifically?

I don't have that data in front of me, and probably would not give it out if I did as a specific.

But the reality is that you all have seen the investment in our business; and we expect that the community count will mirror with that investment in our business.

It is across the board, as Richard talked about before.

We're going to continue to grow our business in every market that we do business in, and it is relative to supply and demand factors that our operators see there.

Alex Baring (ph), also with JMP Securities.

Just wanted to know if you could give us a lot count; and what percent is owned and optioned (ph)?

I will be glad to do that for you.

As of 9/30/04, our total lots controlled are 335,400 of which 47.6 percent are owned.

Thank you.

Joel Locker (ph) from Benchmark.

Good quarter, guys.

I just wanted to get a quick synopsis maybe on your 2005 earnings.

Just on the basis of where do you see land, material, and labor cost in 2005 compared to 2004?

I would tell you that we anticipated that material costs and labor costs will be relatively flat to where we are today.

We are not baking in, again, any upside or downside.

So as we started to see right now the movement in lumber costs heading downward, they're are still at an all-time high, but are heading south.

We have not baked that into our numbers for 2005 as well.

So we have really left price cost neutral at this point going forward.

What about land year-over-year?

Land year-over-year, that would only influence probably 2006, 2007, 2008 at this point.

We have got the majority of the land today.

I can tell you relatively speaking on a lot cost basis it is not significantly different to what we have experienced this year.

Okay, thanks a lot.

Stephen Kim, Smith Barney.

It's Jed Barron for Steve Kim. 1 quick question.

On your deliveries for the quarter, it looks like -- I guess relative to the guidance you had laid out after your second quarter, you were maybe 6, 700 or so units short.

I was wondering if perhaps you could break that out in terms of how many units of that shortfall was due to backlog falling out in Vegas, as well as perhaps the impact from the hurricanes in Florida?

I am not going to get into a specific breakdown today.

I typically give you a range on that.

But specifically, we probably experienced about 220 units coming out of the Florida market, Southeast market from the hurricane.

Then I think anywhere between 40 to 50 units coming out of Las Vegas market in general from the third quarter.

Actually it is Steve Kim as well.

I did have a follow-up.

Pertaining to my earlier question about whether there is a first-mover advantage to achieving a lot of the process improvements you are striving to reach, I thought I heard in your response that you said it was easier to sort of achieve those at a lower volume, as opposed to a much higher volume, that you would not have to face later on.

And also that basically in an effort to reach the numbers that you have put out there, your projections.

I guess my overall question relates to those answers, and also to the questioner who asked about the share repurchase.

Which is that, if it's easier to achieve the process improvements at a lower volume -- which I guess it is true if you state it that way -- why wouldn't it be more prudent for the Company at this point to adopt a somewhat less aggressive stance towards growth?

Recognizing that you could still achieve double-digit growth without necessarily pushing the envelope.

And simply buy back more shares, develop the process improvements that you believe will change your business positively, and then the ramp the Company's operations.

Why is that not a prudent course of action?

First of all, just to clear that, it is easier at a lower volume level because of the organization that you're dealing with.

All of the built-in biases that have been around for years etc.

So there is no question that we want to get to the effort now.

We never said that we were strangers to share buybacks or completely against it.

We said we had an outstanding authorization and we will keep that in mind as a go-forward basis.

But what we have to look at overall is where we think we have the opportunity to add the greatest long-term value.

What you heard us articulate over and over again is that we believe that is in the land side of our business.

And we are very pleased with being able to post the kind of results we have the last several years and again going forward.

But it is one of the arrows in the quiver for us.

We are not opposed to using it.

It is just a question of where we think we can get the greatest long-term value.

Michael Rehaut, J.P. Morgan.

I had a couple of questions.

First I was wondering if you could give a little bit more detail if possible on the -- you referred to some new reporting procedures or better local or regional oversight in terms of preventing a Vegas type of issue recurring.

Would those reporting procedures be triggered by strong appreciation in an area or having pricing go out of range within the competitors that are in that area?

How would those new procedures -- what issues do those news procedures surround?

I will answer that question.

The answer is yes and yes to both of those.

Number 1, it is.

If we see rapid movement in our pricing now in any given market, we have got different controls now, different questions that we are asking.

So in answer to your question that is one of the things I talked about on an exception report.

The other high-level look is that we had left a lot of the pricing decisions in the local market to the markets.

That is historically what we have done, because the market controls and has the best knowledge to the information.

A lot of that information now in summary format on a regular basis -- I don't want to say weekly but I will tell you it is at least biweekly -- is being pushed out to the regional presidents and myself, to give us a lot more visibility on price movement within different consumer segments in their market.

So it is those 2 key factors that will ensure that this will not happen again to our Company.

Maybe I could get in a follow-up before I ask a second question.

That is cheating.

It is cheating, but I was put to the end of the queue for some reason.

There still will be, though, however, enough flexibility on the local level to raise prices on a weekly basis if need be?

I would be disappointed if that did not happen.

Absolutely.

We want our operators pricing to market; and one of the ways we add shareholder value is to raise price where we can.

So no question about that.

Great.

Just quick math in terms of ex-Vegas orders.

You had said in the press release up 24 percent on a Companywide basis.

So just doing the math, that would imply that the West excluding Las Vegas would be up around 35 percent?

I don't have the specific number in front of me.

That sounds approximately correct.

Ken Foman (ph), Omega Advisors.

Just a quick question.

I am not that familiar with your story.

But the question that many people are asking is regarding the stock buyback.

Isn't my interpretation correct that it is more attractive right now to use your stock -- essentially to invest more into land, but not to buy your stock?

Because you are sitting on probably 1.6, 1.7 times book.

So it essentially is an arbitrage between investing in the (indiscernible) by buying land; it is more attractive?

Yes, that is it.

The equation is, when you take a look at how you can create more value for the shareholder, is it to continue to invest in growing the business and the returns that you get.

Certainly that is indicative of what the stock price is, and how that is viewed in the markets.

Versus again buying land to increase returns.

So all of that is the equation.

And you get every single day when you go out to contract the land, if the market goes up or down, you cannot walk away from one or walk away from the other.

Our approach has been to try to stay fully invested, to maximize shareholder value that way.

And again we think we have been doing that.

And again the results speak for themselves.

The overall volatility certainly in the stock is something that we have to deal with.

But back between '95 and 2000 we bought back more than a third of the stock outstanding for the Company.

So we're no stranger to that, as Richard had mentioned, and we are not opposed to that, given the environment and what we thought the opportunity is and think the opportunity is for long-term growth.

We continue to view that investing in the business is good.

In the long run, your share count keeps going up, I guess, including this year, right?

So you continue to view your -- again, your share is more expensive compared to opportunities to invest into land.

How would you think it, like numerically, would be a favorable trade-off, and you would see your stock being cheaper than the potential or just freehold land?

Again, mathematically or financially, you would take all this into consideration, but you cannot take it in isolation on a given day.

It is really what the long-term view of the business is versus the short-run activity in the stock.

Again, if you look over historical periods, look at the volatility in the stock, and then again relatively trade that off at any given point in time for investment going forward.

So as I said back in '95 through 2000, we viewed that as a good opportunity to buy back stock and bought back more than a third for the Company.

Rick Murray, Raymond James.

Just 2 quickies if I can.

One, I did not catch or maybe I missed, did you guys speak to signups and cancellations in Vegas month to date?

I heard you gave out the traffic number.

Yes, Steve did.

Go ahead, Steve.

Yes, I spoke to approximately 300 new sales, and the net sales number would be very distorted, but basically we started with 1550 homes in backlog, of which about 77 percent of those people have come in and re-signed up on their contract at the lower pricing.

So until we tally up all of the cancellations and get them signed and processed -- as you know, we are nowhere near what the net number would be -- but it is kind of like flushing the quail out of the meadow right now.

I mean, very rarely can you go out to all of your backlog in a given market and ask them if they want to cancel in a given month.

So we're very pleased with the numbers that we have seen so far.

Like I said, the cancellation rate is a lot lower than what our expectation was.

Great, thanks.

Roger, if I could real quickly, I was just curious on the other income and expense line.

What caused that line this quarter to differ from your previous expectations to see about 3 or $4 million of income this quarter?

Hold on one second.

Basically, running through there would be some of the joint venture income.

Basically, Our Pratte joint venture that we got into earlier this year.

That is going to be the biggest driver in that line from quarter-to-quarter, and our expectations were exceeded by the home deliveries in that market.

Typically, what we do in that venture, we take the income when the houses are delivered, not when they are built.

So, basically, as we take them out of inventory through the sales and the closing process, we will book that income on that line during the quarter.

So that was the biggest movement there.

Steve Fockens, Lehman Brothers.

Just one quick follow-up.

In terms of the outlook next year, does that make any assumptions for any significant changes in margins in some of your stronger markets; the Californias, the Arizonas, the Floridas?

Is it flat and you're getting good margin improvement from your softer markets, or you're expecting margin improvement across all markets?

Kind of how would that work geographically?

Steve, I think the majority of it is being driven by mix.

Again, you have to take a look at what happened this year.

As margins increased in 2004, from the first quarter to the second quarter to the third quarter and going into the fourth quarter, naturally there is going to be some view when you come across from a fourth quarter or a third quarter going into 2005 that there's some annualization of pricing that would happen and benefit the margin.

So as we took prices up in the first quarter, our margins were lower in the first quarter relative to the third quarter, and again taking those across you get some annualization from that.

That is part of the margin improvement.

Again, no price related to any movement from the fourth quarter going into '05.

Then again, you've got some mix.

We do have some other areas in the country that are going to be better.

For instance, the Northeast is going to contribute a little bit more next year than the average this year relative to some of the others whose margins are a little better there.

So some of the mix is driving in there as well.

So again, let me reiterate; we did not impact '05 for pricing actions or cost actions going forward.

We relatively look at where we are today and carry those forward.

Thanks again.

Margaret Whelan.

It's just kind of a follow-up to Steve's question, but in terms of these markets as you are looking at it 12 months and away from the margin, what is the return on capital that you're assuming relative to the ROE you have right now?

ROE or return on capital, Margaret?

Well, both.

The question is, your return on capital has improved nicely over the last couple years, but what do you expect it to be next year based on what you're seeing?

I expect another 100 to 200 basis points improvement year-over-year in each one of those.

Just an observation, the speed bump in Vegas has cost your shareholders 20 percent.

It might be a good idea to kind of perform a goodwill to buying at least a little stock over the next couple of months.

Thank you, Margaret.

It appears we have no further questions at this time, so I will turn the program back over to our speakers for any closing comments.

Thank you very much.

I want to thank everybody again for their time this morning.

We will be around all day if you do have any other follow-up questions.

Once again, this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for participating and everyone have a great day.