普爾特房屋 (PHM) 2005 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Pulte Homes third-quarter earnings conference call. [OPERATOR INSTRUCTIONS] Thank you, Mr. Zeumer, you may begin your conference.

Thank you and good morning everyone joining today's call to discuss Pulte Homes financial results for its third quarter ended September 30, 2005.

I expect that most of you have had a chance to review the press release we issued last night on Pulte's strong third quarter performance.

On the call to discuss these results in detail are Richard Dugas, President and Chief Executive Officer;

Steve Petruska, Executive Vice President and Chief Operating Officer;

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

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

The presentation will be archived on the site for the next 30 days for those of you who want to review at a later time.

As with prior 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 as defined by the Securities Litigation Reform Act of 1995.

Pulte Homes believes such statements are based on reasonable assumptions, but there are no assurances that the actual outcomes will not be materially different from those discussed today.

All forward-looking statements are based on the information available to the Company on the date of this call and the Company does not undertake any obligation to publicly update or revise any forward-looking statements as a result of new information in the future.

Participants -- participants in today's call should refer to Pulte's annual and quarterly reports on Forms 10-K and 10-Q for a detailed list of the risk and uncertainties associated with the business.

With all that said let me turn the call over to Richard for a few comments.

Richard.

Thank you, Jim, and good morning, everyone.

At the risk of stating the obvious, there are probably more questions and concerns swirling around this industry than at any time in recent memory.

Macro issues ranging from expected Fed action to the impact of higher fuel prices on inflation and direct construction costs, industry questions spanning from pricing trends to speculators, market-specific concerns questioning any developing weakness in D.C. to fears of overheating in Florida to labor constraints in Arizona.

And now we can add to the list.

So what is the impact of hurricane Wilma on Florida?

If you were to gauge the answers to these questions by looking at the stock prices for home building companies, you would have to assume that the answer to every question above is bad.

And further, that the impact on our business will be severe.

In our opinion, these assumptions are both wrong.

If you ask the builders, the answers you get will vary depending on the market, the builders' position within that market, and even the specific community.

Given these conditions, I am sure it won't be a surprise when I say that we have gotten countless calls and questions trying to figure out what's real, what's not, what it means, and how Pulte is responding.

Rogers and Steve's comments will hopefully provide some answers to the first few questions, but I wanted to address the last one, namely how Pulte is responding.

The short answer is that we are intelligently running our business just as we always have, because that's the best thing we can do for long-term shareholders.

Our business has so many moving pieces and the market environment is so fluid that even on the best of days we are always tweaking, tuning, and adjusting something.

Product changes here, community pricing strategies there, land entitlement maneuvering in this market, our construction resource strategies in that market.

From your seats, it may be impossible to appreciate just how dynamic this business is, and trust me, it is dynamic.

We don't punch out widgets.

We clear roads, build large and complex structures, source a myriad of labor skills and materials, set pricing, et cetera, in hundreds of communities of which no two are alike.

Oh, by the way, we do all this outside in the elements.

My point, we are used to adjusting every day.

It is certainly possible that the home building environment could be tougher in the next few months than it has been in the past, but I want to highlight the fact that Pulte always has and always will plan its business for a normal operating environment.

We acknowledge and have enjoyed the more euphoric conditions we have experienced in some markets over the past two to three years, but operationally, we always assume a more normal demand environment when planning for the future.

Our business model is not dependent on continually rising prices.

Said another way, while individual markets are always moving, our long-term growth strategy is built around Pulte expanding its share of the U.S. housing market.

Given the constantly changing nature of our business, however, how does Pulte respond if conditions get more difficult?

Fortunately, it is built into our long-term operating strategy in that it starts with selecting the right land positions based on the consumer segmentation methodology we've talked about.

If we've done it right it is a lot more about having planned properly and a lot less about just reacting and trying to put out fires.

When we see the need to adjust our business, we do.

If this means getting materials in place before a hurricane hits, getting houses built when labor is tight or adjusting incentives or pricing because market conditions have changed we get it done, quickly.

As an example, based on our experience with four hurricanes in Florida in 2004.

We put extra roofing materials and other products on the ground in Texas and Florida before Rita and Wilma hit.

That is the flexibility of a nationwide builder at work.

Our operators, working in conjunction with corporate resources, assess the local market conditions and develop a response strategy.

Most decisions are issue, market, or even community-specific.

I can tell you that we have experienced operators across our 662 communities who have had to respond to a myriad of market changes more often than you would ever know.

As I said earlier, we operate in a dynamic industry.

It's never a static business environment.

It's not a factory, and we don't punch out widgets.

The answers to most issues that affect this business long term can be found in having positioned the business properly.

For Pulte that means the key strategic initiatives you have heard us repeating and repeating and repeating.

Number one, diversification.

The markets, even submarkets within cities and the customer segments all respond differently.

Be diversified enough that you smooth out some of the underlying volatility.

Oh, and have an unmatched position in the fastest-growing segment as we do with Del Webb for active adults.

Number two, operational excellence.

Take costs out of the construction process.

Design houses that use materials more efficiently and that are less costly to construct, use volume and a simplified approach to the business to drive costs out of the supply chain.

Begin moving the business toward a more planned production model as a way to deliver more consistent and predictable results.

Number three, it's not about overall industry growth.

It's about taking market share.

Have a land strategy that enables you to compete successfully in this environment and a strategy that enables you to serve the biggest universe of home buyers.

And, four, always focus on the customer.

When the business gets tougher, delivering the best quality and customer experience does help sell homes.

I am sure you saw at least one of the 17 press releases we issued on our recent JD Power success, where, for the sixth year in a row, Pulte was the most awarded builder in this annual survey on customer satisfaction.

If the business is really getting tougher and the tide won't be lifting all boats, then success will be about company-specific strategies, tactics and execution.

How well have you planned?

How well are you positioned?

And how well can you respond when the need arises.

Pulte's history suggests that as the largest, most diversified and best positioned builder, we can pick up share and run a very successful business in all types of market environments.

Now let me turn over the call to Roger for more details about the quarter's results.

Roger?

Thank you, Richard, and good morning.

As our earnings release highlighted Pulte Homes had another solid quarter by all measures, the third quarter domestic home building net new unit order rate posted in excess of a 19% increase over the third quarter last year and in dollars increased 33% to approximately $4 billion.

Revenues from home settlements from Pulte Homes domestic home building operations increased approximately 32% over the prior year quarter to approximately $3.7 billion.

Higher revenues for the period were driven by an increase in unit closings of approximately 21% on an increase in the community count of approximately 9% versus the same quarter last year.

The average sales price increased approximately 9% versus the prior year quarter to an average of $317,000.

The increase versus the prior year results are primarily from increased product prices and an overall volume driven improvement in product mix and geographical market mix.

In the third quarter land sales generated approximately $25 million in total revenues, which is a decrease compared with the previous year's quarter of approximately $44 million.

Domestic home building gross profits from home settlements including home building interest expense for the quarter increased approximately 34% to $886 million.

Third-quarter domestic home building margins from home settlements as a percentage of sales were 23.8% compared with 23.5% in the third quarter of 2004.

This increased margin conversion of approximately 30 basis points versus the prior year quarter is mainly attributed to product price increases in market and product mix shifts offset by material cost increases.

Home building interest expense increased during the quarter to approximately $49 million versus approximately 36 million in the prior year.

This increases is the result of the continued additional funding requirements associated with the growth of the business year-over-year.

The gross profit contribution from land sales was approximately $1 million for the third quarter, versus approximately $20 million in the prior year quarter.

Land sales transactions during the third quarter ranged anywhere from ongoing single family custom lot sales to several commercial land parcels all in line with our local land acquisition and operating strategies.

The profit on land sales may vary significantly from period to period based on the timing of land sales, and they are and continue to be an important part of our overall land acquisition strategies.

SG&A cost as a percent of home sales for the quarter was approximately 7.3%, improving approximately 160 basis points over the prior year quarter.

The conversion improvement versus the prior year quarter was the result of increased selling prices.

Our internal initiatives focused on controlling costs and better overhead leverage with the increased volume over the prior year period.

In the other income and expense category for the quarter, the income of approximately $3 million is primarily the net result of joint venture income generated during the quarter of approximately $13 million, offset by approximately 10 million in expenses that include the amortization of intangible assets and all other miscellaneous expenses from domestic home building operations.

Domestic home building pretax income for the third quarter increased 44% to approximately $618 million, with pretax margins at 16.5% on total domestic home building revenues.

This represents an increase of approximately 160 basis points in conversion over the prior year quarter.

At the end of the third quarter, our domestic home building operations had a backlog of 23,666 homes valued at approximately $8 billion.

Compared to 20,400 homes valued at 6.4 billion in the prior year quarter.

The third quarter pretax income from Pulte's financial services operation was approximately $19 million or an increase of approximately 7.7 million to the prior year quarter.

The increase versus the prior year quarter was primarily due to the volume-related increase in originations, which accounted for approximately 25% of the increase.

And the more favorable interest rate environment to sell loans experienced during the third quarter of 2005 when compared to the third quarter of 2004 which accounted for the balance of the increase during the quarter.

The shift in product mix from the adjustable rate mortgage products during the third quarter of 2005 decreased from approximately 45% of origination dollars funded from our warehouse lines last year to approximately 42% this quarter and down from 53% in the first quarter of 2005.

Pulte Mortgage's capture rate increased from the same period last year from approximately 87% to 89% in the current quarter.

Mortgage origination dollars increased in the quarter approximately $457 million or 27% when compared to the same period last year.

The increase in originations is a result of higher production volumes and a slightly higher average per loan amount.

Mortgage refinancings represented approximately 1% of total unit originations compared to about 2% for the same period last year.

International operations posted a pretax income of approximately $1.4 million for the -- for the third quarter versus income of approximately 1.6 million in the prior year quarter.

The third quarter income was the result of improved operating performance in our Puerto Rico operations and a break even in income performance from Mexico.

The Mexico break-even performance was a result of amortizing approximately $2.8 million in the quarter.

Of purchase price premium value assigned to house and land inventory related to the purchase of our minority shareholders interest in Pulte Mexico during the first and second quarters of this year.

As I have highlighted in our prior calls, we continue to explore and work through a process of longer-term strategic alternatives with regard to all of our International operations.

And at this time, we have no further update to provide.

Total corporate expenses for the third quarter were approximately $25 million, even versus the prior year.

The lower income tax rate for the third quarter of approximately 36.8% was due primarily to the new manufacturing deduction established by the American Jobs Creation Act of 2004 and the resolution of certain other tax matters during the current quarter.

Income from continuing operations for the third quarter increased approximately 50% to approximately $388 million or $1.47 per fully diluted share as compared to approximately $259 million or $0.99 per fully diluted share for the same period last year.

Fully diluted shares were approximately $263.9 million shares for the quarter.

Also in the third quarter, we recorded a noncash aftertax gain of approximately $8 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 that the Company discontinued in 1994 and the related purchase transactions in 1988.

Net income from the quarter reflecting discontinued operations was approximately 395 million or $1.50 per diluted share versus approximately 270 million or $1.03 per diluted share in the previous year quarter.

Moving to the balance sheet for the third quarter, a review of the major changes versus the year end of 2004 continues to be in support of the Company's growth initiatives.

We ended the third quarter with a cash balance of approximately $215 million, mainly attributable to the issuance in the first quarter of about $650 million of unsecured Senior Notes.

The proceeds were used to repay the indebtedness on the revolving credit facility and for the continued investment in the growth of the business for the balance of this year.

In addition, we have a Senior Note issuance maturing for repayment during the fourth quarter for approximately $125 million.

House and land inventory increased to approximately $9.4 billion, or an increase from the beginning of the year of approximately $2 billion, which is in support of the 2005 and beyond.

Of the $2 billion increase, approximately 75% or $1.5 billion is related to home construction in progress to include house and land related to house, the balance of the increase or approximately $500 million is related to land acquired under development and held for future development.

Land held for sale was approximately $187 million as of the end of the third quarter, a reduction from year end of approximately 44 million.

Investments in unconsolidated entities of approximately $290 million at the end of the quarter are mainly attributed to our investments and participation in various strategic joint ventures that purchase, develop, or sell land and homes, supply and install building materials and components in certain markets in the United States, Mexico, and Puerto Rico.

Included in the other asset category of approximately $1 billion for the third quarter are major items such as receivables, prepaid expenses, and deposits, capitalized preacquisition costs, and net fixed assets of approximately $781 million.

The category also includes all other miscellaneous assets for the remaining $255 million from the corporate, home building, International, and financial services operations.

At the end of the third quarter, the Company's debt-to-total capitalization ratio was approximately 39.1 -- excuse me 39.1% and on a net basis was 37.6%.

This was in line with our expectations for the quarter and our stated operating strategy.

We continue to demonstrate our goal of managing a disciplined, conservative, and flexible balance sheet while investing for the future growth of the business with the goal of creating greater shareholder value.

Pulte Homes shareholder equity for the quarter increased to approximately 5.5 billion with a return on average shareholders equity for the latest 12 months of approximately 27%, an improvement of approximately 440 basis points versus the same period last year.

Pulte Homes’ return on invested capital for the latest 12 months increased to approximately 18%, an improvement of approximately 280 basis points over the same period last year.

In addition, the Company authorized an additional $100 million share repurchase program, bringing the total open authorization available to approximately $121 million.

During the third quarter, approximately 460,000 shares were repurchased.

Year to date, the Company has repurchased a total of approximately 1,031,000 shares.

Now looking ahead, under the SEC regulation FD guidelines, we are providing the following guidance on our current expectations for the fourth quarter of 2005.

Unit settlements in the fourth quarter of 2005 are projected to increase approximately 15 to 16% 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 estimated to be approximately 8 to 9% above the fourth quarter of 2004.

This projection is primarily being driven by product and geographical mix or homes anticipated to be delivered during the fourth quarter from backlog.

Gross margin performance from home settlements as a percentage of sales for the fourth quarter is anticipated to be approximately 30 to 40 basis points above the fourth quarter of 2004.

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

We are projecting land sale gains in the fourth quarter to be approximately 4 to $5 million.

As 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 40 to 50 basis points as a result of better overhead leverage associated with the continued volume growth of the business in 2005.

Our internal initiatives focused on cost controls and the increased selling prices experienced over the past year.

In the other income and expense category for the fourth quarter, we are projecting approximately 11 to $12 million in income, attributable to joint venture income offset by other net operating income and expenses.

Given no material change from the current and short term projected interest rate environment or a significant shift in consumer mortgage product preference, pretax income in our financial services operations is expected to be approximately 30 to 40% above the fourth quarter of 2004.

In the fourth quarter, International operations are anticipated to post a profit for the quarter of approximately 5 to $6 million.

Total corporate expenses are projected to be 8 to $9 million above the fourth quarter of 2004 expenses.

This increase is mainly attributed to higher compensation-related expenses and interest expenses associated with higher debt levels in the quarter, all in support of greater unit volume growth.

We are projecting the effective income tax rate to be 37.3% for the fourth quarter of 2005.

Fourth quarter earnings per share from continuing operations are estimated to be in the range of $1.90 to $2.00 per share.

This earnings per share number is calculated based on approximately 264.5 million fully diluted shares.

As we highlighted in our press release we are raising our guidance for the full-year of 2005.

Our earnings target for the full-year of 2005 earnings per share from continuing operations are now anticipated to be in the range of 5.35 to 5.45 per share.

This now projects our growth rate of earnings per share from continuing operations to be over the full year of 2004 in the range of 39% to 42%.

Earnings per share estimates are based on 263.5 million fully diluted shares.

Looking forward, we offer the following comments regarding our expectations for the full year of 2006.

We are currently in the planning stages of our 2006 annual business plan process.

So I will keep my comments guided to a macro overview for now.

Given the current operating environment for the home building industry, these comments are based on the assumption that the overall macro economic conditions remain in a modestly comparable range to that which we are experiencing today.

Our earnings target for the full year of 2006, earnings per share from continuing operations are between $6 and $6.25 per share.

These estimates are based on approximately 266 million fully diluted shares.

We are projecting the unit settlements of the full year of 2006 are likely to increase to approximately 51,000 to 53,000 units.

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

Our average selling prices for closings are projected to be above the average 2005 selling price in the range of approximately 4 to 5%.

This projection for 2006 is primarily being driven by flat product price appreciation.

Product mix and geographical mix of homes delivered.

In addition, we anticipate our earnings spread by quarter in 2006 to be relatively comparable as a percentage of the total with the actual quarterly performance spread in 2005.

We will provide greater detailed guidance for the full year and first quarter of 2006 on our fourth-quarter earnings conference call to be held in early February of 2006.

I will now turn the call over to Steve for more specific third-quarter comments on operations.

Steve?

Thanks, Roger, and good morning, everyone.

Referring back to some of Richard's earlier comments, I will try to provide some insight into the market conditions we experienced during the last three months.

For the quarter, we operated from a total of 662 communities which is up 9% over the third quarter of 2004, and up slightly from the second quarter of this year.

Unfortunately, in terms of getting new communities open, we continue to face longer entitlement time lines, approval delays and development challenges across all markets.

Pulte has a lot of experience getting land through this gauntlet, but it is tough work.

The bright side is, is that we have a strong pipeline, so we should be in good shape in the quarters and years ahead and on a relative basis in better position than most of our competitors.

On the construction side, you read in our press release that Pulte's domestic home building operations had a strong quarter as closings increased 21% to almost 12,000 homes.

Sign-ups for the quarter were equally impressive increasing in value 33% over last year to $4 billion.

In Units up 19% to just north of 12,000 homes.

Now for a more detailed look at the different regions of the country.

First, third-quarter sign-ups in the northeast remain strong increasing 26% over the same period last year.

I hate to generalize, but I think it is fair to say that markets in this part of the country are undersupplied and when we can get communities opened, there will be good demand.

I know there is a lot of buzz around what's happening in D.C., but I would tell you the business is fine, especially given the strength of our land positions.

While it appears that pricing in the market is leveling off after several years of strong appreciation, the fact is that the local economy is strong and job growth is outstanding some of the strongest in many years.

We will continue to monitor the market carefully but long-term -- but in the long term, Northern Virginia and the greater D.C.

Baltimore areas are great home building markets.

Sign-ups in the southeast remain strong climbing 15% over last year's third quarter.

I would characterize the Carolinas, Georgia, and Tennessee as good with pockets of growing strength while Florida continues to be very strong.

The most common difficulty we hear from our operators is around getting new communities open.

Therefore, when we see the occasional lull in sales, it is most often driven by a lack of product rather than a lack of demand.

Next, the Midwest.

You know out of all of our operations, I think our teams here probably deserve the most recognition for delivering 27% growth in sign-ups.

The group is operating in some of the toughest marketing conditions we face anywhere in the country.

They have done an excellent job in terms of identifying underserved consumer segments and diversifying their market positions.

As a result, just about every market was able to post double-digit gains with Illinois leading the charge.

Our central region continues to post excellent sign-up gains, recording yet another quarter of 40% plus growth.

Texas once again delivered great results with every market showing an increase over the third quarter of last year.

San Antonio and Austin were particularly strong, but I think the entire Texas operation is benefiting from better market conditions and Pulte's repositioning to stronger locations.

The good news here is that our repositioning continues into 2006 with the opening of some of our best new communities yet.

Likewise, Colorado and New Mexico both showed strong increases as we have started to open new communities.

I know some of you on this call have been out to visit our newest Del Webb Anthem community outside Denver.

It is a great community and has been met with excellent demand since opening in late September.

And finally the West.

Pulte sign-ups were up about 8% for the quarter.

Our operations in Northern and Southern California delivered solid results with both areas seeing nice increases over last year.

Las Vegas continues to see strong demand, and our operations posted exceptional year-over-year growth in the market.

In terms of sign-ups, the gains in Vegas were effectively offset by reduced sign-ups in Arizona.

In Phoenix, we have sold out of two large Del Webb positions, while at the same time limiting sales in our other communities to control our backlog and avoid selling too far in front of production.

Demand continues to be so strong for Pulte and Phoenix and Tucson that labor constraints with certain trades, along with permitting delays in local municipalities that are overwhelmed by the market growth are slowing the production process.

In spite of these conditions, I want to point out that our teams have done an excellent job getting homes delivered and we are extremely pleased with how our Pratt venture is helping.

Company-wide, our cancellation rate for the third quarter was approximately 17% which is down slightly from last year and in our historical range of 15 to 20%.

We ended the quarter with only 500 spec homes at the finished stage which is down 30% from the same period last year and continues to represent less than one finished spec per community.

As a company we continue to move towards a more build-to-order model and we are asking our operators to sell out in front to drive a more predictable production model.

It is what is best for our business and we are pursuing it vigorously.

With that, let me 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 are now prepared to answer your question.

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

At this time we'll open the call to questions.

So if you would explain again the process and we'll get going.

[OPERATOR INSTRUCTIONS] Your first question comes from Mike Rehaut.

Hi, good morning.

Good morning.

Just a couple of questions, if I could.

First on the guidance for '06.

I just want to make sure I understood correctly, the up 4 to 5% in ASP closings is really mix driven and doesn't have assumptions with regard to pure price appreciation?

That's correct.

And can I also assume correctly -- you are assuming sort of minimal, if that, margin expansion or gross margin expansion?

Yes, right now, Mike, what -- what we are looking at is where the material costs are today, house costs, that type of thing.

So we didn't bake in price appreciation, but we are experiencing cost increases today.

Then, again, if you look out, there is a lot of discussion about potential increases in the future as well that weren't baked into there and all of that is going to have to be worked out in the next quarter to see really where we line up.

So again, that's pretty much the thinking behind there.

Okay.

And one last thing.

On just a couple of markets, I appreciate the detail there.

If you can just go into a little bit more on Phoenix and also Colorado.

You know in Phoenix, you said you are sold out and things are strong, but just -- if you've seen any kind of moderation in price increases that we have seen in D.C., and, also, it's nice to see good results in Colorado.

Others have had difficulty there and I was wondering if you could comment on the different markets and also in Denver if you can.

Yes, Mike, this is Steve.

First of all, on Phoenix, first -- I would tell that you in general terms, we never saw the price appreciation in Phoenix that we saw in the D.C. market over the last couple of years.

It's been good, it's been steady, but not nearly at the rate of D.C.

So going forward our margins continue to be strong there.

We did sell out of two key Del Webb positions in this quarter so that the gross numbers, as I pointed out in my comments were down from last year, but the new communities are coming on, and we feel real confident that we've got excellent land in the pipeline and we will see excellent demand there.

So all is well in Phoenix as far as we are concerned.

Commenting on Colorado, I couldn't be more excited about the opening of our Del Webb position there.

We have been saying all along that the demand in this consumer segment across the country, not just in the southwest where we have been strong historically is fantastic, and the opening of our Webb community in Colorado demonstrated that for us in the third quarter.

Mike, it's Richard just one added point.

We just want to continue to point out that not all land investments are created equal, and even in a market like Colorado where others have not done as well, Del Webb is really an advantage for us.

Do you have any other type of product in Colorado right now?

Do you have any plans for any other type of product or are you using the Del Webb brand at the moment.

No, we have Pulte product as well in that Anthem community, that is a full style, if you have been out to Arizona and looked at our Anthem communities in Arizona and Nevada, that is what is going on in Denver for us.

In addition, our Colorado Springs, business, Mike, is very strong, up year-over-year and that is all Pulte products with some Del Webb positions in the future coming.

Just one last question, sorry--.

I'm sorry your next question comes from Larry Horan.

Thank you.

I got the color I needed on the various markets.

So I don't really have any follow-up, thanks.

Thank you Larry.

Your next question comes from Alex Baring.

Yes, thank you.

Great job guys.

Thank you very much.

Good morning.

So it looks like your guidance for margins in Q4 seems to be sequentially down from what you guys saw this year; is that correct?

This is Roger.

Again, margins are relative to what you sell, so each house that you sell is not necessarily the same margin, and we are working on about a 35% increase in volume from the third quarter going into the fourth quarter.

So you've got a product mix running through as well as a geography mix in the product.

So again, that's what is really driving them.

We are not seeing any erosion in the pricing that is driving margins down.

This is really more a mix driven.

And I'd also tell you comparatively from third to fourth, when you are putting on that much volume in the areas of the country, you do wind up with that mix.

Okay.

So what -- what -- in particular I guess in the mix is driving -- are you doing more homes or delivering more homes in lower margin states.

Is that what you are alluding to?

That would be indicative of -- yes, and it's not necessarily by state it's but by community.

So yes, there is a mix of entry level to -- up to the single family that is driving a lot of that as well.

So, yes.

Okay.

Did you guys acquire any homes in your backlog?

I had a difference of about 270 homes that I couldn't figure out where they came from.

No, we did not have any acquired backlog during the quarter.

And we would be happy to work with you after the call to perhaps help you roll that forward.

Okay, thanks .

Your next question comes from Dan Oppenheim.

Hi, this is Mike Woods.

Question for you.

I was wondering if you could give us some of the monthly trends that you saw in the quarter in terms of orders, whether or not they were consistent or?

Mike, this is Richard, we posted double-digit growth in all three months of the quarter.

We did have better growth in July and August than we did in September, but, again, it was double-digit plus in each of the three months.

Okay.

Great.

And also, you'd made the comments earlier about the -- where the stock price is now and how that is pricing in, a pretty dramatic slowdown in the market.

I'm curious why the share buyback was rather modest, I guess compared to where some other builders are -- are increasing their authorization to.

Our strategy is certainly to balance the portfolio of the business, and we have been through this a number of times in the past where it runs down, and certainly what we are trying to do is balance our business and not overreact to a movement that could be in the short run.

So that's our reason.

We pretty much look at it in balance basis.

Okay.

Thank you.

Your next question comes from Steven Kim.

Thanks.

Congratulations.

Good quarter, guys.

Thanks, Steve.

Did I just lose you guys?

No, you got us.

I apologize.

Something happened with my handset.

Let me ask you a question regarding your margins sequentially.

Alex sort of touched on my question.

But what I wanted to ask you was over the last two years now it appeared that there is a pretty significant deterioration in the margin, or drop in the margin as you head from third to fourth, and then it recovers very -- it seems -- last year it recovered very nicely as you headed into the first.

What I just want to understand is, if there is anything that has changed over your -- over the last couple of years in your business mix that would explain that and whether or not we should expect the fourth-quarter rate that you are going to report to be carried over into next year or if it might start off next year a little higher because of seasonal factor

Yes, Stephen, Roger.

Again, when you have a lot of different products that you sell.

They sell at all different margins and so to think that the next house that you sell even at the same community is even a higher margin than the last one you sold is not accurate.

Looking for sequential gains each quarter without pricing action doesn't drive the margin quite frankly.

Looking at the fourth quarter, again, when you look at more of the volume coming in over the third quarter, you certainly have a mix that is greater across the country, and our range is anywhere from 18% margins to 30-plus margins.

And so as different parts of the country deliver those into the fourth quarter, you get that mix effect.

I'll also tell you if you look at our performance third quarter of last year to third quarter of this year, we had the influence coming into this quarter from Las Vegas.

So even though we had only 30 basis points increase year-over-year, if you took the effect of our movements in the pricing actions into the third quarter, you would actually have seen us go up about 140 basis points, not the 30 basis points.

Now if you start to compare the fourth quarter with last year's fourth quarter, you are going to see some of that phenomenon in there again relatively to last year as we made the adjustments in pricing and effective margin and I suspect you will see some of that in the first quarter if you compare first quarter of '06 to first quarter of '05 as that carried over.

So we try to take that all into consideration when we give you the guidance.

But nothing has significantly changed in our business overall from a pricing that we've talked about or from a cost side.

It is really driven by the product availability and the products that we are selling again from -- anywhere from stack flats to 4,000, 5,000-square-foot homes.

So I guess if I am hearing what you are saying properly, you are indicating that next year it -- we would probably expect to see margins bouncing around somewhere in the 24 to 25% range -- is what it sounds like you are saying.

Well, again, I didn't give you guidance on the margin other than to say that we didn't build in price, so right now I am not -- I am not at that point to give that.

Right, right.

Okay.

My next question turns to your SG&A which was, again very impressive and it looks like you are looking for that to be rather healthy -- or I should say very encouraging again in the fourth quarter.

Is that something that we can expect to carry over again into next year?

Is there anything that you've done -- is this an issue of maybe subdivisions that had been ramped up over the last year or two that hadn't really been hitting on all cylinders that now are that has driven the SG&A down to sort of a new level here?

Stephen, this is Richard.

I would say it is really two things.

It is the growth of the business and the average sales price increases driving the percentages down combined with frankly, the last year and going into next year a better focus on SG&A.

It is the combination of the two.

I wouldn't say it is communities that are performing better next year or even now versus what they were, it’s -- it is a combination of a concerted effort to drive costs as well as the increase in ASPs.

Okay--.

Your next question comes from Margaret Whelan.

Good morning, everyone.

Good morning, Margaret.

Very nice quarter again.

Thank you.

I pulled out your book from your analyst day in April, and you said you were going to close 53 to 57,000 homes in '06 and I think Roger said 51 to 53 in his prepared comments.

Did I get that right?

You did, yes, you did.

Margaret, I will tell you a little bit about what is going on and I kind of alluded to that in my comments.

We continue to see entitlement and timeline delays in getting our stores open.

As aggressively as we have been pursuing those entitlements and the ability to start the models and start the production, it is an ever-increasing issue in our industry.

And it is the continued, double-edge sword in our business quite frankly in that it is this continued, constrained supply I think that drives the overall growth in the business to a certain degree or growth in our ability to grow our business relative to our competitors.

But it is difficult at times to predict the units on a quarter-to-quarter basis.

So I -- suffice to say that we are working hard to get the stores open, and because of our change in targeting over the last two or three years, a lot of these communities that are delayed are four or five different TCG penetration communities.

So it is no longer for us when we've got a delay, it is one community that gets delayed, it is five or six selling efforts that get delayed.

And it is just -- it is a difficult problem that we continue to work through.

The change in the tone in October relative to April is purely a function of supply, that is what you are saying?

It is not a function of demand, or ability, rates getting higher?

Exactly what I am saying.

It is all supply.

Okay.

In terms of what you can actually control, can you start talking to us again about the initiatives you have in place to take permanent costs out of your business and how those are going through?

Because I know your gross margin was up again this quarter but I guess the rate of increase has slowed a little bit sequentially which is fine.

I am just trying to find where are you in the process of managing the costs out of your business and given the -- I guess the unavailability of some of the products or the allocation you might be on with some supplies and the higher costs, should we be factoring that in?

As Roger said, what we've done, as we have always done, is we have not factored any price increases, and we are looking at some material cost increases relative to the business, relative to shortages created by hurricanes and those type of things, but as it pertains specifically to your question, I can't give away all my thunder before the February meeting.

Because that is the only reason Jim invites me back.

But we are moving aggressively now into our four levels of specifications throughout the country.

The rollouts will begin here very shortly.

And precursor to that we continue to move down product types.

These new communities that are opening such as Anthem, Colorado.

Some of these large ones that will be opening in Phoenix, Arizona over the next couple of months are all incorporating our new supply chain strategy in our simplification model.

So as we have been indicating all along, this is a process.

In the process sometimes, on a net, net, net basis we are seeing cost increases because of things we don't control but it's a relative thing for us and we are pretty satisfied with where we've gotten so far on it.

Margaret, this is Richard.

I want to just add one comment.

As we detailed out in our analyst day last year, this is a three-year effort for us.

And if anything we have been humbled by the scope of the task in terms of how far we are trying to move this business, and it is everything from moving to a presold building sold inventory process to help smooth out our deliveries to simplifying our model and I would tell you frankly on a cost basis as we indicated last year, it is going to be '07 and beyond before we see some significant change there; however, all of these steps have to be taken in order to help us get there.

I hope that helps.

Your next question comes from Lorraine Malkis.

Thanks.

Just a follow-up on the cost increases that you have been experiencing.

We heard Richard on TV this morning saying that 2 to $3,000 per home was your current increase.

I think it is safe to say that the real rebuilding effort has not begun in New Orleans yet.

That coupled with a couple extra hurricanes could really put pressure on your material prices.

Can you just talk through what you expect for 2006 on this front?

Yes, Lorraine.

This is Roger.

As we continue to look at that, there were some immediate effects, and we all felt it as consumers at the gas pump and we saw how gasoline prices went from 2.50 to $3 quickly but now look at where they are, they are back down to the 2.50 range miraculously very quickly.

We heard a lot from the trades and from suppliers out there about increases currently.

So we have experienced some immediately, and then there were discussions of others going up in the first quarter of next year.

So we are going to have to wait until we actually see what happens in next year's quarters, because that's not here yet.

Some of the things we have experienced today, of course, we are dealing with, and when you look out further, we usually have always exceeded the cost increases with price increases, and that's -- it is a two-way street.

You have to work with your suppliers on the other side of that as well and so there is a give and take there.

So right now it is hard to say what that is going to do to us.

We have seen increases so far in the quarter for the fourth quarter quite frankly, as Richard mentioned probably on average of $2500 a house.

And that range is on the size of the house as well and in different areas of the country.

So -- and not all areas of the country were affected exactly the same based on cement in one area versus another or roofing in one area or another.

So pretty much -- that's where we are.

Really just looking at what we have seen and experienced so far at the end of the third quarter and the beginning of the fourth quarter, and not focused on driving that all the way through numbers in 2006 at this point.

Okay, then can you just talk about some of your new Del Webb offerings in the Midwest and northeast and the success in either preorder or order rates there?

Yes, Lorraine, this is Steve.

Again, a lot of the growth that we had in Illinois was driven in our Del Webb operation there.

We opened two new communities in our Active Adult business there and saw tremendous order growth.

We had order growth in Cleveland that was significant this quarter and that was driven primarily by a new Del Webb community.

So again since we don't give a lot of specific information to generalize, when we open a Del Webb community and the process that we go through for approximately 6 to 12 months prior to that opening generates a huge interest list for us, and we have tended to see excellent results once we start taking the sign-ups.

And based on the interest list that we have forming in some communities that will open in this coming quarter and the quarters after that, I would expect that that's going to continue.

Lorraine, if I could just add one further comment.

Here in Michigan the economy as you guys have heard is tough, and we are going to open our first community here in November, and we are quite excited by the substantial interest list we have.

I think it is a good example of how in a tough market, if you position it right, it can really help your business.

Your next question comes from Carl Reichardt.

Good morning, guys.

How are you doing?

Good morning, Carl.

Just on Webb and go back to ’01 when you bought it.

I don't recall what the land position was at the time.

How much of that legacy land now have you worked through?

Yes, Carl, this is Roger.

I think when we acquired in '01 we had like 55,000 lots acquired as a total company, and basically I don't know what the -- we don't count it like that any longer because of the communities.

Some of them have run off, some of them have closed at this point.

So I would tell you that a substantial portion of them were probably have been worked through at this point.

But we are looking at it as a total Active Adult business not just the old Del Webb.

Sure.

Okay.

But you think a substantial portion, so maybe three quarters or so, something like that that?

I can't give you a specific number but that would be reasonable over almost the four years.

Okay.

And then just on material costs to make sure I know -- the increase -- the $2500.

This is effectively mostly surcharge right in order -- what I mean is it is affecting everyone equally from what you guys can see as opposed to being something that is particular to you or less for you than small builders.

Is that your sense of things now?

Yes, Carl, this is Steve.

I can't really say what other people are going through, but I would guess that this is the same thing.

These are a lot of force majeure price increases that hit distributors overnight.

I would tell you that we have been able to go through above and beyond some of our distributors because of our relationships with the manufacturers and then not incur some of those price increases so I would suspect that we are faring better than the small builder.

Your next question comes from Jim Wilson.

Thanks.

I just had one more question.

Could you give a little color on the sort of same store per community sales rates and sort of your -- some of your major markets, particularly the southwest Florida and D.C.

And how those have changed or not changed over the last two, three quarters?

Typically we don't even give the same store, but I would tell you that our absorption rates on a per community basis have been very consistent.

Okay.

So very little -- very little change across most of the regions

Very little change.

Okay.

All right, very good, thanks.

Thank you.

Your next question comes from Steven Fockens.

Good morning, guys.

Two quick--.

Good morning, Steve -- Steve

I am sorry that question has been withdrawn.

Your next question comes from Ivy Zelman.

Wow, I didn't think I was going to get on, guys.

Pushed the buttons and everything.

But I appreciate getting the opportunity.

Your orders in the Midwest were very impressive up 27%.

Can you tell us what types of incentives as a percent of the base price you are using in that market in aggregate, have you increased your selling incentives in order to see that type of growth?

That is my first and I have a follow-up.

Ivy, first of all, the selling incentives that we are using have been very consistent.

This is not a new thing in the Midwest that the markets have been soft.

Our business is there just to remind you and you probably already know this are Michigan, Cleveland, Indy, and Chicago.

So we have been continuing to use standard incentives in the business to drive the absorption paces, and those will vary from community to community.

We have got some excellent land positions in the Detroit Metro area where we offer little to no incentive and have extremely high margins and we have some that were on the fringes and bought four or five years ago and we offer a little bit more incentive there to keep moving that inventory.

But on an overall bases, it has been real consistent for us year to year.

Again the change in the absorption rate has been primarily driven by changing community count and targeting the right consumers specifically in the Chicago market area.

Can you tell us with that in mind, I appreciate it, the margins in the Midwest relative to the overall company margins, if you were to take that region, how would they compare with respect to the total company-wide?

On a mix basis they are slightly less of a percentage, but in the Midwest, we see slightly higher average sales prices.

So depending on how you like to look at margins, dollar-wise or percentage-wise, the number could vary.

It could be right on dollar-wise and a little bit less on a percent basis.

Your next question comes from Greg Gieber.

Good morning, gentlemen.

Good morning.

I wonder in reference to Del Webb you could give us some idea to what your current community count is and what -- how it has grown over the past year?

And looking forward by the end of next year how many Del Webb communities do you think you might have open?

Yes, Greg, I don't have those specific numbers.

So if you want to get with Vinny or Jim after the call, but I would tell you that we are in the -- probably in -- around 40 active Del Webb selling efforts across the country.

Some of those have multiple product lines in them.

So how it relates to the 662, I couldn't tell you as a direct number.

And I would tell you that as a percentage basis as we go forward, Del Webb continues to be about a third of our mix in community openings, about a third of our investment, and I would suspect to see that with the community count growth into next year.

Okay.

If you could go back.

You mentioned on promotional activity in just the Midwest.

Could you expand in -- to a National scale and see are there any areas where you've had to -- by market, you have had to significantly or meaningfully step up your promotional activity?

In some cases, in some markets you didn't appear to have any a year ago and in particular could you also talk about Atlanta where one of your competitors has announced quote employee pricing on their homes in that market.

Yes, Greg, on an overall basis, we have not seen any significant change in what we do to promote the sale of homes on a city-to-city basis.

We have pricing strategies that we go in with, we react to market conditions when supply gets a little constrained.

We might be able to raise prices when we see more inventory come on and foot traffic slow down a little bit, we hold off on the price increases, but on an overall basis, we are not seeing -- we are not significantly changing the incentives that we offer in any part of the country today to stimulate sales.

As it pertains to Atlanta in particular for our business.

Quite frankly we changed our business model there over the last 18 months and from an inventory position out in front of us, we are in the best best position that we have been in the last three years.

We have been selling more out in front of ourselves, and really have a very solid sold backlog to deliver in the fourth quarter.

Greg, this is Richard, let me add to the Atlanta comment.

Frankly, I think what you might want to keep in mind is that all the big builders, the nationwide builders are extremely diversified and certainly one market does not make a company as is evidenced by us last year quite frankly.

So I would just suggest that you have a diversified business driving it.

What you probably saw there was a move to drive a few inventory units by the end of the year, not a big deal in our view.

Your next question comes from Rick Murray.

Hey, good morning, guys.

Nice quarter.

Thanks, Rick.

Just one question if I could and perhaps it has two parts.

I guess the first part is, looking back about four or five years ago you guys bought back about 10 or 15% of the Company when your stock was trading not at a very different multiple than it is today and I guess I am just curious as to how that thought process goes as you look at the price of your stock today as compared to the price of land which I am certain is more expensive than it was then?

And the second part, I guess, is kind of related to that decision.

What are you seeing in the market that is different from perhaps some of your competitors that gives you what's seemingly more confidence in your outlook, whereas one of your competitors yesterday noted that things are, in fact, slowing down in their view, and they are contemplating reallocating capital more towards buying back their stock and perhaps less towards investing in land.

Yes, Rick, this is Roger.

I will take the -- on the share buyback.

Certainly we look at it.

This is not a minute-by-minute type of business.

We are looking at the long term.

Four or five years ago, the world was going to end in housing as well, and we are still here quite frankly, and certainly there has been a lot of winds at our back.

Interest rates.

We are looking at those as well.

We know they are going up.

They have been going up and there has been a lot of different movements in interest rates over the last couple of years as well that have kept the housing industry solid.

We don't think it is going to zero because there has been a housing industry in this country and we think our prospects are pretty solid from the product offering and the geographical breadth that we have across the U.S.

So we constantly look at all that to try to make sure we are maximizing shareholder value and certainly that is our job.

We understand that, that responsibility and obligation.

On the other hand, we have a responsibility and an obligation not to overreact to something that may come up in a particular week that drives the stocks that may or may not be fundamentally the issue in a market or industry.

And so we've dealt with this just about every year over the last six or seven years that have driven this up or down in a given time period in the calendar.

So again, we are not going to overreact to it, but we are going to be sensitive to it and that is our approach as we look to balance our future investment in land and growth of the business and then the markets and opportunities we may have against what the competitive nature is in the country as well.

Rick, I will add to what are we seeing that is any differently.

First of all, I would not necessarily agree with your assumptions that we are seeing things so differently.

We have talked about the price appreciation in D.C. as an example, things like that.

And even in my scripted comments, I just went back to say it is certainly possible the home building environment could be tougher in the next few months than in the past.

So we certainly acknowledge that the euphoria that we have seen the last few years is probably not going to be there going into '06, and I think our guidance and our view reflects that.

Having said that we are proud of our Del Webb positions and we certainly want to highlight the view that we believe that gives us.

So we think we are taking a very balanced view.

Okay.

Thank you.

Thank you.

Your next question comes from Steve Fockens.

Hi, guys.

Sorry.

I seemingly don't know how to work a handset.

That's okay.

Two quick questions.

First. and I am sorry if I missed this.

Did you give out the lot count owned and optioned?

Steve, this is Vinny.

We haven't to date, as of 9/30/2005 we controlled 369,000 approximately 300 lots that compares to last year of third quarter of 335,400.

The split between lots owned and optioned, 46% of our lots are owned. 54% options.

And that's relatively comparable to where we were last year.

Thanks much.

And just on a second question.

I was kind of struck by the comments about strength in Austin and San Antonio and even some of the other builders talking about strength in the Texas market, because one thing we have heard recently from some of our realtor contacts is that it -- for better or worse, it seems like investment buying activity is picking up in both of those markets.

God forbid even Californians looking to swoop in and buy houses there.

I was just wondering what you guys are seeing in those markets in terms of investment buyers and do you have a similar approach to limiting them or putting in any kind of clauses similar to what you may have had in Arizona or California or Florida?

Yes, Steve.

This is Steve.

First of all, our investor addendum that we use in California is the same addendum that we use in our contract in Texas.

So we haven't seen significant investor business in Texas because quite frankly we discourage it strongly.

So most of our strength has been driven by the repositioning of the business that I talked about.

We've got some excellent community openings in Austin and San Antonio that have been in the works over the last 18 to 24 months and have been met with excellent demand and excellent execution on the part of our teams there and I wouldn't take any credit away from them and their our positioning.

That is what we are seeing.

Your next question comes from Rob Stevenson.

Thanks, guys.

Most of my questions have been answered but just quickly.

Have you guys had meaningful delays in the northeast from the rains over the past couple of months here in the fourth quarter?

You know what -- I will take that one Rob, this is Steve.

The rains that have been happening would be reflected in their production reports that they are showing us today.

And for better or for worse, their units are right on the schedules that they have had.

Does that mean that they got a little room in their schedule to maneuver through these things?

Yes, I mean, I think that they predict weather conditions in the northeast to be a bit more erratic than maybe weather conditions in Las Vegas, Nevada.

I think some of that is built into our schedule and our operators are pretty adept at moving around that.

So far maybe they are a little water logged but they are still staying on schedule.

Thanks, guys.

Your next question comes from Mike Rehaut.

Hi, just a couple of quick follow-ups.

The -- Margaret brought up earlier that the closings for '06 were revised downwards from your last guidance, but on the other hand, if I -- I just want to make sure I see this correctly.

You had also given out at that point February EPS guidance of split adjusted 550 to 6.

So is this, in fact, the first time you are raising that guidance.

For '06?

Yes, from an EPS standpoint.

I'm thinking at that time -- yes, we gave -- yes.

And so you haven't -- this is the first time you have updated that '06 guidance.

That's correct, Mike.

From an EPS.

Mike, that is our normal practice.

We don't go through the year.

We will adjust it a quarter like this or as we get to third quarter we will get the next outlook on the next year.

Right, right.

No, I just thought it was important to point that out on the offset that, obviously you are clearly holding on to the majority of your margin expansion and still being able to raise your bottom line numbers despite some difficulties with getting product out on the top line from a regulatory or delay standpoint.

That's correct.

Second question.

You had mentioned community count was up only 9%, and resulting from, again, some delays on openings.

I was wondering if you could give us an idea if you expect that to accelerate in the fourth quarter, and what you were counting on for community count growth this quarter, and what we might think of in terms of next year.

I believe you had talked about a 10 to 15% growth, and if we perhaps see some of the third-quarter delays pushed into 4Q.

Mike, this is Steve.

Number one, at the beginning of the year we gave 10 to 15% growth in community count, and we think it is going to come in -- it is at 9% year to date.

We think that by the end of the year it is going to be right around 9, 10% community count growth.

But, remember, that is a net community count growth.

So in other words, if I look at the pure growth, we have sold out of some communities quicker.

That's why we are still pretty much on our sales numbers and you are still seeing the sign-up growth of 19%.

So even though the community count growth isn't keeping up with the sign-up growth, we are selling out of some communities a little bit quicker which is driving the net community count growth to a little bit lower number.

So right now we are looking at next year.

I would tell you that we are probably right in the same range, probably 10% in community count growth.

Your final question comes from Margaret Whelan.

Just a follow-up.

So that's 10% of community count growth versus the 10 to 15 that you had been forecasting.

Right.

And so the one thing that you really can't control is the share count and each day that your stock is going down your cost of capital is going up and even though you are buying in stock, your share count is flat because of the creep.

Are you going to reduce the number of options and/or increase, really accelerate the share buyback.

Margaret, this is Richard.

I wouldn't anticipate we are going to reduce the number of options, but we think the press release this morning signals our desire to want to balance our investment with buybacks in addition to growth in the business.

We are certainly not afraid to buy in shares, and we will continue to take a balanced view of that, but I wouldn't look for options to go down.

I think if I look at my model that your loss position was basically flat sequentially, is that right.

That's right.

I think it's up 2 to 3,000 loss.

Yes, was that deliberate that you are slowing down the land control.

Well, quite frankly, we are really continuing to invest in the business.

I think the delays that we have experienced have contributed to some of that.

But it's a combination Margaret of our view that we want to take a balanced view going forward.

Our continued majority investment is going to be in land until we see a change in the environment; however, it is going to be balanced with buybacks and that's why we increased the authorization.

There are no further questions at this time.

Mr. Zeumer, do you have any closing remarks?

I want to thank everybody for their time this morning.

We are available throughout the day if you do have any follow-up questions and I'll look forward to speaking with you later on.

Have a great day.

This concludes today's conference call.

You may now disconnect.