普爾特房屋 (PHM) 2005 Q4 法說會逐字稿

Good morning, at this time I would like to welcome everyone to the Pulte Homes fourth quarter earnings call.

[OPERATOR INSTRUCTIONS]

I will now turn the conference over to Mr. Zeumer, Vice President of Investor and Corporate Communications.

Please go ahead, sir.

Thank you and good morning.

I want to welcome everyone on joining today's call to discuss Pulte Homes' financial results for the fourth quarter and year ended December 31, 2005.

I am Jim Zeumer Vice President of investor Relations.

Last night's press release detailed Pulte's excellent Q4 operating and financial results, as well as there was a separate release announcing an increase in Pulte's stock repurchase authorization.

On the call to discuss this in greater detail are Richard Dugas, President and Chief Executive Officer, Steven Petruska, Executive Vice President and COO, Roger Cregg , Executive Vice President and CFO, and Vinnie Frees, Vice President and Controller.

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

The presentation will be archived on the site for the next 30 days for those who want to review it later.

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 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 than those discussed today.

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

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

One last point before I turn over the call so we don't have issues as we did in the past, we are changing our practices for the call and the queue for questions won't up until the prepared comments are completed.

With that, let me turn the call over to Richard Dugas for a few opening comments.

Richard?

Thank you, Jim, and good morning everyone.

First of all based on the registration response I expect we will be seeing many of you at our annual investor conference in New York City on February 21.

The meeting always provides a great opportunity to discuss activities in support of our key business initiatives that include market share expansion through segmentation, operational excellence, people development, quality and financial discipline.

It is our success with these initiatives that help drive our record 2005 results that included over 45,600 homes delivered, home building revenues of over $14.5 billion, earnings per share of $5.47, an increase of 43%, and a record backlog valued at $6.3 billion.

Given our focus on expanding the U.S. market share we were pleased to have recently completed the sale of our Mexico operations.

It took sometime to complete but the decision to exit was the right one and was ultimately well executed.

Looking to 2006 and beyond our areas of focus remain the same as we continue to execute the tactics we believe critical to delivering consistent, long-term success.

Pulte's broad product line and our ability to serve a diversified customer base of first time, first and second move up and active adult buyers is critical to our market share expansion strategy.

Pulte Homes remains the only national builder with a stated business model of serving all major buyer segments or, more specifically, the 11 different targeted consumer group profiles, TCGs that we have identified.

With operations spread across 11 TCGs, 28 state,s and 54 markets Pulte's truly diversified market position is a source of stability as geographies and customer segments respond differently to the macro economic changes.

Our success as a company is a collage of all these geographic and demographic snapshots, ensuring that the Company continues to grow and thrive even as economic conditions ebb and flow in our markets.

This diversification, especially our Del Webb advantage, is one of the reasons we were able to post excellent sign up growth this past quarter, among the best of any builder.

Supporting our ongoing customer diversification we continue to expand and expand rapidly, the introduction of Del Webb communities throughout the country.

In 2005 we opened some exciting new Del Webb communities including introducing Del Webb brand in new markets such as Detroit, Denver and Cleveland.

Looking ahead there are over 20 Del Webb communities set to debut in the next 12 to 18 months.

Among these communities are several large positions in new markets including Atlanta, Charlotte, Raleigh, Dallas and San Antonio.

Even in Phoenix, the birth place of Del Webb, we will have something new with the opening of Sun City Festival and Sun City Anthem at Merrill Ranch next quarter.

This marks the first time that two Sun City developments have opened in the same market at the same time.

Serving different buyer profiles and very different geographies within the Phoenix area we see tremendous opportunity with these newest Del Webb communities.

As part of our investor conference we will provide much more detail on active adult and our Del Webb strategies on why we see this segment as a tremendous opportunity for Pulte.

Beyond market share expansion we continue our focus on operational excellence as we work to retain more of every revenue dollar.

At the upcoming conference we will certainly talk a lot about operational excellence and update you on the key component which is our simplification initiative.

One year into the effort we can say the process has been even more challenging than with expected but also say that we are even more certain of the need.

People outside the Company tend to fixate on the cost savings implications of simplification.

But after labor and material constraints hurt industry-wide deliveries in 2005, everyone is gaining a better appreciation for the need to ensure production capability.

That is the ability to get homes built.

Recognizing this need early in January we purchased the remaining 50% of our very successful Pratt joint venture serving Arizona and Nevada.

Markets in both states continue to show exceptional long-term growth potential, so securing labor resources provides us with a competitive advantage almost beyond measure.

As part of operational excellence we continue to focus the spotlight on customer delight.

Insuring our customer satisfaction is even more important in a demand environment that appears to be moving from euphoric to more normal.

We continue to lead the industry in this important category as 2005 marked the sixth straight year in which Pulte ranked highest among home building companies for customer satisfaction according to J.D.

Power and Associates.

As I tell our employees every chance I get all else being equal other than location, the next best reason to buy a home from any builder is quality and reputation.

As industry consolidation continues, over the long run, builders at valued quality can enhance their brand reputation and those that don't will suffer.

The importance of quality and reputation cannot be overstated.

Just ask Starbucks, Fed Ex or Toyota, for example.

And finally at Pulte Homes we remain focused on maintaining financial discipline as a core philosophy on which to build a company.

As you saw in our numbers we kept tight control on our spending as home building SG&A dropped to 7.7% of settlement revenues for the year.

We will talk more about controlling over heads at our conference later this month.

As part of our focus on financial discipline we ended 2005 with a net debt to cap ratio of 28.6%, even after having repurchased $143 million worth of Pulte stock during the year.

Clearly Pulte enters 2006 in an incredibly strong financial position which will allow to us seize opportunities that can exist in every market condition.

I would also point out that yesterday's announcement of board approval for an additional $200 million share repurchase authorization gives us the opportunity to invest in our business through the purchase of land assets as well as more directly by acquiring our own stock.

With this increased authorization we are in position to better balance how we allocate capital between the alternatives of land acquisition, M & A., share buybacks, debt reduction and or increased dividends.

We are capturing available market opportunities to grow our business but we continue to do so in a prudent fashion that does not stress our balance sheet and that provides a strong foundation and financial flexibility to respond to changing market conditions.

We invite you to join us at our annual investor conference later this month for a more indepth examination of how diversification, operational excellence, people development, financial discipline and customer satisfaction would help Pulte Homes continue down a path of success that was started by Bill Pulte over 55 years ago.

Let me now turn the call over to Roger Cregg for a detailed analysis of our fourth quarter financial results.

Roger?

Thank you, Richard, and good morning, everyone.

First I would like to take this opportunity to congratulate the Pulte Homes organization on another outstanding year.

The women and men of Pulte Homes in all disciplines strive every day working with our dedicated suppliers and trades to deliver a quality home to our buyers and to create value for our shareholders.

We thank you for your hard work, dedication and commitment to excellence.

The fourth quarter home building net new unit order rate increased approximately 10% over the fourth quarter last year and in dollars increased 24% to approximately $3.3 billion.

Revenues from home settlements for Pulte Homes' operation increased approximately 28% over the prior year quarter to approximately $5 billion.

Higher revenues for the period were driven by an increase in unit closings of approximately 17% on an increase in the community count of approximately 6% versus the same quarter last year.

The average sales price increased approximately 9% versus the prior year quarter to an average of $321,000.

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

In the fourth quarter land sales generated approximately $51 million in total revenues, which is an increase compared with the previous years quarter--excuse me--which is a decrease compared to the previous years quarter of approximately $107 million.

Home building gross profits from home settlements including home interest expense for the quarter increased approximately 26% to $1.123 billion, or an increase of approximately $229 million for the quarter.

Fourth quarter home building margins from home settlements as a percentage of revenues were 22.3%, compared with 22.7% in the fourth quarter of 2004.

The decreased margin conversion of approximately 40 basis points versus the prior year quarter is mainly attributed to an approximate 50 basis point adjustment related to land development, inflationary costs experienced during the fourth quarter.

The majority of the increases came from petroleum based products and cement, to include piping, asphalt, curbing, diesel fuel and other costs resulting in an average increase of approximately 4% in overall development costs.

Under Pulte's accounting policies, lock costs are expensed on an average costs by project.

Based on a significant increase in cost experienced in the fourth quarter we adjusted our estimates accordingly.

Adjustments to these estimates affected the amount of lock cost in the current quarter and on a perspective basis.

Additionally home building interest expense, which represents the amortization of capitalized interest increased during the quarter to approximately $59 million versus approximately $46 million in the prior year.

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

The gross profit contribution from land sales was approximately $9 million for the current quarter versus approximately $63 million in the prior year fourth quarter.

Land sales transactions during the fourth quarter included single-family custom lock sales and 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 costs as a percent of home sales for the quarter was approximately 6.2%, improving approximately 130 basis points over the prior year quarter.

The conversion improvement versus the prior year quarter was a result of increased average 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 $2 million is primarily the net result of joint venture income generated during the quarter of approximately $18 million, offset by approximately $6 million in expenses that include amortization of intangible assets, insurance expenses and all other miscellaneous expenses from the home building operations.

In addition the remaining operations in Puerto Rico are now reflected in the other incoming and expense category of the home builder and are not material for the quarter.

Home building pretax income for the fourth quarter increased 23% to approximately $820 million with pretax margins at approximately 16.2% on total home building revenues.

This represents a relatively flat conversion over the prior year quarter, mainly as a result of slightly lower gross margins, significantly less income from land sales offset by improved SG&A leverage.

Adjusting the comparison for the impact of higher land sale gains in the prior year quarter the adjusted conversion from the home building operations activity improved 90 basis points.

At the end of the fourth quarter our home building operations had a backlog of 17,800 homes, valued at approximately $6.3 billion compared to 15,900 homes valued at $5.2 billion in the prior year quarter.

The fourth quarter pretax income from Pulte's Financial Services Operations was approximately $26 million or an increase of approximately $8.3 million compared with the prior year quarter.

The increase versus the previous year quarter was primarily due to the volume related increase in originations which accounted for approximately 30% of the increase.

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

The level of adjustable rate mortgage products originated during the fourth quarter of 2005 decreased from approximately 49% of origination dollars funded from our warehouse lines last year to approximately 42% this quarter which was down from 53% in the first quarter of 2005.

Pulte mortgages capture rate increased from the same period last year from approximately 89% to 91% in the current quarter.

Mortgage origination dollars increased in the quarter approximately $662 million, or 28% 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.

As we previously announced in December we sold substantially all of our Mexico home building operations to a consortium of purchasers.

This sale did not include Pulte's investment in the capital stock of our mortgage company in Mexico as well as several small investments in joint ventures relating to land parcels.

These small remaining joint ventures are not considered material and are not operating entities.

We continue to explore strategic alternatives related to these remaining investments in Mexico.

We received approximately $132 million relating to the sale of the operations.

In addition, included in discontinued operations is an after-tax loss from the sale of approximately $13 million, offset by income from operations in the quarter of approximately $7 million.

The loss on the sale includes accumulated foreign currency translated adjustments and the write up of goodwill associated with the acquisition of the minority shareholders interest in early 2005.

The disposition will allow the Company to invest additional resources and focus on the U.S. home building market.

The Mexico operations have now been reclassified to discontinued operations.

The other pretax loss category for the fourth quarter of approximately $16 million includes corporate expenses of approximately $13 million and interest expense of approximately $2 million.

The decrease versus the prior year is a result of lower interest expense in the quarter due to an increase in capitalized interest of approximately $9 million, offset by increased corporate expenses of approximately $3 million.

The increase in capitalized interest was based on the Company's inventory and debt levels and is consistent with the growth of the Company.

The lower income tax rate for the fourth quarter of approximately 36% was due primarily to the further clarification of the proposed regulations of the new domestic manufacturing deduction established by the American Jobs Creation Act of 2004.

And the resolution of certain other state tax matters during the quarter bringing the annual tax to approximately 36.9% for the full year of 2005.

Income from continuing operations for the fourth quarter increased approximately 28% to approximately $532 million, or $2.03 per fully diluted share, as compared to $415 million, or $1.59 per fully diluted share for the same period last year.

Fully diluted shares were approximately 262.4 million shares for the quarter.

Also in the fourth quarter included in discontinued operations we recorded a cash after tax gain of approximately $49 million related to the payment of the final judgment of the United States Court of Federal Claims for the resolution of the First Heights Bank litigation.

Net income for the quarter reflected discontinued operations was approximately $575 million or $2.19 per diluted share, versus approximately $397 million, or $1.52 per diluted share in the previous years quarter, representing an increase of approximately 45% for the quarter.

Moving to the balance sheet, I would like to highlight several of the major changes versus year end of 2004.

These changes are primarily the result and support of the Company's growth initiatives.

We ended the fourth quarter with a cash balance of approximately $1 billion, mainly attributable to the sales related reduction in inventories during the quarter, the sale of the Mexico home building operations, cash received for First Heights Bank judgement and delays in timing of our investments in land and land development.

House and land inventory increased to approximately $8.8 billion or an increase for the full year of approximately $1.5 billion, which is in support of our 2006 business plans and beyond.

Of the $1.5 billion increase approximately 39%, or $590 million, is related to home construction and progress to include house and land related to house.

The balance of the increase or approximately $925 million, is related to land acquired, underdevelopment and held for future development.

Land held for sale is approximately $258 million as of the end of the fourth quarter, an increase from the prior year quarter of about $28 million.

Investments in unconsolidated entities of approximately $300 million at the end of the quarter are mainly attributed to our investments in 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.

Included in the other asset category of approximately $1 billion for the fourth quarter are major items such as receivables, prepaid expenses and deposits, capitalized pre-acquisition costs and net fixed assets of approximately $788 million.

The remaining $232 million related to all other miscellaneous assets from home building and Financial Services operations.

At the end of the fourth quarter the Company's debt to total capitalization ratio was approximately 36.2%, and the net basis was 28.6% as Richard mentioned.

We continue to maintain a disciplined, conservative and flexible balance sheet while investing for the future growth of the business.

Pulte Homes' shareholder equity for the quarter increased to approximately $6 billion with the return on average shareholders equity for the latest 12 months of approximately 29%, an improvement of approximately 360 basis points versus the same period last year.

Pulte Homes' return on invested capital for the latest 12 months increased to approximately 19% an improvement of approximately 260 basis points over the same period last year.

In addition as announced the Company authorized an additional $200 million in share repurchase program, bringing the total open authorization available to approximately $220 million.

During the fourth quarter approximately 2,577 million shares were repurchased for approximately $102 million, for an average of approximately $39.65 per share.

Year to date, the Company has repurchased a total of approximately 3.6 million shares for approximately $143 million.

Earnings per share from continuing operations for the year of 2005 of $5.47 per share represents an increase of approximately 43% over the prior year based on approximately 262.8 million fully diluted shares.

Now looking ahead under the SEC regulation FD guidelines, we are providing the following guidance on our current expectations for the first quarter of 2006.

Unit settlements in the first quarter of 2006 are projected to increase approximately 7% to 8% over the same period last year.

Driven primarily by the growth of additional volume across most major markets.

Notably we will experience a mix shift in closing volume during the quarter as we face the close out of two Del Webb flagship communities, Sun City Grand in Phoenix and Sun City Lincoln Hills in Sacramento.

Average selling prices for closings in the first quarter are estimated to be approximately 6% above the fourth quarter of 2005.

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

For the homes we project to be delivered during the first quarter from backlog.

Gross margin performance from home settlement as a percent of sales for the first quarter are anticipated to be approximately 110 to 120 basis points below the first quarter of 2005.

The projection driving the lower gross margins are primarily a result of a mix shift as we close out the several flap ship Del Webb communities in Arizona and Northern California.

Plus the increase on land development cost associated with the increase in commodity costs.

We are currently projecting no land sale gains in the first quarter as mentioned in the past, land sale 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 improved over the first quarter of last year by approximately 10 to 20 basis points.

As a result of the better overhead leverage associated with the continued volume growth of the business in 2006 and our internal initiatives focused on cost controls.

In the home building other income and expense category for the first quarter we are projecting an expense of approximately $1 to $2 million.

This is attributable to joint venture income offset by net operating income and expenses.

As Richard mentioned earlier, in January 2006, we exercised our option to purchase the remaining 50% interest in the joint venture that supplies and installs building components in Arizona and Nevada.

The income from this joint venture will be reflected in cost of sales now that we own 100% of the operations.

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 9% to 10% above the first quarter of 2005.

Total other expenses are projected to be $8 to $9 million below the first quarter of 2005 expenses.

This projected decrease is the result of the increase in the amount of interest capitalized.

We are projecting the effective tax rate to be approximately 37.1% for the first quarter of 2006.

First quarter earnings per share from continuing operations are estimated to be in the ranges of $0.90 to $0.95 per share.

This earnings per share number is calculated based on approximately 263 million fully diluted shares.

This earnings per share range represents growth over the prior year quarter by approximately 8% to 14%.

We are reaffirming our earnings target for the full year of 2006 earnings per share for continuing operations at between $6.00 and $6.25 per share.

Estimates based on approximately 263 million fully diluted shares.

This earnings per share range represents growth over the prior year by approximately 10% to 15%.

We are projecting that unit settlements for the full year of 2006 are likely to the increase to approximately 51,000 to 53,000 units driven primarily by additional volume across most major markets.

My guidance target is toward the lower end of the range given the entitlement delays we have experienced in the past in opening larger projects.

Average selling prices from closings are projected to be above the average 2005 selling price in the range of approximately 7%.

This projection for 2006 is primarily being driven by product mix and geographical mix of homes delivered.

We have assumed price appreciation is flat year to year.

Gross margin performance from home settlements as a percent of sales for 2006 is anticipated to decrease in the approximate range of 80 to 110 basis points below the actual performance of 2005.

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

The lower margin reflects commodity cost increases along with product and market mix and amortized interest expense.

We are projecting the gains on the sale of land for the year to be approximately 0 to $10 million.

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

As a percentage of sales SG&A is projected to be flat to slightly below the 2005 actual conversion rate by approximately 20 basis points mainly related to leverage on the additional volume and overhead control initiatives.

In the home building other income and expense category for the year we project a breakeven.

Given no material change or volatile swings in the interest rate environment pretax income from our Financial Services Operations is expected to increase by approximately 7% to 8% over the full year of 2005 actual performance.

The increases associated with increased volume in 2006 offset by incremental increases in staffing and operational costs that are volume driven.

Total other expenses are projected to be approximately $25 million below the actual 2005 expenses.

This projected decrease is a result of an increase in the amount of interest capitalized into inventory for the year.

We are projecting the effective tax rate to be approximately 37.1% for the full year.

From the balance sheet perspective in 2006 we anticipate increasing our invested capital in the home building operations by approximately an additional $2 billion.

This incremental investment is reflective of our planning assumptions for house inventory which is approximately 15% of the increase in land and land development investment, approximately split 50/50 for the balance of the increase.

Our investment strategy will be closely monitored with a cautious eye on the macro economic environment for 2006.

Pulte Homes continues to be well-positioned to capitalize on the consolidating home building environment by gaining market share through our segmentation strategy and geographic diversity.

Our goal expanding continues to be reflective of maintaining a strong and conservative balance sheet with a debt to total capitalization ratio at the 40% level and driving shareholder value by improving our returns on invested capital and shareholder equity.

In addition we anticipate our earnings spread in 2006 to be approximately 34% to 35% in the first half of the year and 65% to 66% in the second half of the year.

I will now turn the call over to Steve Petruska for more specific comment on operations.

Steve?

Thanks, Roger, and good morning, everyone.

I know there's a lot of interest in whether market conditions are changing and if so in which direction and how fast.

I will try to provide some incite into what we experienced during the last three months.

For the quarter,we operated from a total of 662 communities which is up 6% over the same period last year.

Getting communities through entitlement and into production continues to be difficult.

The good news is that a number of our larger communities are now moving into production so we are in an improving position heading into this year.

These communities include two important replacement positions in Phoenix that Richard mentioned earlier.

Our first Del Webb position in Charlotte called Sun City Carolina Lakes and, as part of our repositioning in Texas, our new Dallas community called Frisco Lakes.

All are scheduled to open later this quarter.

Beyond land activities our construction teams did a great job.

Closings for the quarter increased 17% to 15,670 homes, and closings for the year increased 18% to a record 45,630 homes.

To put this in perspective this equates to closing 125 homes every day of the year including weekends.

And we work a lot of weekends.

Sign ups for the quarter were very strong as the value of Q4 sign ups increased 24% to 3.3 billion.

On a unit basis sign ups were up 10% to just shy of 10,000 homes.

As Richard indicated earlier diversification really pays off.

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

Fourth quarter unit sign ups in the Northeast were down about 80 homes or roughly 10%.

Most of the markets in the Northeast actually experienced pretty solid demand conditions, particularly in the Lehigh Valley and Baltimore areas.

The Washington, Northern Virginia market accounted for most of the shortfall in the quarter.

The market has experienced great price appreciation over the past couple of years and now it's pausing.

The underlying economy is still excellent so I am optimistic about the long-term demand conditions.

We will know a lot more once the selling season gears up but given the limited lot supply in this market I feel pretty comfortable about the health.

Sign ups in the Southeast were down about 12%.

As I've said on prior calls, Florida is probably the strongest housing state in the country.

While the Carolinas, Georgia and Tennessee are good and in most cases showing signs of getting stronger.

The shortfall in sign ups for the quarter was driven by Tampa, which was down about 20% in community count, and the fact that we are transitioning out of a recently completed Del Webb community in Ocala, Florida.

The replacement communities in both markets are or will be opening shortly so this is more of an issue of timing rather than a change in market conditions.

Our Midwest teams continue to provide solid results made even more impressive given the tough economic conditions being experienced in some of these markets.

For the quarter unit sign ups were up a strong 16% as growth in Illinois, Indianapolis, and Ohio offset continued weakness here in Michigan.

Our operators have done a super job finding under served segments, diversifying their market positions, and introducing new Del Webb communities.

It's difficult to say when conditions here in Michigan are going to get better so all we can do is being very sharp in how we execute the business.

Our Central region posted another quarter of 40% plus growth.

With unity sign ups increasing 45% to almost 1,900 homes.

Every market chipped in with an increase in orders with Houston, San Antonio and Denver thanks to our Anthem Colorado Community, showing big jumps during the quarter.

Our operations out west reported a great quarter as unit sign ups increased 18%.

There were some shifts in mix as Nevada and Southern California both delivered excellent growth which offset some softness in Northern California and the lack of communities in Arizona.

As I detailed last quarter we are sold out in two large Del Webb communities in Phoenix in the early part of 2005.

The good news is that the replacements will be opening in a few weeks.

Northern California feels a little like Northern Virginia in that the market has flattened out after a long period of strong price appreciation.

Again the economy is good and the lot supply is tight.

So it's more about dealing with the issues of inventory and affordability.

As with DC we are working the sales process hard and likely performing better than most given the diversity of our customers that we serve.

Two final comments, some of which Roger covered earlier in the call.

First, as an industry we tend to think about the growth in terms of units.

Our field operators recognize that units are important but over time it's about revenue dollars in what you can deliver in pretax income that are crucial.

Second, pretax income reflects a combination of unit volume, sales price and margin.

Given the trends in geographic mix with strong sales prices in lower priced and typically lower margin regions like Texas, Colorado, and parts of the Midwest, and the Carolinas, combined with some pricing pressure in Northern California and DC we will likely see more units, more revenue, but a flat to lower margin percent in 2006 compared to 2005.

The destination of delivery more pretax income remains the same but the roadmap on how we get there will be changing.

Just a few last data points.

Cancellation rates for the fourth quarter and for 2005 were 23% and 17% respectively.

We ended the quarter with just under 600 finished spec homes which is down 20% from the same period last year and continues to represent less than one finished spec per community.

There is no one market to highlight in terms of year-over-year change.

It's a matter of one unit here, two units there.

In closing let me just say that I really like the position we have heading into 2006 and what appears to be a more normal market conditions.

We have communities coming on line just in time for the start of the spring selling season.

While we are not burdened with a lot of inventory sitting in other communities.

Now we just have to execute.

Let me turn the call back over to Jim.

Thank you, Steve.

I want to thank everyone for their time this morning.

I know the comments went long but we thought the details were important.

As appropriate now we are prepared to answer your question.

[CALLER INSTRUCTIONS]

Thank you.

[OPERATOR INSTRUCTIONS]

Your first question is from the line of Margaret Whelan with UBS.

Good morning.

My question's around your land position but I missed the LAN count, did you provide that, the land count at the end of the quarter?

Margaret we didn't in our prepared remarks.

I would be happy to do that for you now.

We ended the quarter with the total number of lots controlled, 300, just under 363,000.

That is down slightly from the 369,000 at the end of September and, compared to last year, last year in the fourth quarter we ended at 343,000 lots.

When you look at what's owned and what's optioned, 48% of our lots are owned and 52% optioned.

Thank you.

I guess, when you think about that your lot count has essentially been flat for the last four quarters which is fine and then you are saying you are going to spend about $2 billion on land in '06.

When I look at my estimate for your COGS for '06 is about 13 billion so it looks to me like you are going to keep letting your lot count go down.

Would it be fair to say that?

Margaret, this is Richard, one comment, land investment we anticipate being about 85% of that total 2 billion incremental.

As Roger mentioned about 15% of that is in house and I will point out that half of that land investment is in development dollars particularly as Steve mentioned as we get these bigger communities going.

So when you look at the raw land investment it's lower.

In terms of the lot count going down, Frankly it's more a reflection of entitlement delays than a stated goal to lower it.

Having said that we are trying to be a little bit more balanced with our overall inventory assumptions including the larger buy back authorization that you saw.

So you can look for a little more balance from us in '06.

Your next question comes from the line of Greg Gieber with A.G. Edwards.

Good morning, gentlemen.

I wanted to get a little bit more in your community count.

I inferred from Steve's comments that because you are opening larger communities you sort of expect to see an increase in your sales velocity is the in the first half of this year.

Is that reasonable?

Actually, Greg, we don't provide any guidance on a future sales basis.

I was just merely commenting that we had big communities that sold out and we were replacing those with [inaudible-technical difficulties].

Okay, you're 6% community growth then matches with what you said about your lot position being flat here.

In the past two years, your fourth quarter increased community count has been in double-digits now it's only 6%.

Can you give us any comment on how many communities you think will you have open, say, during the second quarter, the heavy selling season and also at the end of next year?

Greg, on an overall basis what we are targeting is about 10% community count growth in 2006, yeah, 2006.

How those will open sometimes is at the mercy of some regulators out there.

I would like to tell you that they are all going to on and open for the selling season but our track record in working through that environment hasn't been as good as I would like it to be.

Your next question comes from the line of Ivy Zelman with Credit Suisse.

Actually Dennis McGowan for Ivy.

Just want to make sure I understand the Pratt joint venture which is going to be consolidated going forward.

You are saying that income now is going to run through the home building cost of sales?

Yes, it is, the income is going to be a reduction of the overall cost so it will be run through the margin.

How much of the, I guess you said around 72 million in JV income in '05, how much of that was Pratt?

It was probably roughly around $40 million for 2005, roughly.

That represents roughly our 50% investment .

Your next question is from the line of Don Oppenheim with Banc of America Securities.

Thanks very much.

I was wondering if you can talk about the West region?

It's a little bit difficult for to us fully understand the comparisons there given the issues in Vegas in this fourth quarter of '04 and slowing there.

If you look at that in terms of growth in orders in Arizona and excluding Nevada, how do the orders look for the quarter?

Dan, this is Steve Petruska, I will take that one.

Overall as you saw we were up 18%.

I would tell you that due to the community closeouts that we had predominantly in Arizona and Northern California with our Lincoln Hills that was offset by some significant increases year-over-year in Las Vegas and Southern California.

It was kind of a flip-flop for us.

We were obviously going through some issues in Las Vegas at this time last year and our inventories for communities sales were low in Southern California and we were able to generate a lot more sign ups out of those two markets and quite frankly didn't have the stores open in Arizona and didn't have a big store open in Northern California and saw some softness in the market in other places.

On an overall basis I would tell you that our western sign ups which continue to run about a third of our whole business were pretty strong.

Okay, thanks.

And then in the--can you tell me about the growth in the Central Region, what was your community count growth there in Central for the quarter.

I don't have the detail for you, Dan, I am happy to get it for you though.

But in the Central Region, Dan, as we commented in our prepared remarks, that was predominantly driven by getting Anthem Colorado, open in the Denver market where we were in the process of repositioning the business there.

So that was a very favorable unit count growth with some better positions.

Your next question is from the line of Stephen Kim with Citigroup.

Thanks, guys, good quarter.

Thanks, Steve.

I guess my first question relates to your gross margin trends.

I want to make sure, I guess, I would say, your gross margin and pricing trends.

I just want to make sure I heard you correctly.

Did you say that you expected the gross margin to be down 110 to 120, versus, I'm talking about the first quarter, versus the fourth quarter of '05 or the first quarter of '05?

And I have the same basic question for your price.

Yes, Steve, this is Roger.

We did say that the first quarter of '06 would be down 110 to 120 basis points against the first quarter of '05.

First quarter.

Yes, first quarter to first quarter.

Got it.

Okay, that's a pretty important distinction there.

And I guess the second question I had related to your capitalized interest.

I just want to understand it a little bit better.

What was your capitalized interest balance at the end of the quarter?

Stephen, this is Vinnie, let's say our capitalized interest balance at the end of 2005 was just about $230 million.

Your next question comes from the line of Larry Horan with Janney Montgomery Scott.

I saw a recent quote that Del Webb represents roughly a third of your activity these days.

Is that correct?

That's about right, Larry, slightly, between a third and 35%.

Is there any plan to either expand that or are you happy about where it is or is there no target at all?

Larry, there is a target.

We like the diversified model.

However, it's very conceivable that that could inch up.

I would say probably no more than 40% of our business but certainly we continue to highlight Del Webb and we are going to have a nice presentation on that at our investor day to let everybody understand how it fits into our strategy.

But call it between 33% and 40%.

Your next question is from the line of Michael Rehaut with JP Morgan.

Good morning.

Just wanted to go into a little more detail on the gross margin change for the quarter and what's going into the assumption for the full year, upcoming year.

You talked about a 50 basis point adjustment on land development and other raw materials.

I just want to understand how much of that, when you say some of the cement and fuel, how much of this is future anticipated versus what you actually saw during the quarter and, more specifically, how much of this is just perhaps higher lot costs and raw materials having its toll on profitability and what you see going forward in that area?

Mike, this is Roger, the adjustments that we made in the fourth quarter were relative to our view of what the costs are today on the development side specifically the commodity side.

So it had nothing to do with the land cost itself.

Certainly as we look out we have the land already secured for next year so we know what those costs are.

It's the additional development costs that go on there and as we talked about, the spikes that we saw in the fourth quarter we now have to sit down and look at what that estimate is.

And our convention is to adjust the current quarter and perspective going forward as well.

So we would expect that based on today's costs those are carried out for the balance of the project.

And certainly the commodity costs move up and down this was certainly a significant quarter where we saw these commodity costs all at one time increase pretty much across the country.

So when you go back and you take a look at that relative to the quarter against other quarters we certainly hadn't seen those type of spikes.

We have certainly seen quarters where we've seen increases across the country in various commodities but never in the significant way that we saw.

So it is based on what we experienced today going forward.

Okay and just a follow up on that for most of this year going into that, into this quarter you've had some gross margin expansion.

Without this 50 point adjustment you would be up 10 basis points, but still lower than the prior three quarters of the year.

If you could comment what drove that change, was it mix or what's going on in that area?

Yeah, Mike, again, Roger.

The biggest part of the driver there was mix for the quarter.

When you look at where the closing volume ended up being delivered from.

Certainly against my expectation when we put out the guidance at the end of the third quarter, for the fourth quarter I expected a better conversion from the closings.

And actually what we ended up with was more volume coming out of lower margin than average versus buying the Company out of the higher margin areas.

So what we experienced was a change against my guidance of about 30 basis points in that mix and it's about 10 basis points better as you mentioned than it was prior.

So mix is the driver.

Your next question comes from the line of Carl Reichardt with Wachovia.

Hey guys, how are you?

Back on the gross margin again for this quarter, Roger I'm just trying to make sure I understand this.

As you know when you are estimating off sites as you are through the course of closing out a community, you are running estimates that they come in higher than you think they will, you need to go back and adjust.

Were any of the adjustments to gross margin this quarter on closings that you had already had in the past?

No, what we do is just on the current quarter for the closings in the current quarter, so we never go back to look at anything beyond the current quarter.

I got it.

And just on the SG&A line, were there any large expenses that had last year that might be recurring that you somehow deferred from this quarter at all since that number was so good or is that just pure cost management and if that's the issue can you describe in some more detail the initiatives undertaken to get that number as low as it was?

Yeah, Carl.

Certainly we didn't have any comparative from last year to this year to significantly change that but I will tell you our efforts on the overhead side, last year we were driving pretty hard to put up [inaudible] position for growth.

This year what we are seeing because we've got an effort behind this is a lot of the costs haven't risen as much as the volume has gone up.

For instance we've been able to get leverage in our compensation area.

You know, our start up area.

Our advertising, miscellaneous expenses and then the administrative area on comp and stuff like that, all of those costs are relatively up year on year but because of our leverage and ability to add more volume versus the cost we've been able to actually pick up that 120 basis points quarter to quarter.

And each one of those is delivering 10 to 20 basis points year on year.

So we've been seeing that throughout the year.

We've put a lot of effort behind the cost controls on the overhead and we are going to continue to do that.

As we talked about before we are trying to position ourselves for certainly changes in market conditions and this is what we are reacting to.

So we think we are prudently effecting the way we run our business and the cost structure of our business ahead of seeing any downturn in the margin side.

Your next question comes from the line of Lorraine Maikis with Merrill Lynch.

Thanks, good morning.

Just a follow up once more on the gross margin issue.

You guys talked about mix in two ways when you gave your guidance.

First of all it's increasing your average selling price and second of all is diluting your margin.

Can you just talk us through the dynamics of how you anticipate that will work in 2006?

Again, Lorraine, it's Roger.

Certainly we have projections and forecasts and we do monthly flashes so as we end up taking a look across the country in the markets and communities we are in its built up from the base up.

As we end up taking a look at that we put our guidance together based on that.

Certainly the timing of closings when you look out don't always guarantee that they are going to be there so there are mixes in some areas where communities will deliver actually more or less so that will play on the mix effect, not specifically on the price or erosion of price or anything like that.

So, we focus pretty heavily on the forecast that we put together but again timing is everything.

Okay, and then just on the Pratt joint venture I wanted to clarify that I heard this correctly that the income would be a reduction of overall cost and I guess if that is true and it was 40 million last year should we expect 80 million, an $80 million benefit to your COGS from Pratt in '06?

Yes, roughly you will see that, it's probably more somewhere around 50 basis points but remember that we had half of that down into the other income line so basically the bottom line will be affected by 50% because we've already had half of the joint venture this year.

So we will be benefiting the margin.

We will see it reduce in the other income line because of the way you handle joint venture accounting.

Your next question comes from the line of Rick Murray with Raymond James.

Good morning, guys.

Good morning.

Just a couple of quick questions if I can.

One, did you guys make any acquisitions during the quarter and if so did they flow through the order line or just straight into backlog?

And the second question was we've heard of late that one of your competitors here in Tampa has been in some of their communities offering buyers that are currently in the backlog that have yet to close significant incentives to address what appears to be an escalating cancellation problem, just curious if you are seeing that here as well or in any other markets?

Rick, this is Richard.

We had no acquisitions during the quarter.

So all of the sign up growth you saw was from same store account communities that we had been running and I will let Steve take the Tampa question.

Rick, first of all particularly with Tampa, no, we are not seeing any of that in Tampa.

I would say that on an overall basis the incentives we are seeing in the business in general are about the same as what we experienced in the fourth quarter and predominantly the second half of the year, somewhere in that 3% to 6%, 7% range.

So nothing unusual, just a lot more focused on selling versus taking orders.

Your next question comes from the line of Fred Taylor with Lord Abbott.

Yeah, can you just talk about the billion dollars in cash you have on your balance sheet?

Maybe that gets readily absorbed in the $2 billion increase in inventory and the small share repurchase; as well as your comments on a 40% debt to cap?

I believe the numbers today are about 36.

And would you see yourself drifting back up to the 40 or staying about 36 net of cash?

Brad, this is Richard, a couple of comments.

First of all the balance sheet is only one point in time.

You have to remember that as money flows in and out in large quantities.

Our anticipation going forward is to maintain our discipline at or under the 40% level.

You can have some seasonal peaks that might get slightly over that as inventory builds, but don't look for it to change materially from that.

So our view is that the difference this year probably from prior year is a little different balance, share buybacks with land investment and the combined combination will keep us extremely healthy and we are proud of how we ended '05.

Thank you.

Thank you.

Your next question comes from the line of Jim Wilson with JMP Securities.

Thanks, good morning.

I was wondering, on a couple of fronts I guess your margin guidance now implies obviously though down from a year ago it's better than fourth quarter and I'm wondering is there just better land positions flowing through that will help that compared to the fourth quarter or is there just more issues with the fourth quarter and that's the anomally relative to both first three quarters of '05 and what you expect for '06?

And my second question is with Pratt are you looking at or interested in other besides fram, the other types of subcontractors anything else in the supply chain that you might decide to add in or is that still something you will think about down the road?

Jim, this is Roger I will take the gross margin question.

It's up in the first quarter relative to the fourth quarter of 2005 and basically the driver there is mix.

You are delivering close to 16,000 units in a quarter.

You've got a different mix than when you deliver roughly 8,500, 8,600 units in the first quarter.

So most of that is being driven by the overall mix effect coming out of the different margins across the United States.

As it pertains, Jim, to Pratt, specifically we haven't targeted anybody else, but Pratt is a business for us and they are focused on continuing to grow that business and the other opportunities on vertical integration that that that may provide us certainly our management team is down there and very aggressively pursuing any opportunities that might exist .

Your next question comes from the line of Ivy Zelman with Credit Suisse.

Hi, guys, just wanted to follow on my earlier question on the margin, you kind of touched on the benefit you are getting from Pratt, just wondering the rationale with putting that through the cost of sales versus breaking that out as a separate business unit and then I had a follow up with the mix issue you talked about.

The accounting is the appropriate accounting convention, it's vertically integrated so it's part of the cost structure so that's where you would put it, there's very little option to maneuver and do anything else with that, I wasn't sure about the second part.

Actually, Dennis, I'm sorry, I wanted to jump on, Richard, can I ask Steve a question unrelated to the gross margin, as everyone else is very focussed on, I'm kind of taken back, Steve, by your comments about incentives because, you know, it wasn't long ago a year ago that there wasn't a market out there that wasn't getting price increases and based on our channel checks we see a definite change in the market with respect to incentives, 12 hour sales by your competitors and other things that are going on out there so it's really hard for me to hear you say that year-over-year there's been no change and believe that.

I'm having a hard time with that.

Can you please help me?

Ivy, first of all what I eluded to was mostly of the second half of the year, the question that I was asked was are we seeing additional incentives in Tampa in particular and then on an overall basis what are we seeing.

As you know most of the incentivizing started to occur in the second half of the year and then into the fourth quarter.

And our incentive range has been running in the 3% to 7% and we continue to offer a 3% to 7% discount in most of our markets that I'm seeing coming through.

I would tell you that we probably haven't been as aggressive on price increases as well.

When you combine that with the incentives that we continue to offer to drive sales I think you and I are seeing the market basically the same way at least from my standpoint.

We haven't seen the aggressive price increases that we were able to get a year ago and that's just kind of the state of the union out there.

Your next question comes from the line of Alex Baron with JMP Securities.

Thanks, similar to the other question I was wondering how you guys are responding to Cyntex dropping prices 10% to 15% in several markets and how do you stay competitive doing that?

Do you have to do the same thing?

We are not doing the same thing.

And Cyntex has done what they've done based on their positions and I really can't speak to that but on an overall basis we remain competitive based on the consumers that we target and we have very little inventory as I indicated in my prepared comments.

We have about, well on an average less than one final unit per open community right now, so we continue to stay aggressive on our base prices out in front of ourselves trying to sell homes but offering incentives like that is currently not in our game plan.

Thanks.

Your next question is a follow-up question from the line of Margaret Whelan with UBS.

Thanks, based on the channel checks we are doing we are hearing that you are not discounting as much and I wanted to go back to the cancellation rate jumping so much, I know it can be a seasonal number but year-over-year it's had a big pick up.

Can you give us a sense for which markets, which price point it falls in and also how it's trended into February?

Margaret, we just don't as a matter of course predict what's going forward.

But we've seen the same softness that everybody else has seen in DC from a pricing standpoint.

We've seen the same softness as everybody has seen in Northern California.

Ours has been exacerbated from a margin standpoint in Northern California because of the shift in mix from our Del Webb communities into our more traditional projects that are out there.

But on an overall basis what we are seeing is repositioning strength in some of our markets like Colorado and Dallas and within Texas in general and that's because of our repositioning towards better TCGs, we're seeing stronger things in the Southeast relative to where we've been and pretty much holding serve in the other markets, Florida and Southern California, Arizona, and Nevada.

Can you also just talk about moving down the P&L into the COGs, I know a lot of your calls were higher in the fourth quarter maybe higher than you expected, but if we see a slow down overall now how much do you expect your COGs to break?

From a cost standpoint obviously you know it's kind of made up of four things, Roger detailed land and the development side and the acquisition side, house cost side certainly we have longer term material contracts and what we would expect to see is breaks on the labor side if things continue to slow down and typically the quickest, Margaret, that we can get to those is generally a six to nine month period because like anything else in the marketplace it takes some time for the contractor to see the slow down going on, and that would vary from market to market based on overall demand in that individual market.

That's the cost part that we can get to the quickest and that makes up about 50% of our house costs.

Your next question is from the line of Stephen Kim with Citigroup.

Thanks, guys.

I just wanted to hitch on the SG&A question here again.

You guys have had a pretty amazing track record in controlling your SG&A over the last four quarters.

And I'm just curious as to going forward what it is that you are assuming is going to cause your SG&A to decline another 10 or 20 basis points?

I guess in particular, I'm wondering if some of the things that caused you to have much better SG&A control than you expected over the last four quarters, whether you are assuming any of those things recur or if you are still leaving yourself open to surprise yourself as we go into the '06 year?

Stephen, this is Richard.

Quite frankly two or three years ago we weren't running as efficient a business as we could have.

And going into 2005 we decided to focus on this area and we started getting a little smarter about our costs.

One thing that we are working on hard is even flow production.

We are not really pleased with how 2006 is going to end up in terms of even flow as Roger detailed out the distribution but I can tell you it is a huge focus and we get a little bit better every day.

We look for continued focus on even flow.

We will have more to say about that at our Investor Day.

I will also tell you a huge part of your cost structure on SG&A is people and one of the things that we've done is made sure we don't bring people on a year in advance of need or nine months in advance of need.

We are bringing folks on in time to get them trained but when you really get smart about that you can help yourself and with some of the communities delays that we have detailed out in the past we hadn't done as good a job in that so frankly we were carrying excess costs before we could get communities opened.

So we believe it's a trend that we can continue and we are proud of it and we think it's the responsible thing to do and our goal has always been to drive as much pretax income as we can, not necessarily to focus on any one metric.

It's a combination of course of margin, of units, of SG&A control and it's something within our control we are going to continue to manage.

Thanks, the same question I had is a question that goes back to about a year and a half ago I asked you at that time when things were extremely strong what you might be waiting for or what you might wait for to have to make a shift in your strategy, whether or not you would in any way anticipate weakness when things are extremely strong or if you would wait to see the whites of their eyes so to speak and the market weakening.

A lot of folks are obviously getting very concerned that you've got a serious problem arising in '06 just over the hill.

And I guess my question is to you, we've seen a little bit of change here in your strategy towards buybacks.

What are you going to be looking for here over the next call it six months to, that would cause to you make a more significant shift in your overall strategy?

Would you be looking for the next, would it be just the next two months, the spring selling season, are you going to give it to the end of March?

What are the markers on the side of the road so to speak that you are going to be watching for over the next six months to really possibly make another shift in your strategy?

Stephen, this is Richard.

A couple of things.

Late last year we had given a presentation that suggested that as these big businesses continue to grow so much cash is being generated off the backside that you are likely to see a little more natural progression in any environment toward a different mix of capital allocation.

You are seeing something that.

Frankly what I would tell you is we're going to continue to watch sign up rate like we have.

We are very proud of our sign up growth and we anticipate a good year relative to sign ups for -- going forward.

In order for us to make a significant change in strategy, we'd have to see a significant change out there that would allow to us believe that we could not favorably invest the money in the land.

However, as you look out going forward it's getting tougher and tougher for us to invest land given some of the entitlement delays, etc., so we think responsibly we need to have a balanced approach.

So what are the markers for significant or additional change?

I would say a significant or additional change in the fundamentals of the business and we will keep a eye on that mainly through sign up rates.

So let's all watch that one.

Your next question comes from the line of , Joel Locker with Carlin Financial.

Hi, guys, solid quarter, just wanted to ask you about gross margins in '07 and beyond.

In '02, '03 they were around 20% or so and right now they are trending down, looks like 22.5% from your guidance in '06, just wondering what you thought they would be in '07 if they'd decline back to '02, '03 levels?

Joel, this is Roger, '07 is hard to predict.

We are just focusing now on '06.

I really don't have an answer for you.

It's going to be based on the dynamics of again, land, supply materials and how all that plays out but -- so I can't predict what that will be.

But just based on past experience over the last 20 years, seeing a couple of cycles, just kind of gut feeling, you don't really have any color on that?

Joel, we don't have a lot of detail now.

I would tell you that we don't see a big shift in the fundamentals that drive housing overall and the big change of course that's occurred the last several years is a limited supply base.

So read into that what you will.

We will have to see what that plays out going forward.

But that limited supply is frankly in our view going to help prop up profitability for builders that control lots.

Typically when we would put together our three-year projections we would keep margins relatively flat.

Not knowing whether price goes up to offset commodity cost increases or prices go down to offset commodity decreases our assumptions would be that we would just maintain that on a neutral basis so that price cost is flat.

Your next question comes from the line of Glen Cutler with ING Clarion.

Good morning, gentlemen, great quarter.

I was hoping you could go into more detail on the Washington, D.C. market?

Obviously we have all read the head lines, $100,000 off, 12 hour sales, declining orders for most of the builders.

Just hoping you could shed some light on what's been happening perhaps in December, January or what you see for February, has traffic picked up, have you seen inventory on the market decline at all from the end of 2005?

Thank you.

Glen, this is Steve Petruska, I will take that question.

Number one, sorry but I can't give you anything that's going on in the future.

We just typically don't give that guidance out until after the quarter is over.

What I will tell was we saw in the fourth quarter particularly as it pertains to DC is this: You know, not all builders positions are the same.

Richard has said that.

Roger has said that.

Every land position is a little bit different.

Our targeted consumers in the DC market have traditionally been the closer in, Fairfax County, those type of positions, a little bit higher average selling price and quite frankly we did okay.

We didn't do great in some of those.

We saw a big pause in that buyer.

Lots of inventory coming out of the market.

Mostly not new home inventory, resell inventory.

What we did see is a very positive thing for our business was the opening of the first Del Webb communities in the DC market and those performed very well.

Even relative to our expectations.

So we were generally pleased with that.

But on an overall basis we saw a pause in the upper end price points.

I would tell you that we like our positions.

Our positions are not the same positions that some of the builders are discounting at a much higher price point than we are.

We have a very strong backlog out in front of us with very high FICA scores on buyers that we feel pretty comfortable is locked in.

But we will continue to watch that.

We will try to keep a very low inventory position.

I want to point out that specifically in our DC market we ended up with nine finished specs in our DC business at the end of the year, very, very strong.

And we've got a little bit more, I will call it head room in Washington, D.C. because of the length of our backlog and we feel pretty good about that.

And we will watch what the selling season brings and we will respond accordingly at that point relative to what's going on with the competition.

Great, I look forward to it, thank you.

Your next question is a follow up from the line of Ivy Zelman.

You talk about your even flow strategy and realizing that you are looking at 50,000 plus units for '06, if you think about every week that you are starting homes, how do you avoid increasing spec if the absorptions are not there and given that strategy and then realizing, Steve, that you did comment on total finished spec.

Can you tell us roughly how many units out of the total that you start that have yet to be sold?

Vinnie's got the details on that first, so I'll let him go first on that, as he's looking that up I will, he's looking it up I will give you the information.

Richard calls it plan--even flow, I call it planned production, it might be potato potato but it is a plan production model and our plan production model, Ivy, basically takes into consideration exactly what you are talking about.

We have to sell out in front of ourselves.

Part of the message that we give to our operators out there and the models that they operate is to continue to sell more homes out in front of themselves which is a bit more of an aggressive stance on your ability to raise price.

So what we try to do is stay focused on that out in front.

Given fact that we are trying to close 50,000 homes we would like to have a deeper backlog in every market that we are currently in.

Certainly current market conditions will affect our ability to even flow our closings and we won't build spec inventory.

We are just not going to jump off and build spec inventory.

We will plan the production at something less so that we deliver the proper year relative to the sales paces that we are seeing out there.

What's the total spec as a percent of inventory?

Okay, total spec as a percent of inventory looks at 35%.

It looks as though as of the end of December we have 5,800 specs under construction.

And as Steve and I believe Roger had mentioned, it's less than 600 in the final state.

And that 5,000 you said is 35% of the total and that compares to what a year ago?

A year ago we were at--I said 5,800 as of the end of this year.

A year ago, 5,500.

And what percentage roughly if any did that represent?

Roughly about the same percent.

Yes, it is.

Ivy, that would be heavily weighted towards getting the foundations, especially in the fourth quarter, getting winter foundations in the ground in some of the our colder markets as well as we really look at getting the starts out there because getting that even in the warmer markets getting the foundation out there is really the precursor for planning the production throughout the whole building cycle.

Your next question is a follow-up question from the line of Greg Geiber with A.G. Edwards.

I want to go back into the change you've seen in market conditions and obviously we know that there's a softening in demand and we saw your cancellation rate.

I wonder if you could kind of -- what you are seeing the market out between your traditional Pulte homes and your Del Webb operations.

Is Del Webb showing the same type of slowing that you've been talking about or is it holding up better?

What's the cancel rate there, what are your incentives?

Greg, we don't break out the detail in those different businesses.

I will tell you generally speaking the Del Webb buyer has held up very well because there is such an under supply for that product when we open up new communities we are seeing good demand.

I think if you want to characterize any one sector as being a little softer it will probably be in a couple of markets, the upper end price point that we have seen softer but that would be the only one I would highlight.

Okay, thank you.

Your final question is a follow up question from the line of Michael Rehaut with JP Morgan.

Hi, thanks.

Just wanted to try and get final clarity.

There was a lot of talk and conjecture about incentives out there in the marketplace.

If you could just kind of give if possible, just clearly what was your incentives as a percent of sales in the fourth quarter this year versus perhaps the prior quarter and the year ago quarter.

Actually the detail I just asked Vinny if we had detailed data on that.

We don't actually break out the specifics as to what they are as a percentage of sales.

I would tell you that on an overall basis that 3% to 8%, 7% range that I gave is generally what we are seeing and that's staying in pretty close touch with the operators that are out there and we look at the sign ups on a weekly basis and we want to know what's going on and if we see a spike in sales we ask them if they did anything different.

It's generally in that 3% to 8%, but quite frankly in the fourth quarter when -- if we get a cancellation and we want to resell it, the market, somebody may take a little bit more liberty than that but it wasn't a widespread thing.

It wasn't a program thing within our business.

So you're saying the fourth quarter could have increased but nothing where given that you do check these markets on a pretty consistent basis, the fire bells are ringing and I assume that whatever does go on it's part of your guidance for the first quarter and the full year of '06?

Certainly.

Yes.

Thank you.

This is Jim Zeumer, I want to thank everybody for your time on the call today and we will certainly be around all day if you have any additional questions.

Thank you.

This concludes today's Pulte Homes fourth quarter earnings call.