普爾特房屋 (PHM) 2006 Q1 法說會逐字稿

Good morning.

My name is Kimberly and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Pulte Homes first-quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session with instructions to be given at that time. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to your host, Mr. Jim Zeumer, Vice President of Investor and Corporate Communications.

Thank you, Kimberly, and good morning.

Let me welcome everyone joining today's call to discuss Pulte Homes' financial results for its first-quarter ended March 31, 2006.

Last night's press release detailed Pulte's first-quarter operating and financial results.

And on the call to discuss our first quarter are Richard Dugas, President and Chief Executive Officer;

Steve Petruska;

Executive Vice President and Chief Operating Officer;

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

For those of you that 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 who want to review it at a later time.

As with all 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 actual outcomes will not be materially different from those discussed today.

All forward-looking statements are based on information available to the Company on this date of the 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 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 risks and uncertainties associated with the business.

As always, at the end of our prepared comments we will have time for Q&A and we'll wait until then before opening the queue for potential questioners.

Now let me turn the call over to Richard Dugas for a few opening comments.

Richard?

Thank you, Jim, and I would like to thank everyone joining us on the call this morning.

We are pleased to report on Pulte's record first-quarter operating and financial results.

Before turning the call over to Roger and Steve for detailed discussions about the quarter, I'd like to make a couple of general comments about the housing industry.

Depending upon which report you read and when it was written you might believe that the housing industry is in the midst of a material correction, that house prices are coming down and incentives are going up, and that traffic is slowing and cancellations are higher.

Or you might be convinced that housing is experiencing a soft landing and more normal demand, average selling prices are moving higher and incentives are being scaled back and that buyer interest is escalating.

The amazing thing is that there is some degree of truth in all these comments.

Depending upon the market you're discussing and sometimes even the individual community you can have a very different perspective.

In other words, how you view U.S. housing can be greatly influenced by where you are standing.

If you are viewing the nation based on markets in Nevada and Southern California it looks like a soft landing where traffic patterns have stabilized over the past year and price appreciation has returned to historical ranges.

Then again, if you're selling higher priced homes in Sacramento, San Diego and Northern Virginia, it feels much tougher as buyers have become more selective and higher levels of incentives are needed to get deals done.

At the same time, if your point of reference for the industry is based on the Carolinas, Texas or sales among active adult buyers in all markets, you think demand is accelerating as traffic and net new orders have been climbing.

Housing is such a local business that it can be difficult and even misleading to define nationwide demand and market conditions with a single adjective.

What I think it's fair to say, however, is that conditions in many markets across the country are transitioning through noticeable levels of change, some for the better and some for the worse.

Demand in specific markets and customer segments has been and continues to be influenced by a variety of macro and micro factors including higher interest rates, affordability, local economic conditions, land supply and entitlement delays and increased levels of inventory, especially in those markets where real estate investors have shifted from being buyers to sellers.

Further the rapid price appreciation that came to define a number of markets over the past 24 months has changed as higher interest rates and lack of affordability have had their expected impact on demand.

Depending upon the market and the specific community, the rate of appreciation may have simply moderated or it has stopped or it has been reversed through the use of increased incentives.

At different points over the past several months we have seen all three of these responses.

So how do you response to changing demand characteristics that can be very different depending upon the individual market and even a specific community within a market?

Well, if you're Pulte Homes the changes are both obvious and subtle.

In truth, it is this type of operating environment where we expect our diversification strategy, both by geography and by customer segment, to show its value.

Historically diversification has supported Pulte's growth as we entered new markets and then captured market share by expanding to serve additional customer segments.

Now our diversification can provide greater stability and opportunities for Pulte to offset softer demand in some markets by capturing accelerating demand in other cities.

For example, solid demand in parts of the Southeast and Texas and with specific customer segments such as active adult are all helping to compensate for fewer units from Northern California, Arizona and Florida.

Granted pricing and probability can and does vary greatly between the different geographies and customer segments, but I would rather have the opportunity to offset at least some percentage of any slowdown rather than being concentrated to a point where you can't compensate in any way.

Let me add one more thing, in running this business we have to monitor a lot of gauges, but our primary measure and objective is to maximize the pretax profit we generated from each community.

While sales pace is critical, our objective is not to drive for a specific number of units.

Steve will talk more about this in a minute, but know that each community operates differently as they find the right combination of price and sales pace relative to a number of factors in their market.

For Pulte Homes, blindly driving for unit volumes is not a right answer.

Over the long-term solving to maximize pretax income has proven the best road to success.

Beyond diversification strategy we continue to move ahead with initiatives such as simplification in support of our core goal of operational excellence.

At the same time we are working hard to control costs and drive greater overhead leverage.

As our numbers indicate and as Roger will discuss in more detail, we are doing a good job controlling costs in the face of a more difficult operating environment.

Maximizing overhead efficiency is always important, but even more critical when demand is moderating.

And finally, we have to remain focused on the fundamentals that have always driven our success in the home building business.

We have to make sure that every community is executing at the highest standards in the areas of marketing, sales and customer service.

These are just sound disciplines that are important in all market conditions, but offering the best quality and home buying experience to the customer is critical when the business gets tougher.

In all of our divisions we have to sharpen our pencils even more on the land deals we're evaluating and be very selective especially when assessing larger multiyear projects.

We need to be flexible in allocating capital among existing markets and customer segments and do not force an investment.

When markets can't find suitable projects that meet our hurdle rate we will continue reallocating the dollars to other opportunities.

As we talked about on our last conference call, we are being more balanced in our investments, so allocating capital into other uses such as share buy backs, debt reduction and acquisitions is acceptable and prudent in this environment.

For those of you that have followed Pulte Homes you know that we have talked about these key initiatives before and about our efforts to drive a more efficient operation and better financial results.

These are programs that take time to implement and, given the changing conditions in many markets, can provide important competitive advantages to Pulte Homes.

Over the past 20 years the nation's top builders have slowly been expanding their share of the U.S. market for new homes.

In those years when aggregate new home sales in this country have slowed the trend has been for big builders to capture market share at an even faster rate.

With data pointing to such a potential slowdown in 2006, Pulte Homes is well-positioned to continue the trend.

Finally, I'd like to thank all the dedicated men and women who work for Pulte Homes.

As always, I appreciate your customer-focused attitude and commitment to our Company and our shareholders.

Now let me turn the call over to Roger Cregg for a breakdown of Pulte's Q1 financial results.

Roger?

Thank you, Richard, and good morning.

The first-quarter home building net new unit order rates decreased approximately 11% over the first quarter last year, and in dollars decreased 4% to approximately $3.7 billion.

Revenues from home settlements for Pulte Homes' operations increased approximately 17% over the prior year quarter to approximately $2.9 billion.

Higher revenues for the period were driven by an increase in unit closings of approximately 7% on an increase in the community count of approximately 8% versus the same quarter last year.

The average sales price increased approximately 9% versus the prior year quarter to an average of $336,000.

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

In the first quarter land sales generated approximately $26 million in total revenues which is an increase compared with the prior year's quarter of approximately $2 million.

Home-building gross profits from home settlements including home-building interest expense for the quarter increased approximately 9% to $663 million or an increase of approximately $57 million for the quarter.

First-quarter home-building margins from home settlements as a percent of revenues were 22.9% compared with 24.6% in the first quarter of 2005.

The decreased margin conversion of approximately 165 basis points versus the prior year quarter is mainly attributed to the closeout of higher margin communities replaced by newer communities which our contributing lower margins.

The change in communities from the first quarter of 2005 to the first quarter of 2006 was significant.

We closed approximately 240 communities and added 286 new communities that contributed closing in the first quarter of 2006.

These new communities represented approximately 49% of the units closed during the current quarter with an average gross margin contribution of approximately 300 basis points below those now closed communities that contributed closings in the first quarter of 2005.

The lower contribution margin from these new communities versus the closed communities can also be attributed to a combination of a shift in product mix offerings, increased costs associated with purchase of land and land development and materials and labor and house costs.

Another way to view this is through the gross profit dollars contributed by each home.

In the quarterly comparison and on average we increased the gross profit contribution for each unit closed by approximately $1500 per home over those closed in the previous year quarter.

While the gross margin percentage may have declined, the gross profit contribution per unit increased on average.

Additionally, home-building interest expense, which represents amortization of capitalized interest, increased during the quarter to approximately $41 million versus approximately $31 million in the prior year.

This increase is a result of additional debt incurred in the business year-over-year and contributed to approximately 20 basis points in the declining margin versus the previous year quarter.

The gross profit contribution from land sales was approximately $5 million for the current quarter versus approximately $3 million in the prior year first quarter.

Land sales transactions during the first quarter included single-family custom lot sales and several commercial land parcels, all in line was our local land acquisition and operating strategies.

SG&A cost as a percentage of home sales for the quarter was approximately 9.9%, improving approximately 48 basis points over the prior year quarter.

The conversion improvement versus the prior year quarter was a result of increased average selling prices, our own internal initiatives focused on controlling costs and better overhead leverage with the increased volume over the prior year quarter.

In the other income and expense category for the quarter, the expense of approximately $5 million is primarily the net of joint venture income generated during the quarter of approximately $1 million offset by approximately $6 million in expenses that included the amortization of intangible assets and all other miscellaneous expenses from the home-building operations.

Home-building pretax income for the first quarter increased approximately 5% to approximately $378 million with pretax margins at approximately 13% on total home-building revenues.

This decrease in conversion over the prior year quarter of approximately 151 basis points is mainly a result of a lower gross margin conversion offset by improved SG&A leverage.

At the end of the first quarter our home-building operations had a backlog of 19,940 homes valued at approximately $7.1 billion compared to 19,964 homes valued at $6.5 billion in the prior year quarter.

The first-quarter pretax income from Pulte's Financial Services operations was approximately $49 million or an increase of approximately $39 million compared with the prior year quarter.

The increase during the first quarter is mainly attributed to the gain of approximately $32 million from the sale of our equity investment in a Mexico-based mortgage banking company as previously announced.

For clarification, this gain on an after-tax earnings per share basis for the Company contributed approximately $0.08 per share for the current quarter.

Additionally, an operational increase of approximately $7 million versus the previous year quarter was primarily related to a favorable shift in product mix to more profitable loans and a more favorable interest rate environment to sell loans compared to the first quarter of 2005.

The level of adjustable-rate mortgage products originated during the first quarter of 2006 decreased from approximately 52% of origination dollars funded from our warehouse line in the first quarter of last year to approximately 35% this quarter.

Pulte Mortgages' capture rate for the current quarter was approximately 89%.

Mortgage origination dollars increased in the quarter approximately $255 million or 17% when compared to the same period last year.

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

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

The other nonoperating pretax loss category for the first quarter of approximately $9 million includes corporate expenses of approximately $10 million and offset by the net of interest income and expense of approximately $1 million.

The decrease versus the prior year is a result of lower interest expense in the quarter due to an increase in the capitalization of interest of approximately $16 million offset by increased corporate expenses of approximately $1 million.

Income from continuing operations for the first quarter increased approximately 21% to approximately $263 million, or $1.01 per fully diluted share, as compared to approximately $218 million or $0.83 per diluted share for the same period last year.

Fully diluted shares were approximately 260.7 million shares for the quarter.

On the balance sheet for the first quarter we ended with a cash balance of approximately $121 million.

House and land inventory ended the quarter at approximately $9.8 billion or an increase from the year end 2005 of approximately $1 billion.

Of the $1 billion increase, approximately 59%, or $615 million, is related to home construction in progress to include house and land related to house.

The balance of the increase, or approximately $420 million, is related to land acquired, under development and held for future development.

For the first quarter the Company's debt to total capitalization ratio was approximately 35.6% and on a net basis was 34.7%.

Pulte Homes' shareholder's equity for the quarter increased to approximately $6.2 billion with a return on average shareholders equity for the latest 12 months of approximately 28%, an improvement of approximately 220 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 210 basis points over the same period last year.

During the first quarter approximately 1,252,000 shares were repurchased for approximately $47 million or an average of approximately $37.84 per share.

The Company has approximately $173 million remaining on its current authorization.

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

Unit settlements in the second quarter of 2006 are projected to be in the approximate range of even to slightly up by approximately 1% versus the same period last year driven primarily by the closeout of large Del Webb communities in Florida, California and Arizona.

As I mentioned earlier, the closeouts of these communities and the delay we experienced in opening new and replacement communities in 2005 has moved more closings into the third and fourth quarter of 2006.

Please note this does not reflect a change in our operating business plans for the year, but does reflect the growth and more back end of the year loading of closings when comparing quarter to quarter.

Average selling prices for closings in the second quarter were estimated to be approximately 1 to 2% above the first quarter of 2006.

This projection is primarily being driven by product and geographical mix for the homes we project to be delivered during the quarter.

Gross margin performance from home settlements as a percent of sales for the second quarter are anticipated to be approximately 140 to 150 basis points below the first quarter of 2006.

Projection driving the lower gross margins for the quarter are primarily a result of a mix shift as we closed out higher contributing margin communities offset by the startup of replacement communities at lower margins.

The lower margins reflect pricing strategies in generating sales momentum, increased costs associated with land, land development and commodity and labor costs.

We're currently projecting land sale gains in the second quarter to be approximately 2 to $3 million.

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

As a percentage of sales SG&A is expected to be in the range of even to an increase of 30 basis points over the second quarter of 2005.

This range is based on the projection of increased start-up related expenses associated with new selling communities.

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

Given no material change from the current and short-term projected interest rate environment or a significant shift in consumer mortgage product reference, pretax income in our financial services operations are expected to be approximately 8 to $9 million for the second quarter.

Total other nonoperating expenses are projected to be 18 to $19 million for the second quarter.

We are projecting the effective income tax rate to be approximately 37.3% for the second quarter of 2006.

Second-quarter earnings per share from continuing operations are estimated to be in the range of approximately $1.00 to $1.10 per share.

This earnings per share number is calculated based on approximately 259.7 million fully diluted shares.

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

I will now turn the call over to Steve for some comments on the quarter.

Steve?

Thanks, Roger, and good morning, everyone.

Picking up on some of Richard's earlier comments about the changing and varied market conditions, how our operators respond in their individual markets will also vary.

As we've stated on many occasions, our goal is to maximize pretax income for each community.

With this goal in mind, our division teams are constantly working to find the right balance among a variety of factors including sales base, sales price, community openings and community closings just to name a few.

This is not a business where one strategy fits all even at the division level.

We manage right down to the community level.

Now for some specifics on the quarter.

Q1 sign-ups were a very respectable $13.7 billion at an average sales price of roughly $343,000 compared with $3.8 billion last year at an average sales price of approximately $318,000.

Gross sign-ups for the quarter were down roughly 5%, although our cancellation rate increased to 21% from 16% last year.

The net impact was a decrease of 11% in net unit sign-ups for the quarter.

To put this change into a little better perspective, our business plans anticipated a year-over-year decrease in Q1 unit sign-ups of approximately 5%.

We were anticipating this decline due to a closeout of several large established Del Webb communities where entitlement delays resulted in the replacement communities not coming on line as quickly as the established communities sold out.

Below the national numbers let me now take a few minutes to provide some details on what our operators are facing in their respective markets.

On a unit basis, first-quarter sign-ups in the Northeast were down about 29% with the biggest impact seen in the New England and Metro New York/New Jersey areas.

I know there's been a lot of talk about DC, but we actually held up well in that market, with sign-ups for the quarter essentially unchanged versus the same period last year, although our incentives were a little higher.

There are a number of factors hurting sign-ups in the areas of Massachusetts, Connecticut and New York; but the inability or unwillingness of the potential buyers to sell an existing home seems to be one of the biggest stumbling blocks.

With the overall sales base moving a little slower, customers are reluctant to make the commitment on a new home.

Moving down the coastline, sign-ups in the Southeast were down about 9% with Florida accounting for much of that shortfall.

Demand in most markets throughout Florida has cooled from the torrid pace it exhibited over the prior 24 months with additional inventory on the ground and buyers taking longer to make a decision.

For us this was most apparent in the Naples/Fort Myers area where many of our communities are marketed to seasonal and second home buyers who are delaying what is a more discretionary purchase.

Continuing a trend we have commented on during prior calls however, demand in the Carolinas, Georgia and Tennessee was solid in the quarter led by record-breaking success of our new Sun City Carolina Lakes community outside of Charlotte.

In the Midwest our divisions have continued to deliver a great performance in light of what are arguably the most difficult economic conditions in the country.

Sign-ups in most of our markets held up reasonably well with the Illinois active adult business driving a 7% increase in the greater Chicago area.

Orders in Indianapolis and Minnesota were essentially unchanged, while here in Michigan we continue to struggle with getting sales in what is a very difficult demand environment.

On a positive note, I can say we are delighted to finally have the Del Webb brand here in Michigan.

That segment of the market has certainly held up better.

We have a second Del Webb community opening in Michigan later this year which should help, but until conditions improve for the critical automotive industry here in Michigan, it's tough to see demand getting appreciably stronger.

In our central region Pulte's operations reported a 7% increase in sign-ups for the first quarter.

Most of the Texas market saw respectable demand with San Antonio posting a nice gain for the quarter.

In Colorado our Denver operations continued to see signs that market demand may be starting to turn while Colorado Springs held flat versus the prior year.

As mentioned on previous calls, we are changing the operating platform of our business in these markets -- primarily driven by a continued introduction of our Webb brand.

Finally, looking out West, we again experienced shifts in demand across different markets.

Total sign-ups for the quarter were down roughly 15%.

For our Northern California operations talk of market softness and affordability issues are not new, but we had the added impact of the wind down of our very successful Sun City Lincoln Hills community near Sacramento.

Sales for the quarter in Lincoln Hills were right on plan, but that was still down 170 homes from last year as the community closes out its few remaining lots.

Unfortunately, as we have talked about before, a lengthening entitlement timeline has resulted in the replacement community for Lincoln Hills being months behind schedule.

So sign-up growth in this region will be harder to come by for a few quarters.

Further South, strong demand in both Southern California and Nevada was offset by slower sales in Arizona where two large Del Webb replacement communities have just opened for business.

One is the replacement for Sun City Grand which sold out towards the middle of 2005.

Limited availability of Pulte products in the Phoenix market combined with an increase in overall inventory on the ground in Phoenix and Tucson definitely hurt our Q1 sign-ups.

The underlying economy in Arizona is still strong but, with price appreciation less certain and existing homes taking longer to sell, we are seeing buyers being much more cautious.

We are confident about the long-term opportunity, but we'll have to see how the market and our new communities play out over the next couple of quarters.

Let me provide a few more data points before turning the call back over to Jim.

We ended the quarter with approximately 357,000 lots under control, which is down a couple of percent from last year and consistent with recent trends as we continue to be disciplined in regard to our land divestment practices.

Though many opened late in the quarter we ended up operating from a total of 692 communities during Q1, which is up 8% over these same period last year.

The companywide cancellation rate for the quarter was just over 21% which is in line with historical trends but up from more recent trends which have been hovering in the mid to higher teens.

Our spec inventory remains healthy as we ended the quarter with 900 completed homes.

As I said earlier, our call is to maximize pretax profits and be practical in our efforts to manage price and pace.

We certainly appreciate the allure specs can have when running the business day to day, but given the uncertain market conditions we are monitoring spec inventory very carefully.

We are making sure that we don't get ahead of demand and end up putting additional pressure on ourselves by throwing a lot of unsold inventory into the market.

Overall I think market conditions are healthy and we are simply returning to a more normal pace after a period of strong demand and accelerated price appreciation.

Our operations are taking action to make sure we remain competitive in the marketplace and to ensure that we're seizing every opportunity to maximize available operating and overhead leverage.

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 questions.

Everyone gets a chance; participants will be limited to one question and a follow up after which they will be asked to get back in the queue.

At this time I'll open the call to questions and ask the operator to provide directions again.

(OPERATOR INSTRUCTIONS).

Margaret Whelan, UBS.

Good morning, guys.

Very thorough overview, thank you.

My two questions would be, first of all, your first quarter came in light.

It looks like your second quarter is going to be light relative to our expectations.

It's just not clear to me and why you would be reaffirming the guidance; it seems like we're going to be disappointed later in the year.

Margaret, this is Roger.

As we had talked about, the number of communities and the sign-ups that we basically have in our projection and our business plans are certainly more back end loaded.

And so, as these communities are coming on and order rates are coming on in those communities, we still see the opportunity for hitting those numbers for guidance for the year for the out to the balance of the year.

Certainly as we look at the pricing environment, the market environment, the demand environment, there certainly could be pressure on that, even from a unit standpoint or a pricing standpoint.

That could change that going forward.

But sitting here today after the first quarter, I think the next 60 or 90 days will give us a more clear view of the full year.

It just seems like you'd need a really big pick up in your orders to get there.

And the second question before I get cut off is just Richard in his prepared comments said the uses of cash I think would be buy back, debt paydown and M&A.

I'm just wondering, is that the order you'd be using your cash?

Margaret, I think at this point we would say that buybacks would be the primary use of those three with the other two if opportunities present themselves.

So I would highlight the buy back components of the other three.

Michael Rehaut, JPMorgan.

Hi, thanks, good morning.

My first question is I guess just following on on Margaret's regarding the visibility for the back half.

You had said that you're starting to take orders now I believe, but I was wondering if you could give a little bit more detail in terms of the communities that you said have experienced the delays and resulted in 2Q being below expectations.

Where those communities are, if all of them are actually in fact opened at this point, and therefore the degree of confidence that you see for 3Q and 4Q?

Michael, this is Steve;

I'll take that one.

Predominantly what we're talking about is the big communities in Arizona that opened up late in the third quarter as well as some additional openings -- late in the first quarter, pardon me -- and as well as some additional communities that will open this quarter predominantly in Texas and in our Southeast markets and down into Florida.

And right now those communities are tracking to open on time.

We're seeing very, very good initial sales demand in those operations.

We are in the process of developing the land to get the houses to go vertical and the deliveries should start in the third quarter and that's providing we get good weather and we continue to see the strong initial demand that we're seeing.

So as Roger indicated in his guidance, it tends to back load the year a bit.

But at this point, based on these community openings that we see, we feel relatively confident that we should be able to meet those expectations in the second half of the year.

We appreciate that.

It's just, getting the additional details on actually where those communities are is pretty helpful for us.

The second question, if you could just talk about growth in net order trends during the quarter and I guess cancellations rate -- can rates, how they progressed during the first quarter and perhaps where do you see order trends for the second quarter?

Obviously we don't comment on future order trends, so Michael, I can't give you much on the second quarter.

But on the first quarter on a net order basis, obviously our net sign-ups were better in March than they were in January.

On a year-over-year basis we were relatively flat in January and February and we were down in March and that's where most of the 11% decrease came from us the year-over-year decrease in March.

So on an overall basis year-over-year you'd say that the orders were decreasing, but when you look at our net sign-up orders, they were higher in March than they were in January.

Ivy Zelman, Credit Suisse.

It's actually Dennis McGill in for Ivy.

The first question, just in total can you give us what you spent on land and land development in 2005 including any replacement and what you expect that to be in '06?

This is Roger.

I have to take a look at the balance sheet year-over-year, but my guess is year-over-year we put in roughly 2 to $2.5 billion in 2005.

Our forecast for this year was roughly to increase our invested capital by approximately $2 billion in 2006 over 2005, so that would have been the incremental amount.

And I think roughly we did about 2 to $2.5 billion -- I don't have the exact number in front of me -- for 2005.

And typically what we look at in that is about 50% of that is land development, just kind of a rule of thumb, and the other 50% would be new land purchased.

And again, on top of that we certainly work on increasing the lots through the option versus actually bringing all of that cost on the balance sheet at one time.

Okay.

So that $2 billion would be inclusive of any replacement land as well, that's total dollars expended?

No, that would be incremental.

And the replacement roughly in 2006 would be about $4.5 billion and that's what we would replace just to keep inventories even year-to-year.

So we're going to actually charge ourselves in the cost of sales about $4.5 billion for land and land development if you will.

And again, that $4.5 billion would be replaced just to maintain even year-to-year.

Stephen Kim, Citigroup.

Steve, you had mentioned in your commentary that your outlook for the first quarter was a negative 5% decline in orders and actually on a gross basis you essentially hit that and then you had an increase in cancellations.

My question is really two questions related to that.

Number one, can you give us a sense not of necessarily how April is shaping up, but rather what kind of an expectation you're including in your outlook similar to the 5% that you were -- down 5% that you had expected in the first quarter?

And the second question relates to cancellation rates.

Steve, in response to your first question, we just typically don't give guidance on what we're doing from a sign-up standpoint in advance of the quarter.

So unfortunately I can't give you the answer that you're looking for and I apologize for that.

Okay.

The second question relates to cancellation rates.

Yesterday one of the builders mentioned that they anticipated that cancellation rates were cresting and they were seeing indications that that issue had largely run its course and would probably stabilize at these levels.

Can you give us a sense for how you would respond to that or give us your perspective along those lines?

Sure.

Cancellation rates, Steve, come from a lot of different things that are going on.

And for me to sit here and tell you that they're cresting or that they're going to be decreasing or even increasing really varies based on what we're going through right down at the community level.

For instance, if we have a lot of move-up buyers that have houses to sell and we're in some of these escalating resale markets like Orlando or Phoenix, Arizona then we see people, like I said, getting skittish on their resale and they elect to exercise the options under their contingency and cancel.

Likewise, we sell on preliminary public reports in a lot of marketplaces and, to the extent that we get the final public reports and we convert those buyers, the final public report will bring in a massive backlog all at the same time that we presold and essentially give them they write to cancel because that's the laws of that state and so we'll see a surge in cancellation rates.

All that said, what I would tell you on an overall basis is we're seeing cancellation rates getting back to a more normal historic rate for us which is the 20 to -- low 20 percentages versus the mid to high teens that we've seen in the past, and that's indicative of, like I said in my comments, a much more normal operating environment and that's what we expect to see as we go forward.

Greg Gieber, AG Edwards.

Good morning.

There's a lot of skepticism that's been expressed already on this call about your guidance for the year and I would think it would be helpful -- I know you said you won't give out your orders forecast, but if you could at least give some qualitative sense to it, otherwise we have no road signs or milestones to really judge your performance going forward.

Can you give us a vague -- some sort of qualitative sense?

Will it be at least like the sign plus or minus from a year ago because you have a very strong year ago comp?

Greg, this is Richard.

We can't give you any specifics, but obviously we look at a lot of things.

One is we look at our backlog and I would just point out the obvious that your backlog can increase, your backlog can decrease and you can still have a respectable amount of earnings in a given period of time, it's just depending on now you elect to run the business.

I think it's fair to say that we need sign-ups the rest of the year obviously do meet our guidance.

We're not going to give out specific commentary on that.

But we do expect within the normal seasonal patterns that you'd see for that to kick in.

As an example, you typically have seasonality that is important to you in the spring selling season.

We're looking at that as well, but we're not going to give out specific numbers because there are so many moving parts to it.

We have this $7.1 billion backlog and that gives us a good visibility for approximately six months and so we're going to monitor that.

As we indicated in our comments, we're not going to just blindly push units and we're evaluating things community by community.

So we'll have a lot more to say at the end of the second quarter based on what happens during the second quarter, but until then that's our answer.

Okay.

My follow-up question will have to do with your retirement communities.

Is there any way you can give us a little bit of quantification there as to what you're actually seeing on a same-store basis in your retirement communities?

I get the impression that that's much stronger than your more traditional business.

Can you give us some sort of qualitative information on the difference between the two?

Greg, first of all just so you know, we don't break the units out even internally between Del Webb and Pulte and can keep track of them that way between the two different brands.

But from a qualitative standpoint what I'll tell you is that as we open new Active Adult Communities under the Del Webb brand where we have historically not had that brand available, and these resort type communities like Carolina Lakes, we're seeing very, very strong demand for that new product.

And we continue -- as we pointed out on our investor day back in February, we're continuing to proliferate that brand primarily along the East Coast.

So yes, we're seeing good strength in that.

But like anything else, market by market if resales are still an issue, if the active adult buyer has to sell their home to get into our community, then there still is some hesitancy to do that at this time when they feel like there's a lot of inventory out there.

So not all Del Webb communities are created equal.

Buy on an overall basis as we open more of these communities around the country, we continue to see very, very good demand upon those openings.

Carl Reichardt, Wachovia Securities.

Let me ask Greg's question a little different way.

I think historically you've said 33, 35% of total business is Webb.

Is that mix -- is that still the expected mix you'd see in 2006 based on what you think now?

Probably slightly higher than that.

We ended '05 at about 39%.

So probably more in the upper 30%.

And we look for it to be approximately that.

Okay, thanks.

And then I'll a [typical] Tim Jones question.

What percentage of your deliveries this quarter were on homes that you also sold during the quarter?

Carl, this is Roger.

That's very hard to tell.

We don't track the information by that kind a detail within the Company.

So I can't give you an answer on that.

Dan Oppenheim, Banc of America Securities.

I was wondering if you can talk about the second quarter in terms of the margin expectations there.

At your analyst day on February 21st I didn't hear so much in terms of the comments about the land costs and other things which I presume should have been known based on when you put that land under contract.

Can you go through what's changed for the second quarter now relative to then?

And then looking forward for the year, what sort of share repurchase you're assuming in your guidance?

Dan, this is Roger.

First of all, nothing has really changed from the guidance that we've talked about for 2006.

If you recall, we had talked about margins being down between 80 and 110 basis points for the year.

So this is still pretty much in that range -- not giving line by line-item detail for you for 2006 at this point, but I would tell you just generally overall at the 6 to 6.25 there may be some movement between line items.

You certainly respond to market conditions if there's a slow down by focusing on your overhead costs.

We're certainly doing that as well and you could see that even in the first quarter.

So our focus is really on the 6 to 6.25, and specifically in the margin area.

In that change we did have, as I talked about in the fourth quarter, changes in the commodity cost that rolled through.

And then also with the community shifts in the mix alone, that's also moved the margins a little bit as well.

So I would tell you we're pretty much where we were when we talked about it at investor day as well as the fourth quarter.

Larry Horan, Janney Montgomery Scott.

One theme that you -- as you were going through the various regions seems to be that you had a number of Del Webb communities that were winding down and had a few lots left to sell versus delayed openings in Del Webb communities.

Can you put some numbers on that in any way and give us a sense for how much that might have affected orders?

This is Roger.

We're not breaking information down like that.

It's more on a market community.

And again, we're not focused on the Webb versus the traditional side.

I can't give you an answer directly on that.

So you can't talk about the numbers then?

How many Del Webb communities maybe you had open at the beginning of the quarter versus the end of the quarter or anything like that?

Larry, this is Richard.

I think what we can tell you is that the communities that closed out that we didn't have replacement for were very large communities that contributed a lot of sign-ups.

We mentioned Sun City Grand, we mentioned Sun City Lincoln Hills.

We had other projects in Florida, a community called Spruce Creek.

These are communities that on average in some cases were delivering over 1000 units a year for the Company.

And when you lose those, which are typically at the tail end of their life at high margins -- very high margins because the land basis of course was so low eight, nine, ten years ago when it was contracted -- and you replace them with communities that are not starting up at that kind of pricing level you typically generate your sales momentum getting going.

You've got some of the margin pressure that we've seen as a result of that.

In addition, frankly, it's tough to generate that kind of sales philosophy on a brand-new community right out of the box and in a lot of cases, as we mentioned, we haven't even opened those new replacements.

So Steve mentioned a couple of them opening in late March, but then we've got a bunch of others opening in the second quarter.

So hopefully that can give you a little qualitative perspective.

Alex Barron, JMP Securities.

Thanks.

I wanted to find out what amounts to the substantial increase in your inventories.

I think they were up about 1 billion from December?

Alex, this is Roger.

If you recall my comments, we increased our house with land underneath that house by about $600 million and the balance of the $400 million was land and land development.

And again, rule of thumb might be about 50% of that was raw land purchase and the other 50% was investment in the development side.

So as we develop the land we add more value to the raw dirt and roughly rule of thumb about 50-50.

Again, that's just a generality.

So it was about 60%, 59% to be exact was in the house and land getting ready for the second and third quarters.

Got it.

And my second follow-up question is you guys mentioned something about not wanting to through specs into the market.

I guess I'm kind of wondering what percent of the homes that you guys start without a buyer and why not completely build to order?

At different communities we start different paces without buyers.

For instance, we build a lot of the patch product, and when you have a 40 unit stack flat condo building, obviously we're not going to wait to sell all 40 of those before we start a building that may take seven, eight, nine months to complete.

So typically a lot of our speculative starts come from our attached product just because that's the nature of the product.

You have to start a bunch of them that wouldn't be sold at the time, but you have a longer period during the construction cycle to sell those.

On an overall basis we've historically run at norms that say that 35% of any of our inventory at a given time we're comfortable with being speculative.

The last couple of years we've been fortunate to run well below that.

But given the normal state of the market, I could see us moving back up to an overall 35% to 65% balance and we think that would be prudent.

But obviously we manage that right down to the community level because not all communities are created the same, as I pointed out in my comments.

Joel Locker, Carlin Financial.

I'm wondering if you could elaborate on the net income of $1.1 million versus the loss of $13.7 million a year ago and what that looks like going forward.

The net income?

Yes, net interest income for the quarter was $1.1 million versus $13.7 million and I know you said some amortization of $16 million that was last year.

But just in the second, third and fourth quarter what's your expectation for that net interest income or expense line?

I didn't give third and fourth quarter and won't at this point.

I think I gave roughly about $1 million for the second quarter and the difference is from last year where we expensed more interest expense, we made a change in the fourth quarter to capitalize more of the interest associated with the inventories.

As we look at the debt level carrying the balance sheet of land on the books and inventory on the books.

So now we're amortizing more of that through cost of sales.

So as I spoke about in the quarter, roughly about $41 million was in interest expense sitting in cost of sales line.

That's up about $10 million quarter on quarter.

And then you'll see that corresponding decrease down below in the other line item as well.

So that's the difference and it's the difference in the capitalization more than anything else, and the geography.

But you expect that trend to continue going forward just because of the change from the fourth quarter?

Yes.

And also just the community count growth at the end of the second quarter, what do you anticipate that year-over-year?

We gave guidance on the fourth-quarter call that said that we'd be approximately year-over-year about 10% community count growth.

Jay McCanless, Avondale Partners.

Good morning.

I've got a couple housekeeping questions.

First, what was the total change on your Midwest sign-ups?

Give us just a second, Jay.

We're digging that out.

Okay.

Included in our press release the Midwest sign-ups in the first quarter were 1320 units and that's versus last year 1519 units or down 13%.

Okay.

And then what was your owned and options split on your lots?

As we ended the first quarter of 2006, as previously mentioned, we had about 156,900 lots controlled -- 356,900, and we had owned about 51% with the remainder controlled via options 49%.

Dana Richardson, Argus Research.

Good morning.

Just returning to the question about net interest income.

Can you refresh my memory about your forecast for the second quarter of total other non-operating -- wasn't that a negative 18 to $19 million?

That was not just interest, that would be corporate overhead associated with that.

The specific question was on the interest.

Right.

So then I would infer that you think the other expense would increase appreciably in the second quarter.

It's about 18 to $19 million I think is what I said for the total line which included about 1 to $2 million in interest.

Jim Wilson, JMP Securities.

Steve Fockens, Lehman Brothers.

First question, did you have land write-offs in the quarter?

And under what conditions or under what circumstances do you consider writing off land?

Steve, this is Roger.

There's a couple of different ways that you look at it.

One would be from an NRV standpoint, net realizable value.

If you had an impairment on an asset you would take a write-off on that.

We had none of those in the first quarter.

We do have where we would take a look at a piece of ground, property where we may put up a deposit or spend money on a pre-acquisition standpoint and decide not to take down that land -- as well as deposits that may be on options that we have that we decide that we don't want to take down that land.

So we would write those off as well.

In the first quarter we had roughly about $5 million in expenses associated with writing up options.

Last year in the same quarter we had roughly about $3 million.

So it's a normal part of our business as we go through looking at land acquisition, as you can imagine.

Hundreds and hundreds of projects that are ongoing and diligence ongoing every day that there are some that we would walk away from or not pursue because of diligence, finding things in diligence or just making the project not working from a return standpoint.

Ivy Zelman, Credit Suisse.

The follow-up question was dealing with the communities that you're talking about, having trouble replacing them, whether it's the timing or not.

But realizing that the new community is probably rarely going to have the same margins as the older, isn't that a dynamic that continues on until pricing power returns?

This is Roger.

Certainly it's looking at a project from a return standpoint, not necessarily a margin standpoint, I think we've talked about that before.

Margins are only relative maybe to a comparison and certainly when we start out at 20 we definitely want to go to 30 or 40.

Reality is though when we underwrite a project from a return standpoint it's how you start out.

And certainly over time appreciation is important to be able to drive greater returns.

And we certainly want to do that.

But just generally looking at a return for a particular project you start out at a margin and that's our focus.

But good question, definitely right.

We're looking for expansion in that.

And time has proven in this industry over all the years that year-to-year you could get appreciation, your returns can increase.

But our focus is underwriting it at a hurdle, for us 21% at an IRR standpoint, and we try to match that in the end.

And again, if appreciation is there we get better selling prices, expand our margins, it increases returns from our expectation.

Okay.

And from a return standpoint, though, you would still be above today in a lot of those communities relative to what you're bringing on line now?

What we're bringing on is under hurdle rate and I guess if you looked at it, on average for the Company -- and we snap it off every 90 days to show you a return from quarter to quarter.

Reality is a project doesn't really run quarter to quarter.

Projects run in the life cycle of three years, four years, five years.

And so the return is over that period versus a quarter.

And each quarter winds up to be how many you add on, how many you start up, how many are in their beginning life, their mid life or the end of their life.

And the greater returns come at the end of a life and less returns on average come at the beginning of life as you're putting in cash and not getting any cash out.

So as we look at all of those on average, certainly we have our targeted hurdle rate and, again, if there are some that are rolling off they're better on a return standpoint when you add them all and accumulate it for the Company.

Nicky Jones, Wasserman & Associates.

This is the venerable Tim Jones.

A couple of things.

You said your land purchases last year -- land and land development costs were 2 to $2.5 billion.

In looking at your cash flow your inventories -- total inventories only went up $1.7 billion.

Can you tell me what happened there?

Again, roughly when you look at the inventory from the land standpoint, again and the inventory standpoint might have been about roughly 1.7.

I don't have the information in front of me to -- the breakdown from last year on that.

Did you end the year with actually less homes under construction or something because you had a big fourth quarter or something like that?

No, it would have been higher, Tim.

Certainly as we have our backlog going up from '04 to '05.

Rick Murray, Raymond James.

Good morning, guys.

I was just curious about your capitalized interest balance in inventory right now and how that compares to a year ago.

And I also had a follow-up related to that.

I'm going to find that for you.

While you're looking for that I guess I'll go ahead with my follow-up.

And that is under the accounting rules, how long are you permitted to continue capitalizing interest on say a spec home once it's completed or are you?

That's a good question; we don't have an answer for that.

But on our spec homes, again, roughly -- as Steve had mentioned, when we put specs in the ground we typically start them out but we don't end up with them.

So if we start 35% of our homes, let's say, in construction, that is at all different stages from a slab to a foundation.

And typically what we watch is the final specs.

And at the end of the fourth quarter we ended up with about 600 specs and at the end of the first quarter we ended with roughly about 900 finished specs throughout the system.

And I have that information about the capitalized interest balance.

At the end of the first quarter of 2006 it was $245 million and that's versus the first quarter of '05 at $233 million.

Larry Horan, Janney Montgomery Scott.

Could you talk about competing inventory in your various markets, new homes for sale that are completed and as well as existing homes?

Is that an issue in only a few markets or is that an issue countrywide?

Larry, it's an issue -- probably I'd say an issue -- it's an ongoing issue, it's an historical issue countrywide.

What I would tell you is that we've seen a peak in certain markets or a -- maybe it's more a return back to the peaks in certain markets like Orlando, like Phoenix Arizona where the MLS now is full of existing homes.

At the same time, builders in general have been adding a bit more inventory to the marketplaces through developed lots and so we're also seeing a growing community count in a lot of these cities like Orlando, like Phoenix.

So at the same time you're getting resale inventory as well as new home inventory at peaks relative to a demand that's flattening or maybe even decreasing.

So as Richard pointed out in his comments, the investors that were buyers maybe two or three years ago have become sellers today and that's presenting some inventory issues in certain markets across the country.

Okay, thank you.

Jay McCanless, Avondale Partners.

I have one more question for you on the finance business.

If you ex out the sale of the Mexican operation, it looks like you still had a nice gain in pretax income, and I was wondering if the growth in income and originations was driven by tying incentives on the houses themselves to taking Pulte Finance?

Typically that would not be recorded at the mortgage company level.

The improvement year-over-year quite frankly is -- and you've really got to step back and look at the interest rate movement over last year from a quarter to this year in a quarter.

And we're actually able to generate more favorable income from a loan standpoint and also from an operating standpoint in the cost side of it.

So really it was the better performance from selling loans in this quarter relative to last year's quarter, that's what generated the roughly $7 million gain year-over-year operationally.

Okay, thank you.

Jim Wilson, JMP Securities.

I just had one final question on margin mix.

And I know you talked a lot about you've gotten through, which is great, on the Del Webb communities.

And are there -- any of the outcome on the positive side, some material or land deals of significance, transactions or anything or regions where you think the influence of what you're bringing on line will have a much more positive impact?

Jim, this is Richard.

If I understand your question, we certainly do have areas where pricing is (technical difficulty) and margins are improving in certain areas.

Could you give any examples?

Well, as we detailed at our investor day, a good example would be Sun City Carolina Lakes.

It's been a great success for us; we've sold a bunch of homes.

And as we begin to deliver those in the second quarter and into next year -- or into the rest of the year and into next year that will be a strong community for us.

And we've been able to raise price and sell at nice lot premiums, things like that.

So I would highlight the Southeast in general, Texas in general and those coincide with markets that are relatively affordable to a lot of (technical difficulty).

Did you get that?

I did.

Sorry, I don't know where that's coming from.

Sorry.

Okay, no, that's great.

That's what I was wondering -- where there was some of the positive mix shift potentially going on.

Very good, thanks.

That is all the time we have for questions.

Please continue with your closing remarks.

I want to thank everybody for their time this morning.

This is Jim Zeumer; if you do have any other questions we'll certainly be available throughout the day to respond to them.

Again, thank you for your time.

Ladies and gentlemen, that does conclude our conference for today.

You may all disconnect and thank you for participating.