普爾特房屋 (PHM) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the third quarter 2007 Pulte Homes Earnings Conference Call.

My name is Carol and I will be your coordinator today.

At this time, all participants are in the listen-only mode.

We will conduct a question and answer session toward the end of the conference.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I will like to turn the call over to Mr.

Calvin Boyd.

Please, proceed, sir.

Thank you, Carol.

Good morning and thank you for joining us to discuss Pulte Homes financial results for the 3 and 9 months ended September 30, 2007.

I am Calvin Boyd, Vice-President of Investor and Corporate Communications.

You all had a chance to review the press release we issued last night detailing Pulte's third quarter 2007 operating and financial performance.

On the call to discuss these results are Richard Dugas, President and Chief Executive Officer, Steve Petruska, Executive Vice-President and Chief Operating Officer, Roger Cregg, Executive Vice-President and CFO and Vinny Frees, Vice President and Controller.

For those of you who have access to the Internet, a slide presentation is available at www.Pulte.com will accompany this discussion.

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

As for the 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 are reasonable assumptions but there are no assurances that actual outcomes will not be maturely different from those discussed today.

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

Participants on today's call should refer to Pulte's annual report on Form 10-K for the year ended December 31, 2006, and subsequent Forms 10-Q for detailed list of the risks and uncertainties associated with the business.

In addition, this call may refer to certain non-GAAP financial measures.

For reconciliation of these measures, please see the slide presentation that accompanies this discussion.

As always, at the end of our prepared comments we will have time for Q&A.

We will wait until then before opening the queue for questions.

I will turn over the call to Richard Dugas for his opening comments.

Richard?

Thank you, Calvin and good morning, everyone.

The operating environment for home building has been difficult for sometime now and our third quarter proved to be a challenging one as well.

The inventory of new and existing homes continues to be elevated.

Cancellation rates remain high.

And prices of new homes are still underpressure, all having a negative impact on already low buyer confidence.

In addition, concerns surrounding tighter lending standards and ongoing impairment and land related charges pushes any signs of stabilization further away.

Our third quarter 2007 net loss was due largely to sizable impairments and land related charges along with goodwill impairments taken during the period.

These charges result from a weak pricing environment in most major markets which we operate.

We will cover these charges in more detail during Roger's prepared comments.

However, in the midst of this challenging environment, Pulte was able to make substantial progress in the following key areas.

We generated a profit from continuing operations before consideration of impairments and land related charges.

The profit realized exceeded the upper end of the guidance we provided during our second quarter earnings call.

We consider that an important accomplishment in such a challenging environment as this.

In our third quarter there was approximately $175 million of net cash generated by the company.

Another very important accomplishment that we are proud of.

Our goal was to sell and close homes at reasonable prices to generate cash and we accomplished that.

In addition, despite the very weak operating environment, our operators are doing an outstanding job of closing homes and managing land acquisition and development spending allowing us to project approximately $1 billion of cash on hand by the end of the fourth quarter this year.

Roger will have more details in a moment.

Our backlog at the end of the third quarter stood at 12,000 units valued at just over $4 billion.

The best among public home builders who have reported to date.

During our second quarter of 2007, we announced a restructuring plan designed to reduce SG&A costs and improve operating efficiencies to match the current demand environment for housing.

Our progress is evident as our SG&A spend in the third quarter was approximately $65 million lower than the same period last year.

We are pleased with our progress on SG&A and are on track to meet the targeted savings we announced earlier this year.

We stated in our prior earnings call that our immediate goal during this downturn was to return our core operations to profitability excluding impairment and land related charges.

Pulte accomplished this in the third quarter and as you saw in our press release we are also projecting a modest operating profit in the fourth quarter again excluding any impairment in land related charges.

During the third quarter, we again lowered pricing in many of our markets in order to move inventory.

Although this strategy achieved some success, we feel that in several cases lower pricing is not necessarily generating additional sales volume.

Therefore moving forward we are reducing pricing and using incentives only in limited cases where we feel that it will result in more sign-ups leading to closings and incremental positive cash flow, mostly for communities with substantial inventory on the ground.

At this point in a few cases we feel we are better moth balling communities or not putting incremental cash in where it's not needed versus continuing the downward price spiral.

On the house inventory front we continue to work toward lower spec inventory levels' despite this focus, spec levels remain relatively flat during the quarter as cancellations ticked up noticeably given the mortgage turmoil so widely reported.

We remain committed to keeping house inventory levels low.

On the land front, we once, again, reduced our level of controlled lots, again, with the goal of reducing inventory while navigating through this downturn.

Our short-term goals remain focused on properly managed inventory, having SG&A expenses match the current demand environment, maximizing sales and overall balance sheet strength.

Pulte's restructuring efforts have led to a leaner overhead position that will continue to benefit us going forward.

Pulte's backlog position remains relatively strong going into the fourth quarter and combined with our overhead reductions serves as the basis for our fourth quarter guidance similar to our thinking behind our third quarter guidance.

We will continue to focus on reducing inventory levels particularly spec inventory with cash generation as the primary goal.

Time has proven that no one can be sure when this particular downturn will end or begin to show signs stabilization since we were not sure how long this environment will stay this bad, Pulte plans to be prepared for the worse.

We were staying committed to the short-term goals ready to adjust our tactics as needed to navigate through this tough environment.

Demographic trending, household formations and population growth are the factors that will eventually bring back housing to more attractive levels and help sustain positive operating performance.

Pulte plans to be one of the major builders that will thrive during that time period.

Finally let me take a moment to thank our Pulte employees who are doing a remarkable job operating in the worst housing recession in memory.

Your dedication, commitment and attitude are outstanding and deserve my heartfelt thanks.

I'm proud to work alongside each of you.

Thank you and now let me turn the call over to Roger Cregg.

Roger?

Thank you and good morning.

The third quarter home building net new unit order rate decreased approximately 37% from the third quarter last year.

On 7% less communities versus the same quarter last year.

Revenues from home settlements from the home building operations decreased approximately 31% from the prior year quarter to approximately $2.4 billion.

Lower revenues for the period were driven primarily in lower unit closings that were below prior year by approximately 28%.

Average sales price decreased approximately 4% versus the prior year quarter to an average of $322,000 per home.

In the third quarter, land sales generated approximately $31 million in total revenues, which is an increase versus the previous year's quarter of approximately $16 million.

Home building gross profits from home settlements including home building interest expense for the quarter decreased approximately 149% to a loss of approximately $293 million.

Third quarter home building gross margins from home settlements as a percentage of revenues was a negative 12.2% compared with 17.1% in the third quarter of 2006.

The decreased margin conversion versus the prior year quarter, is attributed to land and community valuation adjustments in addition to increased selling incentives.

Adjusting the current quarter for land and community evaluation charges, the gross margin from home settlements as a percentage of revenues was at a run rate of approximately 13.4% for the quarter.

The third quarter benefited from the impact of prior quarters land and community evaluation adjustments by approximately 150 basis points or $36 million.

Additionally, home building interest expense increased during the quarter to approximately $98 million, versus approximately $65 million in the prior year.

Included in the interest expense of $98 million, is an additional $43 million of expense related to the land and community evaluation adjustments taken to the current quarter.

Also included in the gross margin for the quarter was a charge related to land and community valuation adjustments in the amount of approximately $572 million.

For the third quarter, we tested approximately 245 communities for potential impairment and valuation adjustments.

We recorded valuation adjustments on approximately 169 communities for the third quarter.

The total gross loss from land sales posted for the quarter was approximately $79 million.

The losses mainly attributed to the fair market value adjustment in the current quarter for land being held for disposition in the amount of approximately $80 million which is included in the land cost of sales.

The gross profit contribution from specific land sales transactions were approximately $1 million for the current quarter.

Land sale transactions during the quarter included single family custom lot sales along with residential and commercial land parcels.

SG&A expenses as percentage of home sales for the quarter was approximately 9.8%.

An increase of approximately 180 basis points over the prior year quarter.

Additionally, the current quarter also included an insurance reserve related charge of approximately $20 million associated with the development of general liability product claims based on an actuarially basis.

This additional charge in the third quarter represented approximately 83 basis points in conversion.

As Richard mentioned we reduced overhead spending in almost every category yielding a gross reduction of approximately $62 million versus the prior year quarter before the additional non-cash insurance reserve adjustment netting approximately a $43 million reduction versus the prior year quarter.

In the other income and expense category for the quarter, the expense of approximately $490 million includes the write off of land deposits and other related costs of approximately $95 million associated with land option contracts that we determined not to exercise.

Additionally, a valuation adjustment of approximately $51 million related to certain investments and unconsolidated join ventures and approximately $7 million in restructuring charges related to our overhead restructuring initiatives implemented in the second quarter.

Also included in the quarter is an impairment charge related to goodwill of approximately $336 million.

In accordance with Statement of Financial Accounting Standards, Number 142, we determined that as a result of the current market conditions our book value exceeded the fair value in a number of our reporting segments resulting in the impairment of goodwill.

Recapping the components of the $1.178 billion in impairments and land related charges for the third quarter we have included in the webcast a slide breaking out the charges by the categories I discussed and by reporting segment.

Additionally in the third quarter, we dropped land options representing approximately 8400 lots with a purchase price value of approximately $669 million.

The home building pre-tax loss for the third quarter of approximately $1.099 billion resulted in a pre-tax margin of approximately negative 45% on total home builder revenues.

Excluding the charges related to the valuation adjustments and land inventory and investments, land held for sale, the write off of land deposits and other related costs, goodwill and restructuring charges, home building pre tax margins converted at approximately 3.2% for the current quarter.

At the end of the third quarter our home building operations had a backlog of 12,042 homes valued at approximately $4.1 billion compared to 16,375 homes valued at $5.8 billion as of the prior year quarter.

The third quarter pre-tax income from Pulte's financial services operation was approximately $13 million, or a decrease compared with the prior year quarter of approximately $8 million.

The decrease mainly attributed to lower revenues from decreased volumes offsetting a favorable product mix shift to higher profit loans and increase in the capture rate.

Favorable shift to agency versus nonagency products during the quarter resulted in greater profits due to higher servicing values and better structures guidelines allowing greater leveraged processing efficiencies in the operation.

The level of adjustable rate mortgage products originated during the third quarter of 2007 decreased from approximately 26% of origination dollars funded from a warehouse line in the third quarter of the previous year to approximately 7% this quarter.

Pulte mortgages capture rate for the current quarter was approximately 93%.

Mortgage origination dollars decreased in the quarter by approximately $731 million or 34% when compared to the same period last year.

The decrease is related to the overall volume decrease in home builder closing activity for the quarter.

In an analysis of our loans closed for the third quarter based on dollars, we estimate that approximately 4% of the loans with the average FICO score of 588 fell into the sub prime category .

Additionally, 85% fell into the prime category with an annual FICO score of 746, and the remaining 11% in the category of all day product with an average FICO score of 754.

Overall, the average FICO score of our loans closed for the period was 740.

With 83% of the loans averaging a FICO score greater than or equal to 681.

This is consistent with our analysis performed for the first half of this year.

In the other nonoperating category, pre-tax loss for the third quarter of approximately $8 million includes mainly corporate expenses of approximately $8 million.

The net loss for the third quarter was approximately $788 million, or loss of $3.12 per share as compared to net income of approximately $190 million or $0.74 per diluted share for the same period last year.

The number of shares using the EPS calculation was approximately 252.3 million shares for the quarter.

On the balance sheet for the third quarter we ended with a cash balance of approximately $102 million, increasing $27 million from the second quarter of this year.

House and land inventory ended the quarter at approximately $8.1 billion.

Excluding the inventory adjustments in the third quarter, total inventory decreased approximately $340 million from the second quarter.

House inventory excluding land for the quarter increased approximately $43 million related to the seasonal increase in home construction in progress.

Land inventory during the third quarter excluding adjustments decreased approximately $380 million as land relief offset rolling lot option take downs and land development spending.

After generating $175 million in net cash during the third quarter, excluding financial services, we paid down $148 million on our revolving credit facility and remain with $25 million outstanding on the facility at the end of the quarter.

The company's gross debt to cap ratio was approximately 40.3%, and on a net basis 39.6% for the third quarter.

Interest incurred, amounted to approximately $62 million in the third quarter, compared to $73 million for the same period last year.

Pulte homes share holder equity for the third quarter was approximately $5.2 billion.

We repurchased no shares during the third quarter and company has approximately $102 million remaining on our current authorization.

Now looking forward to the next quarter and under the SEC regulation FD guidelines we provide the following guidance on our current expectations and projections for fourth quarter of 2007.

Fourth quarter earnings per share estimated to be in the range of approximately a break even to $0.10 per diluted share.

This range does not include the potential for additional land valuation adjustments, option deposit and other related charges or additional goodwill impairment charges.

Although we may incur additional write offs it's uncertain at this time as to the estimate of those amounts.

This earnings per share number is calculated based on approximately $258 million fully diluted shares.

Unit settlement in the fourth quarter of 2007 are projected to be approximately 14 to 15% above the third quarter -- excuse me, above the second quarter of 2007 deliveries.

Excuse me -- the third quarter of 2007 deliveries.

Again, that's 14 to 15% above the third quarter.

Average selling prices for the closings in the fourth quarter are estimated to be approximately $327,000.

The projected average selling price is primarily being driven by product and geographical mix as well as additional incentives of homes projected to be delivered during the fourth quarter.

Gross margin performance from home settlements as a percent of sales for the fourth quarter are anticipated to be in the approximate range of 10 to 11%.

The projected gross margins for the quarter primarily reflect pricing strategies generating sales momentum and pricing incentives experienced over the period and response to the market conditions for homes to be delivered.

In addition, this gross margin range includes an estimated 150 basis points improvement from the recovery of additional inventory valuation adjustments taken in the third quarter of 2007.

We are projecting -- we are currently projecting no land sale gains for the fourth quarter.

As a percentage of sale SG&A is expected to be in the range of approximately 9.3 to 9.6% for the quarter.

In the home building other income and expense category for the fourth quarter we are projecting expense of approximately, 6 to $7 million.

Pre-tax income in our financial services operation is expected to be approximately 12 to $14 million for the fourth quarter.

Total other nonoperating expenses are projected to be approximately 13 to $14 million for the fourth quarter.

We were projecting the effective income tax rate to be 37% for the fourth quarter of 2007.

Given the continue uncertainty in this challenging market environment and the lack of visibility to look beyond the quarter, we were offering no full year outlook for 2008 at this time.

We will continue to assess the conditions through the next quarter and provide an update accordingly on our fourth quarter conference call.

As I mentioned over the course of this year, with respect to our goals and timing and cash management, we continue to target ending the year with a cash position of approximately $1 billion less any senior debt repurchases completed.

Additionally we anticipate no outstanding on our revolving credit facility at year-end.

We have continued to focus on reducing our land pipeline, generating cash and are committed to maintaining a solid and flexible balance sheet.

Now we will it turn the call over to Steve Petruska for more comments on the operations for the third

Thanks, Roger.

Good morning, everyone.

As Richard noted continued high inventory of new and existing homes, tighter mortgage liquidity and weak consumer demand were factors that contributed to the difficult operating environment we experienced in the third quarter.

With this housing downturn showing no immediate signs of relenting it remains paramount for Pulte to stick with its near-term operation goals of managing our land development spend, starting only sold homes, aggressively moving spec inventory and matching our overhead spend to the size of our business.

We were also focused on capturing the demand that does exists today by finding the right combination of pace and price in each of markets and communities.

Let me discuss our progress in these areas.

I stated that our strategy surrounding land inventory centers on significantly reducing spending on land development, reducing the supply of lots under control and renegotiating the existing option agreements to purchase land.

At the end of Q3, 2007, Pulte controlled approximately 172,000 lots, down 10% sequentially from the second quarter 2007, down 41% from the same period last year, and 53% lower than our third quarter 2005 peak.

Our spending on land will continue to be small and focused on limiting the spending to current projects and take downs on finished lots where we see an acceptable absorption pace and margin.

We want to generate cash at the community level and every project where that's practical.

To touch on house inventory for a moment.

The number of speculative homes at the end of the third quarter was approximately 4000 units.

Down 48% from last year's third quarter.

Our completed spec inventory sits at approximately 1100 homes or about 1.6 finished homes per community.

This represents a small increase of 300 units versus the second quarter of 2007, but a 34% improvement versus this time a year ago.

Given the high cancellation rate for the quarter, we are relatively pleased with our ability to keep total spec and completed spec units under control.

Our field operators are doing a good job managing this area of our business as they continue to focus on reducing spec inventory to the lowest possible levels in each of our markets.

I've stated for awhile that we strive to preserve margin and not force volume where we see an absence of demand.

With cancellation rates still high and buyer sentiment leaning, it's not prudent to begin construction of homes where we were not confident we can sell that home prior to completion.

Part of our short-term strategy continues to be in reducing spec inventory and not forcing volume through continuing price decreases.

Settlement revenues for the third quarter 2007 declined 31% from the third quarter 2006 levels as home closings decreased 28% for the same period.

Average sales price was also down approximately 4%.

Third quarter 2007 sign-ups totaled $1.3 billion as our average sales price for sign-ups were 16% lower from the same period a year ago and unit volumes decreased 37% year-over-year.

Net new ordered dollars represented a composite of new order dollars combined with other movements of the dollars and backlog related to the cancellations and other change orders.

Our cancellation rate was 44% for the third quarter.

Higher than the 36% rate for the third quarter of 2006.

And increase from the 28% rate we experienced in the second quarter of 2007.

Once again, Del Webb outperformed Pulte's other brands with a 35% cancellation rate for the third quarter 2007.

The increase in the overall cancellation rate reflects both the tightening of mortgage liquidity and the inability of buyers to sell their existing homes in order to close on ours.

Let me provide some commentary on what our region has experienced.

After three consecutive quarters of some improvement our northeast operations were softer in the quarter.

Sign-ups for the northeast in the third quarter were down 35% year-over-year.

New communities opened earlier this year in Long Island helped sales there; however, temporary interruptions in mortgage availability for our customers in Washington, D.C., and Philadelphia significantly impacted our sales and backlog.

The southeast which includes the Carolinas, Georgia and Tennessee saw their sign-ups increase 8% compared with last year's third quarter.

An increase in community count helped our South Carolina coastal and Atlanta markets increase their sign-ups year-over-year by 37% in 15% respectively.

We continue to see better performance from our southeast divisions relative to the rest of the country.

Our sign-ups are down only 6% in our Florida operations versus the third quarter of 2006.

However, the environment remains difficult as high levels of both resale inventories and unsold specs continue to negatively impact margins.

Our sales in Fort Myers, Sarasota were down 50% in the third quarter for 2006 as inventories are high in this market and pricing remains soft.

Our southeast Florida or Orlando and Tampa markets showed increased sales of 45%, 22% and 9% respectively versus the third quarter of 2006.

We were very aggressive with our pricing to drive this volume improvement to reduce spec inventory.

And overall these are still very difficult markets.

Sign up's were down 57% in our Mid West operations versus the third quarter of 2006.

Signaling that the operating environment there continues to be very challenging.

Minneapolis and Chicago where our softest markets were the 67% and 62% decrease in sign-ups respectively year-over-year.

Our Chicago operations benefited last year from the opening of our grand Dominion by Del Webb Community in the third quarter of 2006 when it accounted for over 270 sign-ups.

That community is still performing well today but not as the pace we saw in 2006.

Our other Mid West markets, Michigan, Cleveland and Indianapolis all showed weakness in sign-ups.

Our central region which includes all of our Texas markets saw sign-ups declined 46% year-over-year consistent with the weakness we have seen in this area throughout the year.

Our Houston and San Antonio markets suffered the largest decline.

Each slightly over 50% versus the third quarter of 2006.

Our strategy to reduce community count in these markets are responsible for some of this decline.

Other factors are the difficulty of our customers are having selling their existing homes.

This is particularly troublesome for our active adult communities in Dallas and San Antonio where they attract a local buyer versus destination buyers.

Our southwest segment which includes Colorado, New Mexico, Las Vegas and Arizona show a 47% decrease in sign-ups from the third quarter of 2006.

This decline was most felt in our Phoenix market with sign-ups down 73% year-over-year.

High cancellations at a greater impact on this decline in sign-ups versus the decreasing gross orders as tighter lending standards and excess inventory really had a significant impact on our operations there.

Two of our markets, New Mexico and Las Vegas suffered much smaller declines in the sign-ups of 4% and 17% respectively.

Sign-ups decline 51% year-over-year in our California operations.

As compared with only 18% decline during the second quarter of 2007.

In northern California.

We saw 54% decline in sign-ups and we were off additional 47% in southern California.

The amount of excess inventory of new and existing homes continues to plague both of these areas.

Our Central Valley operations in northern California and the Riverside market in southern California were particularly hard hit.

California a very difficult housing environment and we will continue to make adjustments to drive the best performance we can in the midst of this downturn.

We know that the deteriorating operating conditions we saw in the third quarter that were driven by a number of factors that we discussed including the tightening of mortgage liquidity.

Unfortunately until mortgage liquidity returns to the appropriate levels we can expect high cancellation rates to continue.

In the mean time, our operators are finding the right price to move spec inventory.

Putting the brakes on land spending and focusing their efforts on being cash flow positive in all of these communities.

This challenging operating environment may be with us for sometime and executing on these short-term strategies to position Pulte for long-term success when the dust settles from the current downturn.

I now like to turn the call back to Calvin Boyd.

Thank you, Steve.

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

We were now prepared to answer your questions.

So that everyone gets a chance, participants will be limited to one question and a follow-up.

After which they will have a chance to get into the queue.

At this time, we'll open up call to questions.

Carol?

Thank you, Mr.

Boyd, (OPERATOR INSTRUCTIONS) .

Your first question comes from the line of Michael Rehaut with JPMorgan,

Hi, thanks.

Good morning.

Good morning, Mike.

First question is on the impairments.

I was wondering -- sorry if you did this already, but gave regional breakout of where the impairments were concentrated this quarter.

And in terms of the approach, I was wondering, I think last quarter you might have mentioned that you were still more sticking to a in terms of future assumptions that pricing would be, more constant.

I was wondering if with the continued large charges if you have become even more aggressive with your future assumptions in terms of pricing may be even going forward would fall another 5 or 10%.

Two parts to that question.

First, again, the regional concentration, and secondly, if you become more aggressive in your future pricing assumptions.

Yes, Mike.

This is Roger.

If you look at the web cast we supplied a slide there that breaks that down.

And just three of the main areas certainly Florida, the southwest and California represent about 77% of the total.

So you can see those areas and the areas where pricing and mortgage availability played into that.

From a pricing standpoint, we have been holding our prices, but discounting.

I think if you look at our margin levels that we talked about over the last couple of quarters, for what we have been impaired and getting back into our margins were certainly seeing the discounting moving in that direction as well.

For instance, our first quarter was about 12.8% in margins.

Then second quarter about 13.1.

And then third quarter was 13.5.

13.4 in the third quarter.

Excuse me.

We ended up impaired and getting back.

We were also seeing the discounting to go with that as well.

Each one of those markets it is competitive.

And we were continuing to drive for cash as well.

So we aren't going to sit there with product not going anywhere as we see a lot of that competition.

I think the guidance in the fourth quarter for margins, looking in the 10 to 11% range is indicative of what we experienced through the last quarter, maybe a little bit more for deliveries.

We have seen deterioration as we talked about and others have talked about coming through 2007 and it's almost a month by month.

In terms of the assumptions for the actual impairments themselves, have you become given that this is a second quarter in a row of a substantial impairment number, this quarter versus last, have you been assuming -- are you starting to assume a continued decline in pricing and that's why the impairments continue to be so large?

Or is it just that in reaction to the continued deterioration in the markets?

I would tell you it's a significant amount of the reaction.

If you look where we are experiencing most of it, you look into more than 50% in the southwest and in California.

You have a lot of the Del Webb product there.

Length of time for those projects plays a lot on the discounting and the cash flow methodology.

So overall we are working into the impairments based on the current market pricing.

So I would say it's indicative what's going on in the market.

Not a view that we want to continue to drive the pricing down.

Mike, this is Richard.

To add to that, we did state clearly we did lower pricing dramatically during the third quarter.

And we do feel we are at the point in some communities where price is not moving product a lot.

It's a bit elastic.

We will have to see what happened in the fourth quarter relative to pricing and what that does to impairments going forward.

Right.

Finally, could you concentrate that or apply that statement to Florida.

Certainly, the declines there have moderated a little bit for you and what do you attribute that to -- I know you have gone through areas where you have gained traction from a unit standpoint, but is it just that you have felt you lowered price to the extent that you found the buyer?

What particular dynamics are -- do you think driving the lesser declines relative to the rest of the economy?

Yes, Mike, this is Steve.

You hit the nail pretty much on the head.

The only places we are showing stabilization are Orlando and Tampa and our business in the southeast was fairly okay.

And that is really driven by price.

We have -- it's a very, very competitive market and our operators are doing a pretty good job of driving price there.

I think that they have a good reputation in those markets as well.

And they consistently been J.D.

Power winners and those things work to your advantage in this environment.

It's not for the market getting any better, that's for sure.

And your next question comes from the line of Rashid Dahod with Deutsche Bank, please proceed.

Thanks, good morning.

I wanted to follow up in this issue of lowering prices to the level to attract demand.

And the related question whether or not community should be moth balled.

Curious, what parts of the country are you seeing the inelasticity of demand where you aren't able to lower your prices enough to attract a demand and related -- where are you moth balling communities and approximately how many?

Or is it not really an issue of geography it's more of a within a market, market-by-market.

I will it tell you it's not really by geography.

It's kind of more of a broad base situation.

I think the earlier this year as you lower pricing you got something for it.

Now it appears you aren't driving as much volume.

Hence our focus to really concentrate on more promotional activities or other things to try to drive business rather than pure price play.

Roger, I know you have more detail there.

Definition.

There is a lot of definitions what moth balled is, and I would tell you we have few communities that we were selling in that we just decided were going to close up the models and leave them vacant and walk away.

So that's not our definition of moth balling.

Our definition of moth balling is we have a project that typically either started to develop or have not started to develop and decided putting money into those developments now where we don't need the lots, we don't want to do.

So our view of moth balling is to take properties like that and not put money into it until potentially there is a time and opportunity going forward.

Also that it does not mean we will take impairments.

Because we have taken impairments on moth balled opportunities as well.

Not trying to defer any bad news on the aspect.

I would tell you roughly about 20 some odd parcels and not particularly concentrated anywhere but around the United States where we looked at the lots that we have on the ground, the demand, that we particularly don't need to be putting the money and cash into that at this point in time.

That's relatively how we view projects that are moth balled.

Is the issue with these communities maybe a common thread, might it be that they are perhaps B-grade locations rather than A-grade locations, for example?

I would say there are some like that, of course.

Again, as we were looking at land we had taken down in particular markets or the demand fell off.

There are some in the "A" category that we feel good about but the lots in that market just today we don't need to be putting the cash in.

If the demand picks up, we are looking to get back into the game there.

But in the short run looking at putting cash and watching it sit in the ground as demand continues to languish in these markets isn't prudent management at this point.

Just to add a bit of color there, really our test on that comes down to cash flow.

As Steve mentioned in his comments we want to be cash flow positive in as many if not all communities going forward.

Versus an A or B location descriptor, there are so many factors hitting the housing market right now, I don't think it's fair to say it's all "B" locations.

It's more of a question will you be cash flow positive over the next 6 to 12 months or not.

If you are not, in a lot of cases we are choosing to wait with that investment.

As Roger indicated it doesn't mean we will impair it based on what we think.

It's a focus on cash generation very clearly.

As a reminder please limit your questions to two questions please.

Your next question comes from the line of Kenneth Zener with Merrill Lynch, please proceed.

This is Phil [Chunworth] on for Ken.

Get a total number of units under production ?

Bear with us as we dig for that, Phil.

Something else in the mean time?

Just kind of related, wondering if you have a normalized target for total units under production that you are striving for.

Then once you reached that level, what's that going to mean for future cash flow whether it's more difficult generate more future cash once kind of all these finished homes are sold off and once you can't really rely on yet defining whip any more.

Vinny will give you the numbers and I will answer your question.

As of 9-30-07 we had just under 13,000 units under construction.

And that's comparative to 9-30-06 where we had just under 20,000 units under construction.

Then in answer to your question, there is not a target for units under production we have.

Obviously we are trying to start only sold homes.

That doesn't happen to be the case all the time in like a 40 unit building in the northeast where will put a 10 month or a 9 month building time where we will sell half the units and start the building and know that we can complete the rest of the units during the complete the sale of the units during the course of construction.

Our target remains really around starting sold homes.

You will see our work in process continue to grow if we can increase our sign-up pace a little bit.

From an overall standpoint we want to focus on taking spec production out and put sold production in.

From the cash flow standpoint, we continue to look at the demand and the need for development.

Again, all that plays into the cash flow that's needed in any given month and given week and any given quarter as we it continue to balance the supply and demand.

All that is based on what we sell and what goes forward.

Not just on what's in production at any point in time.

And your next question comes from the line of Timothy Jones with Wasserman & Associates.

Please proceed.

Couple questions.

Could you give me your number of employees this year versus last year in (inaudible) the housing -- the housing number and the total number.

Tim, I can probably find our employee count for you.

Our employee count this year 9-30-07, is 9400.

That's down about 3100 employees from 12-31-06.

That's a 20% decline.

Did I hear you ask a question about the peak.

The other (inaudible - background noise) --Is that total employee count include your non-housing operation?

Is that just for housing or total?

It includes our Pulte business building systems in Arizona and Nevada.

That --

Our mortgage operations as well.

I'm trying to do is compare people with just the housing operation.

Okay.

Okay.

That looks like of the 9400, give me a second.

I have to add a few numbers together.

No problem.

About just over 8500 relate to housing.

Tim, just clarify that includes a substantial number at our PBS operation out in Arizona and Nevada which actually construct homes.

May not be a apples-to-apples versus the way some other builders have their number.

The other question is you talked about 150 basis point was it reverse or something in the upcoming quarter.

Is that having to do with -- you reverse -- what was that?

That is the margin impact that we are expecting or projecting in the fourth quarter from impairments that we took in the third quarter.

So we would see that 150 basis points in the margin percentage prior to or before any adjustments that could be made from valuation adjustments.

And your next question comes from the line of Stephen Kim with Citigroup.

Please proceed.

Can we expect the specific numbers for homes under construction and land under development held for future with any adjustments breaking out the adjustments from the write offs this quarter?

Not on the call, Stephen.

Let me get two more questions in if you don't mind.

My first one relates to the issue that Tim just mentioned.

He was talking about the backing out.

And I wanted to make sure we are clear.

You're saying that 150 basis point of benefit is anticipated in the fourth quarter as a result of prior write offs.

Is that a number that you could share for us as for what happened this quarter because I missed it if you gave it.

Want to be specific.

150 is not from prior.

The 150 in the fourth quarter that anticipating is from this quarter.

And so each quarter there are benefits from other quarters in the current quarter.

So for the fourth quarter that was what I was relating to was 150 from this quarter.

In the third quarter from the impairments we took in the second quarter or probably the first, second and third quarters or first and second quarters in the third quarter was about 105 basis points, then if you looked at this year and took last year as well there was probably about 46 basis points.

Our impairments in the third quarter would have contributed roughly about 150 basis points in the third quarter.

Okay.

That's helpful.

Which I think indicated was $36 million.

About $36 million.

Yes.

That's helpful.

The second question I had related to this insurance charge.

It's been $30 million in the second quarter.

I think another $20 million this quarter.

That's correct.

I wanted to make sure I understood what that was related to and are you suggesting in your guidance it will go away after the third quarter?

Yes, we believe so.

We believe based on severity and frequency of construction claims and we do this actuarially.

We work with actuaries and they put them out and even last quarter if you had something like 100 year flood and then you have two of them, actuarily you have to make an assumption you have more than one.

So actuarially we look at our reserves and we calculate based on our experience and frequency and severity of the claims going forward, what they may be.

So so far this year we have taken roughly about $50 million in adjustments to that reserve.

And again as things come up we continue to look at it and scrutinize it.

We feel pretty good about the level of the reserve at this point.

Your next question comes from the line of Alex Barron with Agency Trading Group, Please proceed.

Mr.

Barron your line is open, sir.

Apologize.

Sorry.

Can you talk about how you are going to get to the $ 1 billion in a little more detail, please.

I can give you an overview and then Roger chime in some specifics.

This is Richard.

It's really a combination of closings, bringing cash in along with the substantial reduction in overall spending going forward, particularly on the land development side as Roger mentioned we are looking at every single community.

Looking at making sure that it's going to be as close to cash flow positive if not cash flow positive as we can.

It's a combination of volume coming in and reduced spending.

We have been projecting that target for sometime.

Roger, you might want to.

That's exactly what it is.

Change in working capital and from sales and relief of land.

That's what's going to generate the cash.

Got it.

Can you also talk about this monster sale you are running.

Is that nationwide and what's the average price cut you are offering?

I can speak to that.

We had an event that was last weekend and it was nationwide.

In most cases what our operators were doing with their pricing was repackaging what we had out there already anyway.

I would tell you that on homes that could close within a 30 to 60 day time period.

They were a bit more aggressive than we might have seen incremental 5 to 7%.

But we were already fairly aggressive with our pricing at that point and what we wanted to do was create certain amount of energy in a national event around that and obviously leverage our spend from an advertising standpoint.

And your next question comes from the line of David Goldberg with UBS.

Good morning, guys.

Good morning.

First question is about the TCG, and the way to estimate demand and figure out what to manage to be and how that changes in the current market environment.

Are you making changes to what each of the target groups want?

David, this is Richard.

Actually, we continue to refine each of the 11 consumer groups we target in terms of their offerings.

That's a continuous basis and we have a strong effort underway there.

In this environment in terms of what they want mean generally speaking the choices of people who are interested in overall don't change.

It's a question of whether they can afford them.

Given the mortgage situation and the amount of inventory out there.

I would tell you no, we are not radically changing a lot.

We were continuing to focus on including as many things standard into the home that people want going forward and, Steve, you might speak to that more.

On an overall basis what we are for the opportunity today with obviously some of the impairments on our land is to say now can we hit a price point where we can attract additional TCGs, and that warrant a different go to market strategy and increase the absorption in the community.

We were seeing opportunities to do that many cases we will redeploy a different model park scheme.

We may be able to afford to put a larger home on a similar lot now and offer it at a price that's extremely competitive in the marketplace.

We are looking at all of that.

Our focus on the consumer obviously gets sharper during times like this.

And we were seeing that as a continued opportunity.

And I guess my follow-up question is for Roger.

If you could get in to helping us quantify on the moth balled communities how you run impairment charges.

What kind of assumptions you make.

If there is no bid price, how can you figure out what your potential impairments will be?

I think, David, what you look at is if you assume you are going to sell product on there for $300,000 for a price on a home but that house is selling at $200,000 today, you wouldn't necessarily moth ball it at the $300,000 level.

Gives us an idea of what the homes are selling for in that market because we clearly had intentions of selling specific homes targeted at specific TCGs in that particular community.

Our effort there is to take a look at what the market is doing for that particular product relative to the market itself and then we take a look at the overall cash flows of that based on current market pricing versus what we anticipated really how we underwrote it.

And your next question comes from the line of Susan Berliner with Bear Stearns.

Just a couple questions and I apologize if I missed this.

Did you give the average incentive rate for this quarter?

The average incentive for home discounts and that type of thing?

Exactly.

No, we didn't.

Roughly the -- categorize this in a couple different categories because discounting is running between 6 and 12% on average we are running around 9% for the quarter.

Commissions and closing and discount points probably represent almost another 6%.

So roughly it's running in the 14 to 15% range for this quarter.

If you went back a year ago it was roughly around 11% with all of those combinations.

So I think what we have seen is deterioration coming through and certainly that's based on closings.

That's not based on what actually we are seeing today in the market.

We talked a little bit about the deterioration and that was the overall view of the fourth quarter and the margin deterioration as more of that flows through the P&L as we close the homes.

Great.

Can you give any color as to any impact or what you are seeing with the fires in California and how your insurance will protect you?

Right now we don't have any exposure.

We don't have communities in those specific areas right now.

We are in pretty good shape from that point.

Typically, it would be homes we had constructed that we hadn't closed yet that would be liable for it at that point from an insurance standpoint for coverage.

But again we don't have any exposure there.

And your next question comes from the line of Dan Oppenheim with Banc of America Securities.

Please proceed, sir.

I was wondering if you could talk about your expectations of the fourth quarter and your talking about doing more in terms of building homes that were presold.

Is your expectation that the cancellation rate of the 44% currently and going to the fourth quarter guidance.

And I guess want to get more color into how that cancellation (inaudible) occurs during the quarter and if it's still rising.

How you're think being dealing with that and sort of pricing.

Dan, this is Steve.

I would tell you that overall, yes, we are expecting cancellation rates to stay high.

I would expect given mortgage liquidity and sell difficulty we will continue to see whether it's high 30s to low 40s on a cancellation rate standpoint.

That's all factored into the guidance that Roger gave.

And it's certainly factored into the way we are looking at the first quarter.

Unfortunately we still continue to get a presale.

We will start the home.

But given the cancellation rate, we will end up getting it back at some point during the construction process.

And we attempt to move that house very quickly.

That's why I kind of on an overall standpoint we are only starting sold homes.

As you know.

That home doesn't stay sold throughout the course of production.

Got it.

Thanks very much.

And your next question comes from the line of Carl Reichardt from Wachovia Securities.

If you guys end up hitting what your expectations are from an absorption and sales price perspective that's embedded in your impairments going forward.

What's your sentence to what will happen to your store count in '08 versus where you will end up in '07?

Aren't going to come down but not providing a lot of detail on that.

That's right.

We aren't giving guidance on it.

Certainly with the effort on pulling back because the market is pulling back, the community count will be pulling back as well.

Okay.

And then you mentioned or Steve talked a little bit about potential mix shifts within communities that might be selling on a slower pace than you like.

How do you look at web communities where you have a lot in front of you and you may need to shift the mix of product.

How do you increase demand without price adjustments in a web community.

What tactics to do use?

That's a real difficult one.

Mostly tactic we use is lot size tactic and we will look at what product is actually moving.

It's typically not an introduction of new product because our Del Webb product line across the country is fairly tight in that we probably don't offer an array of any more than 15 to 20 floor plans nationwide on that.

It's real difficult because we are way more sensitive in a web community about any price decreases.

So we can tackle it pretty aggressively with pricing as it relates to premium values and those types of things.

But base pricing we don't have much room to move.

And we will adjust mix where we can.

But even in that case most of those projects even though they have a large lot count, Carl, are fairly fixed on an overall propensity.

We can't mess with it too much.

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

I'm sorry, JMP Securities, please proceed,sir.

Was wondering if you just continue on Del Webb, contrast a little bit on what you are seeing and hard to pull down pricing.

But what you are seeing in sales pace or how the margins look in I guess in particular in some of your largest Del Webb communities around the country compared to the corporate averages.

On an overall basis, I would tell you that we have a hit or miss community with our web communities as well.

They are performing well in the Carolinas with pretty healthy margins still.

Not necessarily at the pace they were 18 months ago.

It's still acceptable absorption paces where as in Arizona they are still soft.

And whether that buyer is local and we see a lot more impact where it's local as I talked about it in my prepared comments in Texas, or whether that buyer is relocating, in many cases they have a home to sell to be able to put their money into the Del Webb home.

It's still impaired our ability.

But as you see by our lower cancellation rate that typically when we get these buyers under contract we can maintain them in our backlog for a little bit longer and typically bring them to closing.

It is a struggle.

It's just not quite the struggle that we see on the Pulte side of the business.

This is Richard.

I think it's just a slightly different environment there.

The buyer still wants to buy a Webb home.

It's just a question of house to sell.

It's not that it's not impacted.

But as Steve indicated but impacted just less.

And again, are the margins the profitability running better at Del Webb than it is for the rest ever Pulte so that actually Webb otherwise brings margins up?

Yes, Jim.

I would say mostly representative across the country the Del Webb product has got better margin points than the other traditional side.

And your next question comes from the line of Dennis McGill with Daleman & Associates.

Please proceed.

Good morning, guys.

The first question just has to do with the development spending you talked about in certain communities you are pulling back from and focusing on the cash flow.

In '07 what you expect to spend on development in total, how that compares to last year and then how much flexibility you have with that number moving forward and then I have a follow-up.

I don't have the specific numbers we spent for the whole year.

Our focus is definitely slow down spending from typically looking at a growth environment.

So that the development dollars we continue to look at.

We have a great deal of flexibility in that and when we put money in the ground, how many lots we developed in it a community.

When we put amenity centers and that type of thing.

We have a lot of flexibility to look at that cash spending.

Typically we try to run very efficiently in our operations.

Putting down hundreds of lots at a time to be efficient with the overall process.

And some of that we would give up efficiency to make sure we aren't sitting here with lots in front of us that may last three years instead of typically maybe six months or one year.

It's a community by community, market by market approach.

And we think we got pretty good focus on it.

And our operators in the field are doing an outstanding job of managing that on a day to day basis.

Dennis before you ask your follow-up, to put a point on that the environment is still difficult in housing and one of the reasons we were able to still keep the $ 1billion target relative to our cash on hand at the end of the year is because of the great degree of ability we have to move that number and our operators as Roger indicated are looking at it literally community by community and each section of each community to make sure we were focusing in on cash.

Do you have a relative sense of how much that spending will be down versus last year?

Not versus last year.

Again, I think at the beginning of the year we talked about being neutral.

And then with the downturn we started to pull back on it which would generate cash for us.

Don't have that number compared to last year.

And perhaps we can look into that in more detail off the call.

And your next question comes from the line of Jay MaCan with FTN Midwest.

Please proceed.

Good morning.

Got a couple questions for you.

First question in Florida, what is the state or the status of the insurance down there for home owners?

Is it getting any better?

Any worse?

Anecdotally because we haven't talked to our operators specifically about that.

I haven't heard that it's getting worse.

I would not suspect it's getting better.

I think that it's stabilized somewhat from after the number of hurricanes that they had over the last couple of years.

Okay.

My other question on land pricing with the bankruptcy of Neumann earlier this week and others we heard about, can you tell us if that's having an effect on raw land pricing and give us a quick overview what prices have been doing lately.

Yes.

Overall, pricing has been coming down for sure.

Mostly as we talked about in previous calls focused around the terms that you can get the land on as opposed to necessarily the base price.

We have seen some better opportunities to go out and buy land.

Quite frankly we still don't think it's a good enough price.

I think that things like the Neumann bankrupty you talked about and we think there is still a lot of downside left to come in some of these marketplaces.

In addition to not wanting to put cash into the marketplace, wouldn't be a good time even if you wanted to, in my opinion.

And your next question comes from the line of Stewart Piotrowicz with Vanguard.

Please proceed, sir.

Good morning.

Couple questions and you might have answered this in different ways.

First, can you provide a little more information on your geographic pricing trends?

You talked about in general that the pricing is lower.

But can you be a little more granular on that?

Stewart this is Richard , Generally, speaking price has been difficult across the country.

One area I'd highlight is the that it has not been is the Carolina, mid-Atlantic area.

As Steve indicated, we continue to enjoy better results in that part of the country than elsewhere.

Steve, beyond that,

I think California, obviously, is the hardest hit.

We have seen that both Arizona and Nevada probably had some of the most aggressive price increases on land throughout the upturn.

They are seeing fairly significant price decreases.

We are at or near the bottom in the Mid West.

Texas, we didn't have a high average sales price to start with there.

As a percentage it may be down fairly good.

From a dollar standpoint it's not down much.

California and the southwest and then Florida are probably most significant price decreases that we have seen over the last 12 to 18 months.

Do you think we were near the bottom in those areas?

Stewart, this is Richard.

I wish quo tell you.

I did mention on my prepared remarks and on a question earlier that price does not appear to be the driver that it was.

I don't know is the answer to the question.

I wish we could give anybody a projection on that.

We will have to wait and see.

Don't know.

I will like to turn the call back to Mr.

Boyd for closing remarks.

Thank you, Carol.

Thank you everyone for their participation on the call today.

If you have follow-up questions, please feel free to give me a call.

Have a great day.

Thank you for your patience in today's conference.

You may now disconnect and zoo -- and have a wonderful day.