普爾特房屋 (PHM) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2008 Pulte Homes Incorporated earnings conference call.

My name is Eric and I will be your audio coordinator for today.

Now, at this time all participants under a listen-only mode.

We will facilitate the question-and-answer session at the end of the presentation.

(Operator instructions) I would now like to turn your presentation over to Mr.

Calvin Boyd, Vice President of Investor and Corporate Communication.

Please proceed.

Thank you, Eric.

Good morning and thank everyone for joining to us discuss Pulte Homes financial results for the three and 12 months ended December 31st, 2008.

I'm Calvin Boyd, Vice President of Investor and Corporate Communications.

You have all had a chance to review the press release we issued last night, detailing Pulte's fourth quarter 2008 operating and financial performance.

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

For those of you who have access to the Internet, a slide presentation available at www.Pulteinc.com 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 of 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 and Litigation Reform Act of 1995.

Pulte Homes believe such statements based on reasonable assumptions, but there're 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 the date of this call and the Company does not undertake any obligation to publicly update or revise any forward-looking statements, as a result of new information in the future.

Participants in today's call should refer to Pulte's annual report on Form 10K for the year ended December 31st, 2007, and last night's press release for a detailed list of the risk and uncertainties associated with the business.

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

Richard?

Thank you Calvin, and good morning, everyone.

Much has been written about the challenging marking conditions that the housing industry continued to face in 2008, as this housing downturn enters the fourth year.

Indeed during the fourth quarter conditions for the industry got progressively worse.

Unprecedented volatility in the stock market during the quarter, the continuation of tight mortgage availability and a surge in unemployment across virtually every sector of our economy, hit housing hard.

These factors led to ongoing erosion in consumer confidence in home buying demand.

Exceptionally soft demand and high foreclosure rates that kept inventory high meant a further imbalance of supply and demand for housing thus the very weak market conditions.

I think the proper way to describe the overall environment for Q4 and for much of 2008 was uncertainty and uncertainty breeds consumer inaction.

Despite last year's difficult market conditions, Pulte performed at or near the top of the industry in what certainly was the most difficult housing year in our lifetime.

Our often stated 2008 focus on cash generation, overhead management and prudent balance of short-term priority with longer term goals guides us through these otherwise uncertain times and positions the Company for long-term success.

Our execution of this strategy allowed us to realize the following goals during the fourth quarter of 2008.

We increased our cash position by almost $500 million during the fourth quarter and ended the period with close to $1.7 billion of cash on hand.

This performance is one we are particularly proud of, especially when you consider the tremendous downward pressure on sign-ups and closings during the fourth quarter.

Our operators did a fantastic job of closing homes while simultaneously holding the line on development spending along with managing overhead costs, thus enabling us to hit our objective.

I don't have to remind everyone of the importance of a strong balance sheet at times like these, but it's worth saying that it didn't happen by accident.

It takes a strong foundation of reasonable, well-planned debt levels and maturity schedules combined with a sharp organizational focus to deliver cash when it's important.

Fortunately Pulte has both.

Not only are we in a good liquidity position now, but as you saw from our press release last night, we also expect to a significant tax refund during 2009 that will add to our cash balance.

While it will be more difficult for the industry to achieve cash flow gains in 2009 versus 2008, given smaller backlogs and overall weaker market conditions, Pulte does expect to grow its cash position during 2009, notwithstanding our expected tax refund.

Count on Pulte to work both levers to generate cash, sign-ups that led to closings bringing cash in and holding the line on and cutting, if necessary, planned cash outflows for land development.

Roger will have more details in a moment.

Another major achievement during the year and in the fourth quarter was the ongoing reduction in our overhead costs.

For the fourth quarter, we realized a $42 million reduction in our home building overhead expense compared with the prior year quarter.

This major reduction was achieved despite significant restructuring charges we incurred during the fourth quarter as we once again realigned our business to reflect the ongoing reality of a much smaller business heading into 2009.

Our overhead structure is much leaner entering 2009, and our entire organization understands the importance of profitability, no matter how tough the environment.

Now, that 2008 is behind us, many have recently asked how first few days of 2009 are shaping up.

While the market is certainly not anywhere close to normal, we are thus far experiencing a modest increase in traffic and sign-up paces as compared to the fourth quarter of 2008.

In fact, we have seen traffic in sign-up and momentum build weekly thus far into 2009.

While it's likely that some are even most of this improvement is simply part of the normal seasonal shift after the fourth quarter holiday season, it's also apparent that buyers are still shopping and haven't been completely disheartened by the economic calamity we witnessed late last year.

Given the weakness we saw in the fourth quarter, we enter 2009 with inventory to sell, and our operators are keenly focused on making positive things happen, as we begin the critical selling season from Superbowl Sunday to Memorial Day.

Let me spend a moment with some comments about government intervention into the housing market.

Most of you are aware of the large coalition formed late last year called fix housing first, and its efforts to secure passage of a temporary sizable tax credit and lower the market interest rates for new and resale homes purchased during 2009.

Pulte has been very active in this overall effort, and while we are optimistic that our work could yield demand stimulus that's so badly needed, we are also realistic that much of the discussion in Washington today is around foreclosure prevention.

To anyone in Congress listening today or reading this transcript later, let me say that foreclosure prevention is needed and worthwhile to help stem the tide of inventory.

That said, it is not demand stimulus.

The current market dislocation we are seeing is unprecedented and dangerous, and will not be fixed by foreclosure prevention alone.

Demand stimulus in the form of a tax credit and low mortgage rates will help spur the housing market and put a floor under prices for both new and resale homes.

Let me add that the beneficiaries of these measures are home buyers.

The fixed housing first effort is not focused on government payments to home builders.

I have said for some time now that there's two potential cures for the housing market problems we faced.

One is government intervention with demand stimulus, and the second is time.

Either one will eventually stabilize and then help and correct the housing market.

Although we are hopeful that some measure of housing stimulus will be passed by Congress soon, a strategic direction will not rely on such an event.

We expect 2009 to be a very challenging and volatile year.

It is incumbent upon us to be relentless in the pursuit of our strategy this year and for the foreseeable future.

We must maintain the same focus that helped us immediate many of the 2008 goals.

We remain committed to focusing on our balance sheet, generating cash, properly managing our house and land inventory and operating with a very lean cost structure.

Although adherence to these near term metrics is critical, we also need to continue to insure these actions remain in alignment with the longer term factors that will enable Pulte to capitalize on an eventual recovery.

To that end, we have chosen to maintain our presence and support key strategic housing networks unlike many of our competitors and as we speak we are increasing market share because of this long-term view.

In short, we have the financial strength to continue managing through this housing crash, while not abandoning initiatives that will help to insure that we are among the few beneficiaries that capitalize on an eventual recovery.

We all know that the housing market will rebound at some point.

It's a matter of timing and endurance.

Pulte is built for the long term, and look for us to continue to during 2009 to keep the focus on both short term priorities while not sacrificing our bigger picture vision to be a leader in this industry for employees, customers and, of course, shareholders.

I will end my prepared comments with a thank you to all the hard-working Pulte employees who endured a year like none we have ever experienced in this industry.

You continue to deliver world-class performance in the midst of these most trying times.

Thanks again.

Now, let me turn the call over to Roger Cregg.

Roger?

Thank you, Richard and, good morning, everyone.

The fourth quarter home building net new unit order rate decreased approximately 61% from the fourth quarter last year, on approximately 28% less communities versus the same quarter last year.

Revenues from home settlements, where the home building operations decreased approximately 45% from the prior year quarter, to approximately $1.5 billion.

Lower revenues reflect lower unit closings below prior year by approximately 37%.

The average sales price decreased approximately 13% versus the prior year quarter to an average of $278,000 per home.

Fourth quarter land sales generated approximately $91 million in total revenues, which is an increase of approximately $15 million versus the prior year's quarter.

Home building gross profits from home settlements, including home interest expense was a loss of approximately $84 million versus a positive margin of $3 million in the prior year quarter.

Home building gross margins from home settlements as a percentage of revenues was a negative 5.5%, compared with a positive 0.10% in the fourth quarter of 2007.

The change in margin conversion versus the prior year quarter is attributed to lower community valuation adjustments in the current quarter offset by reduced closing volumes and increased selling incentives.

Adjusting the current quarter for land and community valuation charges of proximately $205 million, the gross margins from home settlements as a percent of revenue was approximately 7.9% for the quarter.

The current quarter benefited from the the impact of prior quarters landing community valuation adjustments by approximately 876 basis points or approximately $133 million.

Home building interest expense decreased during the quarter to approximately $61 million, versus $72 million in the prior year.

Included in the interest expense of $61 million is an additional $20 million of expense-related to land and community valuation adjustments taken in 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 $184 million.

The fourth quarter we tested approximately 123 communities for potential impairment evaluation adjustments we recorded valuation adjustments on approximately 88 communities on the quarter of which approximately 61 communities or 69% have been previously impaired.

Of the $184 million of land and community valuation adjustments, approximately 33% or $61 million were related to Del Webb communities.

In addition, we had five communities representing approximately $50 million of the impairments that are currently not open for sale.

The total gross loss from land sales posted for the quarter was approximately $141 million.

The loss is mainly attributed to the fair market value adjustment in the current quarter for land being held for disposition and land sold in the amount of approximately $146 million, which is included in the land cost of sales.

Approximately $120 million of the adjustment was associated with the sale of approximately 30 land parcels or 7,300 lots located throughout the country that were closed during the fourth quarter.

These were sales made to local builders, residential and commercial developers and land investors.

SG&A expenses as a percent of home sales for the quarter was approximately 13.5%, or $205 million, a decrease of approximately $42 million or approximately 17% versus the prior year quarter.

The current quarter reflected a reduced level of expenditures in all categories associated with the decline in volume and also included approximately $15 million in severance related overhead reductions, as we continue to adjust our expenses to lower volume experienced throughout the quarter.

Additionally, the current quarter also included an insurance reserve related charge of approximately $32 million, associated with the development of general liability product claims based on our quarterly actuarial valuations.

In the other income and expense category for the quarter, the expense of approximately $36 million includes approximately $14 million in preacquisition expense writeoffs, $15 million associated with the valuation adjustments in a joint venture investment and approximately $11 million related to restructuring expenses, in addition to another $5 million for the writeoff of goodwill.

Customer deposit forfeitures and other market adjustments round out the difference.

The home building pretax loss for the fourth quarter of $466 million resulted in a pretax margin of approximately negative 28.9% on total home building revenues.

Excluding the charges related to the valuation adjustments and land inventory and investments, land held for sale and severance and related charges, home building pretax margins converted at approximately a negative 3.4% from operations or approximately a $55 million loss for the current quarter.

The pretax loss from Pulte's financial services operations for the fourth quarter was approximately $8 million for a decrease compared with the previous year's quarter of approximately $18 million.

The loss in the quarter is mainly attributed to lower sales volumes, a loan loss provision of approximately $9 million, restructuring charges for severance and office closures of approximately $3 million and a writeoff of approximately $700,000 in goodwill.

We continue to experience a favorable product mix shift into the fourth quarter as funded agency originations were approximately 99% of loans funded from the warehouse line versus 95% for the same period last year.

Non-agency funded originations fell from 5% of loans funded from the warehouse line last year, to approximately 1% this quarter.

Additionally within the funded agency originations, FHA loans were approximately 28% of the loans funded from the warehouse line in the fourth quarter, versus approximately 30% in the third quarter of 2008.

The level of adjustable rate mortgage products originated during the fourth quarter of 2008 decreased from approximately 3% of the origination dollars funded from the warehouse line in the fourth quarter to approximately 0.30% in the quarter.

Pulte mortgages capture rate for the current quarter was approximately 92%.

Mortgage origination dollars decreased in the quarter approximately $745 million or 47%, when compared to the same period last year.

Decreases related to the volume decrease in the home builder closing activity for the quarter.

The average FICO scores of our loans closed for the period were 741, increasing slightly over the 736 scores of the second and third quarters of 2008, and down slightly from the 745 for the same period last year.

In the other nonoperating category, pretax loss for the fourth quarter of approximately $6 million includes mainly corporate expenses of approximately $12 million, offset by $6 million in net interest income related to the invested cash balance during the quarter.

The corporate expenses include the writeoff of approximately $2 million, associated with capitalized bank fees as a result of our completed amendment for the revolver agreement during the fourth quarter.

For the fourth quarter, the Company's pretax loss was approximately $480 million, excluding the charges related to the valuation adjustments and land inventory and investments, land held for sale, goodwill and severance and related charges represented a pretax loss of $65 million for the Company in the current quarter.

The Company's income tax benefit for the quarter was approximately $142 million.

In accordance with FAS 109, accounting for income taxes, we increase our net deferred tax assets from $248 million at September 30th to $374 million at December 31st, which now represents the estimated income tax refund related to the 2008 tax year, and is now reflected on the balance sheet as income taxes receivable.

The receivable reflects approximately $363 million related to federal refund, which we expect to receive in the first quarter.

Remaining receivable of approximately $11 million relates to the state tax refunds which are expected to be received throughout the year.

At December 31st, the gross deferred tax asset of approximately $1.052 billion is offset by a valuation allowance of $1.052 billion.

The net loss for the fourth quarter was approximately $338 million, or a loss of $1.33 per share, as compared to a net loss of approximately $875 million or loss of $3.46 per share for the same period last year.

The number of shares used in the EPS calculation was approximately 253.8 million shares for the quarter.

Reviewing the balance sheet for the fourth quarter, we ended with a cash balance of just under $1.7 billion, increasing approximately $481 million from the third quarter of 2008.

House and land inventory ended the quarter at approximately $4.2 billion.

Excluding the inventory valuation adjustments for the fourth quarter of approximately $204 million, and a reclassification of approximately $160 million, through the account, land not owned under option, total inventory decreased approximately $664 million for the quarter.

House inventory excluding land for the quarter decreased approximately $349 million.

Land inventory during the fourth quarter excluding valuation adjustments and the reclassification decreased approximately $315 million.

The major changes were from land released through home settlements of approximately $417 million, offset by investments in rolling lot option takedowns, of approximately $20 million and land development spending of approximately $155 million for the quarter.

In addition, the balance of approximately $73 million represents reclassifications to land held for sale, and changes in capitalized interest during the quarter.

Highlighting the major components of the net changes in cash, total inventory, excluding valuation adjustments decreased contributing approximately $664 million to the reduction of both house and land inventory.

In addition in the fourth quarter we decreased our payables by approximately $143 million in all other categories for another net outflow of approximately $40 million.

With approximately $1.7 billion in cash to end the fourth quarter, we had no outstanding balance drawn on the revolving credit facility at the end of the quarter.

The Company's gross debt to total capitalization ratio was approximately 52.8%, and on a net basis 34.8% at December 31st.

Interest incurred amounted to approximately $54 million in the fourth quarter, compared to $59 million for the same period last year.

Pulte Homes shareholder equity for the fourth quarter was approximately $2.8 billion.

We repurchased no shares during the quarter and the Company has approximately [102 million] remaining on our current authorization.

We amended our unsecured revolving credit agreement during the fourth quarter as reported in November.

On our amended financial covenants for the fourth quarter, the required debt to total capitalization ratio was not to exceed 55%, and at December 31st the ratio was defined in the credit agreement was 49.4%, and the tangible net worth cushion as defined in the credit facility was approximately $722 million.

We are in full compliance under our revolving credit agreement at December 31st.

The continued uncertainty in the credit and the financial markets has impacted the overall consumer confidence in the economy and specifically the housing industry.

This has resulted in slowdowns in consumer spending, business investment and employment.

Given the lack of visibility in the uncertain and financial economic climate, we are offering no earnings guidance for the first quarter of 2009.

With our priorities in focus on cash management in house and land inventory, we expect to generate positive operating cash flow in 2009, excluding the cash from the anticipated tax refund.

We currently plan on land investment in 2009, to include land acquisitions that we estimate in the approximate range of $150 million, and land development spending to include soft costs in the approximate range of $600 million to $650 million for the year.

As we experienced throughout 2008, we will continue to adjust our levels of investment based on what we were experiencing in the market, and we will continue to operate our business with a similar approach to 2009.

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

Steve?

Thanks, Roger, and good morning, everyone.

As Richard stated earlier, the housing market deteriorated further in the fourth quarter of 2008.

Although levels of unsold, new and existing unsold inventory declined, the month supply of new homes increased to near record highs by the end of 2008.

With home prices falling even further in the quarter and economic outlook that's battering the personal net worth, buyers are simply electing to sit on the sidelines until the home buying prospects look better.

Add to that the potential difficulty the customers have in selling their existing homes and in short you get a tough market that the only gets more difficult.

Adhering to the near term strategy we focused on generating cash, maintaining a lower cost structure and managing our inventory levels.

Cash generating has already been covered by Richard and Roger, so I will provide an update on our cost structure initiative and the inventory management strategies.

In the fourth quarter, we took additional steps to realign our overhead structure in response to this ever changing demand.

Should the downward trend in housing experienced in 2008 continue into 2009, additional reductions will become necessary.

We continue to weigh these unfortunate yet unavoidable moves each quarter.

To date we have been relatively successful in leveraging our overhead and we expect to be able to continue this if necessary.

I can't say enough good things about the way our field and home office teams have responded.

From the house cost perspective, we continue to make progress towards our long-term lean operating goals, to take unnecessary costs out of the construction process.

From offering smaller, more affordable homes, to better scheduling, to ordering materials directly from manufacturers, to working with large box and small box distributors to eliminating waste at the construction site and building our homes in fewer days, we continue to uncover more opportunities across the supply chain, and we are becoming a more cost efficient builder of homes.

As I said last quarter, it's tough to see the payoff for these efforts in a declining sales price environment, but they will become more visible once the home prices begin to stabilize.

Turning to inventory management for a moment, we continue to focus on keeping land acquisition and development spending at minimum levels to sustain our business and reducing our lot supply through closing.

Pulte reduced its lots under control by 6% from the prior year quarter and 23% on a year-over-year basis to 121,000 lots at the end of the fourth quarter 2008.

Of these total lots approximately 98,000 or owned and 23,000 are controlled with options.

Our speculative home inventory now stands at approximately 3,500 units, 6% lower than the prior year quarter, with our finished spec homes accounting for 1,900 of those units.

These finished home numbers are way more than we are comfortable with and we are taking further action in this quarter to reduce that number.

The inventory buildup was as a result of a high cancellation rate which was 47% for the fourth quarter, compared with a 37% rate for the third quarter of 2008 and a 40% rate for the prior year fourth quarter.

The cancellation rate for our Del Webb brand was approximately 43% for the fourth quarter of 2008.

Home prices continue to slide throughout the fourth quarter of 2008 as concerns about the overall economy put additional downward pressure on home sales.

While a considerable number of foreclosures hitting the market, and various local and national builders having a tremendous need for cash, the pricing environment remains very dynamic.

Our operating teams will continue to be responsive by making the necessary price adjustments in certain markets to sell and close homes.

Fourth quarter 2008 plans were just under 1,800 units, down 61% year-over-year.

As you saw in our release, plans was lower across all our operating areas.

Our range was highest in the southwest, down 72%, to 49% down in California.

But generally speaking, it just plain bad everywhere.

As I said before the economic environment coupled with growing foreclosures had an increased impact on the major home building markets in the fourth quarter.

The good news as Richard already mentioned is that we have seen a seasonal pickup in traffic and sales thus far in the first quarter.

In conclusion, given the ongoing economic uncertainties that continue to feed this housing downturn we are keeping our focus on selling homes, leveraging our overhead, generating cash and managing our inventory.

We continue to be diligent on the land acquisition and development spending, managing house inventory levels and achieving the best possible balance of price and pays in each of our communities.

We have also been unyielding in our pursuit of cost savings.

We feel these are the right steps to take and will be the foundation which allows Pulte to emerge as the industry leader for the long term.

Now let me turn the call back over to Calvin.

Calvin?

Thank you, Steve.

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

We are now prepared to answer your questions.

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

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

Eric?

Thank you.

(Operator instructions) And stand by for your question.

Your first question comes from the line of Megan McGrath with Barclays Capital.

Please proceed.

Hi, good morning.

Thank you.

I wanted to ask a little bit more about your Del Webb communities and active adult in general in this environment.

I'm curious if you tried to redesign any of these communities, lower the age, anything to get sort of more folks in the door and sort of how that's been going for you.

Yes, Megan, this is Steve Petruska.

We've done almost everything imaginable we can do in those communities.

What you've got to remember is that most of those communities from a design standpoint are -- have been approved and we have explained to the homeowners just in fact, what amendments they will be getting.

We do have some leverage typically in overall lot count.

So what we have been doing is we have been increasing our lot count closer to the maximum that is allowed under our zoning, that means probably more smaller lots versus larger lots.

We have certainly been looking at the size and the scope of amenities, and putting the smaller amenities first, versus maybe some of the larger stuff.

And then clearly we have been looking at different product opportunities.

As I said, we have been downsizing our products across the line.

We have offered more smaller home opportunities for our consumers out there to get our average sales price down.

Okay.

Great.

Thanks.

And I'm just wondering if you can give any more color.

You talked a little bit about prices coming down throughout the quarter.

We heard from some other builders that actually sequentially throughout 4Q things looked a little better with October being the worst quarter.

Could you give us any more color on what you saw sequentially throughout 4Q?

Megan, this is Richard.

It was pretty difficult through the quarter.

I think maybe the more telling comment is that it's been better since the beginning of the year.

But it it was pretty tough through the quarter.

We had a sales event in October that I think might have modified our results a little bit through the quarter, vis-a-vis what some of other builders have reported.

So I don't know that necessarily we would say things got better through the quarter probably based on that event.

I do think economic conditions were the worst in October, candidly based on what we saw in the stock market and what have you.

But as mentioned, we have seen an improvement in business beginning this year.

But we didn't see the same trend that others did through the fourth quarter, primarily, I believe, because of the focus we had in our sales event in October.

Okay.

Great.

Thank you.

Your next question comes from the line of Josh Levin with Citi.

Please proceed.

I wanted to ask you a question about your capital structure.

On the one hand you have a lot of cash and you don't have any debt coming due before 2011, and there's a proposal in Congress right now to change the tax code so that if a company buys back its debt at a discount, could you spread the gain out over many years for tax purposes.

If a proposal like this was enacted how do you think you might approach your capital structure?

How would you balance your current cash balance with the opportunity to buy back some of your debt at a discount?

Well, this is Roger.

I think certainly we need to take a look at that, but it's not just looking at the balance sheet as you well know.

It's a matter of also looking at the conditions in the market place, not the current conditions but also what you think the future is going to be.

So you've got to balance all of those.

And to be highly speculative in trying to guess at what Congress might do and what the environment might do is very difficult at this point.

But certainly we would look at all of those things and take into consideration and try to determine what is the best value for the shareholder at the end of the day.

Okay.

And a question on the impairment cycle.

If you would do an a baseball analogy, what inning are you?

And in impairment, what assumptions are you making about future home prices and absorption rates?

It's hard to project.

I think every time we come through a quarter, we think we are at a point where we adjusted our asset value to the market value, and as things continue to erode, we continue to have more impairments.

Pricing, again, we have been very conservative in it that going out in the future.

Certainly after having done this now, well over into three years I think that we would not speculated on large increases in prices going out in the future.

And that gave rise to some of our impairments this quarter and some of our projects that we don't even have open.

As you look out at the future, you have to continue to look at the present, as the longer projects are out, there if you have assumptions in pricing, the bottom can continue to fall out and you make more impairments.

Josh, this is Richard.

One other comment on that.

If you look at what happened throughout the year 2008, you saw a decline for most of the year, until the fourth quarter in terms of the impairments and that's clearly indicative of incredible calamity we saw in the market.

It's obviously dependent going forward on what we see things improve.

Hopefully impairments will slow down.

That's just very tough to predict.

Okay.

Thank you very much.

Thank you.

Your next question comes from the line of Ivy Zelman with Zelman & Associates.

Please proceed.

Good morning, guys.

It's actually Allen on for Ivy.

Good morning, Allen.

Good morning.

My first question is on the land sales, the $90 million or so, what was the original book value on those assets, your original purchase price?

I don't have that detail in front of me, Allen.

Okay.

But it's safe to say that they were previously impaired before this quarter still?

Yes, I would say that that's a safe bet.

Okay.

And then second on the gross margin looking at your conversion, over 90%, it seems pretty obvious that you guys made a concerted effort the to flush out some spec product in the quarter.

I was hoping to get a little bit of color on kind of the differences in margin you are seeing on spec versus to be built homes.

And looking forward over the next several quarters, when do you think you are going to get kind of back to that where you are going to be focusing more on the to-be built model, as opposed to flushing out the specs?

Allen, this is Richard.

I will start and Steve can give you a little more detail.

Couple things.

There were precious few to be builts sold during the quarter.

Specs continue to be the focus for buyers.

People really not wanting to take a future, if you will on housing in this kind of environment.

Obviously we would like to get back to a typical model for Pulte, where plus or minus one-third of our business is spec sales and two-thirds are presolds.

We are not in that type of environment today.

So the margin differential between those two categories is tough to say, because candidly, almost all the to-be builts are canceling in this type of environment and we end up selling spec.

The other thing on margins is clearly it's being impacted by renegotiating at the closing table.

When you see the unbelievable movement in the market, like we saw through October as an example, buyers are in a position to want to cancel.

And frankly, rather than resell the homes we would just as soon assume renegotiate them and generate the cash.

Clearly our focus as you've seen from what we delivered was on cash and margins candidly took a hit as a result of that.

We closed a lot of houses in the quarter.

So that's a little bit of a general overview.

Maybe Steve might have some specifics there.

Yes, Allen, margin pressures out there.

Like Richard said, we may sell a [dirt] home and it may have a nicer margin than what we put in the backlogs, but as markets continue to deteriorate and the appraisals get tough and it comes down to the actual day of closing, it's a buyers market out there.

So as Richard indicated, we are doing a lot of negotiating at the closing table just to keep that sold backlog in backlog and get them through the closing process.

And that deteriorated on us in the fourth quarter.

What we are continuing to do is, the only thing you can do is start fewer homes.

And we are putting the brakes on pretty hard across the board and really even watching our sold not started trying to get those buyers preapproved, trying to understand what the appraisals are going to come in on those properties, even before we start the sold homes.

As I said we know we have too many sold final homes.

We're going to move those first.

The good news is we typically see better activity during this quarter.

The secondary good news is that buyers aren't buying futures.

They are buying spec homes after they sell their home.

And we think we can make it fairly significant dent in our inventory position in the first quarter.

And your next question comes from the line of Dan Oppenheim with Credit Suisse.

Please proceed.

Thanks very much.

I was wondering about following up on that issue of specs.

What -- if you are talking about your spec count at the end of the fourth quarter, what progress did you make on that in January?

And what's your goal overall for specs for this year?

Dan, we don't have a lot of specifics yet on January.

We are not giving out that information.

We just kind of reiterate what we said.

We have seen a pick up in activity.

It's almost all in spec inventory, overall, and we haven't given any guidance in terms of that.

I think Steve pretty much indicated in his comments we would -- we're not happy with our finished spec position for one.

We think it's too high.

We do think we can make substantial progress on it this quarter.

He just mentioned to Allen that we are going to be putting the brakes pretty hard on new production going forward unless it's very well approved buyers.

So look for progress, but I can't predict what the market will throw at us at this quarter if we see the sequential momentum to build, I think we will make good progress against those spec numbers, if we see something unexpected that could hurt us.

In terms of that, Centex was talking about two to five specs per community, and if you think about the sending that you have on land developments over the year and the limited backlog right now, would your goal is to continue to have some specs available and just to have a positive cash flow for the year?

I wouldn't say just from a positive cash flow, but to be able to actually capture the buyer that's out there.

And as Steve had mentioned, a lot of buyers are looking for specs, rather than waiting for a house to be built.

Certainly we don't want to carry spec just to generate cash flow on the one hand.

On the other hand, we would rather make sure we are driving it from the sales perspective.

Okay.

Thank you.

Your next question comes from the line of [Ken Zenner] with McGuire.

Please proceed.

Good morning.

Good morning, Kim.

The dynamic you discussed at the closing table is that being driven by the buyer as much as the lender and are you seeing differences there between the Del Webb versus traditional business?

Kim, this is Steve.

It is really being driven just kind of across the board.

The buyer is in a situation clearly where they are in the driver's seat.

And if -- to get them to close and there's been significant change in the environment, especially like this was in the fourth quarter, it's taken a lot more work on behalf of our folks and we've got to sweeten the deal so to speak.

So that's some of it.

Some of it is being driven -- I wouldn't say lenders, it's being driven by the underlying appraisal process.

You have markets like Las Vegas where 60% or 70% of the resales are short sales or foreclosures.

In the past, we were always able to throw those appraisals out as non-arms length transactions when the volume was low.

But that's becoming the market reality in those places.

And so appraisers are kind of caught between a rock and a hard place.

They are appraising the market for what the property values are and it's impacting us.

And we come to the table with an appraised valuer than the lower agreed upon sales price.

We have to find a way to get that transaction closed.

If we thought the market would get better in the next 30 days, then we would probably stand our ground, but we haven't seen that.

And so we continue to be way more flexible at the closing table than what we have historically been.

I appreciate that.

You mentioned your own lot count had declined to 98.

How many lots do you hold in land held for sale?

I think that's a different classification, as well as what's your units under construction?

Thank you.

Okay.

I don't have the number of lots in the land held for sale.

I do have the number of units under construction.

And the total units under construction as of And the total units under construction as of 12/31/08 was 5,050, and that compares to 9,030 at the end of the year last year.

And your next question comes from the line of Nishu Sood with Deutsche Bank.

Please proceed.

Good morning.

It's actually Rob Hansen on for Nishu.

Just on the mortgage business, in the release you mentioned that you had a positive shift in the mix of mortgage loans towards more profitable agency-backed products.

I just wanted to see if you could provide some color on this.

Is there a significant difference in the profitability between FHA and conforming or am I just -- could you give some color on that?

Yes, the agency definitely is more profitable, so the shift was minor, relative to the previous year.

We have been talking about it now the last three quarters this year, where we have seen the shift 99% to the agency.

Definitely the agency is more profitable from that standpoint, but even given that, it's kind of hollow from the standpoint when you look at the level of volume that's fallen off.

But yes, the product from the agency side is more profitable.

Okay.

And what percentage of your lots are developed?

And if you could give us a little color in terms of where they are geographically, the majority of them.

You mean fully developed?

Yes.

Okay.

We've got about 29% of our 98,000 lots is fully developed, roughly about 29,000 lots.

And we are not going to go into the geographic spread across the US on those, but it's roughly just around 29,000 lots that are finished.

Okay.

Thank you.

Your next question comes from the line of Michael Rehaut with JPMorgan.

Please proceed.

Hi.

Thanks.

Good morning, everyone.

Good morning, Mike.

First question, just on the land spend, I believe you said that for '09, you expect to do on a combined basis $750 million to $800 million?

That's correct.

And given -- I mean, certainly you guys took the current backlog into consideration there, but just wanted to get a sense to the extent that backlog remains down on the order of magnitude it is or even gets hurt a little more, where the flexibility is in that, particularly on the $600 million to $650 million number and just remind us what it was for '08.

Sure.

The flexibility basically is in a couple of areas.

One, it's the work in process, as Steve had mentioned, that coming into the year we have more inventory.

So technically if you look at even building houses, if you end up with more coming in, you might wind up with less being built.

So there's a cash flow coming over from one year that we didn't -- wouldn't be able to capture in 2008.

And so we get that in 2009 driving the inventory levels down.

And again we are always adjusting these based on what's actually happening on a month-to-month basis.

Flexibility on the land acquisition side, if you remember in 2008, we started out the year talking about investment of $1.1 million to $1.2 billion overall, and we ended it roughly just under $800 million.

So, again, the dynamic environment, we still see opportunities to leverage ourselves on our land spend, but again looking at 2009, into 2010, we're constantly looking at the ability to adjust ourselves for the future as well.

So we ended 2008 with roughly about $110 million in land that we took down in lot options and about close to $660 million in land investment.

So relatively speaking, when you look at it, it's almost comparable, $750 million to $800 million in 2009, but conditions are going to continue to drive that.

Okay.

In the land spend itself, we've talked about $200 million to $250 million in soft costs.

The difference between our $600 million, that is something that we look at our flexibility to slow down more development if the environment deteriorates worse than what we are now.

Mike, this is Richard.

Let me just add a little bit of color to that.

I think it might help.

If you look at where we expected to spend for land in 2008, Roger had given guidance of about $1.2 billion at the beginning of the year, and as he just indicated, we ended up spending plus or minus $600 million to $750 million.

Clearly a difference that helped our cash flow in 2008.

If you look at what we are projecting to spend in 2009, relative to whatever market conditions we see other than the soft cost component he mentioned we do have a flexibility to adjust that.

And that's clearly what we have frankly gotten pretty good at over the last couple of years.

The spend is being monitored incredibly closely.

So it is not just a function of backlog and cash in.

It's obviously that as well, and I think we demonstrated we have been able to hit our guidance consistently on that.

So we'll continue to manage it that way.

Okay.

No, I appreciate that.

Before the -- my second question, just a clarification, the $400 million that you broke out of the $600 million to $650 million, assume obviously a decent portion of that has to be Del Webb, and is it also safe too assume that there's some flexibility in slowing down spend in a Del Webb community, even though there are different dynamics there relative to a traditional community?

Yes, Mike, I just tell you there's flexibility everywhere, right?

Except for the soft costs when you continue to look at the environment that you are dealing in, there are builders out there today that are going out of business.

So flexibility is the name of the game at this point.

But you look to run a solid business when you do this.

We take all of this into consideration.

Again, there's a -- I don't I have a breakdown whether it's traditional side or active adult side.

So clearly there's flexibility there and it's something that we continue to look at on a month-to-month basis.

Thanks.

Second question, just on the spec comments that kind of crept up a little bit more than you would have liked and are going to be focusing on reducing that.

I was wondering if you could give us some color from a regional perspective, if there were some markets where the buildup was a bit more concentrated and just kind of elaborating, perhaps on some regional color.

I think Steve in the past has kind of gone through different -- your different regions and given some more granularity.

If you might be able to just walk through some of the key regions of note.

Yes.

Mike, I mean, it's predominantly exactly where you would expect to see it.

Southwest, as we continue to get hit with a glut of foreclosures out there, Phoenix and Las Vegas markets, as well as Florida.

Those are our predominantly two higher spec areas.

Everything else, there's nothing good out there.

We are working through it every place, but those are predominantly the two higher areas.

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

Please proceed.

Thanks.

Good morning.

Can you hear me okay?

Yes.

Okay.

Great.

Richard, the first question has to do with comments about government stimulus and what that means from a demand perspective.

I wonder if you thought about what it could potentially means to the supply perspective?

And do you think that there's pent up supplies from people waiting to sell their homes in the market?

With that, if there is some sort of stimulus to try to pick up demand, can you pick up demand accordingly, do you think we will see a lot more supply in the market?

And if so --

David, this is Richard.

That's a good question.

It's hard to predict.

I think that if it it were the case, it would be from what you would call more traditional sellers that otherwise holding off and putting their homes on the market.

Frankly, I think what it would likely do is help to stabilize pricing, because the only thing that's going to help stabilize pricing is more demand overall.

And I do believe that there's a significant amount of demand that's on the sidelines because of the market so uncertain, but there's no real way to quantify the answer to your question.

I suspect it's possible we could see more people putting their homes on the market.

It's not going to change the foreclosure picture much, frankly, those homes are continuing to come onto the market.

The only help we may get on foreclosures there as a result of demand stimulus is if prices stabilize.

Maybe some of the homes that are being worked out of foreclosure won't reforeclose.

Unfortunately, the stats are not real good there.

A lot of homes that get worked out reforeclose if the underlying asset value falls.

So there's a lot riding on this idea of getting more demand in the market and that's why we have been so aggressive on helping the fix housing first coalition.

Having said all of that, David, it's really hard to quantify your question.

I'm sorry.

I guess as a quick follow-up before my second question.

Do you think the builders or competitors or your strategy would change if you did see more demand stimulus, i.e., would you build more specs and more land?

Do you think that's a potential issue.

I think the first thing is see how the market responds to the stimulus.

I would dare that for quite some period of time we just need to work off what we have.

Steve indicated we ended with more spec than we would like.

We will obviously try to work that down, and then I think the watch word would be cautious in terms of incremental investment.

We have too much inventory.

We have more land in this kind of environment than we need and we would be cautious.

I think we could probably stand to improve returns for a while before we put a lot of additional inventory out there.

I'm not concerned that builders would all of a sudden build a bunch of product.

Frankly, unless you are a large well-capitalized builder and that list is getting smaller, the banks have been incredibly restrictive on most of the industry.

So I don't know that you would see a return of capital to the industry real fast anyway.

So I think the chances of a lot of either spec or land getting built right away would be pretty low.

And your next question comes from the line of Alex Barron with Agency Trading Group.

Please proceed.

Hey, good morning, guys.

How are you?

Hey, Alex.

I wanted to ask you a question, you gave your number of communities impaired for the quarter and all that.

But I was wondering what percentage of all of your communities you guys own have been impaired at least once here through the last few years?

Hi, Alex.

I don't think we have that information.

That's not a calculation we have done, Alex.

Some of them roll off.

So we might have impaired it.

It's something that's not with us today, of course.

Right yeah.

That's what I was wondering on the current ones.

Well, maybe instead of that question, do you guys have any, like, the benefits to gross margins this quarter of previous impairments?

Yes, I mentioned that in my opening comments.

I think we had about 876 basis points that were in there, $133 million.

Okay.

And my other question was Centex was mentioning the other day they expect banks to start, I guess, selling a lot of properties they have taken back and probably in the back half of this year.

I'm not sure if you guys kind of agree with that or not.

But I guess my question is, what do you guys think will be the impact if those prices are going to be below, where -- I guess, where maybe potentially if some of those land positions are close to where you guys have land, is that going to impact your valuation, do you think?

This is Richard, Alex.

Frankly, I do agree that there will be some bank properties that are going to begin hitting the market.

It seems like that's just starting in any kind of a significant way.

In terms of how it affects our valuation, it's going to be very community specific.

It's impossible to exactly predict.

As an example, if we have a large Del Webb community that doesn't have a lot of competitive product near it, it may not have any impact.

On the other hand, if it is an entry level community that's right next door to a 200 lot parcel that comes back on the market, it could impact strategy.

And I think we have indicated before, in some cases, depending on the terms you are able to work out, it may push you into looking at some of that dirt and potentially putting it in line ahead of some of the stuff you may own in terms of acquiring it.

So it is just going to have to play out, but I guess maybe the most relevant comment I could make that until though properties hit the market and we see what kind of pricing there is, and until demand picks up some, I'm not sure you will see a lot of that actually get sold.

I think some of that property may sit there for a while until people have an appetite to buy, and I think that's going to be coincident with demand improving.

Next question comes from the line of Joel Locker with FBN Securities.

Please proceed.

I just was looking if you have a total for home buyer deposits at the end of the fourth quarter, what the total number was, what the dollar amount.

I think I can find that.

Give me a second.

Thanks.

Maybe not as readily as I thought.

Maybe we can get back to you.

Sure, and just a follow-up question.

Your price per square feet to build in California right now.

What would you say it is on a move up lot, move up or luxury-type house, versus say a year ago or versus the peak?

Well, Joel, I don't have the exact dollar amount as to what it is right now.

It would clearly depend on the product and those type of things whether we are building attached or detached.

You can see that some of our move up is attached.

I would say on an overall basis, we are seeing house cost reductions that are fairly significant on a year-over-year basis.

And we are probably down from the peak, I would guess 25% to 40%, depending on the product type on some of those house cost numbers.

Right.

Alright.

Thanks a lot.

Joel, hang on.

We have the answer to your question there on the customer deposits.

At the end of 2008, it was $41 million and at the end of 2007, it was $133 million.

Home buyer -- and that's home buyer deposits against backlog?

Home buyer deposits, they are reflected as a liability on our balance sheet.

Right.

Right.

So that's roughly 6.5% of the backlog?

Approximately.

Yes.

That sounds about right.

We haven't done the math, but --

Right.

Alright.

Thanks a lot, guys.

Thank you.

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

Please proceed.

Thanks.

Good morning, guys.

Good morning, Jim.

On the gross margin side, I was wondering if I could get a little more color.

You gave the preimpairment, and suggested that your sale in October certainly had an impact on it.

Could you color how it changed your outlook since, or what gross margins might look like in backlog compared to what you saw in the quarter?

No.

We don't give that, Jim, but as Steve had mentioned a lot of it is not really reflective in the backlog, because if you're doing a lot of spec sales, they are coming in through the quarter.

So, what you do have a lot of times is, if you are doing that, you have dilution of maybe what you have in your backlog because of the specs and the sales or selling the spec twice.

So it's not a good indicator the way it has been in the past.

Okay.

And then my other question is on the land held for sale.

Obviously, you took an impairment of -- what was it, about $146 million on land held for sale.

Could you given a little color on what you have held for sale in general?

Is any of it under contract?

Is that reflected or is a general valuation allowance for that pool of assets?

Like I said, the $146 million is what we adjusted in the quarter.

The $120 million and the $146 million of impairment was related to land that we actually sold.

So there was roughly the difference between the $120 million and the $146 million, which is $26 million would have been what was still remaining on the books held for sale.

Typically what we do is many times we had the same land, the same parcel under contract, sometimes twice, sometimes three times, sometimes more.

And each time we have to reflect the value based on what offers may be for those parcels.

So we are constantly adjusting those as we try to sell those parcels.

And in general, again, every market has got some out there.

So, again, it was not like we moved a lot of product off basic inventory into held for sale to actually close it in the fourth quarter.

There was a lot for sale throughout the year, and the fourth quarter just was higher as it was last year as well than the other quarters were.

Okay.

Thanks.

And your final question will come from the line of Susan Berliner with JPMorgan, please proceed.

Thanks.

Just two quick questions.

One was I was wondering if you could just talk about the potential for the NOL and how you are looking at it, because I think some of the recent conversations by the builders have been alluding to the fact that it isn't necessarily that beneficial.

Yes, I think as everybody knows, the discussion on the tax legislation could be to allow 2008 and 2009 to be carried back for five years.

So it's going to be a combination of things.

One is if you have any remaining amount in 2008, it's to be carried back.

That's one, and we do have some to be carried back.

Then the other, which is unknown, and this is where it's very difficult to answer this question very exact, because you need to generate additional tax losses in the current year, 2009, in order to be applicable to the previous five years.

So you would have to -- for 2009, know what your runoff is, and typically that would be what we would know more today -- or not today, or we would know more through 2009, because we are selling homes at properties that have been impaired .

But what's unknown would be new impairments, which you could actually generate a tax loss in 2009 as well as land sales.

So on the face of it, the unknown is what happens in 2009 to get carried back, but the number I think for 2008 is relatively small.

And so overall, again, the tax legislation, it would be more special if you include 2009, which we haven't experienced yet, versus what we have already experienced in 2008, because we are able to carry back 2008 to the 2006 tax year.

So, again, if that's not been exhausted, then there's

Okay.

Great.

And just my other question was, I guess January sales this year versus last year.

What is the change?

We have not given that out and typically don't give out the -- that information within the quarter.

But we just gave some color on typically what we were seeing in the traffic and the overall sign-ups.

Okay.

Great.

Thanks so much.

Thank you.

Thank you.

Ladies and gentlemen, this concludes our Q&A session.

I would like to turn the call over to Mr.

Calvin Boyd for closing remarks.

Thank you, Eric.

Thanks, everyone, for your participation on the call today.

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

Have a great day.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a good day.