Q2 2004 Pulte Homes Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Please stand by for the realtime conference call. The Pulte Homes realtime conference call will begin momentarily. Good morning and welcome to Pulte homes 2004 earnings release. If you should require assistance at any time during the call, please press star and zero and an operator will assist you. I would like to turn the program over to Mr. Jim Zeumer. Go ahead please.

JIM ZEUMER, VICE PRESIDENT OF INVESTOR AND CORPORATE COMMUNICATIONS, PULTE HOMES INC.: Good morning. I appreciate your time in joining us for today's call to discuss Pulte Homes financial results for second quarter ended June. 30, 2004. I'm Jim Zeumer, Vice President of Investor and Corporate Communications. Pulte's release on the second quarter earnings contain some powerful numbers. From earnings per diluted share up 48%, to a backlog valued at $6.3 billion. Clearly Pulte operations had another very strong quarter of performance. On the call to discuss Pulte's results are Richard Dugas, President and Chief Executive Officer, Steve Petruska, Executive VP and COO, Roger Cregg, Executive. VP and Chief Financial Officer. And Vinnie Frees, VP and Controller. For those of you who have access to the Internet, a slide presentation will accompany this discussion. The presentation will be archived on the site for those who want to review at a later time. As with prior conference calls, I want to alert everyone listening on the call and via the Internet that certain statements and comments made during the course of this call must be considered forward-looking statements and as such are subject to risk and uncertainties that could cause actual results to deliver materially from those discussed during this call. At this time let me turn the call over to Richard.

RICHARD DUGAS, PRESIDENT, CEO, PULTE HOMES INC.: Thanks, Jim, and good morning. You've heard the refrain about how this time it's different. We along with the industries other large builders have talked about how balance sheets are stronger, about consolidation and how big builders are taking market share and our returns on equity and invested capital are being pushed to significantly higher levels. Over the course of hundreds of investor meetings and countless media interviews, we have discussed important differences between the home building industry today versus a decade ago. There is another important change that maybe hasn't gotten the attention it deserves, maybe because it is so basic or maybe because not many builders can demonstrate it. And that's the impact geographic and customer diversification can have on a home builder's ability to deliver stronger and more consistent financial performance.

Home building is unique in that when you build a house, at least if you build it correctly, you can't move it. The old adage about location, location, location stems from the fact that unlike cars, appliances, and furniture, you can't move an acre of land. As a consequence, home building becomes a very local business that is heavily influenced by local economic conditions, and that typically results in a varied demand characteristics from one market to the next. At times, the business can be so local that you can find meaningful differences between counties or submarkets within the same city. It's all a matter of local supply and demand dynamics.

I think the benefits of geographic and customer segment diversification, became evident early in the quarter when you saw select financial reports being issued. That showed meaningful swings in orders, closings, and/or margins. It was reported that these swings were based on demand changes in just a couple of markets and/or customer segments within those markets. It wasn't very long ago that Pulte was more of a regional builder with concentrations in a handful of areas, such as Denver, Virginia, and Detroit. As they used to say, when General Motors sneezed, our Detroit operations caught a cold. Having lived through a few local market cycles, we started to focus on the opportunities diversification could offer. Both as a source of growth and longer term as a source of stability. Which is why in the early 90s, we embarked on a significant geographic expansion, effectively doubling the number of markets in which we operated to over 40.

In addition as we've ofter discussed, Pulte serves the broadest range of buyer groups with sizable businesses in all major categories, including an industry-leading position with active adult buyers through our Dell Webb brand. A few years ago when slowdowns in technology and telecom created head winds for northern California, Austin and Denver. These markets found they could draft behind Atlanta, Phoenix, Detroit and a number of other markets. Now Las Vegas, southern and northern California and Washington, D.C. are taking their turn at the front of the pack. Which markets will be next to charge to the front? It is impossible to say with 100% certainty, but looking at conditions and our land pipeline, I can point to several areas, including, Florida, Arizona, and Illinois as likely candidates. In any given period, even in the exuberant 90s, not all the markets shared equally in the economies strength. As rates now climb higher in step with the expanding economy, we fully expect that an overwhelming majority of our communities will continue to deliver solid results, while a handful probably will not meet expectations.

Success and failure in this business is achieved at the local level. Driven first by location. And next by the quality of the home and home buying experience. In fact I believe these are the two most critical areas, where builders differentiate themselves with the customer. While our hit rate with communities won't be 100%. There is no question that managing a broad portfolio that is very well positioned based on local supply and demand, is a winning strategy. In addition to providing more stable business performance, our geographic and customer segment diversity provide another important benefit. We can take advantage of the earnings power in our strongest markets to adjust the operating strategies and tactics in those markets that may be facing changing market conditions. Or where we just haven't been executing as well as we could have.

This is what we are doing today in our Texas and southeast operations. As we have discussed before, we run our operations with a focus on project specific returns on invested capital In certain markets, we have historically achieved targeted return levels, operating under a higher turn, lower margin model. That in truth may not have maximized the earnings opportunity that existed in these markets. In other words we are leaving money on the table. To a degree, limiting our flexibility to adjust, should market conditions require changes in operating tactics.. After a lot of analysis, including extensive research on the different buyer segments that exist in each area, we have been migrating our high return operations toward the higher margin model as a way to drive improvements in our overall financial results. It is why our margins in Texas have actually improved for the quarter and year-to-date and why currently we have been willing to forego unit growth across Georgia and the Carolinas, in exchange for expanding gross margins. Of course, it also helps that we are unique in our customer segmentation strategy, of serving all the major buyer groups, and that we can deliver products on a variety at price points. Only by having this capability can we adjust our position within the markets once we've identified the best overall opportunity that offers the greatest financial benefit. While we have excellent intelligence about local market conditions, we can't always know which markets will be the strongest tomorrow or two years from now. So we decided over a decade ago to plant our flag in the largest and most critical markets, and then grow our business in those markets where local supply and demand gaps are the largest. Pulte's flexibility is unmatched in terms of responding to any economic environment we may face. And we will continue capitalizing on this strength community by community.

Now, as interest rates start to rise and local market economies strengthen at different rates, and as different buyer segment's respond accordingly, Pulte's diversified market portfolio should enable us to run a more successful business and to deliver results like the record-setting second quarter we just completed. Now, let me turn the call to Roger who will provide details about our recently completed quarter.

ROGER CREGG, CFO, EXEC. VP, PULTE HOMES INC.: Thank you, Richard, and good morning. I'm once again pleased to report for Pulte homes an outstanding second quarter of operating and financial performance. The second quarter order rate posted approximately a 17% increase over the second quarter last year. For the second quarter of 2004, revenues from home settlements for Pulte Homes domestic homebuilding operations, increased approximately 30% over the prior year quarter to approximately $2.4 billion. Higher revenues for the …