普爾特房屋 (PHM) 2015 Q4 法說會逐字稿

Good morning.

My name is Shawn and I will be your conference operator today.

At this time, I would like to welcome everyone to the Q4 2015 PulteGroup Incorporated earnings conference call.

(Operator Instructions)

Thank you.

Mr. Jim Zeumer, you may begin your conference.

Great.

Thank you, Shawn.

And good morning to everyone participating in the conference call to discuss PulteGroup's fourth quarter financial results for the three months ended December 31, 2015.

Joining me on today's call are Richard Dugas, Chairman, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; Jim Ossowski, Vice President, Finance and Controller.

A copy of this morning's earnings release and the presentation slide that accompanies today's discussion are posted to our corporate website at pultegroupinc.com We will also post an audio replay of today's call to the site later today.

Let me remind to all the participants that today's presentation may include forward-looking statements about PulteGroup's future performance.

Actual results could differ materially from those suggested by any comments made today.

The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides.

These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.

With that said, I will now turn the call over to Richard Dugas.

Richard?

Thanks Jim and good morning everyone.

I'm extremely pleased to -- with PulteGroup's fourth quarter earnings which show significantly improved results across key business metrics.

In addition to ending 2015 with very strong results, our fourth quarter operating and financial performance provide a foundation we can build on in 2016, as we capitalize on opportunities to accelerate the growth of our homebuilding business.

Bob will go through a detailed review of our Q4 financials in a moment but there are a couple of numbers and points that I'd like to highlight.

Order rates in the fourth quarter were up 13%, which is the biggest year-over-year percentage jump we have realized since 2012.

As solid as this number is, what I view even more encouraging is the 9% gain in absorption pace that we realized in the quarter.

We've always said that generating higher sales within our existing footprint is the most efficient way for us to grow volumes and ultimately earnings.

Pulte's disciplined approach to acquiring the right land positions over the past several years is having a positive impact on our results.

Along with order rates, the average sales price we were able to realize for our homes continued to increase.

In the fourth quarter, closing ASPs were up 6% to $353,000 while backlog ASPs gained 10% to $365,000.

Between market opportunities, mix shifts and ongoing implementation of our strategic pricing programs, we expect ASPs will continue to move higher in 2016 versus comparable quarters in 2015.

Our recently closed purchase of assets from John Wieland Homes & Neighborhoods will further our pricing gains given their higher price points.

I also want to highlight our gross margin, which at 23.5%, is up 40 basis points over last year and remains arguably among the highest in the industry.

As we have discussed for the past several years, we've implemented a number of programs from product and purchasing zones and commonly managed plans to ship costing and strategic pricing.

As an example, almost 60% of our fourth quarter closings were from commonly managed plans that have the benefit of increased consumer feedback and more efficient floor plan design.

The goal of all this work has been to improve sales basis and gross margins in support of delivering higher returns on invested capital.

A lot of time and effort has been invested in implementing these initiatives and the gains are evident in our results.

Given that the financial improvements we realized in the quarter were so broad-based, I could highlight a number of other metrics in my comments.

I purposely picked order rates, ASPs and gross margin because there is at least one common element which I believe has been an important factor in all three metrics.

That common element is land.

In 2011, we launched the Value Creation strategy with its focus on delivering higher returns on invested capital over the housing cycle.

By 2013, we had raised returns to the point where they exceeded our cost of capital.

Since that time, we have purposely increased investment into the business because it makes economic sense to do so.

While we have raised investment, we have done so while adhering to the guidelines and disciplines we put in place back in 2011.

These disciplines include: underwriting projects to a defined 13-point risk-weighting scorecard that helps ensure we select the highest returning projects, focusing in on land positions that are closer in to job centers and located in the better markets and submarkets, prudently using options, which now account for 31% of all lots, and 34% of our more traditional Pulte and Centex land positions to help enhance returns and/or mitigate land risk.

Even though we're having to develop over 70% of the lots we use, we have systematically expanded the percentage of option lots we maintain.

We continue to emphasize investing in shorter, faster turning projects, with an average investment cycle of 36 to 48 months from acquisition to completion.

By focusing in on shorter duration projects, we help to minimize risk should a housing downturn emerge sooner than expected.

As an example, we expect to recoup the capital we invested in the John Wieland assets in less than four years, and we expect the purchase to be accretive to Company returns by year two.

By strategically investing in land over the past few years, we have assembled a robust land pipeline that should allow PulteGroup to grow at a rate consistent with or ideally ahead of the overall housing market.

Our just completed Wieland transaction will certainly support this effort.

The John Wieland Homes & Neighborhood brands is highly regarded in the Southeast, particularly within the luxury buyer category.

Beyond the opportunities we see to expand this position, we also see the potential to deploy our Pulte brand onto certain Wieland land positions, as we work to increase volumes and accelerate future absorption of the acquired lots, again, enhancing returns.

By focusing as intently on the quality not just the quantity of the land assets we acquire, we put ourselves in the best position to maximize sales pace, pricing, margins and most importantly, returns on invested capital while working to mitigate excess market risk.

Through our Value Creation strategy, we have now put the Company in a position to grow.

While continuing to generate better financial performance and consistently returning funds to our shareholders.

And we have done all this while taking a more conservative, lower risk approach to our business: growth, strong returns and properly managed risk.

We think this is a great combination.

Now let me turn over the call to Bob for a more thorough review of the quarter.

Bob?

Thanks Richard and good morning.

The gains demonstrated in PulteGroup's Q4 financial results are a direct reflection of the meaningful improvements we have continued to realize in our core homebuilding operations.

As I will detail, these gains can be seen throughout our fourth quarter financial statements.

Fourth quarter homebuilding revenues totaled $2 billion, which is up 12% from prior year revenues of $1.8 billion.

The increase in Q4 revenue was driven by a 7% increase in closing the 5,662 homes, combined with a 6% increase in average sales price of $353,000.

Although not a metrically managed against, the 5,662 homes closed in the fourth quarter equates to a backlog conversion rate of 65%.

As we addressed in our most recent calls, we are working to close the year-over-year performance gap we've experienced with regard to getting homes delivered.

We're pleased with the progress we made in the fourth quarter.

Having said that, the challenges we and the industry face with regard to labor resources and extended land development timelines are not likely to improve in the near term.

We believe, however, that our decision to prudently increase set production should help us to maintain a more consistent build cadence going forward.

In the quarter, closings by brand were as follows: 19% of homes were from Centex communities, 55% were from Pulte communities and 26% were from Del Webb.

In the fourth quarter of last year, closings from Centex, Pulte and Del Webb were 24%, 46% and 30%, respectively.

Given the profile of projects we are investing in, coupled with the projected impact of assets acquired in the Wieland transaction, we believe that describing our customers by buyer group rather than by brand will better represent the make-up of our business.

As a result, beginning in Q1, we will address buyer groups rather than brands.

In the fourth quarter, closings by buyer group were as follows: 31% were first-time buyers, 40% were move-up buyers, and 29% were active adult buyers.

In 2014, closings by buyer group were 34% first-time, 33% move-up, and 33% active adult.

The Company reported gross margins of 23.5% in the fourth quarter, which is up 40 basis points over the prior year.

As it's been an ongoing trend, fourth quarter margins were enhanced by higher option and lot premium revenues.

In fact, option revenues in the quarter increased 10%, or $4,976 per closing, while lot premiums gained 16%, or $1,868 per closing.

Sales discounts remained modest at just 2.2%, or $8,026 per home compared with 2.1%, or $7,040 per home last year.

Since implementing our strategic pricing programs in 2011 as part of our Value Creation strategy, option revenues per home have increased by $19,800, or 58%, while lot premiums per home have increased by approximately $7,100, or 107%.

We believe our more strategic approach to pricing has been a key contributor to the high gross margins we continue to maintain.

Reported fourth-quarter SG&A expense of $139 million, or 7% of home sale revenues, included the benefit of a $30 million reversal of construction-related insurance reserves.

Reported prior-year SG&A expense of $146 million, or 8.2% of home sale revenues, reflected a $15 million reversal of construction-related insurance reserves.

Looking at the full year, our reported SG&A of $590 million, which was 10.2% of homebuilding revenues, includes the benefit of $62 million, or 110 basis points, associated with certain legal settlements and reserve reversals.

PulteGroup's financial services segment reported fourth quarter pre-tax income of $29 million, which includes the reversal of $12 million in mortgage repurchase reserves.

The decision to reduce reserves was based on probable settlements of various repurchase requests and current conditions.

Mortgage capture rate in Q4 was 83%, up from 81% in the prior year.

I'd like to take a moment to highlight the efforts of our financial services team, including Pulte Mortgage and PGP Title and meeting the challenges of the new regulatory environment under TRID.

Our teams did a tremendous job closing Pulte Mortgage loans without missing a beat and supporting our customers under the new rules.

Deb Still, our President and CEO of Financial Services and her team are recognized leaders in the industry and did a fantastic job implementing the changes needed to operate within the new TRID guidelines.

Looking at net income for the fourth quarter.

We reported $228 million, or $0.64 per share, which includes $0.07 per share benefit from insurance and mortgage reserve reversals taken in the quarter.

Our per share earnings were calculated using approximately 352 million shares outstanding for the quarter, which is down 6% from last year, largely as a result of our share repurchase activities.

As part of our income statement review, we wanted to provide some thoughts about 2016.

Given our backlog and anticipated land, labor and material costs, we expect 2016 homebuilding margins, inclusive of the dilutive effect of the Wieland transaction, to remain high and be in the range of 21.5% to 22%.

This annual margin guidance includes a negative impact from the Wieland transaction of approximately 100 basis points in the first quarter, 80 basis points in the second quarter, and 50 basis points in each of the third and fourth quarters.

Looking at our projected SG&A, we expect our full-year spend will be approximately 10% of homebuilding revenues.

Consistent with prior years, this will be impacted on a quarterly basis by the seasonality of our closings.

Based on the margin and overhead guidance we just provided, the calculated operating margin we expect to generate in 2016 is between 11.5% and 12%.

The operating margin we reported for 2015 was 13.2%, but this was enhanced by the 110 basis point impact from the construction-related insurance reserve reversals we recorded during the year.

When you consider that our 2016 operating margin guidance of 11.5% to 12% is being negatively impacted by roughly 70 basis points from the Wieland transaction and factor in the 110 basis point enhancement to 2015 operating margins, you can see that operating margins will actually be flat to slightly improved in 2016 compared to 2015.

Given headwinds the industry is facing at land and labor costs, we're very proud to be able to maintain our strong operating margin.

Putting all this together, the combination of expected higher closing volumes, higher ASP and overhead leverage have us positioned for strong earnings growth in 2016.

Moving past the income statement and reviewing our homebuilding operations, we ended the fourth quarter with a total of 6,494 homes under construction.

Spec units accounted for 30% of the homes under production, which is up from 26% at this time last year.

As discussed, we have purposely increased the amount of spec homes we have in the pipeline to help maintain a more even construction cadence.

In the fourth quarter, we approved approximately 7,000 lots for purchase, excluding the Wieland assets, as that deal closed in mid-January.

We ended the year with 138,000 lots under control, of which approximately 42,000 lots, or 31% were controlled via option.

We continue to seek out opportunities to increase our use of land options in an effort to enhance returns and/or lower our overall risk profile.

Of our controlled lots, approximately 23% are finished and 18% are currently under development.

As Richard discussed, we continue to use a defined and disciplined approach to our land investment.

Consistent with our land acquisition guidelines, we invested $485 million in land acquisition in Q4 and an additional $304 million for development of previously acquired lots.

These investments brought our full-year land-related spend to $2.3 billion.

For the year, we invested approximately $1.2 billion to acquire new land.

Looking ahead to 2016, including the money invested to acquire the Wieland assets, we have authorized $1.6 billion for land acquisition.

As always, this level of investment is predicated on our continuing assessment of the market and on our ability to identify suitable, high-returning projects.

Looking at our capital allocated to shareholders in the fourth quarter, we distributed $28 million in dividends, and did not repurchase any of our stock.

The lack of share repurchase activity was due to trading limitations resulting from work to close our previously disclosed term loan and to acquire the Wieland assets.

We expect our share repurchase program to become active again beginning in the first quarter of 2016.

Based on our fourth quarter activity, we ended the year with $775 million of cash, and a debt to capital ratio of 30%.

As Richard noted at the start of this call, we realized strong new order growth in the fourth quarter, as orders were up 13% over last year to 3,659 homes.

Higher orders for the period were driven by a 9% increase in absorption paces, as all three buyer groups realized higher prices.

It should be noted that we expect absorption paces in the first half of 2016 to be lower as we integrate the Wieland communities with their typical operating model of higher ASPs and slower absorption paces relative to Pulte averages.

Breaking down orders by buyer group, on a year-over-year basis, our first-time buyer business was flat while move-up and active adult orders increased 35% and [3]%, respectively.

Adjusting for community count, our absorption paces were up 16% for first-time buyers, 11% for move-up buyers, and 9% for active adult buyers.

On a dollar basis, orders for the fourth quarter gained 24% to $1.4 billion, helping to raise the average sales price and backlog to $365,000.

It's important to remember that normal business seasonality and its impact on the mix of closings will typically result in lower delivered ASPs in the first quarter of each year.

The Company operated out of 620 communities during the fourth quarter, which is up 4% over the prior year.

Looking ahead, we currently expect community count growth versus comparable prior-year period to be in the range of 8% to 10% in the first two quarters of the year, increasing to 10% to 15% growth in the back half of the year.

This would be our largest year-over-year increase in community count since the housing recovery began.

Supported by our strong orders in the fourth quarter, we ended 2015 with a backlog of 6,731 homes valued at $2.5 billion.

The growth in our year-end backlog, up 15% in units and 26% in dollars compared to last year, gives us great momentum heading into 2016.

Now let me turn the call back to Richard.

Thanks Bob.

As Bob detailed, the Company realized meaningful improvement in our operating and financial results for the quarter.

Given the strength of operating metrics and the expansion of our land pipeline, we are in an excellent position to grow earnings in 2016 and beyond.

As has been our practice, let me provide a few comments on the market conditions which drove our fourth quarter results.

Consistent with our Q4 increases in orders and absorption pace, we experience generally higher buyer traffic to our communities, a pattern we realized throughout 2015.

Further, many of the trends we experienced earlier in 2015 continued through Q4, with stronger demand in a better located, and on average, closer-end communities.

Specific to the fourth quarter, buyer demand remained positive up and down the East Coast, with notable strength in the Southeast from the Carolinas down to Florida.

We have talked about positive demand trends in the Southeast for a number of years.

It is this trend and our expectations for long-term growth in the Southeast markets, particularly the biggest markets of Atlanta, Charleston, Charlotte and Raleigh, which made the transaction with John Wieland so compelling.

Looking to the center the country, demand conditions remained favorable although we continued to experience volatility in the performance of underlying markets.

Demand in the Midwest showed some positive gains as we benefited from an expanded community count in several markets.

Our Texas business in Q4 was slowed by having roughly 10% fewer open communities available-for-sale versus the prior year.

In addition, our Texas numbers were impacted by ongoing demand softness in the higher-priced communities in Houston, resulting from a prolonged weakness in the energy markets.

Given current conditions, we're being very thoughtful about deploying additional capital in the region and we'll continue to carefully monitor demand throughout the state.

The Western third of the country continued to realize excellent demand from Washington, from California and through our markets in Arizona, Nevada and New Mexico.

Overall, we were pleased with how demand conditions developed in the fourth quarter.

We have seen a continuation of good traffic and demand trends through the first few weeks of January, so we have every reason to be optimistic heading into the spring-selling season.

Consistent with our long-held expectations for a gradual but sustained recovery, 2015 new home sales of approximately 500,000 units for the country were up 15% over last year.

Given the favorable market dynamics of strong job growth, accelerating household formations, supported demographic trends and continued low interest rates, we expect new home sales will continue their slow and steady path higher for the next several years.

All that being said, we are well aware of the volatility in the world today.

From concerns about global economic conditions to the swoon in oil prices to gyrations in the stock market, the day-to-day swings can be violent.

The reality is, however, that we can't control any of these factors.

What we can do is focus on running our business consistent with the goals we've established and disciplines we have demonstrated.

This means acquiring well-located communities that we believe can deliver high returns on investment.

It also means hedging our bets by using more land options, where possible, and focusing in on smaller shorter-duration projects where we can get our capital back quickly.

It also means not over-leveraging the balance sheet and keeping one hand on the lever to slow investment if housing demand begins to change.

And finally, it means having the discipline to systematically give excess funds back to shareholders rather than trying to force investments in the system.

We ended 2015 with a strong fourth quarter performance.

I am confident that we can build on these results in 2016 and further capitalize on the excellent market position I believe PulteGroup maintains today, our market position that has been built by our exceptional group of employees who work hard every day to build great homes and deliver an unmatched home buying experience to our customers.

Now let me turn the call back to Jim Zeumer.

Jim?

Great.

Thank you Richard.

We'll open the call for questions.

So that we can speak with as many participants as possible during the remaining time of this call, we ask that you limit yourself to one question and one follow-up.

Shawn, if you'll explain the process, we'll get started.

Thank you, sir.

(Operator Instructions)

Bob Wetenhall, RBC Capital Markets.

I just wanted to touch on, you have really robust order growth and you also noted a 7.5% decline in deliveries in Texas, and orders were also soft.

Can you give us a view line of what you're seeing in the Texas market?

And specifically, is it broad-based or is it -- and what's going on with the price points there?

Bob, this is Richard.

Good morning.

Overall, the higher price points in Houston continue to exhibit softness as we discussed.

Outside of Houston, I would say that we have a mix performance with some notable strength in Dallas.

It seems to be the one market that continues to hold up better than the rest of the markets.

So overall, it's a decent housing market with the exception of the higher price points in Houston and we're being thoughtful with our investments going forward, keeping an eye on things.

Got it.

That's helpful.

As a follow up, great execution.

It seems like you are on track with deliveries and surmounting some of the labor bottlenecks; trying to understand the setup for 2016.

When we're thinking about pacing and absorption in your expectations for ASP performance, you said that there is some volatility but then you look at some of your trends and they seem very strong.

How should we be thinking about pricing trends versus cost?

You touched on that gross margin 21.5% to 22%.

What gives you confidence on the ASP growth you can get there?

Thanks and good luck.

There is a lot of stuff in that question, Bob.

I think in terms of ASP growth, we don't factor that into our expectations.

But we've got a third of the year in backlog.

We've got an expectation that we've got relatively benign input costs this year, so lumber is trending positively.

Basically all the other input costs, we see about a 2% increase maybe in our house cost construction, that's largely labor.

We're obviously working through that in all the different markets, so we have visibility into a good part of the year, and at least in terms of input costs, we think that we're in relatively good shape coming into the year.

Stephen Kim, Barclays.

Thanks very much.

Yes, strong quarter.

Impressive results.

Thanks Steve.

I wanted to ask you a little bit about your break out of the first-time move-up in active adult.

Just one -- two clarify questions on that.

So first of all, you said that in 4Q, I think it was 31% first-time, 40% move-up and then you gave some numbers about 1/3, 1/3, 1/3 for 2014.

I just want to make sure that was full-year 2014 versus fourth quarter of 2014.

And if you could remind me again the definition of first-time versus move-up.

Are you actually just asking them?

Is it the first-time you've ever owned a home or are you putting a demarcation based on price point or what you think a typical first-time buyer would be buying?

So Stephen, to the first question, that is Q4 data, not full-year.

And to the second question, we actually have what we call targeted consumer groups, and so it's based on the type of product we're building and the location of it that tells us who the buyer groups are.

And so, the first-time designation is just an aggregation of the targeted consumer groups that serve people that are buying there first-time as opposed to move-up.

Yes, that's what I thought.

And what's interesting is that --

Stephen, just to clarify, I think we had talked about this on a couple of calls.

The flagging of those differs somewhat.

So there are -- for that millennial buyer that's closer in typically higher price point, we flagged them Pulte, but they are really first-time buyers.

So that's the primary difference there.

And then there are certain active adult penetrations that we have historically and we'll continue to flag Pulte, not Del Webb, that will get caught in the active adult categorization as opposed to, again, being a Pulte flagged.

Right and I think that's obviously an important distinction to make because, obviously we've been -- well not obviously, but we've been seeing a pick-up in first-time buying activity that doesn't seem to really have manifested in entry-level product per se, but that would be consistent with an idea that the guy, who, let's say, was a 26, 27-year-old, six years ago, is now older and probably in the market, maybe buying a slightly different product than he would have six years ago.

I guess my question generally would be, as you lay out your community count growth, as you think about how you're going to be utilizing the Wieland land with some of your product.

And just generally as you position your business in 2016 and 2017, how specifically or discreetly are you targeting a first-time buyer who may be looking to buy a product which historically might have been considered a little bit more of a move-up, a first-time move-up kind of a product?

How much are you actually positioning yourself for the emergence of that kind of a buyer into the marketplace and an increase in that demand?

Steve, this is Richard.

That's exactly what we are doing.

As an organization, I think we've talked about the millennial study that we completed in 2015, which showed what we believe to be significant opportunity for a buyer that is probably in their early to mid-30s who hasn't owned a home before.

So they are called a first-time buyer, but they're spending $300,000 to $400,000 on urban townhome products.

So overall, our categorization that Bob described, we think more accurately depicts how we're attempting to serve the business because those buyers would be captured in that first-time category.

And we are investing in several of our major cities in that buyer category, and that's part of the contributing change in ASP that you see in our backlog and in our continued guidance going forward.

That's a part of the Pulte story here.

Just to follow on that -- to the ASP point, Richard, the average selling price of the first-time home is about $264,000, and when you compare that to the historical pricing that we've disclosed for Centex, that entry-level business, that roughly $200,000, there is a definite difference in the product that we're offering, the location we're offering it in.

Nishu Sood, Deutsche Bank.

Thanks and let me add, strong results in the fourth quarter.

So congratulations on that.

Thank you.

The first question I want to ask was, the absorption trend was very nice in the fourth quarter and counter to what we've seen generally, I think, from the industry.

9% absorption growth; now that was on a lower level of community comp growth.

You're expecting quite strong community comp growth, 10% to 15%, I believe you said year over year by the end of the year.

So typically with new community openings that might dampen absorptions at first, how would that trend then carry through or how would you anticipate that strength carrying through into 2016?

Is it going to be diluted by a lot of these new communities that are going to be coming on, or do you think there is enough momentum that you might be able to sustain that?

Nishu, this is Richard.

Just a couple of comments.

To be clear, our 13% sign-up growth was driven by 4% community count growth and 9% improvement in absorption rates on like stores.

So we're very pleased with that.

And before I answer your question, I just want to point out that we believe that underlying strength in absorption rates is primarily driven by excellent land positions, and we've been talking for several years how we believe we are doing an excellent job of positioning our communities, not just growing for growth's sake.

Having said that, with regard to our 2016, two things.

Number one, we're going to have nice community count growth this year, but it will be a little less in Q1 and Q2, as Bob indicated, and then more in Q3 and Q4, although strong really all four quarters.

So that factor, we would expect absorption rates in Q1 to be impacted there.

But probably more notably, as we work to integrate the Wieland business, that business -- excuse me, that business is typically a higher price point, slower absorption model, and that, as we integrate it, will impact our results, particularly earlier in the year.

So I'm just trying to make sure that everyone's expectations factor that into their overall model.

So we're very pleased with the way the trends are playing out for 2016, particularly as it relates to earnings growth overall, but those factors will play in.

Got it.

That's helpful.

And then, second question on the margin outlook, which Bob, I think you laid out pretty well.

The capitalized interest that is flowing through the gross margin line, that's been an important tailwind for the overall gross margins.

That's certainly the case in 4Q, as well as for overall 2015, how do you expect that to trend in 2016?

Should we take the percentage of revenues that are representative in 4Q and maybe carry that forward?

So if you could give us your thoughts on that.

Yes, it's a great question.

And essentially if you think about it, we've got a lag between when we incur cost and when we expense it and we've had the benefit over the last few years of the debt pay down.

That obviously is mitigated in the most recent year.

If you look at our current full-year 2015, our cash interest expense was about $128 million.

The expense that we recognized through the income statement was $138 million.

So they are getting closer together.

So there will be a much smaller Delta.

I think in absolute terms, we were $57 million benefit for interest in 2015.

That number will be smaller in 2016, again, reflective of the fact that basically we're costing off what we're expensing.

Mike Rehaut, JPMorgan.

Thanks.

Good morning everyone.

Good morning, Mike.

First question.

I wanted to delve in a little bit around the gross margins as well.

Appreciate the insights there, and I think if I understand you correctly, Bob, you're saying that the amortized interest for 2016 will trend closer to that $128 million; is that fair?

Yes, we haven't given any detail, but it's going to be a much smaller Delta than it has been.

Right, right.

So just try to get into the components then of the pre-interest gross margin.

And get some of your sense of the puts and takes there; 4Q 2015 down about 100 -- or 90 basis points year over year.

What were the key drivers of that?

And it was also down sequentially.

I just wanted to get your sense if labor was a big part?

If there was a mix shift, if there was land cost, what were the drivers?

And also as we think about 2016, I know you highlighted the Wieland acquisition being about a 70 basis point drag, but what would the other components of that, of the year-over-year change be?

Yes, Mike, I think you summarized it well.

There is about 70 basis points of detriment that we expect in 2016 from the Wieland acquisition.

And then if you look at the margin profiles business, thinking about it from consumer groups is, as has been the case for years, the most -- the highest margin is going to be our active adult.

Interestingly, when you look at it, the first-time business actually enjoys very high margins for two reasons.

One, that millennial business that we talked about is a very strong margin business for us.

And for the historical Centex business, since we haven't been investing, many of the lots that we're running through now are older, so they enjoy strong margins.

And then that move-up business which is where we've done most of our investment over the last three or four years, still enjoying very good margins, but because of the higher land cost and labor costs that we're seeing, is today, of the three, although still strong, the lower margin business.

And so the mix shift towards that has implications to our composite margin.

So 70 basis points from Wieland, mix shift in labor cost probably the biggest driver of margin otherwise in 2016.

John Lovallo, Merrill Lynch.

Hi guys.

Thanks for taking the call.

First question I had is you gave a lot of detail on the purchase accounting effect of -- from the Wieland acquisition on gross margin.

Just curious about how you're expecting SG&A to trend through 2016, given some of the integration costs?

And then moving past that, once it's fully integrated, is the $165 million quarterly run rate still a good number, or do you think that, that will actually go up a bit?

Yes, we actually are, instead of targeting dollars, we are putting -- trying to get things more aligned with industry and say, okay, relative to sales, this is what we think.

So we think 10%.

Obviously, the seasonality of the business with lower closings in the first of the year, higher closings you can and should expect to see that be a richer number, meaning higher than 10% in the first couple of quarters and lower, much like we did in the fourth quarter of this year.

Certainly there will be some integration cost associated with Wieland that we would expect overtime to be able to narrow out of the business.

But the 10% that we have projected for 2016 is inclusive of that.

John, this is Richard.

A little color also.

The 10% guidance Bob provided, when you factor in the construction reversal impact in the 2015 number, you can see that we're getting substantial leverage in 2016 as we expect to grow.

Okay, that's helpful.

And then, in terms of maybe can you just give us an update on your spec strategy and how that progressed in the quarter?

I think you ended the fourth quarter with something like 340 finished spec homes and where did you close out the year?

So finished spec at the end of the year was 471 units, which is actually down about 2% from prior year.

It's -- we started that spec really in the third quarter, so they weren't finished at the end of year.

So you'll see that come through in our first quarter and second quarter results.

But total spec, we talked about, at about 30% of our starts compared to 24% historically.

So it's not a big change, and I think what you can and should expect us to do is manage against not letting finished specs get really heavy.

And John and everyone else, just to remind everyone, the reason that we're increasing our spec production a little bit is to help us with the quarterly cadence of closing.

Not trying to run quite as tight as we were with pre-sold inventory, and we think that's going to help us moving forward.

Alan Ratner, Zelman & Associates.

Hi guys.

Good morning.

Nice quarter.

Congratulations.

Richard, just on your comments on January, it seems like it's holding up pretty well.

Curious if you're -- what you're hearing on the ground from your active adult buyers, given all the stock market volatility?

Has there been any -- have you noticed any discernible trends there versus more of the first-time or maybe first-time move-up product, because that is a very discretionary buyer.

I imagine they're looking at their 401(k) portfolios and might be a little bit skittish.

So just curious what you're seeing from that subset of buyers currently?

Alan, that's a great question.

We've been paying attention and so far, we've not seen the change.

Great.

That's good to hear.

Second, on the spec strategy, is there any contemplation within the gross margin guidance next year for specs to represent a greater percentage of your sales?

Assuming that is the case, what's the margin differential running at currently between your spec and to be built sales?

Certainly, Alan, we factored that into our guidance.

As we put together our plans for the year, people knew what they were going to try and start in terms of spec.

In terms of actual performance, I would tell you that recent activity would tell you that there is a very consistent with historical trend where your dirt sales have the higher margins.

We've actually seen that people are contracting before framing that the margins hold up and stay consistent, and then we have a couple hundred basis points of degradation on spec that is finished.

So again, I think one of the things we're really focused on is, let's not get that finished spec to be a big drag on our margins going forward.

Megan McGrath, MKM Partners.

Good morning.

I just wanted to follow up a little bit on the absorption pace.

The nice improvement you had in the quarter, in your commentary, you stated that you feel like that driver is primarily because of the location of your communities, but I assume that, that location didn't change too much quarter to quarter.

So was there anything specific in the fourth quarter that you think drove that incremental increase?

Was it -- it doesn't feel like overall new home sales accelerated, in fact, maybe decelerated a little bit.

So what specific to you changed, let's say, third quarter to fourth quarter which helped that absorption pace, in your view?

Meghan, there is volatility typically quarter to quarter but I would point out this is a third or fourth quarter out of the last, maybe four or five, that we've had improve absorption paces.

So I believe that, that's a factor.

I would also say that as our commonly managed floor plans continue to grow as a component of our total, those are very well-designed and frankly, sell better than the non-commonly managed floor plans.

So that is a factor.

But I would continue to highlight that well-placed land.

We're focused on quality of land, not just quantity of land, is the primary driver, in my opinion, vis-a-vis maybe what some others in the industry have talked about.

Okay, thanks.

I wanted to follow up on SG&A a little bit, too, as well.

I apologize if I missed part of your answer before, but I know there's a lot of moving parts here in some of the numbers.

So it looks like you're looking for, if we ex out the benefits this year are pretty meaningful, year-over-year improvement in SG&A, it looks like about 100-plus basis points, if I have that right.

But also looking for a pretty good increase in growth in community count, which I would usually associate with maybe some accelerating SG&A levels.

So if you could maybe talk us through your confidence in being able to grow SG&A at a slower rate, even though you're accelerating your community count growth, that would be great.

Thanks.

Well, it's interesting, Meghan, a big driver of the community count growth is Wieland.

And so we opened 200 communities this year.

We will open some number similar to that next year.

So there really isn't a significant driver there.

It's in terms of community count growth; a lot of it is going to be Wieland that we get in one big chunk.

And Meghan, I think you highlighted -- this is Richard, I think you highlighted it appropriately.

We are anticipating growth in earnings and certainly in volume this year.

And that provides leverage overall.

So we're not giving an SG&A dollar number, but we do expect to leverage our overheads and you are right with your guidance or your commentary, if you will, on that.

Mike Dahl, Credit Suisse.

Hi.

Thanks for taking my questions.

I wanted to go back to the margin discussion and I think you addressed it with both Mike Rehaut's question and Alan.

But in terms of some of the mix shift, you've got two things going on.

You've got selling through some of the legacy Centex stuff that was higher margin and transitioning both to the move-up product and the recent vintage.

So just wanted to get your sense of this margin erosion that you're seeing in 2016.

Do you think you're fully run rating what the go-forward mix will be, or is there still some to transition out, this still being lifted a little bit by 20% or so of the communities that are still legacy Centex?

Any additional detail you could give there.

Well, honestly, we will -- as the year goes on, share what the breakdown is by consumer group.

I don't know that we would want to give quarterly forward guidance that would be community-specific, Mike.

So I think there certainly continues to be a mix shift.

We've invested largely in that move-up category.

So you will see that continue to play out.

And Mike, this is Richard.

I think it's worth noting that we are extremely pleased with our margin projection for 2016.

When you factor in the known headwinds from a new acquisition, we're pretty pleased with how margins are holding up when you combine that with what we expect to be good SG&A leverage and strong growth.

Our operating margins, we continue to be very pleased with.

So yes, there are certainly some anticipated core declines from higher input cost that Bob mentioned, but on a relative basis, we like our margin position a lot.

Right and clearly coming from a point of strength.

Then, Richard, on that last point on the acquisition, once we get through the -- I mean this is for Bob, once we get through the purchase accounting headwinds, which I believe you said 70 basis points drag for the full year, how should we think about that margin relative to what your legacy business has been producing?

I think that was understanding, was that may have been a competitive deal, so as this once we get through the purchase accounting, a 20% margin business or is it really closer to what we've seen out of your legacy business the past year or so?

Mike, we haven't given anything beyond 2016.

I would tell you we see opportunities to reduce costs and enhance cases to drive higher returns and that's what we're going to work towards.

When we get to 2017, we will share what our total margins are and to the extent that it's relevant, we will share what the impact that Wieland is to that.

Stephen East, Evercore ISI.

Thank you.

Good morning, Richard.

This is the first one.

With John Wieland, could you talk a little bit about what drove your decision process here?

I know you all are always looking at acquisitions as land buys, but more expansively, what was the attraction?

And how specific was it to John Wieland versus or are you all still actively engaged in looking for more acquisition opportunities, that type of thing?

Steve, it's a great question.

Let me first confirm your comment that all acquisitions are looked at through a land lens and we are pleased with the economics of the deal overall and as Bob mentioned, the ability to put some Pulte efficiency, if you will, into what we saw there.

And a part of that, you might have noted in our script, we're intending to take some Wieland assets and put Pulte product on it to help accelerate absorptions and drive returns.

So we fell really great about that.

Beyond that, this particular transaction had significant brand value in our mind.

For the buyers in the Southeast, the John Wieland name commands a premium.

And when you factor that into the strategic pricing programs, the focus on option revenue and lot premium revenue, it's a really nice fit into the way we've been driving margins in the business.

And we feel like it's a real consistent approach toward driving high returns.

So the brand value there is exciting.

And candidly, even the value of the Wieland name from an entitlement standpoint, we feel very good about going forward.

We want to grow our Business in the Southeast, and the Wieland reputation is exciting, and allowing us to get into some of these core infill locations, millennial locations.

So a very, very strong recognized consumer brand in the Southeast that gives us opportunity along with the strong land position.

And then potentially lastly, I will mention the Southeast, Steve, we like, vis-a-vis some other markets we think the Southeast is not overheated.

We think The Southeast has got a lot of runway in front of it, and complementary assets that are not cannibalizing anything else we felt good about.

And then just on your last point, we continue to stay actively looking at any transaction that come our way.

We have been very, very disciplined to make sure the economics work.

Okay.

Thank you.

And then, Bob did I hear you right?

Did you say land spend in 2016 would be $1.6 billion, or were you just talking about the acquisition side of it?

Can you give me a little clarity there?

And where you would be, are you re-allocating more toward this first-time buyer?

I know not active adult the first-time buyer away from the move-up buyer?

And just maybe a bit broader on your net debt targets?

Comfortable where your debt is now, or do you want to take it lower versus repo, that type of thing?

Yes, your first question, that $1.6 billion that we highlighted was just land acquisition.

We will obviously have development spend on top of that.

In terms of where we're spending that money, we're still agnostic.

Over time, we have told folks go find the best deals.

What that has yielded over the last few years is mostly move-up and that millennial core business that we've talked about.

I don't see anything at the moment that tells me it's going to be anything different in the future, but certainly as and when, for instance, if that true entry-level buyer become more robust in terms of paces and the returns makes sense.

We've always talked about a willingness and desire to do that.

And then to your last point on net debt, 30%, 30.5% at the end of the year, we are very comfortable with that.

We have laid out a target range of 30% to 40%.

So again, very comfortable with our GAAP balance sheet position and liquidity.

So we've got plenty of choice, candidly.

We've increased the dividends starting here in the first quarter.

We didn't get to do any share repurchases during the quarter, but you can expect to see us do some of that going forward, and obviously, we think we can do that all in the context of the land spend that we outlined.

Will Randow, Citigroup.

Good morning, and congratulations on the progress.

Thanks, Will.

I just had a question on the mortgage business in regards to how you are thinking about normalizing underwriting standards.

If possible, what levers you can pull, and if you could talk about the difficulties in implementing the new know before you owe rules in terms of more mortgage closings are elongated, et cetera?

So I'll take the first one, Will.

In terms of overall underwriting standards, they remain fairly consistent.

They continue to be tight, and we're governed by the same rules that everyone else is.

So no real change in outlook there.

Maybe on the margin, it continues to ease just very, very slightly, but overall, not much change.

And then Bob, maybe on the TRID rules?

Yes, with respect to all the rules, again, I think we've got the best team in the business.

They think about change long in advance of it, programmatically, systematically.

So I don't see it being an impediment.

And I know they will say, gosh, there's a lot of hard work behind that, but they've got a very clear calendar of the things that are coming at us, think about it strategically.

So again, I don't want to make it sound easy, but the TRID that, effective this fourth quarter, it really did not impact our closings and that's a testament to the work they do out in Denver.

Susan Maklari, UBS Securities.

Thank you.

Good morning.

In terms of the labor side, can you talk a little bit about what you're seeing there?

It seems like with -- that the progress you made in closing homes and the talk around your spec strategy, are you seeing any incremental easing there?

Perhaps some of the contractors are gaining a bit more confidence in what's going on in the market?

Susan, I don't think we're seeing a real easing.

I think we're getting a little bit better in managing through it by not being quite as tight with our spec inventory change, if you will.

We give ourselves a few more targets to shoot at each quarter to account for any up and downs that may occur in the market, but labor continues to be tight.

There's not a lot of new labor that's flowing into the space.

So I do think the industry and us, particularly, are getting a little bit better at managing through it, but it's going to be with us for awhile.

But the ability to give that, the labor markets, the cadence and a consistent view that says we've got the following work.

We're going to keep our crews busy, we're not getting pulled off and on and off the sites, we think will have real benefit in terms of our ability to produce timely.

Okay.

And then, as we look to your -- obviously the improvements in the option revenues that we've seen and we think 2016 is a continuation of the Value Creation efforts there, can we see that continue to come up, or how should we think about the trends with this?

Susan, this is Richard.

I would never say we're done in that regard.

We've certainly taken a lot of price the last few years, and I would say the low hanging fruit has been picked overall.

But that's a big focus for us as an organization and every new job we open, we tend to push it.

It's actually been extremely pleasing to us that we've been able to continue to make progress quarter over quarter there.

So no specific guidance there.

Clearly, there is headwinds from higher cost land and labor pressures Bob talked about influencing it, but that helps us to mitigate it.

Can't really give you much more detail, though, in terms of what we expect there.

We'll have to see how the quarters play out.

Jay McCanless, Sterne Agee.

Good morning everyone.

First question.

What was the cam rate in the quarter and what was it last year?

Cam rate was 18.1%.

That's about 100 basis points higher than last year.

Okay.

And then the second question I had is, with Richard's commentary earlier about maybe shifting some of the Wieland land to the Pulte nameplate, we had expected an ASP growth of roughly high single digits for this year as you roll Wieland in.

Is that what you're expecting internally, or should we be a little more muted in what we expect for average price growth if you're going to shift some of that land to lower-price Pulte product?

Jay, we're not giving a specific guidance on ASP overall.

You can see what's happening in our backlog and project out the next quarter or two in terms of what's happening with overall ASP.

I would point out that Wieland, in total, will make up a modest percentage of the Company's total.

So when you factor a portion of that, only a portion of that being Pulte, that specific impact is probably not significant on our overall ASPs and later in the year can -- because by the time you actually launch the new product, get the community open, start building houses, that doesn't happen overnight, Jay.

Jack Micenko, SIG.

Good morning.

I am curious about how to think about your land's strategy.

Obviously, the option components crept up to about 1/3 of the inventory now, but then I think in the prepared comments, you had said around 70% of the land spend was for undeveloped.

Do we think that the option percentage is going to continue to creep up, or is this a signal that maybe to maintain, those margins are going to have to go out to more of the development side?

Jack, what we really are trying to say is we are really paying attention to managing the risk side of the land component.

The fact that we're having to develop 70%-plus is just a factor the way the land comes to us in the market.

But that doesn't mean we can't break those takes into two, three, four takes with options to mitigate risk.

And we wanted to highlight that on Wieland candidly because some of the reports I saw showed people talking about buying 8, or 10 or 12-years' worth of land and we expect to recoup all of our capital in less than four years on that deal.

So we're very, very focused on mitigating risk from that perspective.

So in terms of option percentage, I would hope that we can continue to drive that forward.

The market will dictate that, but agnostic to options or development or not, the key is we're managing risk very differently than we did in the past.

Buying 10 or 12-years' worth of land at one time is a very, very rare event today for the Company and will continue to be going forward.

Okay, so consistent strategy of more efficient balance sheet around the land piece?

I think that's right.

Just to be clear, it's really not a margin management exercise.

To Richard's point, it's what comes to us in the market and we underwrite transactions against returns, not against margins.

So if there -- they may drive higher margins at some point in time, but we're really focused on what the characteristics of the return are vis-a-vis if we hold the land for too long, that doesn't do us much good.

All right.

And then, adding on to Alan's earlier question about the marketplace, the risk between what the equity markets are pricing around the domestic picture and what companies across many industries have now said in the earnings season --.

And you had some bullish commentary on January.

Is there anything, absent Houston, is there anything you're seeing, the broad footprint, that would suggest that there's any kind of creep in sentiment or psyche from what's happening in the broader markets to the traffic or demand base?

Jack, we're watching it very carefully.

Candidly, we haven't seen the impact yet.

And it's interesting to understand that.

But I would say it's really too early for 2016.

Spring selling season kicks off typically Super Bowl; we'll get a good read on it.

But look, we can only say we like what we see so far.

So we're optimistic.

You factor in the combination of low supply in the space in general, still five months' supply, plus or minus, low rates, a job's picture that I would say is good, not great.

Yes, there's some macro volatility but so far, we like what we are seeing.

Mark Weintraub, Buckingham Research.

Thank you.

First, could you let us know how many active communities there are at Wieland?

Approximately 40.

Great.

And then, I think the original expectation was that it was going to be earnings and cash flow accretive in year, right from the bat.

I think today, you indicated by next year.

Is that a -- can you just clarify that for us?

Yes, we still believe it's earnings and cash flow accretive year one.

It is return accretive year two.

So that was the comments that we made today.

So we've laid out a significant cash position.

We've talked about we need to start up some of these activities that we think drive higher paces and margins, and it will take us some time.

So we think it becomes accretive in year two.

Great.

And then lastly, can you bracket expected land development spend for 2016?

I think you've seen from us over the last two years that it's roughly 50-50.

And that's probably not out of the range of reasonable.

Ryan Gilbert, Morgan Stanley.

Hi, good morning.

Thanks for taking my questions.

Most of them have been answered, but just really quickly on the backlog conversion year over year, improving the gap in the year-over-year decline.

Can you talk specifically about the processes or specific steps that you took in the quarter to generate that improvement, and then how you expect that to trend in 2016?

I think just given that it seems like your growth rate is going to accelerate.

I'm interested in hearing how you think that you can get to -- you close the gap.

Thanks.

I'm sorry.

Just the first and only comment I wanted to make to that is, are spec strategies going to help us there?

We've shifted starting in late Q3 into Q4 building a few more homes on spec in order to give us an opportunity to sort of mitigate that decline.

Having said that, it's going to be a gradual process of, as Bob indicated on one of the questions earlier, a more even production cadence, given the contractors' better visibility into what's coming at them overall.

We think that's the primary vehicle that we're going to use to help.

Clearly, we're paying market rate.

Bob indicated that we're going to expect a little bit of cost inflation this year on the labor side, and that's to be expected.

So those are the primary areas, Ryan.

Okay, great and you're seeing positive feedback from your subcontractors on the increased spec levels?

Well, what they like -- we already have quite a few lots out in front of them.

They like visibility into the production side.

So yes, to the extent that we can build on a more even cadence, sprinkling in spec inventory as we have; that's more predictable for them, allowing them to keep the crews dedicated to our jobs.

Mike Rehaut, JPMorgan.

Hi, thanks for taking my follow-up.

Just wanted to get -- drill down, I think you kind of addressed it a little bit with Wieland, about 40 communities which would kind of suggest that, that, at least in the first half of the year, will be the bulk of the community count growth, but maybe you're expecting a little bit on an organic basis?

Is that fair?

And then the organic growth ex-Wieland would kick in a little bit more in the second half; is that the right way to think about it?

I think it is Mike.

Yes.

Okay.

And then in terms of the absorption impact of Wieland in the first half.

Obviously, you had a nice acceleration into this most recent quarter in terms of sales pace.

Are you talking about maybe expecting overall company-wide absorption to be down low single digits, or would it be a greater type of number than that?

Mike, we didn't give any specific commentary on that.

We would just wanted people to appreciate the fact that absorption rates are going to be slowed by the impact of all these new Wieland communities and their typical model of, say, selling one or two a month in each community versus three or four in typical Pulte community.

How many -- exactly what that impact is overall on absorption rates is hard to tell.

We just wanted people to factor that in.

We don't forecast overall sales, as you know.

So we just wanted you to keep that in mind in your models.

Okay.

All right.

Great, thanks.

Thank you.

Buck Horne, Raymond James.

Sorry guys.

I know the call is going long right now.

But I wanted to talk just a minute about Del Webb and just the active adult business.

I think the absorption rates in active adult seem to be improving, but still lagging some of the other buyer groups.

And I'm just wondering if you've noticed any performance differentials between, say, newer Del Webb communities versus the flagship communities, and what else you can do to improve or accelerate active adult absorption?

That's a good question.

This is Richard.

The flagship communities, if you will, we have really maximized the opportunity there some time ago.

So those are on a steady run rate basis.

The newer Del Webbs that we bring on, though, typically are closer to the core center, 500 to 1,000 lots, I would say overall, better locations.

We're really pleased with the results there.

So the way I would look at it, Buck, would be, as active adult communities cycle over time, for us to be concentrating on opportunities that are closer to city core vis-a-vis the larger big cruise ship Del Webb operations of the past.

Those are probably not going to happen again.

Having said that, we are pleased with the absorption rates we continue to see.

You are right.

They are typically lagging the others, but not by much.

And we love the financial performance of those communities with strong margins and good returns.

Okay, thank you.

And on the West Coast, just given the strength in the West segment, any noticeable differences between maybe California versus some of the other West Coast markets?

Any granularity you can give on just the West region would be helpful.

Buck, it was pretty broad based.

Strong.

Candidly, some of that's given community count changes for us overall, but we like our position.

Our Northern California operation, as an example, has fantastic land positions.

They're continuing to show strength.

We've got a relatively small business up in Washington, but it's getting better.

And Phoenix is doing quite well for us.

So we have a big position in Phoenix, and we have an excellent team in Phoenix and they do a great job.

We're driving quite a bit of volume at very good margins there.

This concludes today's Q&A portion of the call.

Mr. Zeumer, I'll turn the call back to you.

Thanks Shawn.

Thanks everybody for your time this morning.

We are certainly around all day if you have any follow-up questions.

And we look forward to talking to you on our next quarterly call.

This concludes today's conference call.

You may now disconnect.