普爾特房屋 (PHM) 2014 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the PulteGroup, Inc., Third-Quarter 2014 Financial Results call.

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

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you.

Mr. Jim Zeumer, you may begin your conference.

Great.

Thank you, Jonathan

Good morning, everyone.

I want to welcome you to PulteGroup's earnings call to discuss our third-quarter financial results for the three months ended September 30, 2014.

On the call today to discuss Pulte's results are Richard Dugas, Chairman, President, and CEO; Bob O'Shaughnessy, Executive Vice President and Chief Financial Officer; and Jim Ossowski, Vice President Finance and Controller.

Before we begin, I want to alert all participants that copies of this morning's earnings release, along with the presentation slide that accompanies today's call, have been posted to our corporate website at PulteGroupInc.com.

Also posted to the website is a second release we issued this morning announcing a 60% increase in our quarterly dividend, and the $750-million increase in our share repurchase authorization.

We will also post an audio replay of today's call to the website a little later.

Please note that today's presentation may include forward-looking statements about PulteGroup's future performance.

Actual results could differ materially from those suggested by our 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.

All that said, now let me turn the call over to Richard Dugas.

Richard?

Thinks, Jim.

Good morning, everyone.

I'm once again very pleased with the strong earnings and operating results PulteGroup reported this morning.

A 29% increase in year-over-year pre-tax income and bottom-line earnings of $0.37 per share reflect our relentless pursuit of operational improvement.

We continue to work on a series of key initiatives which are improving our fundamental business metrics in support of driving better long-term returns on invested capital.

In a few minutes, Bob will review the details of our third-quarter results, which demonstrate the operating and financial progress we continue to make against our goals.

I'd like to take some time on this call to discuss the other release we issued this morning on dividends and share repurchases.

For the past several years, you have heard us talk about our value-creation strategy and our focus on driving better margins, overhead leverage, and inventory turns.

If you've been monitoring our results, you can see PulteGroup's relative performance on these metrics go from middle of the pack, or even bottom in certain instances, to among the industry leaders.

The work we have done these past few years has clearly driven meaningful Company-specific gains beyond any market lift the industry has realized since the housing recovery started in 2011.

The critical next stage, which investors have been asking about, has been on the Company's plans for future capital allocation.

Beyond the more than $1 billion of cash we carry and related very strong balance sheet, investors see our operations continuing to grow more profitable and more capital efficient.

These trends, and the fact that PulteGroup won't be a cash taxpayer for several years, point to the potential for continued strong cash-flow generation going forward.

Based on these facts and trends, the time is right for us to better define our capital allocation plans for the future.

We will discuss these plans in much greater detail at our December 9 Investor Day here in Atlanta, but the basic components are as follows.

First, to invest in the business to drive higher return on invested capital.

Next, we have increased our quarterly dividend to enhance the cumulative returns of our shareholders.

Finally, going forward, we plan to return available excess capital to shareholders routinely and systematically through share repurchase activity.

Looking at our investment philosophy, you may recall that prior to implementing our value-creation strategy, we allocated capital almost exclusively into the business to acquire the land needed to support aggressive growth.

We got the volumes, but our expensive and heavy land pipeline hindered returns on invested capital and created outsized market risk.

Among the many lessons learned from the last housing boom is that there are paces and rates at which you can effectively grow this business, while still generating high returns.

Exceeding those rates for multiple years in a row puts significant stress on a company, and can encourage an organization to take on excessive risk.

We believe shareholders are not well-served by doing either.

Today, having fixed our balance sheet and improved our overall returns on invested capital to be above our cost of capital, it makes sense to continue to increase our investment in land.

In 2013, we invested $1.3 billion into land acquisition and development, which was an increase of 30% over 2012.

In 2014, land investment will likely be up another 40% or more over 2013.

Given our expectations for a sustained, albeit gradual recovery in housing demand, we have authorized a land spend budget for 2015 of $2.4 billion.

This is an increase of $600 million to $700 million over expected 2014 expenditures for land acquisition and development.

Notwithstanding our positive outlook on the market, we are steadfast in our view that we need to remain balanced and return funds to shareholders over the cycle.

Having established the level of investment we want to pursue, we considered the form and size of the routine and systematic returns of funds for our shareholders through dividends and share repurchases.

This morning's announcement of a 60% increase in our dividend and a $750-million expansion of our share repurchase authorization is a direct reflection of this discipline.

We have said from the start of the housing recovery that we expected a slow, measured improvement in buyer demand that would play out over a number of years.

We have probably been more right than wrong in this forecast, a forecast which we continue to support, And now we are articulating our plans for capital usage throughout the cycle.

From a demand perspective, I am pleased with what we saw over the course of the third quarter, as absorption paces improved for the third quarter in a row.

And our expectations are for sustained growth in demand going forward.

We will, however, keep a watchful eye on the issues ranging from recent stock market volatility and interest rate fears, to fighting in the Middle East and health concerns developing in the US, to see if they impact consumer confidence going forward.

More broadly, our view of the US market remains positive, as continued improvements in both the economy and employment provide ongoing support to an industry that continues to benefit from low inventory, low mortgage rates, and favorable demographic trends.

Further, we are encouraged by proposed changes at FHFA, which have the potential to improve mortgage availability, particularly for first-time home buyers.

Regardless of how the macro environment evolves, I feel really good about where we are as a Company and how we are running the business.

With 134,000 lots under control, $1.2 billion of cash on the balance sheet, a gross debt-to-capitalization ratio of 28%, and a disciplined capital investment process, we are in a great position to further improve our returns and the returns we generate for our shareholders.

I think it's important to stop here and thank the employees of PulteGroup, who have been instrumental in putting us in such a strong position.

Their efforts have allowed us to successfully execute our long-term plans, while delivering the day-to-day actions needed to run this business.

They are an amazing group of people.

With that said, let me turn the call over to Bob for more details on the quarter.

Bob?

Thank you, Richard.

Good morning.

The two press releases we issued today demonstrate the ongoing benefits we're realizing by operating our business in alignment with our long-term value creation strategy.

As Richard indicated, we realized strong year-over-year gains across a number of critical areas in the business.

Before I get to the details, let me remind everyone that, as we highlighted in this morning's earnings release, we acquired certain real estate assets from Dominion Homes in August.

In connection with this transaction, we gained control of 8,200 lots in the Columbus, Louisville, and Lexington markets and assumed 622 Dominion homes in our backlog.

During our five weeks of ownership, these assets contributed 64 sign-ups and 86 closings from 33 active communities.

Looking at our income statement, home-sale revenues in the third quarter increased 4% over the prior year to $1.6 billion.

Our higher revenues were driven by an 8%, or $24,000, increase in our average selling price to $334,000, partially offset by a 4% decrease in closing volumes to 4,646 homes.

The increase in average selling price was driven by an 11% increase in ASP to $410,000 in our Pulte communities, and a 6% increase in ASP to $322,000 in our Del Webb communities.

The average selling price of $204,000 in our Centex communities was essentially unchanged from the prior year.

Our mix of closings by brand was consistent with the third quarter of last year, with 46% coming from our Pulte communities, 30% from Del Webb, and 24% from Centex.

Our reported gross margin in the third quarter was 22.9%, which is an increase of 200 basis points over the third quarter of last year.

Our margins continue to benefit from higher average selling prices, lower interest costs, and gains from our strategic pricing programs which focus on maximizing revenue opportunities within lot premiums and home options.

Lot premiums in the third quarter increased 11%, or approximately $1,200 over last year, while option revenues per closing increased 15%, or approximately $6,500 versus last year.

There's been a lot of market commentary relating to the potential for the industry's increasing use of incentives in certain markets.

I am pleased to note that we have not seen significant pressure to increase incentives in the majority of our markets.

In fact, sales discounts in the quarter actually fell by 8% to just under $5,700 or 1.7% per house.

We know there's a lot of focus on gross margins.

And while our margins are up 200 basis points compared to last year, we recognize that they are down 70 basis points from the second quarter of this year.

Approximately 30 basis points of the decrease was driven by closings from Dominion's backlog, which carry very low margins because of acquisition accounting adjustments.

The remaining decrease in sequential margins is due primarily to unexpected costs associated with the closeout of certain legacy communities, and a modest unfavorable shift in the mix of homes delivered compared to the second quarter, partially offset by a reduction in interest expense.

It should be noted that closing out the remainder of the Dominion backlog will continue to weigh on our reported margins for at least the next two quarters.

The margin impact could be in the range of 50 to 100 basis points each quarter, depending upon the volume and mix of units closed in each period.

Beyond these short-term impacts, we continue to realize efficiency and sales pace benefits with commonly managed plans, which accounted for 45% of deliveries in the third quarter.

The closing volume from commonly managed plans is up from 39% in Q2 of this year, and we're now slightly higher than our year-end target of 40% for 2014.

SG&A costs for the third quarter were $147 million, or 9.5% of home sale revenues, compared with $139 million, or 9.3%, in the third quarter of last year.

At $147 million, SG&A expenses for the period are consistent with previous guidance.

Financial services reported pretax income of $11 million for the quarter, which is comparable with last year's results.

Capture rate for the period was 80%, which is unchanged from last year and consistent with the first half of this year.

For the third quarter, Pulte reported pretax income of $225 million, which is up $50 million, or 29%, over the $175 million of pretax income reported last year.

Our income tax expense for the period was $84 million, which equates to an effective tax rate of 38%.

In the third quarter of 2013, we reported a tax benefit of $2.1 billion related to the reversal of substantially all of our deferred tax asset valuation allowance.

Net income for the third quarter with $141 million, or $0.37 per share.

Last year's DPA reversal makes the EPS comparison hard to assess.

But, given the 29% increase in pretax income, we are extremely pleased at the progress we continue to realize in our financial results.

Looking beyond the income statement, we had 6,865 homes under construction, of which 18% were spec at the end of the quarter.

As a percentage of construction activity, this is consistent with prior year.

And our finished spec inventory totaled only 335 homes, which remains well below one per community.

During the quarter, we put 16,165 lots under control, half of which are related to the purchase from Dominion.

Our third-quarter investment of $525 million brings our total year-to-date land acquisition and development spend to $1.25 billion.

As occurred last year, it's likely that we will not get our entire authorized spend, targeted at $2 billion for 2014, invested this year and that we will be closer to $1.8 billion for the year.

This would represent a 40% increase in investment over 2013.

And, as Richard commented, our land acquisition and development investment authorization for 2015 has been set at $2.4 billion.

I would point out that development and entitlement delays continue to grow more pronounced, which is impacting our ability to get money invested.

Having said that, we want our divisions to remain disciplined and not force investment into the system by reaching for deals or taking on incremental risk just to get a contract signed.

While deals are taking longer, the profile of the projects we put under contract has not changed.

Consistent with our recent quarterly updates, roughly 75% of the transactions we entered into during the quarter are raw, which means additional time and dollars will be required to bring the communities online.

We also continue to see the best return opportunities in projects targeted toward move-up and active adult buyers.

So the lion's share of our investment was targeted toward these consumer segments.

At the end of the quarter we had 134,000 lots under control, of which 36,000, or 27%, were controlled via option.

We continue to look for opportunities to option rather than own assets, where such a structure allows us to enhance returns and/or reduce risk.

Of the 134,000 lots under control, approximately 23% are finished.

During the quarter, we also paid a $0.05-per-share dividend, and repurchased 2.7 million shares of our stock for $50.3 million, or $18.85 per share, in addition to the investment in the business.

This brings our cumulative share repurchases since reactivating the program in July of 2013 to 14.9 million shares, or 4% of our shares outstanding, for $266 million or $17.82 per share.

Even after having spent more than $600 million during the quarter on investment and return to shareholders, we ended the quarter with $1.2 billion of cash.

We recognize that having a $1.2 billion non-returning asset is not advantageous.

Today's announcement about our dividend and share repurchase authorization, in addition to stepping up our land investment in 2015, demonstrates our commitment to putting this capital to appropriate use.

Moving on to sales activities, the dollar value of sign-ups in the quarter increased 3% over last year to $1.3 billion, while net new orders were essentially unchanged at 3,779 homes.

Sign-ups increased 8% at Pulte, and decreased 11% and 3% at Centex and Del Webb, respectively.

Aggregate absorption paces were flat during the quarter; however, if you exclude the five-week impact of the Dominion assets, absorption paces were up 5% overall.

Looking at this by brand, Centex and Del Webb communities increased 8% and 23%, respectively, offset by a decrease of 4% in our Pulte communities.

It's worth noting that our Del Webb community count was impacted by the closeout of several selling positions since last year.

Regardless, we're pleased by the stronger paces we continue to see within this brand.

The ongoing improvement in our Centex communities continues to be an encouraging sign in terms of potential future demand.

We finished the third quarter with 600 communities, which is comparable to last year's 604 communities.

And we ended Q3 with a backlog of 7,934 homes valued at $2.6 billion, which is up from 7,522 homes valued at $2.4 billion last year.

Now let me turn the call back to Richard for some final comments.

Thanks, Bob.

We were generally pleased with the overall level of demand experienced in the third quarter.

But, depending on the market, we did see a little more volatility from week to week.

On the East Coast, we continue to see stronger demand in the Southern markets, and particularly in Florida and the Carolinas.

The D.C. area showed some improvement as the quarter progressed, but demand conditions remain below expectations as you move further north up the coast.

Third-quarter demand in the Midwest was generally positive, with ongoing strength in Michigan, Indianapolis, and Cleveland.

We are excited about the opportunities we see to improve the operating results we realize from the Dominion assets, along with building out our position in these markets going forward.

We have a strong, experienced team in place; so I'm confident about the execution.

Texas remains one of the strongest areas of the country, but we did see the market starting to ease a little from the torrid pace they had been setting.

Out West, Southern California, Las Vegas, and Phoenix picked up in the quarter, which is a positive sign.

Northern California was a little more volatile from month to month.

Demand through the first few weeks of October has followed the usual seasonal pattern, with some uptick coming out of September but with a little less consistency from market to market driven by local market dynamics.

What we are also seeing from market to market are varying degrees of strain on the local trade basis, which are at times struggling to keep up with the current pace of production.

It is likely that tight labor resources will create production challenges in the industry for the foreseeable future.

In closing, I want to thank everyone for joining us on today's call.

Taken together, I think this morning's two releases say a lot about the Company and the strategies we are executing against.

You see continued strong operating and financial performance, supported by a more disciplined capital investment process, working together to drive improved returns for our shareholders.

I look forward to seeing you at the December investor meeting, where we can discuss these topics in greater detail.

Thanks for your time this morning.

And now I'll turn the call back to Jim Zeumer.

Great.

Thank you, Richard.

Before opening the call to questions, I do want to alert investors that registration to attend our December 9 Investor Day will open next Monday, October 27.

We'll issue an e-mail announcing the online registration is active.

And as space is limited, I'd encourage interested investors to sign up promptly.

Now we'll open up the call for questions.

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

Jonathan, if you will explain the Q&A process, we will get started.

Certainly.

(Operator Instructions)

Stephen East, ISI Group.

Thank you.

Congratulations.

Nice quarter.

I really like what you're doing on the capital allocation side.

Could you talk more about that, the decision process that you went through, the criteria that you're looking at when you do it, what your think about the future capital allocation, how you look at the cap structure throughout the cycle -- just the whole process that you went through?

Sure Stephen, this is Richard.

I will make some comments, and then Bob can take you through a little bit more about how we're looking at the balance sheet.

We've studied this very carefully, frankly, over several years, and have really I think done our homework with regard to the entire housing cycle over a long history.

Frankly, what we believe is that returning funds to shareholders through a very disciplined manner over time is the best path toward total shareholder return and value creation for shareholders.

What you see is a little more formalized pronouncement of our strategy.

We've obviously been operating the business with a view toward high returns for several years now, and the results I think are evident.

Now we're just trying to be a little more explicit about additional return of funds to shareholders through dividend and share repurchase activities.

That's how we looked at it.

Our December 9 Investor Day is going to get into, frankly, a lot more history and detail on how we came about these ideas.

Maybe Bob you could explain a little bit about the balance sheet, and what we're looking at there, and then cash.

Sure.

As we look at this, it will hinge off of leverage to a certain extent.

You've heard us talk about in the past that we want to, or were comfortable with 40% leverage.

You can expect us now to target leverage between 30% and 40%.

That's not a hard and fast rule.

If there's a particular transaction that makes sense we might go above or below that.

But the guiding posts for us will be 30% to 40% leverage over time.

Then, as we looked at it, the first priority is always what are we going to invest in the business.

You heard our commentary on what we're going to do for 2015, the goal, obviously, being to drive higher returns.

Now that we are actually earning above our weighted average cost of capital, we'd like to improve that so returns have to be accretive to that on investment in the business.

At the same time we want to be balanced.

We've talked about this, too.

The dividend -- I think you can expect us to target a yield between 2% and 3% over time.

It will be important to us that we have the confidence that we can deliver that through cycle.

We've started.

I think the yield based on yesterday's close was about 1.7%.

If the market is feeling good -- it's always subject to Board approval -- but you can expect to see us increase that to 2% to 3% over time.

We always want to be cognizant that M&A activity is available to us.

We still look at it as land transactions, so Dominion is a very good example of that.

Then what we'll do is, as we look at our projected cash flows -- capital structure again targeted 30% to 40% leverage ratios -- if we have money available beyond that in any period of time, we would seek to buy back stock with that.

It's important to note that we're not actually looking to time the market on that, so you would see us put plans in place that are meant to do that ratably over a period of time.

Those plans will be reactive to market pricing, so if there's dislocation I think we'd accelerate somewhat.

But again, it's not designed to say we're making a call on the equity value today.

It's we're returning shareholders to money systematically and routinely, as Richard said.

Okay, thank you.

I really like the plan that you all are laying out on that.

Just to follow along on the land spend side, you started ramping up your spend.

You're still sort of in a catch-up mode, if you will, as far as getting new communities open as the others burn off.

As you look at the $2.4 billion for next year, what type of gross community count do you expect, and how is that compared to what you think will be rolling off?

Steve, this is Richard.

We're going to give some guidance on that number at our Q4 call as our budgeting process is under way now.

I think it's fair to say the increased investment at some point in time will yield community count growth, but we're not prepared to get into that today, as we are still finalizing the numbers for next year.

Okay.

Fair enough, thanks.

Jack Micenko, SIG.

Hello, good morning.

Bob, the margin guidance piece, the Dominion 50 to 100 each quarter -- is that incremental, or is that off of sort of the run rate.

How do we think about that next couple quarters?

Yes, what that does is it incorporates -- we assume 622 homes in their backlog, which, because of acquisition accounting will be ascribed very low margins.

We're just saying that mix of business in our total will drive our margins on an aggregate basis down between 50 and 100 basis points.

Okay, great.

Richard, you said in October there was some volatility region to region.

Can you talk about where demand was a little better versus maybe a little not as good?

Jack, we're not going to comment on specifics with regard to October, but it's candidly not a lot different than we saw in Q3.

If you noted in our release, Florida was particularly strong.

The Midwest was a good market for us.

We saw some improving conditions in the Southwest, and then a little bit weaker versus a frankly unsustainable pace in Texas in the quarter.

Then Northern California started to show a little bit more volatility.

What we're trying to indicate about October was that we saw the typical seasonal up-tick coming out of September, but we do see some volatility week to week, just based on all the world events.

Ken Zener, KeyBanc.

I have two questions conceptually for you, since you've gone through this exercise on returning of capital.

Your 30% to 40% net leverage target, you're going to confidence in that after you book second-quarter backlog, assuming it converts?

That assumes always a back-half bias to share buy-backs?

Ken, just one comment.

It's a 30% to 40% gross leverage.

It's not net.

Just FYI, you said net.

Sorry.

Candidly, the seasonality within the business doesn't impact our leverage ratios much, if at all, Ken.

When you think about yield, that's yield to your current stock, or that's what you value your own Company at intrinsically?

It would be to current value.

We recognize that there's volatility.

If we had made this announcement a week and a half ago, and the price was $17 the yield would have been higher.

Again, we're thinking of this through cycle.

Obviously our belief in our forward cash generation will help to drive what we do.

If it turns out that it's a 1.9% yield or a 2.7% yield is less important to us than the consistency and being able to deliver it through cycle.

Ken, this is Richard.

If I could illuminate on that just for a second.

The goal here is to signal very clearly and deliberately that we want to be balanced in capital through cycle.

We're making a deliberate statement to suggest that our first priority is in the business, but at high returns.

To the extent that annually we have leftover funds, which clearly we think we'll have the capacity for, given our strong cash-flow generation, a combination of dividends and repurchases, we think, is the best bet for shareholders over the long run.

Right.

I guess if I could ask for your comment just briefly on the news last week with the agencies and the SEC, the rulings about qualified residential mortgages?

What are the factors you're going to look at over the next month that you think are most indicative, if in fact that's delivering higher demand?

Thank you.

Yes.

Well, with regard to what is happening with FHFA right now, Mr. Watt's comments earlier this week certainly leaves us encouraged.

There's always a path between announcement and implementation, so we have to watch to see what ultimately gets implemented.

But we have said for some time that mortgage availability is tight in the industry, and we believe any clarity that can be brought with regard to government loads are going to be treated is important for banks to want to underwrite.

We've heard that again and again from folks at Wells Fargo, JPMorgan Chase, and others.

We believe we heard is the right step.

I think it's important that the administration has recognized that housing is not as big a driver in the economy as it could be, partly due to credit being a little bit tighter than is necessary.

We're watchful, we're cautious.

We're not certainly predicting that anything dramatic changes here.

But over time if some of these ideas get put into practice, it certainly has the potential to affect activity, particularly for the entry-level category.

I think we've all talked about for a couple of years now that that segment has been under-represented in the recovery.

If it gets going, housing could get exciting again.

Our view is that it's a positive statement.

Robert Wetenhall, RBC Capital Markets.

Hi, this is Desi filling in for Bob.

Thank you for taking my question.

Just speaking on that topic, maybe a little further along there.

Do you think the easing of credit standards could be maybe what gets us from 1 million starts today to 1.2 million or 1.3 million starts, or is it a smaller incremental upside from where we're at?

That's a really tough question to answer.

Candidly, I don't know.

I do think it's important to recognize that a combination of factors will go into this.

Number one will be the actual easing of credit to the extend it eases, and number two will be the press that goes around it that suggests to buyers that today could actually get credit that are not applying, to apply.

There's certainly some evidence that people think that credit is tighter than it actually is.

A combination of people that are maybe a little bit uneducated with regard to credit today could get in the market, along with some actual easing, could help us, we believe.

But in terms of exactly what impact it is in terms of starts, I don't know how to quantify that at this point.

All right.

Just to get a little clarity on the community count absorption pace that you talked about, in the absence of the acquisition of Dominion homes, would your community have been lower year over year?

I'm just trying to square the fact that orders were relatively stable, with absorption pace up 5% and community count flat.

What happened is we bought it.

We had 33 active committees that came on line in August, and contributed some sign of activity.

But if you think of retail with same-store concept, in our 600 ending communities are 33 communities from there.

Directly to your question, we would have had 567 communities if we hadn't purchased Dominion.

Our pace assumption -- so we've talked about a 5% pace increase.

What it does is it takes the 33 out of our ending community count, and then takes the sign-ups excluding the sign-ups from those committees to say how did the rest of the business do that was in for the entire quarter.

Ivy Zelman, Zelman Associates.

Hello everybody, and congratulations on the quarter.

I have an echo, so hopefully you don't hear it.

But the 600 to 700 incremental in land and development that you're planning on spending, we get a lot of questions about Pulte is chasing land, they're late to the market.

They stopped -- they didn't buy land when everyone else was buying land, and now they're paying in inflated prices.

Given your disciplines around returns, my first question is really understanding how to comfort investors that you're not going to sacrifice returns by now incrementally buying more land?

Yes, Ivy, this is Richard.

Thank you, that's a great question.

First of all, let me just refute directly the fact that we're taking on more risk than we should.

As a matter of fact, that would be counter to everything that we have said with regard to the last several years about investing in high-return committees.

We now have this 13-point, risk-adjusted scale for investment.

Frankly, we have stuck to that discipline.

We have not chased any land transactions.

We do not build in forward price assumptions into our transactions.

In fact, I'm extremely pleased with the quality of the land that we are buying.

Frankly, as one of the largest builders in the country we do have access to land, given the size of our checkbook.

The land that we have been pursuing is a really high quality across the country.

I completely discount anybody's concern that we are reaching or chasing.

Frankly, the rest of our announcement today is indicative of that, as evidence of the fact that they we're not going to reach, given the incredibly strong cash flows that we have, and frankly are likely to have in the future.

We're going to be balanced to ensure, in fact, that we don't over-reach.

We've learned the lessons of the past.

This Company used to be very land heavy.

We're not going back there.

We want to be very balanced.

A combination of prudent, smart, high-returning land; a combination of a growing dividend; and maybe stepped-up share repurchase activity I think is evidence of that.

Very helpful, thanks Richard.

Secondly, as we talk about one of the proposals from director Mel Watt was to re-introduce the 97% LTV, recognizing that with the loan limits are higher in most of the country relative to FHA.

If you could talk about specifically Phoenix and some of the northern Cal markets where it was more dramatic, whether it be Stockton, Fresno -- maybe you're not in those areas as much.

But if you could just talk about the potential impact that those markets with a higher loan limit and that 97% LTV could have on your business.

Is it in those markets meaningful?

Ivy, that's a great question, and it's certainly not insubstantial.

A lot of people, I think it flew under the radar when the loan limits got dropped.

I think people got that really high cost markets came down from 700 to say 550.

But places like Phoenix that were kind of a lot of bread-and-butter housing, a $50,000 or $60,000 drop in loan limits made a big difference, and took out a swath of the market.

It's again, per someone's earlier question, a little bit hard to quantify exactly what it could mean, but it's clearly a positive.

The only thing we're watchful for is to make sure that it gets implemented responsibly.

We've heard the announcements, and we're certainly excited about it.

Through the leading builders of America, our industry has done a good job of advocating for responsible credit, and credit that is accessible to all with the right safeguards.

I think we have a good relationship with Mr. Watt and the administration, and we're looking forward to seeing what comes of it.

But to directly answer your question, it could be significant.

I can't put an exact quantification on it, but it will certainly help housing.

Mike Roxland, Bank of America Merrill Lynch.

Thanks very much.

Congratulations on a very good quarter.

Thank you.

As Bob mentioned, the commonly managed floor plans increased to about 45% from 39% in 2Q, yet your gross margin still declined sequentially, even after adjusting for the 30 bps of accounting adjustments related to Dominion.

Can you talk about some of these weaker mix shifts that occurred in the quarter that negatively impacted margins?

I also believe, if I recall correctly, that 2Q also had a weaker mix which impacted margins.

I'm trying to get a sense of what actually occurred this quarter, and whether you expect this type of trend to persist or reverse going forward?

Mike, this is Richard.

We indicated on the prepared comments there were two factors.

One was some unexpected legacy community close-out cost that impacted margins.

Second was that mix shift that you mentioned.

Frankly, it was less high-margin Dell Webb closings coming through and more lower-margin Centex closings coming through.

With regard to future trends on mix, it's frankly almost impossible to predict.

There is volatility in closing mix, and candidly, the trade base issues I mentioned persist in the industry.

Overall, you can have one particular region versus another closing homes in one quarter.

But we continue to be very pleased with our margins.

We've clearly moved from a low-margin Company a few years ago to among the highest in the space.

We like our position overall.

Thanks, Richard.

As a follow-up, could you -- would it be fair to say that as you sell out of more of the higher-margin Dell Webb and continue to see an acceleration with Centex that maybe you will have this negative mix shift persist on a go-forward basis?

A second question would be, with respect to the accounting adjustments, once you get through them the next two or three quarters, should we expect to see gross margins rebound to the 23% to 24% you had been achieving?

Mike, a couple points there.

We have said that margins are going to vary quarter to quarter, and we said that very consistently.

I don't see any reason to change that view.

With regard to the second part of your question, we don't have visibility to our margins much beyond the next couple of quarters, given our backlog.

Frankly, I don't know what's going to happen as you get into Q2 our Q3 going forward.

I will point out that we do have favorable pricing dynamics.

We continue to like what we see.

We do, offsetting that, though, have higher land costs and some trade pressures coming through.

It's going to be choppy and volatile from here, so it's difficult to give you a guidance number there.

David Goldberg UBS.

Thanks.

Good morning and congratulations.

Thanks, David.

I wanted to follow-up, Richard, on the comments on labor tightness.

I'm wondering if you could help us connect the common-plan management system, how that's working with the trade, if it's allowing you to attract some of the trade a little more favorably, because you have a more consistent program going through.

Also, if you can with that talk about cycle times and what's happening on homes that are going through the system, what the cycle times would look like versus homes that haven't been as valued engineered, or not as efficient right now?

Sure David, this is Richard.

From the labor comments, basically what you're seeing, as I think has been well chronicled, is there's just not as many folks available to build the homes that are in production across the country as there were.

With regard to common-plan management, we are able to attract trades that are more favorably inclined to candidly build for us for two reasons.

Number one, we're big and we have a large backlog.

Trades understand that consistency of work is important.

Then our common-plan management allows for more ease of production as the trade base, particularly on the labor side, gets more familiar with the plans.

Candidly, I would suggest that even though we're seeing some delays in closing as a result of labor shortages, it's probably less pronounced for us then candidly many folks who are smaller in this space.

Particularly the real small builders I think are going through a very volatile time with regard to overall labor.

We are very optimistic that the common-plan management roll-out, as Bob indicates, continues to ramp up.

It's a very productive part of our business for many reasons.

With regard to cycle time, we are focused separately on house-turn time and land-turn time, if you will, internally.

We have a lot of focus on both those areas.

Frankly, we've made a lot of progress on our house turns the last few years, including this year.

How much further can we push it, it's hard to say.

Frankly, we're -- inventory turns in total are one of the guiding posts around our focus on return, which has been helpful.

I hope that helps.

That's good color.

Just a follow-up on the common-plan management system.

On customer satisfaction, have you been able to gauge -- I know it's early in the process still -- but in terms of quality of construction, in terms of defects, have you been able to get some gauge on overall customer satisfaction and warranty-related issues on homes that have gone through the system versus the homes that haven't, and even versus the historical where you've been?

David, we certainly have high expectations in that regard.

It's probably a little early to look at warranty trends and customer satisfaction trends, given the delay between putting these homes into production, closing them, and then having people live in them for a year or more overall.

But clearly, everything that we're doing with common-plan management we believe has benefits: margin benefits, sales pace benefits, customer satisfaction benefits, and frankly to your point, long-term with regard to customer satisfaction and warranty.

The features that we're putting in our commonly managed homes, I think a lot of investors appreciate the efficiency gains that we have.

We are probably more excited about the actual buyer acceptance of these consumer-driven plans.

If you recall the feature CNBC did on us about a year ago now where we're putting homes in productions -- into prototype in warehouses and getting buyer feedback.

We're continuing that good work that our marketing and architectural teams are doing.

We've got a lot more where that comes from over time.

This whole idea of continuing to refresh our product portfolio while reducing the overall number of floor plans we manage has benefits in all parts of the Company.

Michael Rehaut, JPMorgan.

First question I had was on the share repurchase.

I appreciate, obviously, the increased focus there.

I think it certainly helps a more balanced approach to capital.

But when you talk about a gross leverage of 30% to 40%, I guess right now you're in the high 20%s.

You also, though, mentioned that it would really be excess cash that you would be deploying after internal investment and dividends.

If I'm reading it right, it doesn't sound like this is going to be a relatively aggressive bulk purchase at any time, more of the -- perhaps what you did in this past quarter and maybe a little bit more.

Can you can give any color on that, because certainly, again, from the gross leverage standpoint, it doesn't seem like you have that much wiggle room, although certainly you have a lot of cash on the balance sheet?

Yes, Mike, we do have a lot of cash on the balance sheet.

We also expect to be generating a lot of cash over the next few years, particularly as we realize the deferred tax asset.

But the other think we've made a point of is we're not stock pickers, so we're not going to be doing an accelerated plan, generally.

You can expect us to be buying it dollar-cost average through the year.

But I think the $750 million speaks to the fact that we're going to be buying more stock.

Mike, this is Richard.

If I could just add, having bought back about 4% of our shares with a frankly less-defined program over the past 12 to 15 months.

We're not talking about insignificant activity, but Bob mentioned on his remarks earlier, we're talking about being routine and systematic and disciplined and balanced.

We see it all as part of a well-orchestrated, well-articulated plan.

We think we have articulated our operating philosophy very well for the past several years.

We are now trying to articulate our balance sheet and cash philosophy with that same degree of consistency.

Okay, I appreciate that.

Secondly on the absorption pace, I think you mentioned Centex down 8%, Pulte down 4%, and generally people viewing the year-ago comp as somewhat easier, given the rate-driven slow-down from last year.

You had also mentioned that the common-plan management does drive some improvement in sales pace.

I'm just trying to get a sense of if you're pleased with the sales pace at current levels?

Did you think it would have improved off of perhaps an easier year-ago comp, and what could be done to perhaps increase that going forward?

Mike, just a couple points, and Bob can give you the details.

Our paces in Centex and Del Webb were up sharply, especially in Del Webb, so you may have misheard that.

We are pleased with our pace.

Bob, maybe you can reiterate the numbers?

Yes, it was up 8%, not down 8%, Mike.

Again, Pulte was off 4%, Centex up 8%, Del Webb up 23%.

Stephen Kim, Barclays.

Thanks very much.

I wanted to follow-up on the land question -- the land spend question.

You talked about $2.4 billion.

We were already modeling in about $1.9 billion.

We thought that was pretty generous.

I was a little surprised.

Your targeted land spend is about $500 million more than what we're looking for.

I was wondering if you could give us some understanding as to the break-out of that spend in terms of new lots versus development of existing lots?

Maybe in answering that question, if you could let us know whether the 23% of controlled lots that are finished, how much of those actually owned versus option?

Thanks.

Yes, so Stephen, we've expressed I'd say over the last 12 months that because we're buying more raw land, our spend during the year has changed.

Two years ago we were probably two-thirds on land and a third on development.

It's now probably 50-50.

Part of the spend that you're seeing us do next year is to develop the land we've been buying over the last 18 or 24 months.

I think -- not sure --

But only half, though.

But only half, right?

Okay.

It's not an insignificant number, though.

Steve.

Right.

We're really pleased with that number.

As we've indicated, we have a very clear formula.

We get above our cost of capital, and we can find high-returning assets.

We want to grow the business and invest.

We spent two or three years getting our business to that point.

We are there now.

Just to reiterate a comment someone asked earlier, we are definitely not reaching for land.

We are being very disciplined and prudent.

Frankly, with still a lot of dry powder, continuing to return funds to shareholders elsewhere.

Yes, I don't think you got the -- I didn't get the finished number.

Sorry.

He had ask another one.

Say it again, Steve, please?

Yes.

My question was of the 23% of controlled lots that are finished, I assume the majority of those are owned, but I wanted to check on that.

One other one before I get cut off is that you had talked about in previous quarters that perhaps a recovery in the entry level.

I think you had pointed to some signs in your Centex division.

I was curious, could you quantitatively or qualitatively talk about whether you think that momentum is building, whether it's pulled back, just how you're feeling about the entry-level buyer at this point?

Yes.

Stephen, 80% of those finished lots are owned.

Thank you.

Steve, with regard to the entry level, we are pleased with what we've seen -- the absorption pace up 8%.

It was up nicely the prior two quarters, as well.

We do think it's building.

As I indicated, while we don't want to get ahead of ourselves, the potential for some of what Mr. Watt outlined to be enacted has the potential to improve it further.

We're going to have to wait and see what happens, but we thought it was a good announcement that they are at least considering it.

Stephen, though, the one thing that we have seen in terms of the entry-level buyer -- they're still buying closer in.

We haven't seen them really start to go out to some of the outer markets.

We've had a couple meetings here in Atlanta, and it's a perfect example -- strong demand in the close-rim positions, but if you look at some of the outlying areas where there aren't finished-developed lots available, there's still no buying going on out there.

We're pretty comfortable in our ability to respond quickly on this, but right now again, the demand is closer in and not further out.

Eli Hackel, Goldman Sachs.

Eli Hackel Goldman Sachs your line is open.

John, why don't we go on to the next questioner.

Nishu Sood, Deutsche Bank.

Thanks.

First, I wanted to follow up on the conversation that Desi and Bob were having earlier.

If you take out the 30-odd communities from Dominion at the end of 3Q, it implies a pretty steep drop in the number of communities.

I think you mentioned some of the factors.

Obviously there was the close-out of the legacies, which impacted your gross margins, as well.

You also mentioned the delays in opening new committees.

The drop that we saw here, the significant drop, is that just a -- how should we think about that?

Is that just a temporary mismatch, and the trend that established -- been established in the last few quarters of increasing community count should continue, or is there something more than that?

Yes, Nishu.

We had guided to between 560 and 580 throughout 2014.

Ex-Dominion, we were right within the guidelines we had provided.

Nishu, a little more color on that.

Things are taking longer to open, there's no question about that, overall.

As Bob indicated in his prepared remarks, that persists.

We're trying to be balanced and not get communities open before they're ready, and before we're ready to present a good sales image overall.

I don't think that implies anything one way or another going forward.

As we indicated earlier, we'll be giving guidance for 2015's community count on our Q4 call.

Michael Dahl, Credit Suisse.

Hi, thanks.

I wanted to go back, Richard, to your comments on the entry-level buyer a minute ago.

Curious, because you still said that, I think, in earlier remarks land deals are best for the move-up in active adult.

In your budgeting for next year, is that contemplating more of a shift towards more of the Centex-type communities?

Mike, it's a good question.

The way we do that is when we allocate capital to the operations, we are agnostic as to where they spend it.

We want it to go to the highest-returning opportunities that they find.

They clearly have a targeted plan, but we don't push it towards, say, Pulte or Centex or Del Webb, any of the brands.

The answer is I don't know how exactly that's going to play out overall.

It depends on what we see in the market when folks are acquiring property.

What I will say is the same factors that go into the underwriting are the same ones.

What we've said consistently is that up to now, while margins have been very acceptable in that category, paces have not recovered yet to where we believe they are needed to underwrite a lot of Centex communities, because given the limited pricing power that we have on the buyer income side with regard to Centex, we need more pace to support good returns.

As the market recovers, and particularly if the entry level begins to see a little bit more credit availability, the potential does exist for that category to come back, and therefore for us to start seeing more land deals there.

But it will be dependent on whether the pace comes back to a point at which that becomes a bigger factor.

I don't know exactly how that is going to play out.

I think it's clear based on what we have purchased the last year or two that for the foreseeable year to 18 months most of our openings are going to be on the Pulte or Del Webb side.

Bbut we're hopeful that that could change with a little better availability in the future for credit.

Thanks, that's helpful.

As a follow-up at a high level, you also made comments that you want to be careful to avoid getting into stretching for growth rates that are going to put a real strain on the organization.

Clearly, you've had some run-off of legacy land.

But this will be the second year looking out to 2015 that you're looking for 40% growth on the spend side.

With a lot more of that coming on development, that does support quite a bit of growth.

How do you reconcile that?

How close are you to a level where you're less comfortable pushing for growth aggressively here?

Yes, Mike.

Again, we're not giving community-count guidance, but land investment dollars do not necessarily translate into volume or community count directly.

It totally depends on what you're buying, what markets you're buying it in, how expensive the land was where you are.

I'm not concerned about us approaching the level at which we'd get concerned about growth.

We are nowhere near, candidly, the growth rates of what we used to be in the past through the boom times.

As I started out the prepared remarks and my first question out of the box today, we are not going back there.

We are going to be very balanced with our view.

We are going to be balanced with our capital allocation, and mindful of what can happen if you get overly aggressive.

We're not close to that edge at all, and frankly not concerned about it.

We're mindful of it, and are going to be cautious.

Great thanks.

Nishu Soo, Deutsche Bank.

Thanks.

The follow-up I wanted to ask was, Richard, about the Investor Day.

It's been quite some time since you had an Investor Day, and that's certainly not from a lack of exciting things happening at Pulte, value-creation strategy being conceived, and executed well in the past couple years.

I wanted to get your thoughts on what prompted the decision to create a special outreach event for investors, and maybe if you could, just some preview on what you will be covering?

Because clearly it's created some excitement around the event.

Thanks Nishu, I appreciate that.

First of all, this is not something that we intend to do every year.

It's been many years, as you've indicated.

We think we have a great story to tell.

While we have gotten pieces of the message out over the last several years, we don't feel like we have had a forum to really tell the entire story.

What you can expect is a little bit of a view onto what the details were on how we got to the philosophy that we are today.

We're certainly going to expose you to some of the possibilities for the future with regard to what common-plan management can do for us, what our pricing philosophies can do, and demonstrate for investors that there's more energy around some of the things that we have been working on than have yet come to the market.

Then we're going to get a little more detailed on this capital allocation strategy: how we got to it, what the parameters are, and basically walk into a little more detail than we're able to do on an earnings call like today.

We think it's a very robust lineup.

We look forward to seeing as many investors there as possible, and it should be a good day for us.

Okay, great.

Thanks.

Thank you.

Ladies and gentlemen, this concludes the question-and-answer session for today's conference.

I will now turn the call back over to Mr. Jim Zeumer.

Great.

Thanks everybody for your time this morning.

We have gone through our allocated time for today's call.

We're certainly available for the remainder of the day if anybody's got any follow-up questions.

We will look forward to seeing you on December 9 here in Atlanta, Georgia.

Have a great day.

Ladies and gentlemen this concludes today's conference call.

You may now disconnect.