普爾特房屋 (PHM) 2014 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the 2014 PulteGroup fourth-quarter financial results conference call.

(Operator Instructions)

Thank you.

Mr. Jim Zeumer, you may begin your conference.

Thank you, operator, and good morning.

This is Jim Zeumer, Head of Investor Relations for PulteGroup.

I want to welcome you to our conference call to discuss the Company's fourth-quarter financial results for the three months ended December 31, 2014.

Participating in today's call to discuss our results are: Richard Dugas, Chairman, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; Jim Ossowski, Vice President Finance and Controller.

Let me remind everyone that copies of this morning's earnings release, along with the presentation slide that accompanies today's call, are posted to our corporate website at pultegroupinc.com.

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

Before we begin the discussion, I want to alert 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 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 slide.

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

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

Richard?

Thank you, Jim, and good morning, everyone.

Early in December, we hosted our first analyst and investor day in almost a decade.

Our goal in hosting the meeting was to provide a comprehensive review of our value-creation strategy and the underlying initiatives which have driven its success over the past four years.

The topics of our investor day included: a review of the significant operating and financial gains we have realized as we work to deliver higher returns on invested capital; an assessment of the opportunities that remain to realize additional gains in revenues, gross margin, overheard leverage, and overall construction and asset efficiency; and finally, a comprehensive analysis of our focus on capital efficiency and our related approach to capital allocation.

For those of you who were unable to attend, I would certainly encourage you to review the presentation, which is posted on our website.

I'm extremely pleased to say that the strong financial performance we delivered in the fourth quarter and the full year demonstrate the ongoing success of our efforts.

In a couple of minutes, Bob will provide a detailed analysis of our fourth-quarter results and the gains we realized, so let me spend my time looking at our full-year 2014 progress against our value-creation strategy.

On slightly lower unit volumes, we generated a 4% increase in home sale revenues to $5.7 billion.

The much more telling number, however, is our ability to leverage the 4% revenue growth into a 33% increase in reported pre-tax income of $635 million for our home-building operations.

Inclusive of our financial services operation, we realized pre-tax income growth of 31% to $690 million.

The significant increase we generated in 2014 pre-tax income was supported by our strategic pricing and common plan initiatives, along with interest savings from our dramatic debt reductions over the past few years.

In combination, these factors helped to expand our reported 2014 gross margin by 280 basis points to 23.3%, and pre-tax margin by 250 basis points to 11.8%.

As we have done over the past several years, we capitalized on our strong operating performance and associated cash flows by implementing a disciplined allocation of capital, which included investing $1.8 billion into our Business in 2014, an increase of roughly 40% over 2013.

We are also in position to comfortably expand our planned 2015 investment by another 30% to $2.4 billion, but only if we can identify high-returning projects.

We retired $246 million of debt in 2014, helping to reduce our year-end debt to capital to 27%; among the lowest in the industry.

We returned $321 million to shareholders in the form of dividends and share repurchases.

And after all this, we still ended the year with $1.3 billion of cash on the balance sheet, which is available for planned investments, and to fund dividends and any future share repurchases.

We are extremely pleased with these results, and I am personally very proud of the entire Organization for all the hard work they've invested to make them happen.

Given the significant gains we realized over the past several years since launching our value-creation strategy in 2011, we remain committed to this program and the ongoing benefits we believe it can deliver.

As such, we will continue to focus on margins, overhead leverage, inventory turns, return on invested capital, and disciplined capital allocation.

Back in 2010, we analyzed 20 years of financial and operating data on our Company and our peers.

The findings clearly showed that companies generating the highest return on invested capital drove the greatest total shareholder returns over the housing cycle.

An ROIC focus should have value in all market conditions, but we believe it can be particularly effective during the sustained but historically slower-paced housing recovery we expect will continue for the next few years.

By focusing on returns, we have controlled our investment in land assets, and lowered our house inventory by reducing specs and accelerating cycle times.

Having raised our return on invested capital above our cost of capital, our land investment spend is moving beyond maintenance, and is now supporting future growth.

Consistent with our operating strategy, this would be higher-return growth, not just investing to churn out higher unit volumes.

And as we demonstrated in 2013 and 2014, if the appropriate land transactions are not available, we won't force investments into the system, but will continue to use our capital to fund ongoing dividend payments and to repurchase shares.

At the same time, we continue to advance our common plan management work and related initiatives to squeeze additional efficiencies out of our construction operations.

Many of you got to hear from Ryan Marshall, Harmon Smith and Mike Wyatt at the investor day, so you can better appreciate how much we have accomplished, and yet how much opportunity remains to be realized.

Overall, I view 2014 as another year of great progress relative to our value-creation work.

Equally important, I think we enter 2015 in a strong overall position, with opportunities to drive additional operating and financial gains.

Now let me turn over the call to Bob for a discussion of our fourth-quarter results.

Bob?

Thanks, Richard, and good morning.

I'd like to echo Richard's comments that 2014 marked another significant step in our progress, and highlight that the fourth quarter represented a strong finish to the year.

Beginning with a review of our income statement, wholesale revenues in the fourth quarter increased 10% over the prior year to $1.8 billion.

Higher revenues for the period were driven by a 7% increase in closing volumes to 5,316 homes, combined with a 3%, or $9,000, increase in our average selling price to $334,000.

The increase in our average selling price reflects higher sales prices at all three of our brands.

In the fourth quarter, Centex was up 1% to $212,000; Pulte was up 5% to $406,000; and Del Webb was up 4% to $327,000.

The mix of closings by brand changed only slightly from last year's fourth quarter, with 45% of closings coming from Pulte communities, 30% from Del Webb, and 25% from Centex.

Our fourth-quarter gross margin was 23.1%, which was down 10 basis points from the fourth quarter of last year, but up 20 basis points on a sequential basis.

Our stable Q4 margins reflect a number of factors, including the Company's efficiency and pricing initiatives, interest savings from our significant debt paydown, the mix of homes closed, as well as changes in labor, material and land prices.

In addition, although the land market is competitive, we believe our focus over the last few years of investing in well-positioned, higher-returning land assets has helped support our margins.

Fourth-quarter option revenue per closing increased 11% or $4,800 over the prior year, while lot premiums in the period decreased 5% or $680.

Sales discounts for the quarter remained low at just over $7,000, or 2.1% per home, compared with approximately $5,500 or 1.7% per home last year.

We've said for a number of quarters that discounts were likely approaching their lower limit, so the Q4 change should be viewed as typical quarterly variance and not a shift in our pricing strategy.

As we assess the Company's future margin performance, there are clearly a number of macro and local market forces at work.

In this volatile operating environment, we continue to focus on our value-creation strategy, and will respond to local market challenges on a community-by-community basis.

Based on our view of the market, and considering the Company-specific opportunities we see in strategic pricing and construction efficiency initiatives, weighed against the challenging competitive dynamics in the market, we are targeting full-year gross margins in 2015 to be consistent with our current level of 23%, with the proviso that we expect there will be movement up or down as we move from quarter to quarter, including previously discussed Q1 headwinds from acquisition accounting adjustments associated with our Dominion transaction.

SG&A costs for the fourth quarter totaled $146 million, or 8.2% of home sale revenues, compared with $150 million or 9.3% last year.

Our SG&A expense for the period was benefited by approximately $15 million, or $0.03 per share, from reversals of construction-related insurance reserves.

The reduction to our insurance reserves is not directly tied to the insurance charge we took in the second quarter of this year, but reflects typical adjustments based on actuarial assessments of our construction-related exposures, which trended modestly better than projected in the second half of the year.

Looking at our projected overhead spend in 2015, we expect our SG&A will be in the range of $160 million to $165 million per quarter, which is consistent with our underlying spend in Q4 of this year.

The increase over 2014 relates primarily to investments we're making in support of our value-creation initiatives, and in connection with the increased number of communities we will be opening and operating this year.

As noted in our press release this morning, we recorded a charge of $8.7 million, or $0.01 per share, for lease exit costs in connection with the relocation of our corporate offices to Atlanta.

The charge is recorded in other expense net, and was anticipated in the original cost estimates we provided when our relocation was announced.

Our financial services operations reported pre-tax income of $13 million in the fourth quarter, which is up from $7 million last year.

In the quarter, financial services benefited from higher volumes, and decreasing interest rates, which drove higher gains on mortgage sales.

Capture rate for the period improved to 81% from 79% last year.

In aggregate, our pre-tax income for the fourth quarter was $267 million, which is up $35 million or 15% over the prior year.

Closing out our review of the income statement, we reported $50 million of income tax expense, which represents an effective tax rate of 19%.

It should be noted that our fourth-quarter taxes reflect benefits of approximately $50 million, or $0.13 per share, associated with the resolution of certain federal and state tax matters, as well as adjustments to our state deferred tax asset valuation allowance.

The Company's normalized effective tax rate in the quarter was 38%, which is lower than our original guidance of 39% for the full year.

At this time, we expect our 2015 effective tax rate to be approximately 38%.

On the bottom line, we reported net income for the fourth quarter of $217 million or $0.58 per share.

Included in these results are the tax and insurance benefits of $0.16 per share, partially offset by the lease exit charge of $0.01 per share.

Moving on to home-building operations, at the end of the quarter we had a total of 5,059 homes under construction, of which 26% were spec.

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

At year end, our finished-spec inventory amounted to only 483 homes, keeping us below an average of one per community.

In the fourth quarter, we approved approximately 8,800 lots for purchase, which brings our total for the year to just over 22,000 lots.

One interesting note about our Q4 land transactions: Almost 60% of the lots were for Del Webb communities, including four new positions and an extension of our highly successful Georgetown community outside of Austin, Texas.

Given the timeline for developing these positions, we expect these projects will impact our operations in 2016 and beyond.

We spent $539 million on land acquisition and development in the quarter, bringing our total land spend for 2014 to approximately $1.8 billion.

Consistent with recent quarters, our spend was split equally between development and acquisition.

As we noted at our investor day, our spend this year was less than our authorization of $2 billion.

As a result, the authorization of $2.4 billion for 2015 includes the $200 million of remaining authorization from 2014, as we seek to allow our local home-building teams to manage their capital investment programs over time with an eye towards driving investment in high-quality, high-returning transactions.

We finished the year with 131,000 lots under control, of which 35,000, or 26%, were controlled via option.

Of our controlled lots, approximately 25% are finished, with another 18% currently under development.

Looking at our 96,000 owned lots, as measured against our 2014 deliveries of 17,196 homes, our owned lot supply is approximately 5.6 years, which is two years lower than we maintained in 2011.

We're pleased with our progress on this metric, given its significance to our overall return on invested capital.

As we have demonstrated throughout the year, we are actively allocating capital beyond our land investment activities.

During the fourth quarter, we repurchased 5.2 million shares of our stock for $98 million, or $18.87 per share.

This level of activity is roughly twice the level we executed during each of the first three quarters of 2014, and is consistent with our announcement last quarter that we had increased our repurchase authorization by $750 million.

We put the expanded authorization in place with the intention of using it, and clearly we are.

Based on our strong operating performance, we ended the year with $1.3 billion of cash, despite the significant investments we made during the year in land, and our return to shareholders of $321 million in the form of dividends and share repurchases.

We expect to use this capital over time in the fashion we laid out at our investor day.

Our debt to capital at the end of the quarter was 27%, which is down from 31% last year.

A few final data points: On a year-over-year basis, Q4 sign-ups increased 1% to 3,232 homes, which, on a dollar basis, increased 2% to $1.1 billion.

Unit sign-ups increased 4% at Pulte, while slipping 3% at both Centex and Del Webb.

Fourth-quarter absorption paces were down 5% at Centex and 7% at Pulte, while Del Webb closed out a very strong year, as absorption paces gained 10% in the quarter.

The lower absorption paces for Centex and Pulte were impacted, in part, by our decision to slow down, and in some cases stop, sales at several Columbus and Louisville communities, as backlog levels had gotten too far extended.

Excluding the impact of the Columbus and Louisville operations, our absorption paces were essentially flat versus the prior year.

We finished the year with 598 communities, which is up 4% from the end of 2013.

Looking ahead to 2015, we expect to operate out of approximately 600 to 620 communities in each quarter of the year, up from the 560 to 580 range for 2014.

Plans call for opening over 200 communities in 2015, so it will be another busy year for our operations.

Finally, we ended 2014 with a unit backlog of 5,850 homes valued at $1.9 billion, compared with 5,772 homes valued at $1.9 billion last year.

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

Thanks, Bob.

As we typically do, let me provide a few comments on the market conditions we experienced in the quarter.

At a regional level, on the east coast we continue to see the same general pattern that existed throughout the year, with demand getting stronger as you move from the northeast down through the southeast and into Florida.

The Carolinas, Georgia and Florida, in particular, were among our strongest markets.

Demand in the middle third of the country experienced a similar pattern, with conditions improving as you move from north to south.

We have purposefully slowed sales in the roughly 30 communities we acquired from Dominion in Columbus and Louisville, as delivery dates on the acquired backlog and new sign-ups were out too far.

We are working hard, as we speak, to get build costs down and strategic pricing tools established in both of these markets.

As was the case throughout the first nine months of 2014, Texas was strong in the fourth quarter, with demand improving as we moved through the period.

We are certainly monitoring conditions to see what impact lower oil prices ultimately have on housing demand, but thus far in January, demand in Texas continues to be strong.

We have read the articles on Texas's economy being more diversified than in the past, and how the benefits of lower gas prices nationwide provides a big tailwind for the overall economy, but we appreciate the potential for lower oil prices to impact the Texas economy.

Like everyone else, we have to see how this plays out in 2015.

We are fortunate in that our investments are diversified by brand in each market, and geographically diversified across the markets of Texas and across the country.

Fourth-quarter results were generally stable out west, although conditions were volatile over the period.

California, principally the coastal and Bay areas, Arizona and New Mexico held up well during the quarter.

Our newest Del Webb community called Mirehaven is just opening for sales in Albuquerque, so we're looking forward to seeing how this performs in the new year.

Relative to our expectations, we are pleased with the fourth-quarter demand trends, which suggested positive momentum was building as we moved through the period.

On a year-over-year basis, we generally experienced higher traffic levels and sign-up volumes that held up well, except for our actions to slow pace in Columbus and Louisville as we moved through the period.

We have seen a continuation of these positive traffic and sign-up trends in the first few weeks of January, which we consider a good sign heading into the important spring selling season.

These recent demand trends are consistent with our optimistic view as we head into 2015, with expectations that housing demand continues on the slow and steady recovery path that we have been discussing for the past several years.

We are mindful, however, that there are a lot of cross currents which will impact individual markets differently, and make demand challenging to predict.

Overall, we believe that the positives of an improving economy with declining energy cost, rising employment, lower mortgage rates and related fees, beneficial long-term demographic trends, and a generally healthy supply of inventory should be able to offset any headwinds the industry may face.

The reality is that we can't control the US economy or the housing market, but what we can do is concentrate on running the best business we can.

For us, this means continuing to improve the returns on invested capital we generate over time by capturing efficiencies in our operations.

It also means implementing a supportive capital allocation program that, in this order, seeks to: first, invest in projects to maintain or grow relative market share while achieving required return thresholds; second, fund an increasing dividend; third, selectively engage in return-accretive M&A; and fourth, distribute any residual capital through systemic share repurchases.

Let me close by thanking the employees of PulteGroup for their hard work to successfully implement our strategies and for delivering the tremendous gains we realized in 2014.

I believe you are the best team in the industry.

Also, I want to thank you, and our suppliers and trade partners, for your enthusiastic support of PulteGroup's Built to Honor program.

I am proud and humbled by your efforts.

Now let me turn the call back to Jim Zeumer.

Jim?

Great, thank you, Richard.

We will now 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 yourselves to one question and one follow-up.

Sean, if you will explain the process, we will get started.

Thank you, sir.

(Operator Instructions) Ivy Zelman.

Good morning.

Great job on the presentation, guys.

And a solid quarter.

Richard, can you talk a little bit about what you're seeing in the mortgage environment given some of the policy changes, as well as maybe challenges on why people can't get approved, what the main reasons are, please?

Sure, Ivy, good morning.

From the mortgage environment, the changes that the president announced a few weeks ago, I honestly think it's too early to see how they play out.

Having said that, I'm very optimistic and certainly I think my peers are optimistic that's there are meaningful changes.

As you know, the mortgage environment has been tight overall and the FHA fee change announcement allows several hundred thousand new potential buyers to qualify for FHA mortgages.

We're optimistic, and as we noted in our commentary, we believe that there was a demand shift that began sometime around Thanksgiving, that began playing out in December, and we have certainly seen positive trends through the first few weeks of January.

And can you comment on why people do get denied when applying for mortgages?

Maybe at the Centex operations and some of the impediments that you guys see that our lingering or challenging?

Because it seems as if FHA has a pretty lean underwriting to get those people with credit scores low and low down payments.

So what are the reasons when people can't get approved?

Yes, Ivy, I think it's a couple of things.

I guess, primarily down payment difficulty.

I think underwriting standards with regard to FICO scores and debt to income ratios and things like that have been stringent for some time.

And I think the big impediment is down payment scores, and then, of course, lenders wanting to lend in this environment.

So the changes in FHA, I believe, are significant.

That 3.5% down payment threshold with proper supportive, appropriate underwriting guidelines is a very effective program.

I think the folks at FHA would tell you the quality of the book that they have been writing the last several years is outstanding.

So I think down payments are an issue overall.

That to me is one of the big impediments and one of the reasons why FHA is so important.

We're very optimistic that the changes that we've seen with this recent announcement will have an effect.

I think it's a little too early for us to say whether that's driving the improved activity we're seeing yet, or just people more being optimistic in general about housing.

Jack Micenko.

Hi, good morning.

Richard, in the analyst day talked about a net debt to cap number, 30% to 40% longer-term target, obviously, you're below that now.

With the pull back in the long end of the curve, just thinking about where your head is at around maybe layering a little more balance sheet leverage and how we can think about that line going forward?

Yes, Jack, it is Bob.

I think the answer to that is it will depend on our investment levels.

It will depend on our capital outlays for other things, share repurchases being the driver of that largely.

Certainly, as we look at our leverage we've got maturities in FY15 that are relatively modest.

Then we've got a bigger maturity in FY16, and so as we think about it, we will look at the long end of the curve.

We'll also think about, we've got, we've already got paper out there.

It might make more sense to start building the latter in the five- to 10-year window.

And I think it's really going to just depend on what the capital market is like when we actually are in a position where we need to issue some debt.

Okay, great.

Let's just say 2015 is maybe the year of the return of the first time buyer, how quickly can you ramp Centex?

We always think about a third, a third, a third in your business mix and the other two have been fairly successful where the demand has been at, but can that number rise above 30% and can you pivot fairly quickly to meet that demand?

Jack, this is Richard.

I guess, first and foremost, I'd remind everyone we still have a big Centex position.

Just like we've seen with the other segments, the first place you will see it is in same-store sales growth.

So I'm very confident we can capture our fair share of that activity.

In terms of new investment, it is likely an 18- to 24-month cycle.

We could put dollars to work now if we saw that activity improving, that could benefit, say, the end of 2016.

It's not an immediate turnaround.

In some cases, it can be quicker than that.

As an example, in Texas, the market is a little bit easier to access land and you might have a little bit bigger impact for 2016.

It's fair to say that 2015 is baked.

But I remind everyone that the first place any improved demand shows up is in same-store sales growth, and as we commented on Del Webb and Pulte before there's quite a bit of leverage we can get from a relatively deep land position we have there, as well.

Stephen East.

Thank you.

Just talking a little bit more about the capital allocation et cetera, and maybe, Bob, this first question is for you.

If you look at it, $2.4 billion in land spend, you spent about $300 million for next year, and you spent about $300 million in dividends and repurchase.

Ignoring any type of M&A, are you comfortable with that number being -- those two combined -- being around $3 billion or so?

And with that, where would you like, where would you feel comfortable with your cash balance dropping down to?

We certainly look at liquidity and it's not just cash.

It's availability under our revolver.

It can be substantially below where it is here.

I don't want to say $250 million or $500 million because it's really going to depend on the timing of cash flows, and, obviously, the way the business works a lot of our closing volumes in the back half of the year, and so if we spent a lot of money early in the year on land and development we might go a little bit lower on cash and then expect to recoup it through the closings through the back half of the year.

So it's not hard and fast rule, but certainly we could live comfortably between $250 million and $500 million of actual cash.

Okay.

So having a $3-billion-type number out there is not a big stretch then, I guess, when you look at it.

I don't want to say what we're going to spend on share repurchases because that will happen over time, but I think order of magnitude, you're absolutely right.

Okay.

Fair enough.

And then if you looked at, Richard, that was helpful on Centex, how long it would take to ramp up.

If you just look at your land spend in 2014, and then prospectively in 2015, could you talk about where you put money regionally, where you are going in 2015, and is there any switch among the other buckets other than Centex?

Yes, Stephen, from a geographic standpoint, given the stringent standards we have it is fair to say we allocated an appropriate amount of money across the country.

I don't think there is any one geography that stood out.

We're certainly being cautious in some of the places that we have a long land balance as we work hard to improve turns.

As an example, we have a very large land balance in the DC area.

We have a large land balance in Phoenix, so we would want to be appropriately focused and not get too far ahead there and continue to drive our turns.

As it relates to segment, we have in 2014 continued to put most of our money in Pulte.

Bob indicated, though, we did see a ramp up in Del Webb spend in the fourth quarter in terms of our approved transactions.

That's is going to ebb and flow up and down.

Those don't come in evenly.

So I would expect in 2015 we're going to get predominantly Pulte branded approvals with some Del Webb, and Centex, I think, is a TBD.

We didn't do a whole lot of it last year.

We've got to see that activity continue to ramp up before we really push the accelerator there.

David Goldberg.

Thanks.

Good morning, everybody.

Good morning, David.

Nice quarter.

I wonder if you could talk a little about the competitive environment at Webb?

I know you kind of mentioned for the business as a whole and for home building generally, certainly competitive, and some of the competition may be doing a little more incentives and discount a little bit more, but could you talk about the Webb business?

I know price was up 4% this quarter, you mentioned, but what is the environment?

How has traffic been?

And are you finding that buyers are looking for more incentives or more discounts as they come in the door?

David, the Webb environment is probably the least competitive of all the segments that we deal in because of the uniqueness of the offering that we have.

We certainly have good competitors there.

Shea Homes is a very good competitor, obviously.

Some of our larger peers, like Lennar, and Hovnanian and others have competitive offerings, but Webb is, we believe, unique.

What we find there, and this is consistent with what we've seen through past cycles, that buyer is not nearly as price sensitive as some of the other categories.

What they want is confidence in the economy and confidence in their ability to sell their existing home, which is clearly improved through 2014 versus what was, say, in 2012 and 2013.

Which is why we've seen absorption paces lead in Q4 there, and I would expect good things out of Webb this year.

We typically see them being a later cycle play in the housing cycle and that continues to play out.

So I don't want to give anyone the impression there's no competition there, but it's certainly an area that we have the ability to push margin and price more than some of the other areas because of the lack of competitors, but also, frankly, because that buyer category is less price sensitive in general.

That's fantastic.

Then, Richard, I wanted to ask a bit of a follow-up question.

You mentioned in your comment about maintaining market share or growing market share as you look forward.

You look at the growth and within your closings and kind of flattish year-over-year, up a little bit year-over-year from where we are now.

What I'm trying to get an idea of is with community count that you have baked in and the guidance that you gave, do think that would put you in a position where you would kind of maintain market share versus the overall market?

Do think you would grow faster than the market, or do you think it's too hard to determine something like that just based on the community count growth?

Yes, David, it's tough to know what exactly our competitors are going to do, but I'll just remind everyone a couple of things.

We were very disciplined about not pushing investment until we got above our cost of capital.

That happened for us sometime in 2013.

And that's when you began to see us accelerating our investment to more than, I think, as the script indicated, maintenance mode and more into growth mode.

How that relates to our ability to take share is going to be really dependent, obviously, on what happens to the market and what our competitors spend.

I would expect that over a period of time, not necessarily today or tomorrow, but over a period of time, that we are going to be able to grow our share.

But one of the factors that we're focused on internally is the concept of relative market share, meaning our size in the market vis-à-vis our peers.

And we believe that if we can have a relative market share somewhere around 0.5 or greater that that captures the majority of the efficiencies that we can get in a market.

So our goal has been to push our relative market share to at least that level in every market, and in many we are much greater than that.

And for those markets where we have not been able to achieve that, either figure out a way to get there or get out of the market.

We've been very disciplined with that.

How does that all relate to our overall market share growth?

It's really hard to say.

Clearly, we are focused on generating high returns, and as you can see with our community count guidance, growing our business in general.

But I wish I could give you a more definitive answer on market share, but it's a little too complicated to answer that.

Jay McCanless.

Good morning, everyone.

First question I had was going back to Centex.

Do you see the opportunity, either through acquisition or through loosening of the mortgage standards, to maybe increase that neighborhood count?

I know you all have been asked this a couple of different ways, but just after the commentary we heard on the third quarter call I was surprised not to hear more about Centex and where you're going with that?

Well, Jay, I'll remind everyone that part of what we acquired with Dominion was Centex.

I don't remember the exact percentage, but a sizable piece of that business was that first time category.

So there's a good example of our desire to get into that space where we feel like the terms and price points and financial transactions matter.

So we are paying attention to this category, but we said consistently before, we had need pace to continue to come back to ensure that returns get there.

Now, again, I'll just remind everyone that we like what we're seeing these last few weeks and couple of months with the market.

So that could be the beginnings of an opportunity for us to begin to invest more in Centex.

So we're going to not force investment into segments that don't generate the highest returns for us.

We're certainly hopeful that Centex becomes a bigger part of that equation.

But we're going to watch the market to make sure.

Okay.

And then, just the follow-up question I had is on a Del Webb.

Are you seeing an increasing amount of cash buyers there?

Are you seeing people come with more, either higher down payments, et cetera?

Just wondering if you are seeing more well-heeled buyers starting to get into that market and helping to accelerate the sales pace there?

Yes, it's been fairly consistent, Jay.

We've been sort of in the 40% to 45% range for cash buyers, cash as a percentage of the total Del Webb category overall.

Not a big change in the financial profile.

Again, this buyer category is quite different from either Centex or Pulte in that they have a large asset base built up, they are less concerned about income.

It's more about cash flow and their overall position, their financial position.

What we tend to see with this category is that if they feel good about the economy and their own financial position, they tend to increasingly want to buy.

For the Del Webb buyer, it's really not a question of whether they want a new lifestyle, they clearly do.

It's a question of when they are comfortable pulling the trigger.

As we've seen, slow and steady improvement in that category which continued to bear out in Q4.

Ken Zener.

Good morning, gentlemen.

Good morning, Ken.

I appreciate your gross margin outlook.

Given that it's fairly steady, could you comment on what gives you the confidence in giving that guidance given and overall pressure we're seeing from gross margins from some of the larger builders.

Some are highlighting lower margins to go after higher turns.

Others are just saying, look, we're at a very high level, let's smell the coffee.

Can you express where your confidence comes from?

Is it that your common plans are giving you that lift, or is it that because you didn't buy high-priced land?

That would be helpful.

Thank you so much.

Sure can.

This is Richard.

A number of things.

We highlighted a few of these things in our script, but number one, common plan management and efficiency of production, we believe, continues to make a difference for us.

So that's part of it.

Would you quantify that?

It's very difficult --

Or are you just ranking them?

No, I'm not ranking them, but you asked about the different factors, so let me just kind of give you them.

Number one is the common plan management and that's clearly important to us.

Two would be our strategic pricing focus.

We do have a very disciplined focus on lot premiums, option pricing, ensuring that we have a systemic base price increases when we can.

So we're being disciplined there.

We also are very proud of the land that we've been buying.

We believe that our focus on land has been very disciplined and focused on high returns, that's helped.

I will also point out that our limited spec inventory is helping us.

We are not discounting a bunch of finished specs, and, frankly, that continues to weigh on our margins very positively.

We've also got lower interest costs that are coming through as a result of all the debt that we've paid down and we're very proud of that.

So when you add this all up it equals what we call value creation.

It's a road to higher returns over time to generate the best possible total shareholder return, and we believe we're on that road and well on that road.

We're doing well with it.

Thank you.

Michael Dahl.

Hi, thanks for taking my question.

Richard, I guess, the follow-on on Ken's question, or to a certain extent, on the margin side, it seems like strategic pricing still, obviously, a focus.

You've got backlog that looks kind of flattish.

Pricing has flattened out.

Community count growth is going to improve a little.

But it seems like the way your setting up for the business is for a fairly low revenue growth, at least for this year, before maybe some investments kick in.

Is that fair?

Mike, we're not commenting on our revenue targets or our unit targets overall.

I would just remind everyone that we're executing our playbook.

We increased investment into the business starting in 2013.

We clearly ramped up in 2014.

We're guiding to more investment in 2015.

It does take time for that investment the flow through.

We're staying disciplined on it overall.

So we're very happy with our overall trajectory, and sometimes we wish we could push a button and a community would pop open.

We are facing entitlement delays and development delays just like other people are.

But in the scheme of it we like the slow and steady progress that we're on.

We feel like that benefits investors.

We are really being smart about the land that we buy, not getting out ahead of ourselves.

And if you were to walk around our communities and talk to our leaders around the Company they would tell you they are focused on returns.

And a portion of that is, of course, pre-tax income growth.

But a portion of it is also inventory turns and SG&A leverage and all the other pieces.

So I'm just trying to run a balanced business, Mike.

Got it.

And, I guess, as a follow-up, and, Bob, I think you commented that you expect SG&A to be in a dollar range of $160 million to $165 million per quarter.

So, I guess, did I hear that correctly, and if so, that seems to imply that you would potentially delever by maybe 100 basis points or so.

So just how to think about that, and then what the opportunity or time frame of re-levering the SG&A would be?

Yes, obviously, you are right.

We are projecting an increase in our spend and it's for all the things that we are working through.

And sometimes you have to spend in advance.

Obviously, we are opening a lot of communities this year.

We've opened a lot of committees last year, so there are costs associated with that.

I think if you take a step back, what we're proud of is, you look at our operating margin for 2014 and it's, excluding the construction defect accounting in the second quarter, 13%.

So we're paying attention to our spend and choosing where to invest.

So I think we're delivering on the bottom line and trying to be disciplined about that.

Okay, great.

Thanks, guys.

Stephen Kim.

Stephen?

Sorry, can you guys hear me?

Hi, Stephen.

We've got you now.

Okay, sorry about that.

Very interesting call and, obviously, good results.

I guess a couple of questions related to your guidance on margins.

You just have put a lot of emphasis on the return on invested capital, and giving guidance on the gross margin but not really giving guidance on the revenue.

What strikes me about that that is interesting is that most of the other builders that are talking about somewhat lower gross margin with a little bit more volume are also talking about an emphasis on return on capital, and talking about the fact that they are able to sort of tolerate a somewhat lower gross margin because of the fact that they're just simply focusing on the return of capital and that will sometimes require more volume at the expense of margins.

And that's okay.

I didn't catch a return on capital guidance figure from you and I was curious if you could give one because just giving a gross margin kind of guidance number without a revenue number doesn't really seem to be consistent with a focus on return on capital.

So I was wondering if you could give us some more guidance on the return on capital?

Yes, Stephen, it's Bob.

We have not historically, nor did we today, give guidance on what our goals are.

What we have said consistently over time is that we seek to improve it.

You heard Richard say we got our cost to capital.

Our returns exceeds our weighted average cost of capital sometime in 2013.

We're moving that forward.

We've got a lot of cash, we want to manage through that.

We have a large deferred tax asset.

So our investment profile, our invested capital profile is a little bit different than we might like.

So rather than set a target that gets measured against -- our goal is improvement.

And we think we have been doing that and expect to continue to do that.

And, Stephen, this is Richard.

I'll just add a little bit of color.

To add emphasis to what Bob said, we want to improve returns over time.

The way capital flows into this business is lumpy at times quarter-to-quarter, and there can be volatility, but clearly over time we want to improve returns.

We've got one builder in this space that has outstanding returns and we're in second place the way we measure it.

We want to close that gap over a period of time.

So just because we didn't give an ROIC target for a lot of reasons don't think for a minute we're not focused on improving it.

That comes through loud and clear.

Great.

Thanks very much for that.

So with this focus on return on capital, I want to then shift a little bit to the gross margin, because what's interesting is that you're talking about a flat gross margin outlook for 2015.

But you have three sort of distinct businesses.

You have the Centex, you have the Webb, you have the Pulte, and I was curious if we should be thinking that in general your gross margins will be flat next year in each of those three sub-categories, or if you're envisioning that one may start to drive negative year-over-year margins but that others will be up and so the aggregate will be flat.

If you could just help me understand how widespread it is going to be?

Stephen, we're not breaking it down in that much detail.

What I can tell you is that Webb continues to, and Pulte continued to deliver higher margins that Centex does.

Again, our operators are incented.

Their pay systems, our pay systems for the senior leadership team are all focused around return.

We continue to focus a lot on margins, though, because we believe it's a big driver of return and we have seen what it has done for us.

I'll just point everyone to a comment Bob made around operating margins.

When we've got operating margins, excluding the charge we had to take in Q2 last year around 13%, we're pretty proud of that.

We're continuing to focus on that.

So I would just leave you that Webb and Pulte higher than Centex overall on margins, but the volatility within each, or the guidance within each, we're not providing that level of detail.

Mike Roxland.

Thanks very much and congratulations on a good quarter and a good year.

Thanks, Mike.

I know there have been a lot of questions on Centex on this call thus far, so I really don't want to beat a dead horse here, but just one quick follow-up.

Obviously, you have seen some of your competitors begin to focus more on the first-time buyer.

You yourself have seen some improvement in Centex, ignoring what some of the weakness in 4Q.

At what point do you start to become more constructive on that cohort and begin investing in it?

And really, is there any particular metric that you look at that would get you over that hurdle?

And if, let's say, it that metric is returns, is there a type of return hurdle that must be cleared before you start actively investing?

Can you just help us frame how you would get comfortable deploying more money into Centex?

Mike, I'll take a stab, and then Bob can give you some additional color.

We have a 13 point risk-weighted scale for the way we invest in all of our land, and all the different factors that go into that include things like the length of the land transaction, whether or not we're building the same product, the market's performance, et cetera.

A number of factors.

And the return thresholds range from around 20% up into the low 30% category.

So our focus for a window to invest in Centex is when we can generate returns in that band between 20% and 30%, effectively.

The factor that we've talked about repeatedly that we believe drives Centex over that 20% threshold is pace.

Because that buyer, unlike the Pulte or Del Webb buyer, have a limited amount of income to spend there is only so much you can do on the pricing side with the Centex buyer before you price them out of their home.

So as an example, if you are selling four homes a month in a Pulte community and you're selling four homes a month at a Centex community, if Pulte is generating 25% margins and Centex is generating 19% margins, it's going to take more pace than four per month in order to get those returns where we need them.

So you might need six or seven homes a month in a Centex community to make that work.

So that's what we're looking for, and perhaps we're beginning to see the beginnings of that with the improvement, but it's generally pace.

So, Bob, anything to add there?

That's exactly what I was going to say.

The only thing to emphasize is it's not as if we've told people don't invest in Centex today.

We are agnostic to brand, so the local investment and operating teams are actually evaluating transactions against each other with the capital they have to spend over time.

And so what Richard just laid out plays out such that today the move up in Del Webb transactions look better to us from a return perspective, that's where we are investing.

Got it.

Appreciate all the color there.

Can you just draw that a little further, though, say, if you look at the return threshold, 20% to 30%, can you give us an idea of where returns currently stand on your Centex product, and what the current pace is on an absolute basis versus your targeted pace to achieve that 20% to 30% threshold?

Mike, it's a little complicated because a lot of the land that we're sitting on for Centex we might've acquired five years ago.

Some we may have acquired two years ago.

So the kind of current returns, obviously, a project when it gets to the end of its life generates higher returns than at the beginning when you're putting a lot of capital in overall.

I would say this, we are driving each of our current communities to the highest possible return, and that's like balancing the knobs in an airliner trying to adjust all the different pieces.

So for Centex, it might be pushing pace a little bit more than price, kind of given the dynamics that I have indicated.

I think the commentary we're trying to provide is around new investment or future investment, we need to get over that 20% return hurdle, which is the way we look at it before we will invest a lot of additional dollars there.

Got it.

Good look in 2015.

Thank you very much.

Michael Rehaut.

Thanks, good morning, everyone.

Morning, Mike.

First question, I was hoping just to delve in a little more granularly in terms of the gross margin component, that being interest expense amortization.

You had a great improvement in 2014, you listed it as one of the drivers.

I think down about 130 BPS.

I would presume that is expected to continue to come down in 2015?

I was hoping perhaps you could give us a range or an outlook for that as a percent of sales?

Well, we wouldn't do it necessarily, Mike, as a percentage of sales because we haven't given sales guidance, but what I can tell you is what we expensed in FY14 was about $195 million.

And you can expect that number to come down probably to around $140 million next year, reflective of the fact we have much less leverage, our cash spend on interest is in the neighborhood of $130 million or $140 million per year.

So we will get to the point where we are expensing what we are capitalizing.

So before my second question, just that $130 million, $140 million, would that kind of be where it stabilizes unless you take a lot more debt off the balance sheet?

Yes, obviously, depending on what we do.

So we paid down some debt this year.

So what we capitalized in 2014, which will get amortized over time, is less than what was capitalized the year before.

So it's kind of like a FIFO, if you think about the old accounting analogy.

Right.

And then just lastly, Richard, I think you referred a couple of times to December and January trends being a little bit better, if I'm characterizing that right.

A little bit momentum, perhaps.

I was hoping you could review the trends, let's say, throughout the quarter?

Other builders have pointed to, perhaps, competitive activity intensifying a little bit.

And I just was curious if you had seen that yourselves because certainly the December/January commentary suggests otherwise possibly?

Yes, thanks, Mike.

So let me just kind of take everybody back a little bit to 2014.

The year started off from a sales pace perspective, I think, for everybody really strong and definitely we noticed a pause sometime in the summer that continued through most of the fall.

What's notable is that around Thanksgiving things started changing, and so to answer your question, we sold virtually the same number of homes in October, November, and December which, candidly, very rarely happens.

Normally, you would sell a lot more homes in October than you did in December and you'd see the quarter trail off.

So that was notable in our minds.

And then January has continued to be quite positive.

So from a competitive activity standpoint it's hard to say.

Candidly, we're not trying to play the spec inventory, drive a bunch of volume, push incentives in order to drive a bunch of volume game.

So perhaps we're not focused as much on what's happening from a discounting perspective as maybe others are.

I can just tell you that overall buyer activity, I think, was weak in the beginning of Q4 and improved through Q4 based on that trend, and it has continued into January.

And before we move, Mike, I just want to clarify something, in terms of the interest expense, I had indicated $140 million.

You said $130 million to $140 million.

I would say it's probably $140 million to $150 million rather than $130 million to $140 million, just for everybody's benefit.

Nishu Sood.

Thanks.

I wanted to ask about the share repurchases.

The increase in the share repurchases in the fourth quarter relative to the earlier quarters of the year, was that driven mainly by just the seasonal cash flows?

Obviously, stronger cash flows at the end of the year, or a lesser need for land purchases?

What was the kind of driver.

Was it opportunistic?

Well, I think, we talked about this at the investor day and we announced the fairly significant increase in the authorization.

It really comes down to we have the capital to do it.

As we look at the cash balance that we have, it really isn't an either/or conversation around land investment.

So we elected to increase our spend on repurchasing shares knowing that we were increasing our spend on land, as well.

And, Nishu, as we indicated on our investor day it is not our goal to try to be opportunistic.

If something happens and we have that opportunity we always have that option.

But our goal is to more systemically and routinely return funds to shareholders.

But I'll just remind everyone, you invest in the business first, dividend improvement second, accretive high return M&A third, and then repurchases fourth.

And we have a good discipline about the way we're going about that today.

Got it.

And second question, everyone tends to think just about Texas and oil prices.

You have one of the broader footprints of the public builders.

Are there any other markets you are keeping tabs on or would be potentially concerned about as it relates to lower oil prices, or is it pretty much just focused on Texas?

I would turn that around to tell you I'm pretty optimistic about the rest of the country because of a huge tax break that everybody just got with a lot lower gas costs annually.

So, clearly, there are other markets that have more energy dependence, if you will, Nishu, than others.

But I don't think anyone to the same degree as Texas, potentially California in a market or two, but personally, I'm optimistic that the cash flow implications for people's monthly cycles based on cash gas prices are a positive factor from oil prices being depressed.

Bob Wetenhall.

Good morning, and thanks for all the color.

Obviously, a really good quarter.

Just wanted to get your view on land costs, what you are seeing.

Obviously, your spend slowed down last year.

You came in lower than your original targets.

What are you seeing from land prices today, and do you think that there is a possibility you might come up short and have to redeploy the excess cash elsewhere this year?

Bob, it's Bob.

I don't think we've slowed down our spend.

We didn't spend everything we authorized and that's, again, consistent with the year, but still a 30% increase in our spend.

We are projecting another 40% if we can find investment that makes sense.

Is it possible we won't spend that much money, yes.

Just like we didn't last year, and I'll say the same thing we said a year ago, we are okay with that because we want people to do it -- the thing we're trying to give our teams visibility to is a multi-year capital allocation so that they can plan accordingly.

If we've just said, okay, we authorized it this year and then take it away, they will be induced to spend it because they don't want to lose it.

So we think it drives better behavior to say, look, one thing we haven't shared with this group broadly is we've actually given the field three years of capital allocation, so they know today what they have for 2015, 2016 and 2017.

And we will give them a view of 2018 at some point.

The idea being manage your capital over time.

So I know we all focus on this call around the current fiscal year and what we're going to spend.

As a Company, we're actually looking longer term than that because the market is still competitive.

I don't know that we would say, okay, if we spend $2 billion next year instead of what we've targeted would we then turnaround and write a big dividend check or buy back a lot of stock.

Not necessarily.

It would be dependent on what we thought we were going to do over time.

What do you see with the land prices?

I'm sorry, Bob, it's Richard.

Land prices are competitive, no question about them.

Fortunately, we've got a very broad footprint.

We're not, as Bob indicated, forcing investment into any particular geography.

We allocate capital to geography and if we can't find the right deals we don't spend it.

Land is competitive.

I don't personally think that is news.

I expect it to stay competitive.

Adam Rudiger.

Hi, thanks.

Two questions on the Dominion acquisition.

The first was the purchase accounting impact this quarter and what the expected impact is for next quarter?

Yes, so it was about a 70-basis-point tailwind, sorry, headwind.

So detrimental margin impact in the fourth quarter and our expectation is between 30 and 50 basis points in the first quarter next year, up [50.]

Thank you.

And the second question relates to your comments about slowing or stopping sales at the Columbus and, I think you said Louisville communities.

How much of that -- at first glance it would make it sound like those were ultra-strong markets.

So my question is, is that the case, or how much of it is a philosophical or structural difference in the way you want to run the business versus how they ran the business?

It is 100% the latter, although we are happy with the markets and we think the market dynamics are good and appropriately strong.

But, frankly, we had way too much backlog out there in front of us, Adam, and we are very comfortable with a few months of backlog.

But we don't want to get seven, eight, nine months of backlog because we think we lose pricing power.

It also gave us the opportunity to intensely focus on common plan management, getting our, frankly, more efficient plans in place than what they had been building in Dominion, and then also implement some of our strategic pricing focus with lot premiums and our option focus.

The teams are fantastic.

They are really working hard and doing a lot of work to kind of prepare for reopening a number of communities, both existing communities that we stopped, as well as new communities.

So very pleased with what is happening there, but it was just a philosophical difference and, frankly, driving return versus growth.

Will Randow.

Hello, good morning, thanks for fitting me in.

Hello, Will.

Just a follow-up on the land color.

I was curious if the markets like Texas, in particular, you are seeing competitors back off or get less competitive in regards to land?

It is interesting.

I can't say what has happened in the last 30 days.

But we certainly have approved a number of transactions there, including one of the Del Webbs, and they would tell you for well-positioned assets people are still interested.

So it's not like the demand goes away from the builders immediately.

Got it.

And then, in the Southeast are you seeing competition step up?

I would assume so based on a number of acquisitions among competitors.

Will, it is Richard.

I think the Southeast has been historically pretty competitive.

I haven't noticed a big change in that dynamic.

We happen to have some pretty dominant positions.

Our two operations in North Carolina and South Carolina are fantastically run.

We do very, very well there.

I'd say it has continued to be competitive, but we're doing very well.

And to the extent that they bought somebody, it's just a different name, but they are still the same builder there with the same lot positions initially.

So it doesn't change the competitive landscape immediately.

There no further questions.

Presenters, I turn the call back to you.

Great, thank you, Sean.

I know there's a lot of conference calls lined up today.

Sorry we ran a little bit long on this call, but wanted to get in as many people as we could.

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

Thank you for your time, and we'll look forward to speaking with you again next quarter.

This concludes today's conference call.

You may now disconnect.