PulteGroup Inc (PHM) — Q4 2015 Earnings Call Transcript

Great. Thank you, Sean and good morning to everyone participating in the conference call to discuss PulteGroup’s fourth quarter financial results for the three months ended December 31, 2015. Joining me on today’s call are Richard Dugas, Chairman, President, and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; Jim Ossowski, Vice President, Finance and Controller. A copy of this morning’s earnings release and the presentation slide that accompanies today’s discussion are posted to our corporate website at pultegroupinc.com. We will also post an audio replay of today’s call to the site later today. Let me remind all the participants that today’s presentation may include forward-looking statements about PulteGroup’s future performance. Actual results could differ materially from those suggested by any comments made today. The most significant risk factors that could affect future results are summarized as part of today’s earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. With that said, now let me turn the call over to Richard Dugas. Richard?

Thanks, Jim and good morning, everyone. I’m extremely pleased with PulteGroup’s fourth quarter earnings which show significantly improved results across key business metrics. In addition to ending 2015 with very strong results, our fourth quarter operating and financial performance provide a foundation we can build on in 2016 as we capitalize on opportunities to accelerate the growth of our homebuilding business. Bob will go through a detailed review of our Q4 financials in a moment. But there are a couple of numbers and points that I’d like to highlight. Order rates in the fourth quarter were up 13%, which is the biggest year-over-year percentage jump we have realized since 2012. As solid as this number is, what I view even more encouraging is the 9% gain in absorption pace that we realized in the quarter. We’ve always said that generating higher sales within our existing footprint is the most efficient way for us to grow volumes and ultimately earnings. Pulte’s disciplined approach to acquiring the right land positions over the past several years is having a positive impact on our results. Along with order rates, the average sales price we’re able to realize for our homes continues to increase. In the fourth quarter, closing ASPs were up 6% to $353,000, while backlog ASPs gained 10% to $365,000. Between market opportunities, mix shifts, and ongoing implementation of our strategic pricing programs, we expect ASPs will continue to move higher in 2016 versus comparable quarters in 2015. Our recently closed purchase of assets from John Wieland Homes and Neighborhoods will further our pricing gains given their higher price points. I also want to highlight our gross margins, which at 23.5% is up 40 basis points over last year and remains arguably among the highest in the industry. As we have discussed for the past several years, we have implemented a number of programs from product and purchasing zones to commonly managed plans that include cost management and strategic pricing. As an example, almost 60% of our fourth quarter closings were from commonly managed plans that have the benefit of increased consumer feedback and more efficient floor plan design. The goal of all this work has been to improve sales paces and gross margins in support of delivering higher returns on invested capital. A lot of time and effort has been invested in implementing these initiatives and the gains are evident in our results. Given that the financial improvements we realized in the quarter were so broad-based, I can highlight a number of other metrics in my comments. I purposely picked order rates, ASPs, and gross margin because there is at least one common element which I believe is an important factor in all three metrics. That common element is land. In 2011, we launched the value creation strategy, with its focus on delivering higher returns on invested capital over the housing cycle. By 2013, we had raised returns to the point where they exceeded our cost of capital. Since that time, we have purposely increased investments into the business because it makes economic sense to do so. While we have raised investment, we have done so while adhering to the guidelines and disciplines we put in place back in 2011. These disciplines include underwriting projects to a defined 13-point risk rating scorecard that helps ensure we select the highest returning projects, focusing on land positions that are closer to job centers and located in better markets and sub-markets, prudently using options which now account for 31% of all lots and 34% of our more traditional Pulte and Centex land positions to help enhance returns and/or mitigate land risk. Even though we are having to develop over 70% of the lots we use, we have systematically expanded the percentage of option lots we maintain. We continue to emphasize investing in shorter, faster turning projects with an average investment cycle of 36 to 48 months from acquisition to completion. By focusing on shorter duration projects, we help to minimize risk should a housing downturn emerge sooner than expected. As an example, we expect to retrieve the capital we invested in the John Wieland assets in less than four years. And we expect the purchase to be accretive to company returns by year two. By strategically investing in land over the past few years, we have assembled a robust land pipeline that should allow PulteGroup to grow at a rate consistent with or ideally ahead of the overall housing market. Our just completed Wieland transaction will certainly support this effort. The John Wieland Homes and Neighborhoods brand is highly regarded in the Southeast, particularly within the luxury buyer category. Beyond the opportunities we see to expand this position, we also see the potential to deploy our Pulte brand onto certain Wieland land positions as we work to increase volumes and accelerate future absorption of the acquired lots, again enhancing returns. By focusing as intently on quality, not just quantity, of the land assets we acquire, we put ourselves in the best position to maximize sales pace, pricing, margins, and most importantly, returns on invested capital while working to mitigate excess market risk. Through our value creation strategy, we have now put the company in a position to grow while continuing to generate better financial performance and consistently returning funds to our shareholders. And we have done all this while taking a more conservative lower risk approach to our business. Growth, stronger returns, and properly managed risk. We think this is a great combination. Now let me turn over the call to Bob for a more thorough review of the quarter. Bob?

Thanks, Richard and good morning. The gains demonstrated in PulteGroup’s Q4 financial results are a direct reflection of the meaningful improvements we’ve continued to realize in our homebuilding operations. As I will detail, these gains can be seen throughout our fourth quarter financial savings. Fourth quarter homebuilding revenues totaled $2 billion, which is up 12% from prior year revenues of $1.8 billion. The increase in Q4 revenue is driven by a 7% increase in closings to 5,662 homes, combined with a 6% increase in average sales price to $353,000. Although not a metric we managed against, the 5,662 homes closed in the fourth quarter equates to a backlog conversion rate of 65%. As we addressed in our most recent calls, we are working to close the year-over-year performance gap we’ve experienced with regard to getting homes delivered. We are pleased with the progress we made in the fourth quarter. Having said that, the challenges we and the industry face with regard to labor resources and extended land development timelines are not likely to improve in the near term. We believe, however, there is a decision to prudently increase spec production, which should help us to maintain a more consistent build cadence going forward. In the quarter, closings by brands were as follows: 19% of homes were from Centex communities, 55% were from Pulte communities, and 26% were from Del Webb. In the fourth quarter of last year, closings from Centex, Pulte, and Del Webb were 24%, 46%, and 30%, respectively. Given the profile of projects we are investing in, coupled with the projected impact of assets acquired in the Wieland transaction, we believe that describing our customers by buyer group, rather than by brand, will better represent the makeup of our business. As a result, beginning in Q1, we will address buyer groups rather than brands. In the fourth quarter, closings by buyer group were as follows: 31% were first-time buyers, 40% were move-up buyers, and 29% were active adult buyers. In 2014, closings by buyer group were 34% first-time, 33% move-up, and 33% active adult. The company reported gross margins of 23.5% in the fourth quarter, which is up 40 basis points over the prior year. As it’s been an ongoing trend, fourth quarter margins were enhanced by higher option and lot premium revenues. In fact, option revenues in the quarter increased 10%, or $4,976 per closing, while lot premiums gained 16%, or $1,868 per closing. Sales discounts remained modest at just 2.2% or $8,026 per home, compared with 2.1% or $7,040 per home last year. Since implementing our strategic pricing programs in 2011 as part of our value creation strategy, option revenues per home have increased by $19,800 or 58%, while lot premiums per home have increased by approximately $7,100 or 107%. We believe our more strategic approach to pricing has been a key contributor to the high gross margins we continue to maintain. Reported fourth quarter SG&A expense was $139 million or 7% of home sale revenues, including the benefit of a $30 million reversal of construction-related insurance reserves. Reported prior year SG&A expense was $146 million or 8.2% of home sale revenues, reflecting a $15 million reversal of construction-related insurance reserves. Looking at the full-year, our reported SG&A was $590 million, which was 10.2% of homebuilding revenues, including the benefit of $62 million or 110 basis points associated with certain legal settlements and reserve reversals. PulteGroup’s financial services segment reported fourth quarter pre-tax income of $29 million, which includes the reversal of $12 million in mortgage repurchase reserves. The decision to reduce reserves is based on probable settlement of various repurchase requests and current conditions. Mortgage capture rate in Q4 was 83%, up from 81% in the prior year. I would like to take a moment to highlight the efforts of our financial services team, including Pulte Mortgage and PGP title, in meeting the challenges in the new regulatory environment under TRID. Our teams did a tremendous job closing Pulte Mortgage loans without missing a beat and supporting our customers under the new rules. Deb Still, our President and CEO of Financial Services, and her team are recognized leaders in the industry and did a fantastic job implementing the changes needed to operate within the new TRID guidelines. Looking at net income for the fourth quarter, we reported $228 million or $0.64 per share, which includes $0.07 per share of benefit from insurance and mortgage reserve reversals taken in the quarter. Our per share earnings were calculated using approximately 352 million shares outstanding for the quarter, which is down 6% from last year, largely as a result of our share repurchase activities. As part of our income statement review, we wanted to provide some thoughts about 2016, given our backlog and anticipated land, labor, and material costs. We expect 2016 homebuilding margins, inclusive of the diluted effect of the Wieland transaction, to remain high and be in the range of 21.5% to 22%. This annual margin guidance includes a negative impact of the Wieland transaction of approximately 100 basis points in the first quarter, 80 basis points in the second quarter, and 50 basis points in each of the third and fourth quarters. Looking at our projected SG&A, we expect our full-year spend will be approximately 10% of homebuilding revenues. Consistent with prior years, this will be impacted on a quarterly basis by the seasonality of our closings. Based on the margin and overhead guidance we just provided, the calculated operating margin we expect to generate in 2016 is between 11.5% and 12%. The operating margin we reported for 2015 was 13.2%, but this was enhanced by the 110 basis points impact from the construction-related insurance reserve reversals we recorded during the year. When you consider that our 2016 operating margin guidance of 11.5% to 12% is being negatively impacted by roughly 70 basis points from the Wieland transaction and factoring the 110 basis points enhancement to 2015 operating margins, you can see that operating margins will actually flat to slightly improve in 2016 compared to 2015. Given headwinds the industry is facing on land and labor costs, we’re very proud to be able to maintain our strong operating margins. Putting all this together, the combination of expected higher closing volumes, higher ASPs and overhead leverage have us positioned for strong earnings growth in 2016. Moving past the income statement and reviewing our homebuilding operations, we ended the fourth quarter with a total of 6,494 homes under construction. Spec units accounted for 30% of the homes under production, which is up from 26% at this time last year. As discussed, we have purposely increased the amount of spec homes we have in the pipeline to help maintain a more even construction cadence. In the fourth quarter, we approved approximately 7,000 lots for purchase excluding the Wieland assets as that deal closed to mid-January. We ended the year with 138,000 lots under control, of which approximately 42,000 lots or 31% were controlled via option. We continue to seek out opportunities to increase our use of land options in an effort to enhance returns and/or lower our overall risk profile. Of our controlled lots, approximately 23% are finished and 18% are currently under development. As Richard discussed, we continue to use the defined and disciplined approach to our land investment. Consistent with our land acquisition guidelines, we invested $485 million in land acquisition in Q4, and an additional $304 million for development of previously acquired lots. These investments brought our full-year land-related spend to $2.3 billion. For the year, we invested approximately $1.2 billion to acquire new land. Looking ahead to 2016, including the money invested to acquire the Wieland assets, we have authorized $1.6 billion for land acquisitions. As always, this level of investment is predicated on our continuing assessment of the market, and on our ability to identify suitable high-returning projects. Looking at our capital allocated to shareholders in the fourth quarter, we distributed $28 million in dividends and did not repurchase any of our stock. The lack of share repurchase activity was due to trading limitations resulting from work to close our previously disclosed term loans and to acquire the Wieland assets. We expect our share repurchase program to become active again beginning in the first quarter of 2016. Based on our fourth quarter activity, we ended the year with $775 million of cash and the debt-to-capital ratio of 30%. As Richard noted at the start of this call, we realized strong new order growth in the fourth quarter as orders were up 13% over the last year to 3,659 homes. Higher orders for the period were driven by a 9% increase in absorption paces, as all three buyer groups realized higher prices. It should be noted that we expect absorption paces in the first half of 2016 to be lower as we integrate the Wieland communities with their typical operating model, which includes higher ASPs and slower absorption paces relative to Pulte averages. Breaking down orders by buyer group, on a year-over-year basis, our first-time buyer business was flat, while move-up and active adult orders increased 35% and 3% respectively. Adjusting for community count, our absorption paces were up 16% from first-time buyers, 11% from move-up buyers, and 9% for active adult buyers. On a dollars basis, orders for the fourth quarter gained 24% to $1.4 billion, helping to raise the average sales price in backlog to $365,000. It’s important to remember the normal business seasonality and its impact on the mix of closings will typically result in lower delivered ASPs in the first quarter of each year. The company operated out of 620 communities during the fourth quarter, which is up 4% over the prior year. Looking ahead, we currently expect community count growth versus comparable prior year periods to be in the range of 8% to 10% in the first two quarters of the year, increasing to 10% to 15% growth in the back half of the year. This will be our largest year-over-year increase in community count since the housing recovery began. Supported by our strong orders in the fourth quarter, we ended 2015 with a backlog of 6,731 homes, valued at $2.5 billion. The growth in our year-end backlog, up 15% in units and 26% in dollars compared to last year, gives us great momentum heading into 2016. Now let me turn the call back to Richard.

Thanks, Bob. As Bob detailed, the company realized meaningful improvement in our operating and financial results for the quarter. Given the strength of our operating metrics and the expansion of our land pipeline, we are in an excellent position to grow earnings in 2016 and beyond. As has been our practice, let me provide a few comments on the market conditions which drove our fourth quarter results. Consistent with our Q4 increases in orders and absorption pace, we experienced generally higher buyer traffic to our communities, a pattern we realized throughout 2015. Further, many of the trends we experienced earlier in 2015 continued through Q4, with stronger demand in the better located and on average closer-in communities. Specific to the fourth quarter, buyer demand remained positive up and down the East Coast with notable strength in the Southeast from the Carolinas down to Florida. We’ve talked about positive demand trends in the Southeast for a number of years. It is this trend, and our expectations for long-term growth in the Southeast markets, particularly in the bigger markets of Atlanta, Charleston, Charlotte, and Raleigh, which made the transaction with John Wieland so compelling. Looking to the center of the country, demand conditions remain favorable, although we continue to experience volatility in the performance of underlying markets. Demand in the Midwest showed some positive gains, as we benefitted from an expanded community count in several markets. Our Texas business in Q4 was slowed by having roughly 10% fewer open communities available for sale versus the prior year. In addition, our Texas numbers were impacted by ongoing demand softness in the higher price communities in Houston, resulting from the prolonged weakness in the energy markets. Given current conditions, we are being very thoughtful about deploying additional capital in the region and we’ll continue to carefully monitor demand throughout the state. The Western third of the country continues to realize excellent demand from Washington through California and through our markets in Arizona, Nevada, and New Mexico. Overall, we were pleased with our demand conditions developed in the fourth quarter. We have seen a continuation of good traffic and demand trends through the first few weeks of January so we have every reason to be optimistic heading into the spring selling season. Consistent with our long-held expectations for a gradual but sustained recovery, 2015 new home sales of approximately 500,000 units for the country were up 15% over last year. Given the favorable market dynamics of strong job growth, accelerating household formations supported by demographic trends and continued low interest rates, we expect new home sales will continue their slow and steady path higher for the next several years. All that being said, we are well aware of the volatility in the world today. From concerns about global economic conditions to the swoon in oil prices, to gyrations in the stock market, the day-to-day swings can be violent. The reality is, however, that we can’t control any of these factors. What we can do is focus on running our business, consistent with the goals we have established and disciplines we’ve demonstrated. This means acquiring well-located communities that we believe can deliver high returns on investment. It also means hedging our bets by using more land options, where possible, and focusing on smaller, shorter duration projects, where we can get our capital back quickly. It also means not over-leveraging the balance sheet and keeping one hand on the lever to slow investment if housing demand begins to change. Finally, it means having the discipline to systematically give excess funds back to shareholders, rather than trying to force investments in the system. We ended 2015 with strong fourth-quarter performance. I’m confident that we can build on these results in 2016 and further capitalize on the excellent market position I believe PulteGroup maintains today. Our market position has been built by our exceptional group of employees, who work hard every day to build great homes and deliver an unmatched home buying experience to our customers. Now let me turn the call back to Jim Zeumer. Jim?

Great. Thank you, Richard. We’ll open the call for questions. So that we can speak with as many participants as possible during the remaining time of this call, we ask that you limit yourselves to one question and one follow-up. Sean, if you’ll explain the process, we’ll get started.

Interesting year, I just wanted to touch on – you guys have really robust order growth and you also noted a 7.5% decline in deliveries in Texas and orders were also soft. Can you give us a view on what you’re seeing in the Texas market and specifically, is it broad-based or what’s going on with price points there?

Well, Bob, I think you’ll find that Texas sort of contributes some unique challenges, like any market. But I would say overall, we’re seeing ongoing demand in many segments, albeit not as strong as we would like in some areas. The luxury segments are under pressure, primarily influenced by the energy sector. We’re continuously analyzing our position and making adjustments as necessary, utilizing the strong foundation we've established in other regions to mitigate these market-specific issues.

Got it. That’s helpful. As a follow-up, great execution it seems like you’re on track with deliveries and surmounting some of the labor bottlenecks. Trying to understand the setup for 2016, when we’re thinking about pacing and absorption and your expectations for ASP performance, you said that there's some volatility, but then you look at some of your trends and they seem very strong. How should we be thinking about pricing trends versus cost? You touched on that gross margin 21.5% to 22%. What gives the confidence on the ASP growth you can get there? Thanks and good luck.

There’s a lot of stuff in that question, Bob. I think in terms of ASP growth, we don’t factor that into our expectations. But we’ve got a third of the year in backlog, we’ve got an expectation that we’ve got relatively benign input costs this year. So lumber is trending positively, and basically all the other input costs, we see about a 2% increase, maybe in our house costs construction that’s largely labor. We’re obviously working through that in all the different markets. So we have visibility into a good part of the year, and at least in terms of input costs, we think that we’re in relatively good shape coming into the year.

Thanks very much, guys. Yes, strong quarter and impressive results.

Thanks, Steve.

I wanted to ask you a little bit about your break-out of the first time move-up in active adult. Just one, two clarifying questions on that. So first of all you said that in Q4, I think it was 31% first-time, 40% move-up, and then you gave – some numbers about a third, third, third for 2014. I just want to make sure that was full year 2014 versus fourth quarter of 2014. If you could remind me again, the definition of first-time versus move-up. I mean are you actually just asking them? Is it the first time you’ve ever owned a home or you just sort of putting that sort of a demarcation based on price point or what you think a typical first-time buyer would be buying?

Yes, Stephen. To the first question, that is Q4 data, not full-year. And to the second question, we actually have what we call targeted consumer groups and so it’s based on the type of product we’re building and the location of it that tells us who the buyer groups are. And so, the first-time designation is just an aggregation of the targeted consumer groups that serve people that are buying their homes for the first time as opposed to move-up.

Yes. That’s what I thought. And what’s interesting is that we’ve been sitting…

Stephen, just to clarify, I think we had talked about this on a couple of calls. The flagging of those differs somewhat. So there are – for that millennial buyer that’s closer in, typically a higher price point, we flagged them Pulte, but they are really first-time buyers. So that’s the primary difference there and then there are certain active adult penetrations that we have historically and will continue to flag Pulte, not Del Webb that will get caught in the active adult categorization as opposed to, again being a Pulte flagged.

Right. And I think that’s obviously an important distinction to make because, obviously we’ve been – will not obviously, but we’ve been seeing a pickup in first-time buying activity that doesn’t seem to really have manifested in entry-level product per se. But if that would be consistent with an idea that the guy who let’s say was a 26, 27-year-old six years ago is now older and probably in the market maybe buying a slightly different product than he would have six years ago. I guess my question generally would be, as you lay out your community count growth, as you think about how you’re going to be utilizing the Wieland land with some of your product. And just generally as you position your business in 2016 and 2017, how specifically or discreetly are you targeting a first-time buyer who may be looking to sort of buy a product which historically might have been considered a little bit more of a move-up, the first-time move-up kind of product? Like, how much are you actually positioning yourself for the emergence of that kind of a buyer into the marketplace, an increase in that demand?

Yes, Steve. This is Richard. That’s exactly what we’re doing. As an organization, I think we’ve talked about the millennial study that we completed in 2015 which showed what we believe to be significant opportunity for a buyer that is probably in their early to mid-30s who hasn’t owned a home before. So they’re called a first-time buyer, but they’re spending $300,000 to $400,000 on urban townhome product. So overall, our categorization that Bob described, we think more accurately depicts how we’re attempting to serve the business because those buyers will be captured in that first-time category. And we are investing in several of our major cities in that buyer category and that’s part of the contributing change in ASP that you see in our backlog and in our continued guidance going forward. That’s a part of the Pulte story here.

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

Thanks and yes, let me add strong results in the fourth quarter. So congratulations on that.

Thank you.

Thank you.

First question I wanted to ask was – the absorption trend was very nice in the fourth quarter and counter to what we’ve seen generally I think from the industry. 9% absorption growth; now that was on a lower level of community count growth. You’re expecting quite strong community count growth 10% to 15%, I believe you said year-over-year by the end of the year. So typically with new community openings, that might dampen absorptions at first. How would that trend then carry through or how would you anticipate that strength carrying through into 2016? Is it going to be diluted by a lot of these new communities coming on or do you think there is enough momentum that you might be able to sustain that?

Nishu, this is Richard. Just a couple of comments. To be clear, our 13% sign-up growth was driven by 4% community count growth and 9% improvement in absorption rates on like stores. So we are very pleased with that and before I answer to your question, I just want to point out that we believe that underlying strength in absorption rate is primarily driven by excellent land positions, and we’ve been talking for several years about how we believe we’re doing an excellent job of positioning our communities, not just growing for growth sake. Having said that, with regard to our 2016, two things, number one, we’re going to have nice community count growth this year, but it will be a little less in Q1 and Q2 as Bob indicated and then more in Q3 and Q4, although strong, really all four quarters. So that factor, we would expect absorption rates in Q1 to be impacted there. But probably more notably, as we work to integrate the Wieland business, that business typically has a higher price point and slower absorption model, and as we integrate, it will impact our results, particularly earlier in the year. So just try to make sure that everyone’s expectations factor that into their overall model. So we’re very pleased with the way the trends are playing out for 2016, particularly as it relates to earnings growth overall, but those factors will play in.

Got it. That’s helpful. And then second question, on the margin outlook which Bob, I think you laid out pretty well. The capitalized interest that is flowing through the gross margin line has been an important tailwind for the overall gross margins, that’s certainly the case in 4Q as well as for overall 2015. How do you expect that to trend in 2016? Should we take the percentage of revenues that are represented in 4Q and maybe carry that forward? Could you give us some thoughts on that?

Yes, that’s a great question. And essentially if you think about it, we’ve got a lag between when we incur cost and expense it. And we’ve had the benefit over the last few years of the debt paydown. That obviously is mitigated in the most recent year, if you look at our current full year 2015 our cash interest expense was about $128 million, and the expense that we’ve recognized through the income statement was $138 million. So they’re getting closer together. There will be a much smaller delta, I think in absolute terms we were $57 million benefit for interest in 2015. That number will be smaller in 2016, and again reflective of the fact that basically where costing off what we’re expensing.

Thanks. Good morning, everyone.

Good morning, Mike.

Good morning, Mike.

First question I wanted to delve in a little bit around the gross margins as well. Appreciate the insights there. I think if I understand you correctly Bob, you’re saying that the amortized interest for 2016 will trend closer to that $128 million, is that fair?

Yes, we haven’t given any detail. But it’s going to be a much smaller delta than it has been.

Right, right. So you’re just trying to get into the components then of the pre-interest gross margin. And get some of your sense of the puts and takes there 4Q 2015 down about 100 or 90 basis points year-over-year. What were the key drivers of that, and it was also down sequentially? I just wanted to get your sense if labor was a big part, if there was a mix shift, if there was land cost, what were the kind of drivers? And also as we think about 2016, I know you highlighted the Wieland acquisition being about a 70 basis point drag, but what would the other components of that – of the year-over-year change be?

Yes, Mike, I think you summarized it well. There is about a 70 basis points detriment that we expect in 2016 from the Wieland acquisition. Then if you look at the margin profiles business, thinking about it from consumer groups, as has been the case for years, the highest margin will be our active adult. Interestingly, when you look at it, the first-time business actually enjoys very high margins for two reasons. One, that millennial business that we talked about is a very strong margin business for us. For the historical Centex business, since we haven’t been investing much into those lots, we are now running them through because they enjoyed strong margins. And then that move-up business, which is where we’ve done most of our investment over the last three or four years, is still enjoying very good margins, but because of the higher land cost and labor costs we are seeing is, today of the three, still strong, the lower margin business. So the mix shift towards that has implications on our composite margin. So 70 basis points from Wieland, mix shift and labor cost are probably the biggest driver of the margin otherwise in 2015.

Hey, guys. Thanks for taking my call. First question I had is, you gave a lot of detail on the purchase accounting effect from the Wieland acquisition on gross margin. Just curious about how you are expecting kind of SG&A to trend through 2016 given some of the integration costs and then moving past that, once it’s fully integrated, is the $165 million kind of quarterly run rate still a good number or do you think that will actually go up a bit?

We actually are – instead of targeting dollars, we are putting trying to get things more aligned with industry and say, okay relative to sales this is what we think. So we think 10%. Obviously the seasonality of the business with lower closings in the first half of the year, higher closings. You can and should expect to see a richer number being higher than 10% in the first couple of quarters and lower, much like we did in the fourth quarter of this year. You know, certainly there will be some integration cost associated with Wieland that we would expect over time to be able to narrow out of the business. But the 10% that we had projected for 2016 is inclusive of that. John. This is Richard. And I’d like to give a little color too. The 10% guidance Bob provided, when you factor in the construction reversal impact in the 2015 number, you can see that we’re getting substantial leverage in 2016 as we expect to grow.

Hi, thanks for taking my questions. Why don’t you go back to the margin discussion. I think you addressed it with both Mike Rehaut’s question and Alan, but in terms of some of the mix shift, you’ve got two things going on. You’ve got selling through some of the legacy Centex stuff that was higher margin and transitioning both to move-up product and the recent vintage, so just wanted to get your sense of this margin erosion that you’re seeing in 2016. Do you think you are fully run rating what the kind of go-forward mix will be or is there still some to kind of transition out this is still being lifted a little bit by 20% or so of the communities that are still legacy Centex? Any additional detail you could give there?

Well, honestly, we will share what the breakdown is by consumer group as the year goes on. I don’t know that we would want to give quarterly forward guidance that would be community-specific, Mike. So I think there continues to be a mix shift we’ve invested largely in that move-up category. So you will see that continue to play out.

And Mike, this is Richard. I think it’s worth noting that we are extremely pleased with our margin projection for 2016. When you factor in the known headwinds from a new acquisition, we are pretty pleased with how margins are holding up when you combine it with what we expect to be good SG&A leverage and strong growth. Our operating margins, we continue to be very pleased with. So yes, there are certainly some anticipated core declines from higher input costs that Bob mentioned, but our relative basis we like our margin position a lot.

Okay, that’s helpful. And then, in terms of, maybe can you just give us an update on kind of your spec strategy and how that progressed in the quarter? I think you ended the third quarter with something like 340 finished spec homes. Where did you close the year?

So finished spec at the end of the year was 471 units which is actually down about 2% from prior year. We started that spec really in the third quarter, so they weren’t finished at the end of year. So you’ll see that come through in our first quarter and second quarter results. But totals spec we talked about, at about 30% of our starts compared to 24% historically. So it’s not a big change, and I think what you can and should expect to do is manage against not letting finished specs get really heavy.

And John and everyone else, just to remind everyone, the reason that we’re increasing our spec production a little bit is to help us with the quarterly cadence of closing, not trying to run quite as tight as we were with pre-sold inventory, and we think that’s going to help us moving forward.

Hi, guys. Good morning and nice quarter. Congrats.

Thanks, Alan.

Richard, just on your comment on January, it seems like it’s holding up pretty well. Curious if you’re – what you’re hearing underground from your active adult buyers given all the stock market volatility? Has there been any – have you noticed any discernible trends there versus more of the first-time or maybe first-time move-up product? Because it is a very discretionary buyer I imagine, they’re looking at 401(k) portfolios, as they might be a little bit skittish. So just curious what you’re seeing from that subset of buyers currently?

Alan, it’s a great question we’ve been paying attention and so far we’ve not seen a change.

Great, that’s good to hear. Second, on the spec strategy, is there any contemplation within the gross margin guidance next year for specs to represent a greater percentage of your sales? Assuming that is the case, what’s the margin differential running at currently between your spec and to-be-built sales?

Certainly, Alan, we factored that into our guidance. As we put together our plans for the year, people needed to know what they were going to try and start in terms of spec. In terms of actual performance, I would tell you that, recent activity we would tell you that there is a very consistent with historical trend where you are, your dirt sales have the higher margins, we’ve actually seen that people are contracting before framing that the margins hold up and stay consistent, and then we have a couple of hundreds basis points of degradation on spec that is finished. So again, I think one of the things we’re really focused on is, let’s not get that finished spec to be a big drag on our margins going forward.

Good morning.

Good morning.

I just wanted to follow-up a little bit on the absorption pace. The nice improvement you had in the quarter, in your commentary you stated that you feel like that driver is primarily because of the location of your communities. But I assume that location didn’t change too much quarter-to-quarter. So was there anything specific in the fourth quarter that you think drove that sort of incremental increase? It doesn’t feel like overall new home sales accelerated, in fact, maybe decelerated a little bit. So what specifically do you guys change, let’s say third quarter and fourth quarter, which help that absorption pace in your view?

Megan, there is volatility typically quarter-to-quarter. But I would point out that this is a third or fourth quarter out of the last maybe four or five that we had improved absorption paces. So I believe that’s a factor. I would also say that as our commonly managed floor plans continue to grow as a component of our total, those are very well designed and frankly sell better than the non-commonly managed floor plans, so that’s a factor. But I would continue to highlight that well-placed land, we’re focused on quality of land, not just quantity of land is the primary driver in my opinion. These will – maybe what some others in the industry have talked about.

Okay. Thanks. And I wanted to follow-up on SG&A a little bit too as well. I apologize if I missed part of your answer before. But I know there’s a lot of moving parts here and some of the numbers. So it looks like you’re looking for, if we ex-out the benefits this year, a pretty meaningful year-over-year improvement in SG&A, it looks like about 100 plus basis points. If I have that right. But also looking for a pretty good increase in gross and community count, which I would usually associate with maybe some accelerating SG&A levels. So if you could maybe talk us through your confidence and being able to sort of grow SG&A at a slower rate even though you are accelerating your community count growth that would be great, thanks.

Well, it’s interesting, Megan. A big driver of the community count growth is Wieland. And so we opened 200 communities this year and will open some number similar to that next year. So there really isn’t a significant driver there. It’s, in terms of community count growth, a lot of it is going to be Wieland that we get one big chunk.

And Megan I think you highlighted – this is Richard, I think you highlighted it inappropriately. We are anticipating growth in earnings and certainly in volume this year and that provides leverage overall. So we’re not giving any SG&A dollar number but we do expect to leverage our overheads and you are right with your guidance or your commentary if you will on that.

Hi, thanks for taking my questions. Why don’t you go back to the margin discussion and I think you addressed it with both Mike Rehaut’s question and Alan, but in terms of some of the mix shift, you’ve got two things going on. You’ve got selling through some of the legacy Centex stuff that was higher margin and transitioning both to move-up product and the recent vintage, so just wanted to get your sense of this margin erosion that you’re seeing in 2016. Do you think you are fully run rating what the kind of go-forward mix will be or is there still some to kind of transition out? Is this still being lifted a little bit by 20% or so of the communities that are still legacy Centex? Any additional detail you could give there?

Well, honestly, we will share what the breakdown is by consumer group as the year goes on. I don’t know that we would want to give quarterly forward guidance that would be community-specific, Mike. So I think there continues to be a mix shift. We’ve invested largely in that move-up category. So you will see that continue to play out.

And Mike, this is Richard. I think it’s worth noting that we are extremely pleased with our margin projection for 2016. When you factor in the known headwinds from a new acquisition, we are pretty pleased with how margins are holding up when you combine that with what we expect to be good SG&A leverage and strong growth. Our operating margins, we continue to be very pleased with. So yes, there are certainly some anticipated core declines from higher input costs that Bob mentioned, but our relative basis we like our margin position a lot.

Okay, that’s helpful. And then, in terms of, maybe can you just give us an update on kind of your spec strategy and how that progressed in the quarter? I think you ended the third quarter with something like 340 finished spec homes. Where did you close the year?

So finished spec at the end of the year was 471 units which is actually down about 2% from prior year. We started that spec really in the third quarter, so they weren’t finished at the end of year. So you’ll see that come through in our first quarter and second quarter results. But totals spec we talked about, at about 30% of our starts compared to 24% historically. So it’s not a big change, and I think what you can and should expect to do is manage against not letting finished specs get really heavy.

And John and everyone else, just to remind everyone, the reason that we’re increasing our spec production a little bit is to help us with the quarterly cadence of closing, not trying to run quite as tight as we were with pre-sold inventory, and we think that’s going to help us moving forward.

Hi, guys. Good morning and nice quarter. Congrats.

Thanks, Alan.

Richard, just on your comment on January, it seems like it’s holding up pretty well. Curious if you’re – what you’re hearing underground from your active adult buyers given all the stock market volatility? Has there been any – have you noticed any discernible trends there versus more of the first-time or maybe first-time move-up product? Because it is a very discretionary buyer I imagine, they’re looking at 401(k) portfolios, as they might be a little bit skittish. So just curious what you’re seeing from that subset of buyers currently?

Alan, it’s a great question we’ve been paying attention and so far we’ve not seen a change.

Great, that’s good to hear. Second, on the spec strategy, is there any contemplation within the gross margin guidance next year for specs to represent a greater percentage of your sales? Assuming that is the case, what’s the margin differential running at currently between your spec and to-be-built sales?

Certainly, Alan, we factored that into our guidance. As we put together our plans for the year, people needed to know what they were going to try and start in terms of spec. In terms of actual performance, I would tell you that, recent activity we would tell you that there is a very consistent with historical trend where you’re selling dirt, your sales have the higher margins, we’ve actually seen that people are contracting before framing that the margins hold up and stay consistent, and then we have a couple of hundreds basis points of degradation on spec that is finished. So again, I think one of the things we’re really focused on is, let’s not get that finished spec to be a big drag on our margins going forward.

Good morning.

Good morning.

I just wanted to follow-up a little bit on the absorption pace. The nice improvement you had in the quarter, in your commentary you stated that you feel like that driver is primarily because of the location of your communities. But I assume that location didn’t change too much quarter-to-quarter. So was there anything specific in the fourth quarter that you think drove that sort of incremental increase? It doesn’t feel like overall new home sales accelerated, in fact, maybe decelerated a little bit. So what specifically do you guys change, let’s say third quarter and fourth quarter, which help that absorption pace in your view?

Megan, there is volatility typically quarter-to-quarter. But I would point out that this is a third or fourth quarter out of the last maybe four or five that we had improved absorption paces. So I believe that’s a factor. I would also say that as our commonly managed floor plans continue to grow as a component of our total, those are very well designed and frankly sell better than the non-commonly managed floor plans, so that’s a factor. But I would continue to highlight that well-placed land, we’re focused on quality of land, not just quantity of land is the primary driver in my opinion.

Okay. Thanks. And I wanted to follow-up on SG&A a little bit too as well. I apologize if I missed part of your answer before. But I know there’s a lot of moving parts here and some of the numbers. So it looks like you’re looking for, if we ex-out the benefits this year, a pretty meaningful year-over-year improvement in SG&A, it looks like about 100 plus basis points. If I have that right. But also looking for a pretty good increase in gross and community count, which I would usually associate with maybe some accelerating SG&A levels. So if you could maybe talk us through your confidence and being able to sort of grow SG&A at a slower rate even though you are accelerating your community count growth that would be great, thanks.

Well, it’s interesting, Megan, a big driver of the community count growth is Wieland. And so we opened 200 communities this year and will open some number similar to that next year. So there really isn’t a significant driver there. It’s in terms of community count growth, a lot of it is going to be Wieland that we get one big chunk.

And Megan I think you highlighted – this is Richard, I think you highlighted it inappropriately. We are anticipating growth in earnings and certainly in volume this year and that provides leverage overall. So we’re not giving any SG&A dollar number but we do expect to leverage our overheads and you are right with your guidance or your commentary if you will on that.

Hi, thanks for taking my questions. Why don't you go back to the margin discussion and I think you addressed it with both Mike Rehaut’s question and Alan, but in terms of some of the mix shift, you’ve got two things going on. You’ve got selling through some of the legacy Centex stuff that was higher margin and transitioning both to move-up product and the recent vintage, so just wanted to get your sense of this margin erosion that you’re seeing in 2016.

Well, honestly, we will share what the breakdown is by consumer group as the year goes on. I don’t know that we would want to give quarterly forward guidance that would be community-specific, Mike. So I think there continues to be a mix shift we’ve invested largely in that move-up category. So you will see that continue to play out.

And Mike, this is Richard. I think it’s worth noting that we are extremely pleased with our margin projection for 2016. When you factor in the known headwinds from a new acquisition, we are pretty pleased with how margins are holding up when you combine that with what we expect to be good SG&A leverage and strong growth. Our operating margins, we continue to be very pleased with. So yes, there are certainly some anticipated core declines from higher input costs that Bob mentioned, but our relative basis we like our margin position a lot.

Okay, that’s helpful. And then, in terms of, maybe can you just give us an update on kind of your spec strategy and how that progressed in the quarter? I think you ended the third quarter with something like 340 finished spec homes. Where did you close the year?

So finished spec at the end of the year was 471 units, which is actually down about 2% from the prior year. We started that spec really in the third quarter, so they weren’t finished at the end of the year. So you’ll see that come through in our first quarter and second quarter results. But totals spec we talked about, at about 30% of our starts compared to 24% historically. So it’s not a big change, and I think what you can and should expect to do is manage against not letting finished specs get really heavy.

And John and everyone else, just to remind everyone, the reason that we’re increasing our spec production a little bit is to help us with the quarterly cadence of closing, not trying to run quite as tight as we were with pre-sold inventory, and we think that’s going to help us moving forward.

Hi, guys. Good morning and nice quarter. Congrats.

Thanks, Alan.

Richard, just on your comment on January, it seems like it’s holding up pretty well. Curious if you’re – what you’re hearing underground from your active adult buyers given all the stock market volatility? Has there been any – have you noticed any discernible trends there versus more of the first-time or maybe first-time move-up product? Because it is a very discretionary buyer I imagine, they’re looking at 401(k) portfolios, as they might be a little bit skittish. So just curious what you’re seeing from that subset of buyers currently?

Alan, it’s a great question we’ve been paying attention and so far we’ve not seen a change.

Great, that’s good to hear. Second, on the spec strategy, is there any contemplation within the gross margin guidance next year for specs to represent a greater percentage of your sales? Assuming that is the case, what’s the margin differential running at currently between your spec and to-be-built sales?

Certainly, Alan, we factored that into our guidance. As we put together our plans for the year, people needed to know what they were going to try and start in terms of spec. In terms of actual performance, I would tell you that, recent activity would tell you that there is very consistent with historical trends where your dirt sales have higher margins. We’ve actually seen that people are contracting before framing that the margins hold up and stay consistent, and then we have a couple of hundreds basis points of degradation on spec that is finished. So again, I think one of the things we’re really focused on is, let’s not get that finished spec to be a big drag on our margins going forward.

Good morning.

Good morning.

I just wanted to follow-up a little bit on the absorption pace. The nice improvement you had in the quarter, in your commentary you stated that you feel like that driver is primarily because of the location of your communities. But I assume that location didn’t change too much quarter-to-quarter. So was there anything specific in the fourth quarter that you think drove that sort of incremental increase? It doesn’t feel like overall new home sales accelerated, in fact, maybe decelerated a little bit. So what specifically do you guys change, let’s say third quarter and fourth quarter, which help that absorption pace in your view?

Megan, there is volatility typically quarter-to-quarter. But I would point out that this is a third or fourth quarter out of the last maybe four or five that we had improved absorption paces. So I believe that’s a factor. I would also say that as our commonly managed floor plans continue to grow as a component of our total, those are very well designed and frankly sell better than the non-commonly managed floor plans, so that’s a factor. But I would continue to highlight that well-placed land, we’re focused on quality of land, not just quantity of land is the primary driver in my opinion.

Okay. Thanks. And I wanted to follow-up on SG&A a little bit too as well. I apologize if I missed part of your answer before. But I know there’s a lot of moving parts here and some of the numbers. So it looks like you’re looking for, if we ex-out the benefits this year, a pretty meaningful year-over-year improvement in SG&A, it looks like about 100 plus basis points. If I have that right. But also looking for a pretty good increase in gross and community count, which I would usually associate with maybe some accelerating SG&A levels. So if you could maybe talk us through your confidence and being able to sort of grow SG&A at a slower rate even though you are accelerating your community count growth that would be great, thanks.