PulteGroup, Inc. (PHM) Q4 2014 Earnings Report, Transcript and Summary

Good morning. My name is Shawn; I will be your conference operator today. At this time, I would like to welcome everyone to the 2014 PulteGroup Inc 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 and President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; Jim Ossowski, Vice President and Financing Controller. Let me remind everyone that copies of this morning's earnings release along with presentation slide that accompanies today's call are posted to our corporate website at www.pultegroupinc.com. We'll 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 slides. This risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. That's it. 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 Analysts 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've realized as we work to deliver higher returns on invested capital. And assessment of the opportunities that remain to realize additional gains in revenues, gross margin, overhead 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 who you are unable to attend, I'd certainly encourage to review the presentation which is posted on our website. I am extremely pleased to say that the strong financial performance we delivered in the fourth quarter and the full year demonstrates the ongoing success of our efforts. In a couple of minutes Bob will provide a detailed analysis of our fourth quarter results and gains we've 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 pretax income of $635 million for homebuilding operations. Inclusive of our financial services operation, we realized pretax income growth of 31% to $690 million. The significant increase we generated in 2014 pretax 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 help to expand our reported 2014 gross margin by 280 basis points to 23.3% and pretax margin by 250 basis points to 11.8%. As we've 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 plan 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 yearend 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 these 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 in 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 have invested to make them happen. Given the significant gains we've 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 we can deliver. As such we will continue to focus on margins, overhead leverage, inventory returns, 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 show that company is 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've controlled our investment and land assets and lowered our house inventory by reducing specs and accelerating cycle time. Having raised our return on invested capital above our cost of capital, our land investment spends 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 we'll continue to use our capital to fund ongoing dividend payments and 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've 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 I'd like to turn over the call to Bob for discussion of our fourth quarter results. Bob?

Thanks, Richard. And good morning. I'd like to echo Richard's comments for 2014 marked another significant step in our progress and highlight that the fourth quarter represented strong finish to the year. Beginning with the review of our income statements, home sales revenues in the fourth quarter increased 10% over the prior year at $1.8 billion. Higher revenues for the period were driven by a 7% increase in closing volumes to 5,316 combined with the 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 is 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 is 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 pay down, the mix home closed as well as change 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 discount for the quarter remain below at just over $7,000 or 2.1% for home compared with approximately $5,500 or 1.7% for home last year. We've said for a number of quarters that discounts are likely approaching their lower limit so the Q4 change should be viewed as typical and quarterly variant and not a shift in our pricing strategy. As we've said the company's future margin performance, there is 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 we'll respond to local market challenges on a community by community basis. Based on our view of the market and considering the company's specific opportunities we see in strategic pricing and construction efficiency initiative, 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 they will be moving 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 a $150 million or 9.3% last year. Our SG&A expenses for the period was benefited by approximately $15 million or $0.03 per share from reversals of construction related insurance reserve. The reduction to our insurance reserves is not directly tied to the insurance charge we took in the second quarter of this year reflect 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 are making in support of our value creation initiatives and in connection with the increased number of community tool 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 cost in connection with the relocation of our corporate offices to Atlanta. The charges recorded another expense net and were anticipated in the original cost estimate we provided when our relocation was announced. Our financial services operations reported pretax 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 rate which drove higher gains on mortgage sales. Capture rate for the period improved to 81% from 79% last year. In aggregate, our pretax 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 represented effective tax rate of 19%. It should be noted that our fourth quarter tax is reflect benefit of approximately $50 million, or $0.13 per share associated with the regulation of a 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, reported net income for the fourth quarter of $217 million, or $0.58 per share. Included in this result for the tax and insurance benefits of $0.16 per share partially offset by the lease exit charge of $0.01 per share. Moving out to homebuilding 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 back 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 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 Boston, 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 acquisitions and development in the quarter, bringing our total land spent for 2014 to approximately $1.8 billion. Consistent with recent quarters, our spent was split equally between development and acquisition. As we noted at our Investor Day, our spent 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 remaining authorization from 2014 as we seek to allow our local homebuilding teams to manage their capital investment programs over time with any eye towards driving investment in high quality high returning transactions. We finished the year with 131,000 lots under control of which of 35,000 or 26% were controlled via option. Of our controlled lot 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 own lots supply is approximately 5.6 years which is two years lower than we maintained in 2011. We are 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 at last quarter that we had increased our repurchase authorization by $750 million. We put the extended authorization in place with the intension 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. Few final data points. On a year-over-year basis, Q4 sign ups to increase 1% to 3,232 homes which on a dollar basis increased 2% to $1.1 billion. Unit signs up 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 gain 10% in the quarter. The lower absorption paces for Centex and Pulte were impacted in part by a decision to slowdown and in some cases stop sales at several Columbus and Louisville communities as backlog levels have gone too far extended. Excluding the impact of the Columbus and Louisville operations, our absorptions paces were essentially flat versus the prior year. We finished the year with 598 communities which are 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 calls for opening over 200 new 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 North East down to the South East and into Florida. The Carolina, Georgia and Florida in particular were among our strongest markets. Demand in the middle third of the country experienced the 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 signs up were out too far. We are working hard as we speak to get builds cost 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 move 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 continue to be strong. We have read the articles on Texas' economy being more diversified than in the past and how the benefits of lower gas prices nation wide provides a big tailwind for the overall economy. 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 are looking forward to seeing how these performed in the year. Relative to our expectations, we are pleased with the fourth quarter demand trends which suggested positive momentum was building as we move through the period. On a year-over-year basis, we generally experienced higher traffic levels and signs up volumes and held up except for our actions to slow pace in Columbus and Louisville as we move through the period. We've 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 a slow and steady recovery path that we have been discussing for the past several years. We are mindful however that there are lots of cross currents which will impact individual markets differently and make demand challenging to predict. Overall, we believe that the positives and the improving economy with declining energy cost, rising employment, lower mortgage rates and related fees beneficial long-term demographic trends in 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 U.S. economy or the housing markets. 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 systematic share repurchases. Let me close by thanking the employees 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 on a program. I am proud and humbled by your efforts. Now let me turn the call back to Jim Zeumer. Jim?

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 yourself to one question and one follow up. Shawn, if you explain the process, we will get started.

[Operator Instructions] Your first question comes from the line of Ivy Lynne Zelman. Your line is open.

Good morning. Great job on the presentation guys and solid quarter. Richard, can you talk a little bit about what you are seeing in the mortgage environment given some of these policies changes as well as maybe challenges on why people can't get approved, what the main reason, please?

Sure. Ivy, good morning. From the mortgage environment the changes that the President announced few weeks ago, I honestly think it is too early to see how they play out. Having said that, I am very optimistic and certainly I think my peers are optimistic that they 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. So we are 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 certainly saw positive trends through the first weeks of January.

And can you comment on why people do get denied when applying for mortgages maybe as Centex operations and some of the impairment that you guys see that are lingering or challenging? Because it seems this FHA have pretty lean underwritings to get those people with credit scores low and low down payment. So what are the reasons when people can't get approved?

Yes, Ivy, I think it is 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 impairment is down payment scores and then of course lenders wanting to lend in this environment so that the changes in FHA I believe are significant. That 3.5% down payment threshold with proper supportive appropriate underwriting guideline is a very effective program. I think the folks at FHA would tell you that the quality of the book that they have been writing last several years is outstanding. So I think down payments are an issue overall. And that to me is one of the big impairments, one of the reasons why FHA is so important. So we are very optimistic that the changes that we've seen with these recent announcements will have an effect. I think it is little too early for us to say whether that's driving the improved activities we are seeing yet or just people being more optimistic in general about housing.

Your next question comes from the line of Jack Micenko. Your line is open.

Hi, good morning. Richard in Analyst Day you talked about a net debt cap number 30% to 40% longer-term target. Obviously you are 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 outlets for other things, and share repurchases being the driver that largely-- certainly as we look at our leverage we've got maturities in fiscal 2015 that are relatively modest. Then we've got bigger maturity in fiscal 2016. And so as we think about 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 sort of 5 to 10 years 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 return of the first time buyer, how quickly can you ramp Centex? I mean we always think about third, a third in your business mix and the other two have been fairly successful where demands has been at, but can that number rise above 30%, can you pivot fairly quick to meet that demand?

Jack, this is Richard. I guess first and foremost I remind everyone we still have a big Centex position and just like we've seen with other segments the first place you will see in same store sales growth. So I am very confident that we can capture our fair share of that activity. In terms of new investment, it is likely an 18 to 24 months cycle so we could put dollars to work now if we saw that activity improving, that could benefit say the end of 2016. It is not an immediate turnaround. In some cases it can be quicker than that. As an example in Texas, the market is little bit easier to access land and you might -- it might have a little bigger impact for 2016. I think it is fair to say that 2015 is baked, but I remind everyone that the first place improved demand shows up is in same store sales growth and as we commented on Del Webb and Pulte before, it is quite a bit of leverage we can get from relatively deep land position we have there as well.

Your next question comes from the line of Stephen East. Your line is open.

Thank you. Just talking 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 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?

Yes we certainly look at liquidity and it's not just cash, its availability under our revolver and it can be substantially below where it is here. I don't want to say $250 million or $500 million because it is 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 which is closing to the back half of the year. So it is not a hard and fast rule but certainly we could live comfortably between $250 million and $500 million and actual cash

Okay. So having a $3 billion type number out there is not a big stretch and I guess when you look at it?

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

Okay, fair enough. And then if you look 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 perspectively 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 are certainly being cautious in some of the places that we have a long land balance as we work hard improve returns. And 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 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's spend in the fourth quarter in terms of approved transactions. That's going to ebb in flow up and down, those don't come in evenly. So I'd expect in 2015, we are 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 got to see that activity continue to ramp up before we really push the accelerator there.

Your next question comes from the line of David Goldberg.

Thanks, good morning, everybody. I was -- last quarter I was wonder if you could talk a little about competitive environment at Webb. And now you kind of mention for the business for homebuilding generally certainly competitive and some of the competition maybe doing a little more incentive and discount little bit more. So could talk about the Webb business? I know prices up 4% this quarter you mentioned but what's the environment, how is traffic been and are you finding that buyers are looking for more incentives or more discount as they come in the door?

David the Webb environment is probably the least competitive of all the segments that we deal in because 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 Hovnanian others have competitive offerings. But Webb is we believe unique. What we find there and this is consistent with what we've seen two past cycles, those buyers 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 it was say in 2012 and 2013 which is why we've seen absorption paces lead in Q4 there. And I'd expect good things out of Webb this year. We typically see them being a latter cycle play in housing market and that continues to play out, so I don't want to give anyone the impression there is no competition there but it is certainly an area that we have the ability to push margin and price more than some of the other areas because of the lack competitors but also frankly because that buyer category is less price sensitive in general.

That's fantastic. And then Richard I want to ask a bit of a follow- up question. You mentioned in your comments about kind of maintaining market share or growing market share as you look forward and you look at the growth in within your closing and kind of flattish year-over-year up a little bit year-over-year from where we are now, what I am trying to get an idea is with community count that you have big then and the guidance you gave, do you think that would position or you would kind of maintain market share versus the overall market, do you think you grow faster than the market or do you think it is too hard to determine I mean like that just based on the community count growth.

Yes. David it is tough to know what exactly our competitors are going to do but I'll just remind everyone a couple of things. We were much disciplined about not pushing investments until we got above our cost to capital. That happen for us sometime in 2013 and that's when you begin to see us accelerating our investment to more than I think it has script indicated maintenance mode and more in a growth mode. How that relates to our ability to take shares is going to be really depended obviously on what happens to the market and what our competitors spend. I'd 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 are focused on internally is the concept of relative market share and meaning our size in the market vis-à-vis our peers. And we believe that if we can have relative market share somewhere around 0.5 or greater 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 were 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. And we've been much disciplined with that. So how does that relate to overall market share growth, it is 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 is a little too complicated to answer that.

Your next question comes from the line of Jay McCanless. Your line is open.

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 counts. I know you've all been asked to 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 the sizable piece of that business was that first time category. So there is 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 need pace to continue to come back to ensure that returns get there. Now again I'll just remind everyone that we like overseeing these last few weeks and couple of months with the market. So that could be the beginning of an opportunity for us to begin and invest more in Centex. So we are going to not force investment in the segments that don't generate the highest returns for us and we are certainly hopeful that Centex becomes a bigger part of that equation. But we are going to watch the market to make sure.

Okay. And then just a follow-up question I had is on a Del Webb. Are you seeing an increasing amount of cash wires there? Are you seeing people come with more --either of 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 has 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 is more about cash flow and their overall position. Their financial position and 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 buyers, it is really not a question of whether they want a new lifestyle, they clearly do, it is a question when they are comfortable pulling the trigger. And as we've seen slow and steady improvement in that category which should continued to bear out in Q4.

Your next question comes from Ken Zener. Your line is open.

Good morning, gentlemen. 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 the overall pressure we're seeing from gross margins from some of the larger builders. Some are highlighting lower margins to go after high returns. Others are just saying we're at a 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, Ken. This is Richard. A number of things, we highlighted 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? Or you just ranking them?

It is very hard -- no, I am 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 systematic base price increases when we can. So we are being disciplined there. We also are very proud of land that we have been buying. We believe that our focus on land has been very disciplined and focused on high return, that's all. I'll also point that our limited spec inventories helping us. We are not discounting a bunch of finished bag 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 we pay down and we are very proud of that. So when you add this all up it equals what we call value creation. It is a road to higher returns over time to generate the best possible total shareholder return and we believe we are on that road and well on that road. We are doing well with it.

Your next question comes from the line of Michael Dahl. Your line is open.

Hello, thanks for taking my question. Richard, I guess the follow on Ken's question on or to a certain extent of the margin side. It seems like strategic pricing still obviously a focus. You've got backlog that looks kind of flattish. Pricings flattened out. Community count growth is going to improve a little. It seems like the way your setting up for the business is for a fairly low revenue growth at least for this year, for maybe some investments kick in. Is that fair?

Mike, we are not commenting on our revenue targets or unit targets overall. I would just remind everyone that we are executing our playbook. We increased investment into the business starting 2013, we clearly ramped up in 2014, we are guiding to our more investment in 2015. It does take time for that investment to flow through. We are staying disciplined on it overall. So we are very happy with our overall trajectory and sometimes we wish we could push a button and 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 to slow and steady progress that we are 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 talked to our leaders around the company, they would tell you they are focused on returns. And a portion of that is of course pretax income growth. But a portion of it is also inventory returns and SG&A leverage and all the other pieces. So I am just trying to run balance business, Mike.

Got it. And, I guess, as a follow-up, and Bob I think you've 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 potentially de-lever by maybe 100 basis points or so. So just how to think about that and what the opportunity or timeframe of re-levering the SG&A would be?

Yes, obviously, you are right. We are projecting an increase in our spend and it is for all the things that we are working though. And sometimes you have to spend in advance obviously we are opening a lot of communities. This year opened a lot of communities last year, so there are costs associated with that. I think if you take a step back what we are proud of is -- you look at our operating margin for 2014 and it is -- excluding the construction defect accounting in the second quarter 13%. So we are paying attention to our spend and choosing where to invest. So I think we are delivering on the bottom line and trying to be disciplined about that.

Your next question comes from the line of Stephen Kim. Your line open.

Can you guys hear me? Okay, sorry about that. Yes, very interesting call and obviously good result. I guess a couple of questions related to your guidance on margins. You just has put a lot of emphasis on return on invested capital. But not -- but than giving guidance on the gross margin but not really giving guidance on the revenues, what strikes me about that, that's interesting is that most of the others builders that are talking about somewhat lower gross margin with a little bit more volume are also talking about 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 are just simply focusing on return on capital and now sometimes require more volume, expense to margins and that's okay. I think counter 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 seemed to be consistent with the focus on return on capital. So I was wondering if you can give some more guidance on the return on capital.

Yes, Steve, this is Bob. We have not historically nor did we today give guidance on what our goals are. What we've 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 to capital sometime in 2013. We are moving that forward. We've got a lot of cash. We wanted to manage through that. We have 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 your goal is improvement. And we think we've been doing that and expect to continue to do that.

And Steve, 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. 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 are in second place the way we measure it. And 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 are not focused on improving it.

No. That comes through loud and clear. Great, thanks very much for that. So with this focus on returning I want to then shift a little bit to the gross margin because what's interesting is that you're talking the flat gross margin outlook for 2015, but you have three sort of distinct businesses, you have the Centex, Del Webb, 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 are envisioning that one may start to drive negative year-over-year margins, but that others would be up and so the aggregate would be flat. If you could just help me understand how widespread is going to be?

Yes, Steve, we're not breaking it down in that much detail. What I can tell you is that Webb continues to and Pulte continues to deliver higher margins than 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've seen what has done for us. I'll just point everyone to the comment Bob made around operating margins. When we got operating margins excluding the charge we had to take in Q2 last year around 30%, we're pretty proud of that. So we're continuing to focus on that. So I would just leave you that Webb and Pulte higher than Centex overall in margins, but the volatility within each of the guidance within each we are not providing that level of detail.

Your next question comes from the line of Mike Roxland

Thanks very much. And congratulation on a good quarter and a good year. Now there a bit lot of questions on Centex on this call thus far so really I don't want to be dead horse here, but just one quick follow up. Obviously you've 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 weakness in 4Q. At what point do you start to become more constructive on that cohort and begin investing in it, and is there any particular metric that you look at that we get you over the hurdle. And if let's say if that metric is return their type of return hold that must be clear before you start actively investing. Can you just help us frame how you would get comfortable putting deploy more money into the Centex?

Mike, I'll take stab and then Bob can give you some additional color. We have 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 link of land transaction, whether or not we are building the same product. And the market's performance et cetera, number of factors and the return threshold range from around 20% up into the low 30% category. So our focus for when to invest in Centex is when we can generate returns in that band between 20% and 30% effectively. And the fact that we talked about repeated that we believe drive Centex over that 20% threshold is pace. Because that buyer unlike the Pulte or Del Webb buyer has a limited amount income to spend, there is only so much you can do on 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 are selling four homes a month at a Centex community, if Pulte is generating 25% margin and Centex is generating 19% margin, it is 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 and make that work. So that's what we are looking for. And perhaps we are beginning to see -- the beginning of that with the improvement. But it is generally pace so Bob anything you add there.

Exactly, I can say only thing and to emphasize is it is not as if we've told people don't invest in Centex today. We are agonistic to brand. So the local investment and operating team are actually evaluating transactions against each other with the capital they have to spend over time. And so what Richard has laid out plays out such that today the move up in Del Webb transactions look better to us from a return perspective, that's why we are investing.

Got it. Appreciate all the color there. Can you just drill down little further though say if you look at the return threshold 20% to 30%, can you give us an idea where returns currently stand on your Centex product? And what the current paces on an absolute basis versus your targeted pace to achieve the 20% to 30% threshold?

Mike, it is little complicated because a lot of land that we are sitting on for Centex, we might have acquired five years ago, some we may have acquired two years ago. So they kind of current returns -- obviously a project when it gets to the end of its life generate higher returns than in the beginning when you are putting a lot of capital in overall. I would yes we are driving each of our current communities to the highest possible return. And that's like balancing the knobs in an airliner try 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 have indicated. I think the commentary we are trying to provide is around new investment or future investment we need to get over that 20% return hurdle which is a way we look at it before we invest a lot of additional dollars there.

Your next question comes from the line of Michael Rehaut. Your line is open.

Thanks, good morning, everyone. First question I was hoping just 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 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 percent of sales.

We wouldn't do it necessarily, Mike, as a percent of sales, haven't given sales guidance but what I can tell you is what we expensed in fiscal 2014 was about $195 million. And you can expect that number to come down probably to around $140 million next year. Reflective of the fact that we are -- have much less leverage, our cash spend on interest is in the neighborhood $130 million or $140 million a year. So we will get to the point where we are expensing what we are capitalizing.

And so before my second question, Richard, that $130 million, $140 million, with that kind of be where it is stabilizes unless you take a lot more debt off the balance sheets?

Yes, obviously depending on what we do. So we paid down some debt this year. So what we capitalize in 2014 which will get amortized over time is less than what was capitalized the year before. So it is kind of like FIFO if you think about all the counting 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 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 a summer that continues 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 sell lot more homes in October than you did in December and you 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 is hard to say. Candidly we are not trying to play the spec inventory drive a bunch of volume, push incentives in order to drive a bunch of volume gain, so perhaps we are not focused as much on sort of 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 is continued into January.

And before we move, Mike, I just want to clarify something, in terms of the interest expense side, I had indicated $140 million, you said $130 million to $140, and I would say it is probably $140 million to $150 million rather than $130 million to $140 million just for everybody's benefit.

Your next question comes from the line of Nishu Sood. Your line is open.

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 flow is obviously stronger cash flows at the end of the year or 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 very significant increase in the authorization. It really comes down so we have the capital to do it. As we look at the cash balance that we have -- if really interested 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 then we always have that option, but our goal is to more systematically and routinely return funds to shareholders but I'll just remind everyone, invest in the business first, dividend improvement second, accretive high return M&A third, and then repurchase is fourth. And we have a good discipline about the way we are going about that today.

Got it. And the 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 focus on Texas?

I would turn that around to tell you I am pretty optimistic about the rest of the country because of a huge tax rate that everybody just got with a lot lower gas cost 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. And potentially California and market or two but I am personally I am optimistic that the cash flow implications for people's monthly cycle based on gas price are a positive factor from oil prices being depressed.

Your next question comes from the line of Bob Wetenhall.

Good morning, and thanks for all the color. Obviously, really good quarter. Just wanted to get your view on land costs what you are seeing. Obviously, your spend flow down last year and 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?

Yes. Bob, it is Bob. I don't think we slowed down our spend. We didn't spend everything we authorize 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 an investment that makes sense. Is it possible we won't spend that much money? Yes. Just like we did in last year and I'd say the same thing we said a year ago. We are okay with that because we want people to do it, because things we are trying to give our team's visibility to is a multiyear capital allocation so that they can plan accordingly. And if we've just said okay we authorize to 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. That the idea being manage your capital over time. And so I know we all focused on this call around the current fiscal year what we are going to spend. As a company, we are 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 turn around and write a big dividend check or buyback a lot of stock. Not necessarily, it would be depended on what we thought we are going to do over time.

What do you think with the land prices?

Bob, it is Richard. Land prices are competitive. No question about them. Unfortunately we've got a very broad footprint. We are not -- as Bob indicated forcing investment into any particular geography. We allocate capital to geography and if we can't find right deals, we don't spend it. So land is competitive. I don't personally think that's news. And I expected to stay competitive.

Your next question comes from the line of Adam Rudiger.

Hi, thanks. Two questions on the Dominion acquisition. The first one was the purchase accounting impact this quarter and what is the expected impact is for next quarter?

Yes. So it is about a 70 basis point headwinds, so detrimental margin impact in the fourth quarter and our expectation is between 30 and 50 basis points in the first quarter next year.

Thank you. And the second question relates to your comments about slowing or stopping sales that Columbus and Louisville communities. How much is that -- at first glance I'll make that, we will make it sound like those were ultra strong market. So my question is, is that the case or how much of that 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 have way too much backlog out there in front of us. So, Adam, we are very comfortable with 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 and what they have 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 stop as well as new community. So very pleased with what's happening there. But it was just philosophical difference and frankly driving return versus growth.

Your last question comes from the line of Will Randow.

Hey, good morning. Thanks for fitting me in. 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 it get less competitive in regards to land?

It is interesting. I can't say what's happen in the last 30 days but certainly have approved a number of transactions there including one of the Del Webb. And I would tell you for well positioned assets people are still interested. So it is not like the demand goes away from the builders immediately.

Got it. And then in the South East, are you seeing competition stepped up? I would assume so based on number of acquisition among competitors.

Will, it is Richard. I think the South East 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. So I'd say it is continued to be competitive but we are doing very well.

And for the extent that they bought somebody, it is just different name but they are still the same builder there with the same lot position initially. So it doesn't change the competitive landscape immediately.

There are no further questions. Presenters, I turn the call back to you.

Great, thank you, Shawn. I know there is a lot of conference call lined up today. Sorry we ran a little bit long in this call. We wanted to get in as many people as we could. We are certainly be available for the remainder of the day if you got any follow up questions. Thank you for your time. And we look forward to speaking with you in next quarter.

That concludes today's conference call. You may now disconnect.