Q4 2019 Earnings Call
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I'd now like to handle the conference over to your Speaker today, Jim Zeumer. Please go ahead Sir.
Thank you James and good morning, I want to welcome participants to this morning's call to discuss Pultegroups outstanding fourth quarter, 2019, operating and financial results.
I'm joined this morning by Ryan Marshall.
Ill.
Publish honestly executive Vice President CFO .
Most ASCII senior VP of finance.
A copy of this morning's earnings release, the presentation slides that accompanies today's call have been posted to our corporate web site at Pultegroup dotcom.
We'll also post an audio replay of today's call to our website a little later today.
I want to highlight that we'll be discussing our reported results today as well as results adjusted to exclude the impact of certain significant items.
A reconciliation of these adjusted results to our reported results is included in this mornings release within the webcast slides accompanying this call.
We encourage you review these tables to assist in your analysis of our results.
Excuse me.
Before I turn the call over to Ryan I want to alert everyone that today's presentation includes forward looking statements about the company's expected 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.
To summarize as part of today's earnings release and within the accompanying presentation slides.
These risk factors. Another key information are detailed in resi, she filings, including or anyone quarterly reports.
Now, let me turn the call over to right right.
Thanks, Jim and good morning.
As detailed in this mornings press release Pultegroups fourth quarter results closed out 2019 on a high note, which I believe positions the company for even greater successes in the year ahead.
Our outstanding Q4 results reflect the strength of our overall overall market positions and homebuilding operations in combination with an ongoing acceleration in fundamental housing demand.
What our views, particularly encouraging is the broad based strength of the housing market as our Q4 order rates were higher across each of our geographic areas and across each of the buyer groups we serve.
Reflective of this strengthened demand traffic to our stores was up 14% over the prior year, well order rates increased 33%.
Housing continues to benefit from favorable market dynamics, including strong employment and consumer confidence and demographic numbers, which have underpinned demand for the last several years.
I think improve affordability across many markets is now, adding incremental support and allowing more consumers to get actively engaged in the home buying process.
Well the slow start to 2019 resulted in or full your closings in revenues being up only slightly over last year.
We still delivered increased earnings per share generated $1.1 billion, an operating cash flow and that's after having invested $3 billion into the business and we also returned almost $400 million to shareholders through dividends and share repurchases.
We're also successful in strengthening our financial position, having to retire $274 million were bonds that were scheduled to mature and 2021 with this helping us to enter the new year with a net debt to cap of only 21.7%.
Couple all of this with our highest ending backlog in over a decade.
And I think it's clear that we're extremely well positioned to grow the business and deliver even greater financial results in 2020.
Well I am excited to speak with you. This morning about this morning's announced acquisition of innovative consumer construction group.
I'm first going to turn the call over to Bob So he can finish reviewing our financial results Bob.
Thank you and good morning, everyone.
Pultegroups order volume and absorption rate were the highest we've generated in the fourth quarter and more than a decade.
For the period net new orders totaled 5691 homes, which did increase of 33% over the prior year.
That's right indicated we experienced strong demand the grass across all geographies and buyer groups.
The quarter, our first time buyer orders increased 57% to 1743 homes.
Move up orders increased 27% 2471 homes.
Well active adult orders increased 22% to 1477.
In the quarter, we operated from an average of 865 communities, which is an increase of 5% over the prior year community count to be 25.
Adjusting for community count absorption pace was up 27% over last year.
Consistent with our orders, we realized higher absorption rates across our entire portfolio as absorptions increased 38% among first time buyers, 29% among move up buyers and 10% among active adult buyers.
The improved operating environment contributed to the company strong financial performance in the quarter as home sale revenues increased $2.9 billion.
Higher revenues in the period were driven by 2% increase in closings to 6822 homes.
Our average sales price was down less than 1% to $429000.
Our average sale price for the period and flex accommodation pricing dynamics and mix shifts realized in the period.
More specifically our average sales price for move up an active adult closings increased 4%.
The 494420 $3000 respectively.
Pricing for first time homes decreased by 8% to $342000.
It's worth noting that the decrease of first time ASP reflects the ongoing and purposeful expansion of our entry level business, particularly in the southeast, Florida and Texas.
This successful expansion of our first time business is also demonstrated in the mix of our fourth quarter closings.
Buyer group closings for the quarter were comprised of 32% first time, 45% move up and 23% active adult that's compared with 26% first time, 47% move up and 27% active adult in the fourth quarter last year.
These results include the closing of 432 more first time homes this quarter to the fourth quarter last year.
Given the increased investment we have been making it assets that serve this buyer group. We believe we're well positioned to continue expanding this element of our business.
The strong order environment has also contributed to a 20% increase in our backlog over the same period last year to 10507 homes.
As a result, we've been increasing our production such that we had 10780 homes under construction at the ended the quarter, which is up 14% over last year.
Of the homes under production, 69% or sold while the remaining 31% our spec.
As a percentage basis spec production is down from last year, but up sequentially.
This largely reflects largely reflects the introduction of incremental spec units and our entry level communities as we seek production efficiencies and to meet the move in ready expectations of that fire group.
Given the homes, we have under contract and introduction, we expect first quarter deliveries to be the range of 5300 to 5500 homes.
At the midpoint this would represent an increase of 17% over the first quarter of 2019.
With this strong start to the year, we expect full year deliveries to be in the range of 25520 6250 homes in 2020.
Based on the relative strength of our first time communities. We expect the average sales price of closings in the first quarter will be in the range of $410000 to $415000 with full year ASP in the range of $415000 to $420000.
Continuing down the income statement I reported gross margin in the fourth quarter was 22.8%.
Compared with prior year reported and adjusted gross margin of 21.5% and 23.8% respectively.
Our gross margin for the quarter came in lower than our previous guidance due to a number of factors, notably we delivered more homes than we expected in California, where pricing was under pressure much of the year.
In addition, we realize higher than expected warranty costs, a limited number of previously close communities and we recorded a couple of minor inventory impairments.
None of these items are individually significant together they did act as a margin drag in the period.
Demonstrating the real ongoing strength of our business, we expect our first quarter gross margin to increase sequentially and to be in the range of 23.0% to 23.3%.
In fact, the potential is there for margins to improve further as the year progresses, and we currently expect full year gross margins to be in the range of 23.0% 23.4%.
Our reported fourth quarter, SGN, a expense of $262 billion or 8.9% of home sale revenues.
Included $31 million pre tax benefit from an insurance reserve adjustment recorded in the period.
Excluding this benefit our adjusted EPS DNA expense was $293 million were 10% of home sale revenues.
SGN a expense for the prior year fourth quarter was $292 million were 10.1% of home sale revenues.
With expectations for higher closing volumes in 2020, we believe we can realize incremental overhead leverage as such we expect this DNA expense for 2020 to be in the range of 10.5% to 10.9% of home sale revenues.
Our financial services operations generated fourth quarter pretax income was $34 million.
Compared with $5 billion in the fourth quarter of last year.
Last year's results included a charge of $16 million for reserve adjustment recorded in the period.
This year's improved financial performance also benefited from a strong margin environment higher loan volumes, resulting from growth in our homebuilding operations as well as a higher capturing.
In fact, our mortgage capture rate increased to 84% from 77% last year.
In the fourth quarter, our income tax expense was $100 million for an effective tax rate of 23%.
Compared with $92 million for an effective tax rate of 27.9% last year.
Our fourth quarter rate was lower than our previous guidance as we benefited from an adjustment and evaluation allowance associated with certain deferred tax assets.
As well as a benefit related to the recent approval of the energy tax credits.
Looking ahead for 2020, we expect our base effective tax rate to be approximately 25%.
In total reported net income was $336 million or $1.22 per share in the quarter.
On an adjusted basis or net income for the quarter was $312 billion or $1.14 per share.
In the prior year, our reported net income in the fourth quarter was $238 million or 84 cents per share. While adjusted net income was $314 million were $1.11 per share.
Our fourth quarter diluted EPS was calculated using approximately 271 million shares which is down 9 million shares.
We're roughly 3% from the fourth quarter of last year.
Our lower share count is due primarily to our ongoing share repurchase activities.
During the fourth quarter, we invested $771 million and land acquisition and development spend bringing our total land spend for 2000 $19 billion to $3 billion.
We ended the year was approximately a 158000 lots under control with 41% of them held the option.
Looking to 2020, we expect our total land spend to increase to approximately $3.2 billion.
Given our existing land pipeline, we expect full year 2020 community count growth of 1% to 3% over 2019.
Growth will be closer to 3% to 5% in the first quarter of the year, reflecting the benefit of last year's American West acquisition.
The fourth quarter, we repurchased approximately 765000 common shares for $30 million for an average price of $39 in 16 cents per share.
For the full year, we repurchased 8.4 million shares for $274 million or an average price of $32.52 per share.
After all this activity we ended 2019 with $1.2 billion of cash and as Ryan mentioned, a net debt to capital ratio of 21.7%.
Gross basis, our debt to capital ratio was 33.6%, which is down 500 basis points from last year.
Let me now turn the call back to Ryan for some additional comments right.
Thanks, Bob.
Consistent with a 33% increase in orders the demand environment in the fourth quarter was obviously much stronger than last year.
We saw generally strong demand in the eastern third of the country with Florida, continuing to deliver exceptional performance.
Demand in our Midwest in Texas operations was also much improved with our Texas business in particular benefiting from increased business among first time buyers.
And out West was certainly much stronger in the quarter and I would cautiously highlight the northern California appears to be finding its footing after a tough 12 plus months.
Strong fourth quarter demand, which has continued into the first few weeks of January has us heading into 2020 with much higher expectations and we had at this time last year.
We are optimistic did a good macroeconomic backdrop and better affordability should keep buyer interest high in the year ahead.
Now with the review of our operating and financial results complete I want to discuss Pultegroups acquisition of innovative construction group, where I see G.
For several years, you've heard the construction industry talk about a tight labor market and how this is adding to our construction costs and cycle times.
Given these conditions, you've also heard us discuss efforts to expand the use of offsite manufacturing in our construction operations.
As you know we launched our commonly managed plans platform in 2011 to better standardize our product offering and simplify or purchasing and construction processes.
In 2019, 81% of our closings were from our common plan portfolio.
With the success of this platform, we have viewed capturing the benefits of Offsite manufacturing as index logical step.
Over the last 18 months, we've met with numerous businesses that are working to bring increased automation to homebuilding.
It is through this work that we identified I, CG, which provides framing solutions to residential and commercial contractors in and around the Jacksonville market.
Hi, CJIS Offsite solution includes offering design services manufacturing wall panels root dresses and floor systems and onsite installation to provide a full frame shell construction process.
Evaluating EISG, we were very impressed by the management team along with the product quality production efficiency and overall innovation of the plants operations working closely with the company founders, who will continue to lead EISG going forward, we plan to extend the use of pre assembled for systems and to expand the factories.
Production capabilities to include installed windows and won't prep for mechanical electrical and plumbing.
I see GE will remain a standalone operation and continue serving its existing customer base and build their clients.
This acquisition has the potential to benefit our Jacksonville operations through faster cycle times precision structural components and savings on lumber and other materials.
More importantly, we see this facility is a model for integrating increased offsite production in other pultegroup divisions.
Well likely a few years down the road the opportunities there to develop comparable production plants in areas where scale in adjacent markets can support a dedicated factory.
It is important to note that EISG is just one component of our strategy as we do continue to partner with key suppliers to move more of our production into a factory setting.
This is one plant serving one market, but we are greatly encouraged by the potential offsite production offers to enhance our operations in north, Florida today and other markets in the future.
We see the opportunity to produce high quality components with greater efficiency, while allowing pultegroup to work more effectively with its trade partners.
We look forward to providing updates on this venture and related activities as they develop.
Before opening the call the questions I want to welcome the employees of IC GE into the Pultegroup family.
Thank our entire team for their outstanding work in 2019.
Thanks to your efforts the company is operationally and financially strong and we head into 2020 with tremendous momentum now let me turn the call back to Jim Zeumer. Okay. Thanks, Ryan will now open the call for questions that we can speak to as many participants hospital during the remaining time in this call. We ask the limit yourselves to one question and one follow up.
Tim just explain the process again, we'll get started.
At this time I'd like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad and we'll pause for a moment, while we compile the Q and a roster.
And our first question comes from the line of Michael Rehaut with JP. Morgan Go ahead. Please your line is open.
Thanks, Good morning, everyone.
First question I had was just run you know the the.
The drivers of the gross margin for 2020 and expecting a little bit of improvement I was hoping you can break down how you're thinking about.
Uh huh different components of that.
This is drivers.
You know by either mix.
Pricing.
<unk> costs cost inflation.
What are the bigger drivers there.
Yes, Mike it's Bob.
Obviously, when we look at the business and how we want to project our margins going forward. The first start Weve. Please the first place we start is our backlog.
We've got a strong backlog coming into the year. So we know the pricing embedded in that.
We think about how the businesses performed largely over the last three months of it as we've built that backlog.
And so as an example, California, we've seen pricing get a little bit from are out there we've seen a little bit more volume.
But.
So I guess it simply as I can say, it's based on what we see in our backlog, we're not assuming price appreciation.
I can tell you that as we look at.
Vertical construction cost in fiscal 20, we see about a 1% increase.
So relatively modest inflation.
A lot costs are obviously going to get a little more expensive as we move more recent vintage Sir the portfolio, but again, that's all factored in but we're not we're not giving price appreciation.
In that side.
Okay. Appreciate it I guess for my second question.
And I apologize I was pulled away for a moment during some of their prepared remarks.
Yes, Hi, CG acquisition.
I was curious about that in terms of the rationale and again I apologize if you kind of addressed this already but just the rationale behind buying the company outright.
Versus.
Being a customer as is.
Reaping the benefits of the efficiencies of the of the business or the business relationship at the simply as a customer or you know, perhaps making an equity investment.
To allow the company to grow for their without.
Fully consolidating and.
Kind of adding additional.
Cost structure, so to speak on your own book.
Hey, Mike It's a it's Ryan and good morning. Thanks for the question I think as we looked at the way I explained that as we looked at I.C.G. I think there are a number of different ways that we put potentially could have reap some of the benefits associated with the Offsite manufacturing you highlighted a number of those we elected to go the route that we did for a number.
Reasons, which I probably won't get into on this call.
What I will tell you is the path that we've chosen to take on this particular acquisition was right for this particular opportunity where.
We're going to as we look at our entire operation across the country.
We continue to leverage relationships with other suppliers, where we're looking to move as much of our production into automated type factory settings as we can.
And in many of those cases, it will be with existing suppliers that are bringing technology to the table.
We are going to use the learnings from.
This plant the certainly enhance right away our Jacksonville operations.
We will use those learnings down the road.
The potentially look at standing up new plants of our own where we have.
The right amount of volume to support those so.
We're really excited about what this does it's been a journey frankly in the making since 2011, when we started our commonly called commonly managed plans portfolio and this is the next logical step so more to come but suffice it to say, we're pretty excited about what this opportunity holds for for the industry.
And our next question comes from the line of Stephen Kim with Evercore. ISI go ahead. Please your line is open.
Yes, Thanks, a lot guys I'll, let me follow on Mike's question here on IC GE a number of questions. Maybe you can just seemed to take a malls one.
You know I'm curious about your longer term plans you do this opportunity to expand are you thinking that it's going to be more along the lines of these integrated systems, you know with the mechanical integrated and windows or be more kind of like that that the raw, but they're skeleton as you think about the opportunities.
And can you give us a sense of for the asked him an estimate of how much you think that you're saving.
Or or they are saving in the Jacksonville market, and whether you think that thats something which.
We can increase.
As you take this across the country.
Yes, Steve ill take the the first question as far as where we see this going in the future and I think it's really the ladder or the first piece that you mentioned, which is to take it to.
To the level of.
Plumbing and electrical wins window installation et cetera, So I think even in advanced level of manufacturing from whats you know readily available I think in most markets today with just the raw frame shell so.
I see GE is already starting to do some floor cassettes, which which we think is kind of in that more advanced level Offsite manufacturing and as we look to this existing operation plus the places down the road.
We think the real opportunity is to get into the more advanced manufacturing.
We're certainly going to get benefits are today from kind of the the frame shell components of walls and trusses.
But where we where we really see the benefit coming is in those more advanced manufacturing techniques.
You know.
In terms of kind of the benefits Stephen we certainly believe that theres benefit there.
I would highlight for you that this is a kind of single plant in a single market.
So any impact in our overall reported results I think will be modest.
But it's a it's a big step for the company and a journey that.
We're really excited to take over the next two or three years.
Excellent well I know you guys have done tremendous amount of work there. So nice to meet median probably one of the best positions to know.
Second question relates to the entry level segment of the market. We highlighted this morning that there were some changes done with respect to housing policy or these changes that look like they're coming which could be helpful to the lower end of the market.
Even beyond what we've seen over the last couple of years I'm curious as to whether or not you have seen any change.
In that in the entry level of the market.
We know that there has been a lot of other folks moving into that segment of the market more serious way and I was curious whether or not you have continued to see strength at the entry level or if you've seen it starts to moderate and in any way.
So just your commentary about what you're seeing in the marketplace from a at the lower end of the market, Yes, Steven its Ryan I'll take the first piece of that we are seeing continued strength and I think its evidenced in our reported numbers for the fourth quarter on our first time entry level space, We had 50% 57 per.
Yes on year over year, Signup growth, which is pretty robust.
So we're excited about that we're excited about the continued investment that we've been making over the really the last two and half years to meaning meaningfully move the number of lots that we control that are specifically targeted to this first time space and so.
I'd like how we're positioned there.
Some of the changes that you speak too I think of certainly helped.
With.
The overall affordability equation.
In providing attractive and accessible financing to even more buyers and I think that is all factored into the overall demand situation that we're seeing from the first time entry level buyer.
Your next question comes on line as Matthew Bouley with Barclays. Go ahead. Please your line is open.
Good morning, Thank you for taking my questions.
I wanted to ask about the move up business, obviously strong absorption growth there as well in the quarter.
And obviously many are your competitors leaning harder and into the entry level.
So I guess on move up how do you think about at this point pull these position competitively both in terms of land acquisition and potentially even pricing power at move up community is just because simply you don't quite hear you as much about your competitors leading into into that part of the business as much. Thank you.
Matt It's a good question and I think it highlights the reason or or or maybe gives me an opportunity to reiterate the balanced mix in the balanced approach that we've tightened. The we have tried to take with our business and if I take you back to kind of late 2016, but we started talking about wasn't.
Opportunity to shift about five points of our business out of move up and into entry level and you're starting to see the results in our closed home mix from that effort what that yields just to give you some specific numbers in the fourth quarter.
43% of our sign ups were from our move up business. So it continues to be the largest piece of our business. It's a very profitable piece of our business and it carries kind of our flagship brand of Pulte homes. So we like how we're positioned we have not abandon it at all or rather I think weve more up.
Procreate at least shape the size of that business to be reflective of the market opportunity. We think we've also the counterbalanced of that is that we think we've gotten better positioned to take advantage of the first time opportunity as well and suffices to say, we don't have all of our base all of our eggs in any one single basket and we like that.
Okay. Appreciate that color and then secondly, I wanted to ask on the SGN a side, you're guiding to relatively flat leverage in 2020, maybe maybe slight leverage at the midpoint, but obviously you are set up well from a backlog standpoint around revenue grows I guess just are there any other expenses.
No there were some of the I.T. spending you were talking about last quarter.
That we should be aware of that might prevent some of the kind of additional assay in a leverage thank you.
It's Bob Yes, we obviously when you adjust for the current year, we'd come in around 10.8%. So the range that we've given shows some even at the midpoint some.
Approvement over that.
Certainly we've talked about over the last couple of years that we've been on a journey on the T. side.
Grades of our systems as those systems get put in place, we're actually starting to depreciate them now.
So we've got some cost associated with that.
So really nothing new or unusual in that you know, it's really just being able to leverage the increase scale the business.
And our next question comes from the line of Mike Dahl from RBC Capital markets. Go ahead. Please your line is open.
Great. Thanks for taking my questions.
First wanted to start with a question around kind of pricing power and the momentum and gross margins I think Bob you talked about the potential for margins to improve as as the year. It goes on I'm not sure if that was.
Still within that the cost structure of the full year guidance say, you're giving or suggesting that there could be upside from there, but but as a starting point could you talk about just.
The pricing power that you've seen maybe maybe maybe if you can give kind of percentage of communities that you've been able to raise price any sense, a magnitude and how that compares year on year over the past few months.
Yeah, Hey, Mike just to clarify that improvement was included in the guide not outside the guide. So that's just reflecting that the range for the year actually goes a little bit higher than what we've prepared for the first quarter.
In terms of pricing power I think if you look at our ASP during the quarter, it's roughly flat on an aggregate basis.
But you've actually got a decrease in the entry level, which is really a reflection of the types of assets, we're providing there theres actually if theres any pricing real pricing power in the market I think it's there and I think it has been for probably the last year too.
You know we showed about 4% up.
The move up and active adult.
So I think.
There is it's a real substantive change in the product we're delivering so I think that gives you some insight into what the pricing power is around that mix always matters, where what markets. It comes from all that.
But on balance I would say you've got more power to price.
In the entry level, although they are price sensitive so there's a limit to how far you can push that.
But we're we're seeing prices hold to go up a little bit in the balance of the business.
And Mike the only other thing that I'd add to that as I think with the strength that you're seeing on the volume side.
And we're starting to see some reduced inventory levels I think certainly that would create an environment, where all of the the builders will have more pricing power. The thing that I think you will see certainly Austin all builders be cautious with is the affordability equation.
Yeah, we all saw what happened kind of in the back half of 18, when affordability became challenged and so.
Pricing is one of the key levers in that mix and I think we want to pay attention to that.
Okay. Thanks for that and the second question just another follow up on on ICICI and Ryan appreciate that there are some things that you don't want to get into in terms of the details but did want to press again on just.
Since you'll continue to have ICICI serve its external customer base.
What is that true differentiation to to pulte of owning the assets is it just the first hand learnings you've discussed or was this maybe more of a situation where.
You were on existing customer and had you not taken this position you could have lost access.
To that messy as a supplier or any other dynamic at play that that could just to kind of explain why this ends up being differentiating for for you versus versus so there's a question just having this be more of a partnership but still a you know.
Traditional kind of customer relationship.
Yeah, I think I think the opportunity here, Mike is really twofold number one we see it is a great opportunity to partner with the founders to speed up the innovation moving from from the current version of frame show into some of the more.
Advanced manufacturing techniques. So that's something that we've been talking about you've heard us talk about really for the last two two or so years that we think theres a tremendous opportunity there and then the other pieces with 80% of our closings coming out of our commonly managed plans portfolio, we see this opportunity.
You know really applying to other parts of our business. Besides just what it's going to provide in the north North Florida market.
So.
That's that's something that we think working with.
The founders of ice EG weekend, we can really benefit from in other parts of the country. The biggest reason, Mike and I can't Overemphasize US enough. This is about labor.
We have been talking about labor shortages in this industry for the last 10 years give or take.
There doesn't seem to be anything that's going to structurally change the availability of labor and so the only logical off ramp that we see to that is getting more efficient and one of the avenues that we think is.
The easiest the easiest.
Or the most easily accessible off ramp is too.
You know truly have having a housing operation that can benefit from offsite production.
And we see the the unlock that it gives us on this on the tight labor supply as a as a huge benefit.
Your next question comes on line of John Lovallo from Bank of America Go ahead. Please your line is open.
Hey, guys I. Thank you for taking my questions. The first one on ICICI and I think that I think this is an incredible opportunity and frankly, we see it is the future of homebuilding. So I think this is this is an excellent move on your part.
But I see GE looks like they have the ability to deliver a complete fully integrated off site solution. I mean building information modeling component manufacturing installations excedrin, it looks like that you're taking kind of more of a piecemeal approach here just to start with some more prefab parts.
Instead of going for the full solutions I guess the question is.
Is this just being a little bit conservative on the onset here and how quickly could you kind of pivot in the Jacksonville market to really deliver a fully integrated offsite solution.
Hey, John as its Ryan we haven't given that level of detail, yet, but I think what you highlighted what the real opportunity is and that's certainly what we're focused on.
The you know as I mentioned in some of my prepared prepared remarks, the the level of innovation that was that was existing inside of hcg is one of the things that made it really attractive.
So to your point, they have design services, where manufacturing precision components Weve got the ability to assemble those precision components with the on site labor.
And so you know the next logical stuff is some incremental investment.
And then to kind of systematize in a way that you can do it.
Volume type setting and so that's that's what the opportunity is in certainly what we're squarely focused on.
Okay. That's helpful. And then maybe just more of a housekeeping item here. The gross margin in the quarter. I think you guys had highlighted California incentives warranty and inventory impairments anywhere you can you can kind of bucket the impact in the quarter.
From each of those.
Yeah, I wouldn't because none of them are individually significant.
If we if they were we would have walked you through them.
I would characterize the.
Total love it as being somewhere in the neighborhood of 40 basis points of margin impact on the quarter.
Our next question comes on line of Alan Ratner with Zelman and Associates go ahead. Please your line is open.
Hey, guys, good morning, and nice quarter and congrats on the acquisition.
Thanks, Alan My first one my first one on I.C.G. on just the here in your comments about some of the things they were the future where you can see just going.
Especially the closed panels with the windows and the plumbing and electrical et cetera already pre installed.
One thing that we typically here from builders is the reason why perhaps that hasnt become more mainstream is yes, the very high.
Transportation costs associated with that bring and bringing those products to the job side as well as breakage I mean, I know builders even back in the eighties, Ninetys, where we're experimenting with that without such installing windows and things. So is there anything that I see GE has done that kind of its crack the code to make that process more efficient and and affordable from a building perspective that.
The math actually makes sense now where is that just something that you think you've got the right team in place to pursue that but perhaps not quite there yet.
Yes, Alex.
Thanks for the question I appreciate it.
We mentioned today, what's what's coming out of IC G are the wall panels, the floor cassettes and manufactured trusses, we think theres an opportunity to go to the close wall panels inclusive of windows electrical plumbing et cetera work in investment has got to be done on a.
I think you highlight the challenge that applies to all Offsite manufacturing not just.
Kind of this second stage in its transportation and so what that what that means is that you've got to have enough volume within.
A relatively close proximity such that the transportation costs don't.
Offset the savings that you get from from building those components in a more efficient way.
So work to be done investment to be done to figure that out. It has been done in other places in other applications and so we think that the ability to do it is there.
And then you know the I think the next logical question as well why is this time going to be different and it goes back to the question that I answered a a few a few back which is labor and we just don't see.
Labor rates going in that direction that will.
Challenged the efficiencies that are gain from from the manufacturing environment, which you know has happened in the past, but because of what I think is going to be a persistent shortage of labor. We really we really view this as a new opportunity to do something different.
Got it that's helpful Ryan.
And second question, maybe for Bob just kind of thinking about the capital allocation thinking at this point here on your net debt to cap is that the lowest level. We've seen in many years and at the same time buybacks decelerated this quarter and then for the year, we're down fairly meaningfully from the prior few years. So how are you thinking about the bank.
She is the capital allocation at this point is there another kind of use of that cash that's being earmarked at this point or is it a function of where the stock prices on any commentary you can get there.
Yeah, you know, it's going to sound, a little bit redundant and boring, but it's kind of the same playbook, we've been working from for the last several years.
You know we pulled every lever this year, we bought stock we increased our dividend.
We retired some debt we've invested in the business we've indicated we'll be investing more this year.
Obviously, we've got investment we just made a nice EG.
And I think you'll continue to see all of those things be in our in our windshield. Yeah. We obviously expect pretty strong cash generation in fiscal 20.
What we've highlighted and been consistent with I think as.
We will report the news on the share repurchase activity.
But I think any and all of those are still.
Front of mind, but nothing new or different to report beyond that.
And our next question comes from the line of Jack Micenko with ESI GE go ahead. Please your line is open.
Hi, Good morning, first one little bit bigger picture for Ryan.
Thinking about this pivot towards the entry level and it seems this maybe occurring a little bit faster than maybe you expected to success or the uptick.
On the Angelo side, you've got a real gamut of competition you guys.
Fair bare bones product you've got.
Everything included on the other and then somewhere between you've got build to order curious how you.
He pulte really positioning and competing and entry level product standpoint, as that business gets to be a bigger part of your mix.
Yeah. Good morning, Jack I. Appreciate the question, we're going to see US play on the higher end of the entry level price point, we have.
You know made some modifications to our typical built to order model and you heard that in Bob's prepared comments that.
The increase we are building more specs in that business.
Kind of meet the demand that's there and so you saw a little bit of an uptick in our us specs as a percentage of total inventory and it's largely reflective of more specs in that entry level business.
We are we are limiting the choice within our Centex model.
To drive some of the efficiencies that were in turn passing on to the consumer which really creates the affordability and the value. The this first time buyer desire so less choice less ability to customize but you're getting a really nice home and a lot of home for the money and we think Thats, where the magic is will continue.
Good to deliver the great customer experience the high quality.
You know the quality location of community that I think all of our brands of have been.
Known for I don't think you'll sit well you won't see us probably go with the bare bones model to really small square footage model. We just don't think that's.
Part of the the offering that we give to the consumer.
Okay. Thanks for that and then.
And that five five points of pivot.
Given the uptake that the two scene and I think last quarter, you said that the margins in the entry were healthy for perhaps than the movie does that five point number expand.
Relieving the door open for that to expand or you can say, hey look we want to we want to be a balanced business.
And third of the book is all we really want on the entry side.
Jack I think the over the key message that I'd emphasize as we want a balanced business I think you'll see it may be it may go down a few points. It may go up a few points as opportunities arise.
Our overall focus is going to continue to be to drive through cycle return on investment.
Within the residential housing space and so as we see trends emerge, we'll certainly take.
Take take opportunities, where where they present themselves but.
With the focus on being more balanced I don't think youre going to see us place outsized that's in anticipation of some future trend.
So we're pretty close to probably where we want to be is probably the message that I'd leave with you.
And as far as margins go into your other question, we like the margin profile that we're getting out of the entry level space.
They're they're attractive margins.
And it's really reflective of what Bob shared which is that's the place where we've seen the ability to get some price expansion.
You know what I would emphasize Jack to the comment I made a minute ago about our focus is on return we really look at at the underwriting of that business is the same as we look at move up in the same as we look at active adult. So certainly gross margins are part of the story, but but the real prizes.
As return on invested capital and we look at all of our consumer segments. The same.
When it comes to return.
And our next question comes from the line of Ken Zener with Keybanc go ahead. Please your line is open.
Good morning, gentlemen.
Ken.
So your entry level, a few years ago people horse so concerned around the del Webb you seem to be putting that to rest. My question is that if youre moving in that because that's where demand is it makes sense.
You are building more spec homes.
Why is that approach.
Given your hesitancy to do it on in other categories. What is the risk return that you're seeing there is a cause you're controlling more labor like some other builders have talked to is it that.
Well what is that that gets you over that risk profile that you have for your other categories in short.
Yes, Ken its Ryan.
Risk is just part of it it's really about value in the eyes are the consumer and so as we've looked at what the consumers willing to pay for we believe that were more efficient more profitable and manage risk better with the move up an active adult buyer when they get the opportunity to choose the things that they value and that's part of our strategic pricing.
Model that has contributed to.
The margin profile that we have today that we're very proud of.
We think with this entry level consumer they value different things and affordability and access is probably the biggest driver and so by limiting the amount of choice that we give building a few more specs.
Having those homes quicker to deliver because this buyer in theory is coming out of an apartment.
They just to operate on a little bit different biden cycle than our move up and our active adult buyer and so it's less about risk and more about maximizing value and given the consumer the things that they want and need.
I understood I think it's a good move.
Second question could you expand a little bit since you mentioned that as the gross margin drag, California could you just talk about it being north south coastal and land.
Et cetera, just give us your perspective since that was something you called out specifically, thank you very much.
Yes, Ken I think California as a whole it's been no secret has been a drag and has had a it's been a tougher selling environment for really the last 12 months.
South and north coastal and inland.
You know in in order of severity I think northern California coastal.
Probably being the hardest hit and the slowest. It also happens to be the place where we're starting to see.
Some strength start to come back into the market and so we're cautiously optimistic.
As we've got a very strong business are.
Nicely positioned business in northern California in the Bay area in particular so.
You know probably more the drag and more on discounts and incentives that had to be that were given the continued to sell homes in northern California over the last 12 months.
Our next question comes from the line of Truman Patterson with Wells Fargo. Go ahead. Please your line is open.
Hi, Good morning, guys. Thanks for taking my questions.
First just first just wanted to follow up on the move up market get a little bit more color on that our field research.
Recently is revealed a healthy move up market, which I'll. Just say has been ahead of our expectations quite frankly, but what do you really think is driving that is it is it no lower rates kind of breaking up the prior rate lock are you starting to see the leading edge in the millennials no purchase in earnest in the move.
Of up market really what do you think is driving that improvement.
Yeah, I think like everything else. It it is the the health of the economy first and foremost so you've got wage inflation you have relatively slower price appreciation there's rate certainly helps if it's benefiting.
So all those things coupled together one of the earlier questions talked about.
Sort of the the big move for a lot of the builders to the entry level, which as to what degree thinned out the competitive sets of supply is in pretty good shape, both from a new build perspective.
And we've got a healthy supply in just about every market, where we're operating today in terms of days on market for resale, which is our biggest competitor. So I think all those things together have let themselves to a pretty pretty nice business for us 29%.
Absorption increase.
4% price appreciation is pretty nice so we'd like to visits and I've.
Ill paired with Ryan said earlier, it's the reason, we're not making a big bet, one way or the other we think through time being able to serve in each of the markets where we operate.
The the.
Set of consumers that are there and it's going to be different for instance, in some parts of Florida than what it is in some parts of the Midwest right. So that we're looking at each market and investing to serve a balanced portfolio in the market we were operating.
Okay, Okay, I, absolutely agree with that.
On the cost inflation outlook for 2020, I know you guys mentioned, 1% stick and brick.
It was likely to occur or what you were expecting could you just break up you know your outlook for Williams labor and materials and whether or not you think this accelerates versus 2019.
Yeah, it's interesting on the land side.
It's a it's a competitive market you've heard us say this before it always is.
I think you'll see certain parts of the country in certain asset classes be more competitive than others, but I think we're going to see continued land pressure.
We see it in the land coming through and closings today.
And I I don't think land is on sale.
In terms of the.
Labour and materials.
The material side, we've got a little bit of a tailwind in the first half of the year.
Reflective of the the decreasing price of lumber and lumber package in the back half of last year, which will affect our closings now.
But yes, we've seen.
Robert tick up a little bit not not bad, but a little bit. So we think that will moderate through the year.
All the other real other than concrete, which is always local to a market, we see a pretty pretty benign.
Material inflation rate.
Labor is as you've heard us talk about in the reason for the IC investment is always a little bit of a wildcard.
It's it's been better the last 12 months and so our expectation is that we don't see a lot of pressure on labor rate.
Thats going to vary by market.
But obviously, we think about 1% up overall.
Once again thats going to largely be labor just given the way the materials Mark is behaving.
And our next question comes from the line of Carl Reichardt with BTI GE go ahead. Please your line is open.
Thanks morning, guys Jack in tooling got a couple of minds I just have one for you.
Move up looking better first time mix has moved that way that the old crew ship del Webb stuff is kind of come off I'm curious what you're thinking about inventory turns next couple of three years, how important that metric is to you turned about your image about one one time of year by my numbers are.
Are you expecting that to pick up meaningfully and how important is that metric to you out as a driver of returns.
Carl It look it's a it's a big driver of return and and so I think the way that we look at inventory turns is breaking down what do you get on the how side and what do we get on the land side.
With 80, some odd percent of our balance sheet being on land.
Thats the lever that can really move the needle on overall inventory turns and it's a big reason why you've heard us talk about doing.
You know shorter duration land deals with more options because it drives right at the heart of the inventory turn equation. So the hope would be that we can continue to grow that as we roll in more options as we roll off some of the the cruise ship del Webb that you mentioned.
We look for opportunity to accelerate our land inventory turn on the how side of that's a that's a balance between really cycle time.
How much labor is available and delivering high quality product.
And I think it's another reason why we've made the investment a nice IGI is because it speaks to all of those you've got an opportunity to build with more precise components that are.
Sitting out in the rain in the snow you've got.
The ability of the been modeling and some of the the technology the factors into that.
And we think we can cut cycle time as well. So we think theres an opportunity to kind of pull all the levers there with.
More efficient labor higher quality materials.
Being more cost efficient so we think theres a lot of goodness.
And I appreciate that Ryan thanks.
And ladies and gentlemen, that's all the questions time for questions that we have today, so I'd like to turn the call back to Jim Zeumer for some closing remarks greatly appreciate Everybodys time. This morning, we are certainly available over the remainder of the data for any follow up questions and we look forward speaking with you on our next call.
Ladies and gentlemen, this concludes todays conference you may now disconnect.