PulteGroup, Inc.
Q4 2020 Earnings Call Transcript

Published: 28 Jan 2021

[Operator:]

Good morning, and welcome to the Fourth Quarter 2020 Pultegroup, Inc. Earnings Conference Call. . Please note, this event is being recorded. I would now like to turn the conference over to James Zeumer, Vice President of Investor Relations and Corporate Communications. Please go ahead.

[James Zeumer:]

Thank you, Andrew, and good morning. I'm pleased to welcome you to PulteGroup's Fourth Quarter Earnings Call. For the period ended December 31, 2020. We appreciate your time this morning and offer belated best wishes for the new Year. I'm joined on today's call by Ryan Marshall, President and CEO; Bob O’Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior VP of Finance.

[Ryan Marshall:]

Thanks, Jim, and good morning. I appreciate everyone joining today's call. I hope that your New Year has started well and that you are -- and that you remain healthy and safe. It goes without saying that COVID-19 and the resulting challenges made 2020 a year, unlike any that we've experienced before. Let me just say right up front that I'm extremely proud of how our entire team responded and how our organization remain engaged and focused during some very difficult times. Thanks to the sustained efforts of our dedicated team, we successfully navigated through a year that started strong, slam to a halt and then accelerated into the strongest demand environment this industry has experienced in more than a decade. As you read in this morning's press release, PulteGroup completed an exceptional year by delivering outstanding fourth quarter results that included a 24% increase in orders, a 220 point increase in gross margin and a 31% increase in adjusted earnings per share. We also ended the quarter with $2.6 billion of cash and a net debt-to-capital ratio below 2%. Reflecting a lot of hard work by an amazing team PulteGroup realized a 6% increase in full year closings to 24,624 homes and a corresponding 7% increase in full year home sale revenues to $10.6 billion. Benefiting from our ability to expand homebuilding gross and operating margins, along with dramatic gains in our financial services business, we converted the 7% top line growth into a 29% increase in pretax income of $1.7 billion. Our outstanding results extend beyond our income statement as we generated $1.8 billion in operating cash flow in 2020, after investing $2.9 billion in land and development during the year.

[Robert O’Shaughnessy:]

Thanks, Ryan. Good morning, everyone, and let me add my best wishes and express my hope that we can all navigate the coming year in health and safety. As indicated in our press release, our fourth quarter financial results were impacted by the following items

[Ryan Marshall:]

Thanks, Bob. When I took over as CEO in 2016, there were several areas where I saw an opportunity to enhance our long-term business performance. Among the targets we put in place were to expand first time to be 1/3 of our business, to lower our lot position to 3 years of owned lots, to control 50% of our land pipeline via option, and increase our growth rates while continuing to deliver high returns for our shareholders. Given our 2020 performance and our expectations for 2021, it is gratifying to say that we've achieved these initial goals with this foundational work in place, we can now continue developing an even more successful business as we expand our operations, advancing innovative customer-centric technologies and integrate new construction processes. Our outstanding 2020 results in combination with continued strength in housing demand, also has PulteGroup entering '21 with tremendous momentum. We begin the year with our largest backlog in well over a decade, along with great operating metrics and a strong balance sheet that gives us the flexibility to capitalize on market opportunities. These opportunities include the expansion of our off-site manufacturing capabilities that I spoke about earlier as well as the geographic expansion of our homebuilding operations. I'm sure that most of you saw last week's press release that PulteGroup has established new operations in the Greater Denver area. At the same time, our Raleigh division is extending its reach and establishing a presence in the TRID area of North Carolina, which includes the cities of Greensboro, Winston Salem and Burlington. We have our initial land positions in place, and we're working quickly to increase our lot pipeline in these new areas. We are excited about the opportunities we see in both markets as well as several other cities we are currently evaluating. With our goal to increase closings by more than 20% this year, along with investing $3.7 billion in land and our expansion into new markets, we believe we are well positioned to grow our operations while continuing to deliver high returns. In closing, I'm extremely proud of what our organization accomplished in 2020. The and I want to thank all of our employees for their efforts toward delivering an outstanding homebuying experience and homes of exceptional quality. I also want to thank our suppliers and trade who are working tirelessly to provide the resources needed to successfully run our business. We entered 2021 with high expectations, but I know the pandemic continues to rage and so we will continue to operate our business thoughtfully and safely. Let me turn the call back to Jim.

[James Zeumer:]

Great. Thanks, Ryan. We're now prepared to open the call to questions. So we can get as many questions completed as possible during the remaining time of this call. . And now let me ask Andrew to again explain the process and open the call for questions.

[Operator:]

. The first question comes from Mike Dahl of RBC Capital Markets.

[Michael Dahl:]

Nice results. Brian or Bob, I guess first question really is around land investment and in away capital allocation as well. Not to turn our nose up at an $800 million increase in land spend this year, it does seem like you guys are maintaining your typical balance when you're thinking about the debt paydown, the potential for share repurchases. A lot of your peers have started to more significantly ramp up land investment, just given the strength in demand and potentially some shortfalls in community counts coming. How do you think about this current environment and your allocation to land investment relative to your more balanced kind of through-cycle mentality?

[Ryan Marshall:]

Yes, Mike, thanks for the question. A couple of things that I would share with you. Number one, I would orient you to the fact that we've maintained for the better part of the decade that we're running a balanced business through cycle, where we want to invest in land, first and foremost, and grow our business, but there are other parts of capital allocation that we believe create long-term value. We are taking a pretty big step-up in our land spend this year, as I think we've highlighted this morning, going to $3.7 million. It's a big bump from where we were at in 2020. Certainly, there were some delays in '20 that have rolled into '21. But even adjusting for that, we think it's a pretty big step-up. We are going to continue to be very thoughtful and responsible in making sure that we're driving the types of returns that we know create long-term value. We just don't believe that now is the appropriate time to get into -- back into the mentality where all available cash is funneled into land. The last thing, Mike, I'd tell you is that we do -- while we don't peg our land investment specific to this number, we do think about land spend as a percentage of revenue. And we think the numbers that we have allocated and projected for 2021 are an appropriate step up, reflective of what is a very strong market.

[Michael Dahl:]

Okay. My second question goes to the margin side, and you clearly had success in terms of utilizing price and controlling costs to drive margin expansion. I think you alluded to margins potentially being slightly lower than the 4Q levels and mostly being able to offset the increase in-house costs. Could you just elaborate more on kind of magnitude of the increase in costs, maybe on a per square foot basis or however you want to quantify that, that you're expecting to come through the P&L? And also, if you could share some sort of kind of price per square foot that you've been able to achieve, just help us understand that balance between price cost a little bit better?

[Robert O’Shaughnessy:]

Yes, Mike, it's Bob. I think important to remember, we're starting from a very strong margin position and certainly, in the fourth quarter, we got the benefit of some spec sales, and we don't have a ton of spec on the ground today. So as we're looking forward into the year, what we're trying to project is where are the sales prices that we've contracted. But we recognize that our house costs are going up. We are projecting them to be up in the neighborhood of 5% next year in fiscal '21. So that's inclusive of commodity input cost and labor. So a little bit richer increase than we've seen for the past couple of years. Obviously, the market is strong. We think we can get most of that price back. The other thing we are cautious of is affordability, and we want to make sure that we've got pricing that people can actually afford to close on. So our teams are doing a nice job of managing that price equation as we're out in market. So the guide for the year at 24.5% again, reflective of a very, very strong environment. And -- but we do recognize, especially with lumber, having risen so rapidly that there'll be a little bit of pressure on margins with that.

[Operator:]

The next question comes from Ivy Zelman of Zelman & Associates.

[Ivy Zelman:]

And congrats on a strong year in the fourth quarter. Maybe, Ryan, you can help us better understand when you think about the $3.7 billion of acquisition land acquisition development, spend, even excluding COVID, we hear a lot from municipality or builders complaining, we want affordable housing, just not in our backyard. And just thinking about some of the constraints on getting lots developed is there anything that can change with maybe whether it's some type of tax incentive to developers? There's a lot of focus on the demand side by the Biden administration. But do you think that it's not a constraint that appears to be and you're overcoming that? Or is there something that has to change to continue to build more shelter for this country with municipalities being a bottleneck?

[Ryan Marshall:]

Yes, Ivy, and thanks for the question. I think you've touched on an item that, frankly, we've been talking about as an industry and as a company for a while, and you hit the nail on the head. I think all municipalities want more affordable housing and shelter as they work to grow their job base and grow their own local municipalities and economies. But you nailed that they want it as long as it's not next door or 2 existing residents or other folks that are already there. So I believe that's more a local issue than it is a national issue and -- but that being said, I do think a tone from the top, from the administration can certainly help to influence what local municipalities do. So look, there are challenges out there, but one of the things that I think we highlighted is our size. And I think the talented team that we have, we're working through what is a challenging environment out there, and we are able to get our land entitled. We are able to get it developed, we are able to get investment. If things were a little easier, I think you could do even more. But we feel very comfortable about the numbers that we've put forward for 2021.

[Operator:]

The next question comes from Matthew Bouley of Barclays.

[Matthew Bouley:]

I wanted to follow-up on the margin side. So guiding gross margins up 20 basis points in '21 despite this pricing environment. I'm just wondering if there's any, I guess, other margin headwinds that we should be aware of beyond that increase in-house cost, you just mentioned, Bob. So I'm thinking whether it's the mix of option lands that's come up and maybe now coming through? Or perhaps more first time closings expected? Just what else might be sort of playing into the puts and takes there on that guide?

[Robert O’Shaughnessy:]

Yes, Matt, I don't think there's anything really dramatic. Obviously, land is more expensive, each successive lot as the vintage gets kind of worked through, you're bringing more expensive land on as the market has appreciated through the years. So that's a contributor. Other than that, I mean, we've got a very large backlog. We've got pretty good visibility into what our margins are going to be. And in candor, we contracted these houses 3 months ago and so the pricing environment isn't fully reflected in our sales right now. So you see that kind of on a little bit of a lag with us. We actually like that because it puts us in a position where we can understand our house cost going into it when we're contracting. But we do have a little bit of a lag in terms of where the pricing environment is right now versus what is closing for us, for instance, in the first quarter.

[Matthew Bouley:]

Okay. Understood. That's helpful. Second one, just around selling pace. I think I heard you say that December ended up even stronger than November. And correct me if I misheard you, of course. But just obviously, Pulte, like many others, ending the year running faster than usual. Last quarter, you guys talked about sort of intentional slowing of pace. Do you think you have the capacity at this point to see further uptick on selling pace into Q1 as normal? And I guess, I think you mentioned January sort of continued unabated. I guess any additional color there would be helpful as well.

[Ryan Marshall:]

Matt, it's Ryan. We did have a very strong fourth quarter. And you heard correctly, December sign-ups were up over November and equal to what we did in October. And I think for those of you that have been following the industry for as long as you have, that's atypical. Normally, you see a seasonally downturn October to November, November to December. So I think it's reflective of how strong the demand is. And then January is off to a very good start. So we did, in the majority of our divisions manage the number of sales that we were allowing to be sold either via lot releases or price increases or some combination of both. And that's really about making sure that we're matching our sales rate to our ability to produce homes. We've significantly increased the production capacity that we have. So I think we're doing a nice job working through that. And then the other factor that you've got to think about is lot availability. So we factor all of those things into our sales release and our pricing strategy. And all of those elements are reflected in the guide that we've given for the full year. So it's -- look, as I highlighted in some of my prepared remarks, it's a great time to be in the homebuilding business. And I think there are a number of really strong demographic and economic trends that are going to continue to help support this industry.

[Operator:]

The next question comes from Stephen Kim of Evercore ISI.

[Stephen Kim:]

Yes. Good quarter. I was really intrigued by some of the things that give a glimpse into what could be coming. One of the interesting things, I think that you pointed out is that you have a build-to-order model, which suggests that what we saw in the fourth quarter doesn't really fully reflect the environment, which it sounds like it was pretty enormously strong in the fourth quarter. So it looks like that's still yet to come. And so in that vein, I wanted to ask you about your outlook for pricing and, therefore, implicitly margins. We couldn't help but notice that your order price this quarter was extremely strong. And relative to the price that you are forecasting or your outlook for price for the full year next year. I just did a quick analysis of that going back through time. And we have never seen anything like the kind of decline that you're calling for in your full year '21 closing price relative to the order price that you took this quarter. And in your commentary, everything seemed to suggest that there is actual momentum building in price. And so I just wanted to talk to you about what is embedded in that? Is there a significant mix shift of more entry-level communities that you are embedding in that assumption? And are you not seeing what other builders seem to be seeing, which is consumers actually paying up for more options and upgrades, which your BPO model would capture and even a preference for larger homes. Because your guidance would seem to suggest that's not happening nearly to the degree that you're going to have a negative mix shift. It's kind of curious. So I was wondering if you could address that.

[Ryan Marshall:]

Stephen, it's Ryan. Thanks for the question. There was a lot in there to unpack, and I'll try and touch on the key elements. And if I miss anything, we'll come back and grab it in a follow-up. But we are seeing a robust pricing environment, as I think we've highlighted, as it relates to the pricing, the ASP guidance that we've given for the full year, it is being largely influenced by the increasing amount of first-time business that we have coming through our business, along with geographic mix. So as you know, we build in kind of coastal locations like Northern California, Southern California, et cetera. And so the load of closings that come out of those divisions relative to other places in the country can certainly have an influence on ASP. As it relates to pricing and our ability to take price I think, Stephen, you know that we've long talked about our strategic pricing methodology and how that has been a large contributor of the company's outperformance in margin relative to the competition. So certainly, we feel that will continue to be a real strength for the company. We're operating in the same market that I think everyone else is and so there's not really any reason to believe that we wouldn't benefit from the uptake in demand and the ability to push price.

[Stephen Kim:]

Yes. I certainly would agree with that. It's just that maybe we haven't seen it as quickly in your numbers just because you have a build-to-order model, but that should also allow you to capture, I would think, if anything, a little bit more price. Because you give your comes the ability to option. In that regard, we've seen a couple of other builders report so far that our spec builders and in both cases, we -- well, so far, we've seen margins for the spec builders surprise to the upside even versus what they had thought a couple of months ago. And when we dig into that, some of it, obviously, is pricing, but some of it is also that cost per square foot seems like it didn't go up as much as they might have thought. And part of the reason for that is because they found that they're building somewhat larger homes. And that the somewhat larger homes have an actual lower cost per square foot because there's only 1 kitchen and only 1 roof and all that kind of stuff. So you get more efficiency when you build a slightly larger box. I was curious if you're seeing any of that and if you have incorporated any of that into your thinking about what cost per square foot will be over the next 6 to 12 months?

[Ryan Marshall:]

Yes, Stephen. So we've certainly factored into the guide that we've given what we believe the product mix will be. But within a given community, the offering that you could have -- could easily range from -- just as an example, 2,000 feet to 3,300 feet. Within that, there might be 4 or 5 floor plans, and you don't know what plan the customer is going to choose until they come into the sales office. So we have made some assumptions. I think as we highlighted in our prepared remarks, we're seeing customers do different things based on their current their current living situation, their work from home situation, the need for more space, more space for school, more space for home gyms, et cetera. So there's -- I think there certainly is a story to be told that there are some bigger homes being built. To your point, I'd agree with you, bigger homes are a little bit more efficient. So time will tell. We've factored in what we think are our best assumptions at this point in time, and we'll continue to keep everyone updated as the year progresses.

[Operator:]

The next question comes from Michael Rehaut of Jpmorgan.

[Michael Rehaut:]

And congrats on the results. I wanted to circle back to gross margins, and I apologize that this is beating a dead horse a little bit. But just wanted to try to get a better sense of the levers here. And you hit on price. But when you look at the 25% margin in the fourth quarter, it was up a little bit versus the guidance of 24.5%. And now you're also looking for 24.5% in the first quarter and -- of '21 and the full year of '21. So I was just curious, number one, what drove that differential? And if it was more temporary or mix driven per se? And number two, when you think about price versus cost inflation, I think a lot of builders have been looking towards some decent level of gross margin expansion in '21 versus '20. Given your margins being so much higher historically over the last few years than most of the other builders, I'm wondering if there's any upward limitations on taking price from an affordability perspective or a competitive perspective, if that's why perhaps we're not seeing as much expansion in '21 versus '20, just given the higher starting point?

[Robert O’Shaughnessy:]

Yes. I think it's apples-to-oranges to a certain degree, in terms of us versus others. So I can't comment on their relative margin performance. And Mike, there's clearly nothing that prevents us from accelerating price if it's available in the market. And if that's expansive to margin, we're going to do it. I think we've demonstrated, and you saw it actually in fiscal '20 versus the prior year, we were up that 25% was up 220 basis points over the prior year. So we're paying attention to market, and we're looking to get every dollar of price that we can. I think in terms of the forward guide, we've got 15,000-plus homes in backlog, right? We kind of have pretty good visibility into what our margin profile is going to look like next year. There is nothing, and I want to be clear about this, nothing that will stop us from trying to expand that margin. But based on what we see today, we want to give you the best estimate we've got. And as I said in answer to an earlier question, we do see vertical construction costs escalating. Lumber, I think everybody is aware of. It's a busy market out there. There's a lot of people selling a lot of houses. We think there'll be some price on the labor side that we'll be asked to contribute for that. So at the end of the day, we are pretty -- we're pleased with our margin profile. We'll seek to try and push it to the extent that we can get more price going forward. And if that more than covers the increase in costs, including land, I think you can see us do that. And there's no message here, but we outperformed in this most recent quarter. If the opportunity is there, we'll seek to do the same going forward.

[Ryan Marshall:]

And Mike, on the Q4 outperformance, I just -- you asked where did that come from, we mixed in more spec inventory in Q4 than we had anticipated. And so there's a good example of we were able to get kind of current market pricing that help provide some outperformance in Q4.

[Michael Rehaut:]

Thanks for that, Ryan and Bob, that was very helpful. I guess, secondly, I just wanted to focus a little bit on community count and sales pace. And your community count in the second quarter, just down a touch year-over-year. Which was relatively positive, I think, versus some of your peers having much greater declines. At the same time, you've made comments, I believe, around -- and correct me if I'm wrong here. But to a degree, perhaps managing sales pace to make sure you're not getting too far ahead of your backlog and allowing your business to operate at a relatively consistent cadence. How should we think about '21 on those metrics? And specifically, community count, if you could give any directional guidance for the first quarter and where we should expect year-end to wind up. And to the extent that you've kind of limited or managed your sales pace, could we expect sales pace in '21 to be more kind of consistent even off of these levels? Obviously, again, you're not seeing in your numbers, maybe the dramatic year-over-year growth on some of your peers. And I'm just wondering if that could actually work towards your benefit as you get through the next few quarters?

[Robert O’Shaughnessy:]

Yes. So I think the question sort of is what's the community count for next year? And how are we thinking about sales against that? And the way I think we ask you to think about community count, we obviously had a slowdown in development spend this year, even some delayed AC. We've highlighted that we're going to be investing at a more aggressive rate next year, Ryan walked through that. Where we see it is community count in Q1 of '21 versus Q1 of '20 is down about 5%. And then if you fast forward to your question at the end of the year where do we think we'll be? We'll be down about 5% kind of end of year '21 versus end of year '20 will have some variability in that during the year, and it will be dependent on what's the sales environment like? How quickly are we closing out of communities? And what's the weather like, how does development go? We'll obviously be looking to accelerate communities as much as we can. But the sales environment is going to drive some of that number too. And we are looking at a pretty big step-up in acquisition spend next year, which would obviously contribute to years beyond that.

[Operator:]

The next question with apologies to Ms. Zelman, a follow-up or second question for her from Zelman & Associates.

[Ryan Marshall:]

Maybe I thought we hit I scared you away with my last answer.

[Ivy Zelman:]

Yes. No, a follow-up.

[Ryan Marshall:]

It was Zeumer's fault, right?

[Ivy Zelman:]

Yes, Zeumer, right. It was Zeumer's fault, there you go. Just digging in a little bit on the land spend. You think about spending $3.7 billion. Are you spending -- are you fully set up for '22? Or are you still buying for '22? And how far out are you buying? And just give us just the perspective between the margin differential on the option lot versus on the own lot? If there is a differential from a price perspective and margin perspective?

[Ryan Marshall:]

Yes, Ivy, both good questions. We're pretty well set up for most of '22 at this point. Some of the spend that will happen in '21 will influence the back half of '22, but we're mostly set up. So given the difficulties that you highlighted in your first question with entitlements and approvals and things like that, we're largely into 2023 at this point in time. And we've factored that into kind of everything that we're doing. In terms of -- and the second part of your question, I lost my train of thought on that one.

[Ivy Zelman:]

The option -- the option margin or price differential?

[Ryan Marshall:]

Yes. So Ivy -- the thing I or --

[Ivy Zelman:]

I know you focus on returns, and I recognize that. And I see it a faster return, we'd be the option or a better return. But just thinking about the pricing in the market, the land grab right now is pretty heated. So what are you seeing if there's a differential when you're optioning lots and what that may be from an impact to gross margin, even if it's a better return?

[Ryan Marshall:]

Yes. So I don't want this to come across as the nonanswer, Ivy, but you highlighted the most important point, which is we underwrite the return every single deal we do has got very different characteristics depending on who the seller is. As a general rule of thumb though, there is a cost to doing options. They're not free. And we factor that into what the ultimate return is and the overall kind of risk reward balance that we think we're getting for the option. So Bob, anything else you'd highlight on that.

[Robert O’Shaughnessy:]

The 1 thing I'd add is that in terms of the optionality, there's a couple of ways that, that manifests self, right? Are you doing a finished lot option transaction or are you tying up a bigger parcel where you're saying, all right, I want 1/3 of the lots today, 1/3 of lot 2 or 3 years from now and 1/3 of lots, 2 or 3 years after that. Remember, we're trying to manage against market risk as much as anything else. And so I don't think that the kind of the step-up is as impactful on margin because of that as opposed to just doing a straight finished lot option deal. So if you're in a master plan because they're getting real-time retail pricing for taking all that risk for you to take just-in-time lot delivery. So I don't know -- if you look at the book, a lot of our transactions are more what I've described as having these are larger lot positions that's just more than we need right now. And so we're paying a little bit for people to carry the land but then we might even be developing the land. It might not even be an option of finished lots. So I don't think it's a deleterious from a margin perspective as some people think sometimes when they're looking at it is exactly the way you just did.

[Operator:]

The next question comes from Ken Zener of KeyBanc.

[Kenneth Zener:]

To make sure I was connected. Great quarter. I mean, your leverage is flat. Your returns on capital, or as I look at our returns on inventory, are very high. So you should be investing in your company like you're doing. So I have 2 questions. First, go over your logic for this 50% owned option target and how much does del web legacy land play into that? And then my second question, is you're a build-to-order builder, yet your start capacity is limiting your orders. Perhaps. So what does that mean for your kind of start capacity? I mean, you started about 7,500 homes. We can calculate your starts basically. So what is your 30,000 guidance reflect in terms of where your quarterly capacity is going?

[Ryan Marshall:]

Ken, so I'll maybe take the start capacity question first. And we feel good about how our production machine is running. We have ramped it up almost every single quarter, and we continue to do so. And that's the guide that we've given for full year deliveries are reflective of the pace that we believe our production capacity is on certainly, if we can do more, we'll work to do that, and we think the demand environment is there that would allow us. But there's a lot of moving parts in that, labor capacity, supplier capacity, et cetera. So in addition to that, Ken, and I think everybody knows, we've long believed that the build-to-order model is better for a number of reasons, and it's the 1 that we've chosen to largely employ but specs are a big part of kind of what we do as well, especially with our entry level, lower priced product. And so in addition to building our sold not started backlog, we're also in increasing the number of specs that we have in the system. I don't believe that the build-to-order model is limiting our ability for success because at some point in time, you've got to make a decision about how much you can build. Whether you build that as a sold or you build that as a spec, you still got -- you've got to put the start on the ground at some point in time. So we're in a great time right now. We're excited about the prospects for 2021. And if we can keep some of the wins at our sales here, I think we're going to have a great year. Andrew, are you still there? Who is next in the queue?

[Robert O’Shaughnessy:]

The . Is 9

[Ryan Marshall:]

Andrew? . Yes. Jim, I got a confirmation from a couple of folks that the audience can still hear. So it sounds like it's an operator challenge.

[James Zeumer:]

So if anybody wants to -- we're still here. So if anybody wants to text me a call or text me a question, we'll do our best to take it that way because I'm not sure where our operator disappear to. I'm not sure at this point in time in terms of technical difficulty, how we're going to solve this. But again, we'll give it another couple of minutes if anybody wants to e-mail me a question or text me a question, I'm happy -- we're happy to answer it. And I apologize for this confusion.

[Operator:]

I guess it's just a are this is the conference operator. It looks like we're experiencing some technical difficulties. I'm going to go ahead and take over the call for now. It seems we were in the middle of our Q&A session. Is that correct?

[Ryan Marshall:]

That's correct.

[Operator:]

Okay. Our next question comes from Jack Micenko with SIG.

[John Micenko:]

It's always Zeumer's fault, isn't it?

[Ryan Marshall:]

Jack, I think this one, we can actually let Zeumer off the hook. I'm not sure he had anything to do with this.

[Robert O’Shaughnessy:]

He was running around with wire cutters, but I don't know what that so now your next in the Q? Jack?

[John Micenko:]

Probably, probably. All right. So we got a huge backlog. You've got great visibility into it. The industry has seen backlog conversion rate come down, not surprisingly coming out of some of the unique things we dealt with in 2020. It looks like the 1Q guide is calling for continued pressure on backlog conversion historically, which tells me there's a ramp in the back half of this year to hit that 20% growth. Can we unpack some of the drivers that I think Bob talked about increasing spec in the prepared commentary but kind of what gives you confidence you can sort of build back some of that backlog conversion in the back half of the year while maintaining margin?

[Ryan Marshall:]

Yes, Jack, it's Ryan. We tend to look at our conversion of work and process inventory as opposed to backlog. So we do have a larger backlog than we ordinarily carry, which is reflective of the strong sales environment. From a production standpoint, we're running very comparable to what we've historically run in terms of work and process conversion. And what I can tell you without giving you specific numbers is the daily, weekly, monthly start rates are increasing, working through that sold not started backlog and the spec inventory such that we feel like the guide that we've given for the full year is very achievable. So it's not necessarily a huge bet on a bunch of incremental spec inventory, which I think you may have been alluding to a little bit. Certainly, we want to put more in there, but it's really reflective of getting through the sold not started backlog in addition to putting some more spec in the ground. Our cycle times are a little elongated, given some of the disruptions in the supply chain. I think the areas where there's some -- a little bit of sand in the gears from a product standpoint or probably fairly widely known. I'd highlight that the relationships we have, the size of our company, the talented procurement team that we have. We've done a really nice job working through that, but it is a challenge that is out there for sure.

[John Micenko:]

And then you've got you've got the 1 plant down in Jacksonville. You're bringing another 1 online, I think early online early '22, right? How should we think of -- where will that show up in the numbers? Is that going to be at a company level, is that going to be gross margin? Is it going to be G&A ratio? Maybe lower warranty reserves over time. Where can guys like outside looking and kind of expect to see the benefit of that in the model?

[Ryan Marshall:]

Yes. Jack, I'll let Bob take that one. And maybe what I'll do is I'll highlight the benefits that we think we're going to get out of these plants. And the reason that we bought the first one, the reason that we're expanding to the second one, we're getting huge increases in our cycle time efficiency, which is a big deal and the labor efficiencies that we're picking up are tremendous as well. You combine those things with the added cost benefits that we're getting, and we're very pleased with how these off-site manufacturing facilities are performing. So as I highlighted in my prepared remarks, Jacksonville's exceeded our expectations. We're on the plant number two. We're in the final stages of site selection and just working through some contract things. So we're excited about the prospect of what the future of this holds, and then I'll let Bob touch on where you can see the numbers.

[Robert O’Shaughnessy:]

Yes, Jack, it's in homebuilding. Obviously. And so you'll see, I think, a couple of impacts. One is the contribution from the business itself. It's on the margin line, it's consistent with not a little bit better than our building our homebuilding operation. And then you obviously have the benefit, we believe, in terms of both the cycle time that Ryan talked about. But even some cost benefit to the builder side of the business, so the actual divisions contracting with them. And then there is a cost to do in this, but it's not out of line with the rest of our business. So I think it -- for all intents and purposes, you won't see it impact things materially other than that we get the improved operations that Ryan was talking about.

[James Zeumer:]

Operator, I think we have time for 1 more call, if you're still there. One more question if you're still there.

[Operator:]

Our next question comes from Susan Maklari with Goldman Sachs.

[Susan Maklari:]

My first question is really around the active adult business. You saw another nice lift there. Quarter. I think, Ryan, in your comments, you kind of mentioned the fact that it feels like that buyer is definitely out there. Can you just give us a little bit of color on what you're seeing in terms of the demand trends there? How you're thinking about that coming through? And how much of this do you think is really being driven by the fact that maybe the existing market in some areas in the country, like maybe the Northeast and other parts that weren't as strong prior to COVID have really kind of picked up and allow these people to kind of get out of their homes and make that transition?

[Ryan Marshall:]

Yes. Susan, and take the question. I think there's a number of things that are benefiting the active adult buyer right now. One is they were first to kind of go to the sidelines they've certainly got more comfortable figuring out how to buy and figuring out how to make the decisions that they want to make as it relates to the retirement. The strong stock market behavior, I think, certainly plays a factor in that as retirement accounts are our flush. And then finally, the strong resale market has made it a seller's market, and so very easy for that active adult buyer to sell their existing home and move into 1 of our new communities. So our expectation is that the Webb brand will continue to be a big part of our business, and that buyer will continue to perform very well.

[Susan Maklari:]

Okay. And my follow-up question is around capital allocation. You started to buy back some stock in the fourth quarter. Can you just talk a little bit to how you're thinking about that for '21? And any kind of color you can give there?

[Ryan Marshall:]

Yes, Susan, the stance that we've taken on stock buybacks is that we'll report the news. What we have highlighted is it is going to continue to be part of our capital allocation. We paused for the second and the third quarter given the pandemic. But as you saw in the fourth quarter, we reinitiated a $75 million level. So we will be active throughout 2021. We're not going to provide forward guidance on the amount of the spend rather at the end of each quarter, we'll share with you what we've done.

[James Zeumer:]

I think we've now kind of run out of time, and I apologize for the technical difficulties for it. We'll certainly look forward to getting back to everybody over the course of the day. We appreciate your time, and we look forward to talking to you on our next earnings call.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.