Greetings and welcome to the Meritage Homes First Quarter 2020 Analyst Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. Brent Anderson, Vice President of Investor Relations. Thank you sir, you may begin.

Thank you, Donna. Good morning, and welcome to our analyst call to discuss our first quarter 2020 results. We issued the press release yesterday after the market closed, and you can find that along with the slides we will be referring to during our call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our homepage. I'll refer you to Slide 2 and remind you that our statements during this call as well as our press release and accompanying slides contain forward-looking statements, including but not limited to our views regarding current business conditions and the potential adverse impacts related to the COVID-19 pandemic. Our expectations are projections regarding the demand for our homes, home prices, costs, mortgage financing, margins, overhead expenses, cash flow and liquidity. Those and other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially differ then our expectations due to a wide variety of risk factors, which we've identified and listed on this slide as well as in our press release and our most recent filings with the SEC, specifically our 2019 Annual Report on Form 10-K and which contain a more detailed discussion of these risks. We'll also be filing our 10-Q shortly. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our press release as compared to their closest related GAAP measures. With me today or at least distant, are Steve Hilton, Chairman and CEO; Hilla Sferruzza, our Executive Vice President and CFO; and Phillippe Lord, Executive Vice President and Chief Operating Officer of Meritage Homes. We expect the call to conclude in about an hour, and a replay will be available on our website with approximately an hour after we conclude the call. It will remain active through May 13. I'll now turn the call over to Mr. Hilton to review the first quarter. Steve?

Thank you, Brent. I'd like to welcome everyone participating on our call today, and sincerely hope that all of you and your families have been able to stay safe and healthy through this global health crisis. Our hearts go out to those who are sick or caring for loved ones stricken by the virus. And our heartfelt thanks to all the healthcare workers, first responders and those who rely on vital necessities like groceries and gas during this time when most of us are safe in our homes. We are grateful for your service. Our number one concern since the coronavirus began to spread has been the health, safety and wellbeing of our people, including each of our Meritage team members and their families as well as our customers and business partners and I commend our entire Meritage team for their commitment to overcoming challenges we've never experienced before over the last six weeks. We'll cover what we're seeing on the ground in April shortly as well as the change we've made, but we think it is important to also review a few of the financial highlights of our first quarter performance that we realize is not a firm indicator of the remainder of the year. We believe the financial strength of our balance sheet and our strategic market position actually in Q1 will allow us to successfully weather the uncertainty of the upcoming quarters and be prepared for the near to midterm volatility while keeping our long term focus aligned with our strategy. Turning to Slide 4. Through most of the first quarter we enjoyed strong demand for new residential construction amongst the higher demand I've seen in my 35-year career. As you are well aware, active buyer conditions have deteriorated across the U.S. since mid March, which coupled…

Thank you, Steve. Slide 5. As we reported earlier this month, the spread of the coronavirus began to have a notable impact on our operations in the latter half of March. [Indiscernible] 8% drop in orders compared to March 2019 following year-over-year increases of 38% and 51% in January and February. Based on our sales through the past weekend we expect major [ph] orders to be down approximately 25% to 30% from April 2019. About 650 sales compared to 916 last year. Our order cancellation rates increased from 13% in the first quarter to the high teens in late March and are currently around 20% month-to-date in April. Shelter-in-place orders are still in effect across most of our markets. Our residential construction is currently deemed as an essential service in almost all of our locations with the exception of our handful [ph] communities in California. We are continuing to build and deliver homes following the protocols recommended by the BDC [ph] [indiscernible] and other government and health agencies to stay safe and minimize our risk. Slide 6. While the world we are living in today is very different then what it was just a couple of months ago, I am proud of the way in which our teams have quickly adapted to the new temporary model and we are leveraging our technology for solutions to continue to operate remotely. For example, we are seeing customers via virtually or by appointment only in our sales officers and studio and design centers, allowing customers to practice social distancing during their home buying process. Our online traffic has helped [indiscernible] earlier in the year and almost 50% since last year's April. Additionally approximately 15% of our net orders came from virtual tours, a validation of the creativity and determination of our sales team…

Thank you, Phillippe. Considering the fluid conditions and lack of clarity regarding the timing and pass back to a more stable economy, before I begin, I'd like to note that we're withdrawing our previous guidance until an appropriate time in the future. Starting on Slide 10. We produced strong earnings growth of 180% in the first quarter of 2020 over 2019 and achieve that result with margin expansion and SG&A leverage in addition to the 27% home closing revenue growth. Closings were up 31% over the first quarter of 2019, with 69% coming from spec inventory and a backlog conversion rate of 83%, compared to 73% last year. Our home closing gross margins increased 330 bps over last year's Q1 to 20% for the first quarter of 2020, traditionally, our lowest margin quarter. Our margins benefited from pricing power over the last couple of quarters as well as construction efficiencies due to simplification of our products and processes, cost efficiencies from better negotiating power on a lower number of SKUs and incremental efficiencies and construction overhead from the additional closing revenue. Although we've not yet seen notable discounting for new or resale homes in our markets, our high gross margins would be able to absorb material price concessions before we would have any concerns about taking meaningful impairment, which has been a topic of discussion among investors lately. At this time, we anticipate volume will be lower in the current environment, but we are still continuing to sell and close homes every day. While profit is always front of mind, in the current environment, we believe it is important to continue to maintain cash flow from home closings to cover our fixed costs. It's also important to maintain a production cadence to delivers cost savings with our streamlined construction processes.…

Thank you, Hilla. As our first quarter results demonstrated, our strategy was hitting on all cylinders until late March with closures of large sectors of the U.S. economy began to severely impact the market. Since then, our focus has changed as we are leading and managing the company through a much different landscape now. However, we reminded our employees, partners, homeowners and investors that this is not 2008. Home inventories are still in short supply and the industry has been under producing relative demand for many years. Demand for homes is from buyers who are taking possession and moving into them. The attraction of single-family homes is even more compelling in today's shelter-in-place world. Prices are not been arbitrary inflated by investors looking to flip homes for a quick profit. Mortgage standards are tighter yet interest rates are still very, very low and builders are focused on bringing costs down to make homes more affordable rather than offering, aggressive discounts to harvest cash. We believe Meritage is well positioned in that regard with our strategy in simplifying and streamline our operations, which has been very successful to-date and we believe will continue to serve us well through this crisis and in the future. Our entry level LiVE.NOW home offers surprisingly more value than some of our competitors at the bottom of the entry-level market, so we can attract a higher credit buyer. Our first move-up homes are point the features and finishes that also attract some second move up buyers which expands our potential buyer pool. We are also in a much better conditions there were before the last recession. Our balance sheet is the strongest it's ever been with ample liquidity and very manageable debt levels and maturities. We have curtailed discretionary spending and delayed development projects where possible, reduced our cash outlays in 2020 and beyond as necessary. We are carefully managing our spec starts in inventory. We will maintain the cost base [ph] of that model to maintain a competitive edge for our entry level communities and help protect our margins. We are well positioned in the market with our entry level and first move-up communities, which we believe will continue to serve us well. We have an experienced management team that was in sync with our current strategy. Employee morale is good and we are supporting each other, our families, our business partners and the communities that we serve. This is not the end of the world. It's the most remarkable active global solidarity the world has ever seen. And to that end, we rolled out a new charitable program last week where Meritage Cares Foundation and our employees are contributing $250,000 to feed America. I'm proud of our entire Meritage team for putting our customers first and working hard every day to make a positive contribution. That concludes our prepared remarks. I'd like to thank you for your support at Meritage Homes and we'll now take questions. Operator?

Thank you. [Operator Instructions] Our first question is coming from John Lovallo of Bank of America. Please go ahead.

Hey, guys. Thank you for taking my questions and I hope you all are well. First question, Hilla, I think you mentioned more recently, some of the activity has improved a bit and maybe in the context of that 25% to 30% decline you're expecting in April, can you maybe frame the past two weeks maybe versus the first two weeks in April in terms of year-over-year declines just we can kind of gauge how things are progressing?

Let Phillippe take that one.

Yes, I'll take that John, it’s Phillippe. So, certainly when the shelter-in-places started to occur and state homers were instituted, we saw a dramatic slowdown that occurred in the back half of really the last week of March. And really the first two weeks of April were pretty slow they were off 50%, 60%ish from last year's April. But then as we move through the month of April, things have gotten much better. So that’s where you start to see us being off 20% that really gets you to that 25% to 30% that we're talking about. So what I would tell you and April is not over yet, and we sell a few more days here, but we have seen a meaningful difference in the back half of April versus the first half of April and sort of that last week of March.

Just one other point I'll add to that John, I know some other folks have mentioned a detailed describing a backlog and a higher cancellation rates during the last week and that's not typical for us. We scrub backlog every day. So we're not expecting an unusually high spike in cancellations to occur in the last days or through the month.

Yes, we don't report any contingent sales in our sales numbers or in our backlog numbers.

Got it, that's all really helpful guys. And then I think there was a mention that I think 15% of orders came from virtual tours or something in that neighborhood. I'm just curious the percentage of those folks that will typically will need to come in physically to see the house before purchasing?

I think they will all come – to the house at some point in the process. The point of that stat is they are buying the house basically site unseen virtually and then before they close, they’ll come see it, but it's a pretty remarkable staff. It's a staff I really want to believe I couldn't believe I struggled to believe that people would actually buy a home without physically going out and walking and touching it, but in this new reality we are happy that the 50% of our buyers are doing that and we think that that number could potentially increase. That said, that said let me just add one more thing that and many of our markets, the shelter in place orders are expiring and being replaced with, the Phase 1 of America reopening. So many of our communities this weekend and then into the following weekend, we'll be back open for business under more of a normal situation. So and we will begin to bring some of our offices back online next week in those states where we'll have shelter in place, orders have been relaxed.

I would just add as employees that obviously having finished facts is really how you’re able to sell a home virtually. It's much difficult, much more difficult to do that in a built order environment. Our Live Now models are Live Now specs, we have to carry more specs and carry, variety of specs. So we have to demonstrate that home in a virtual tour. What you see is what you get when you get out there. And I will tell you that all of those sales, for the most part are on finished specs.

It's a good proxy for folks that are nervous about existing inventory, as the inventory that's being lifted declined, and people are nervous about doing tours in someone else's home – it’s very good proxy for that.

Makes sense, thanks, guys.

Thank you.

Thank you. Our next question is coming from Alan Ratner of Zelman & Associates. Please proceed with your question.

Hey, guys, good morning. Glad to hear everyone's doing well and congrats on the strong performance both in the quarter and since then as well. So, my first question I guess, just touching a little bit on that last comment about the advantage of having finished specs. One of the things that we've been seeing on the resale side in this current environment is there's been a huge decline in inventories as people are sheltered in their homes and presumably can't sell it if they're looking to move? And I would imagine you guys have benefitted to some extent from that there. I guess the question is, as you look forward and eventually, perhaps listings do start to increase. And you have to think about that four to five month ideal supply of specs that you have on the ground. How quickly are you kind of adjusting that that start-case because obviously, the trends are changing so dramatically by the week? So should we think about your current start activity, kind of down in that 25%, 30% range that you're forecasting April to be in or are you taking some different view based on what's going to happen with resale inventory once eventually it does come back online?

First of all Alan, thank you for the question and hope you guys are doing well also. I'll tell you that I think our spec strategy is going to be the defining elements of our overall strategy. And it's going to be what allows us to gain market share in this downturn because many builders don't do it. And we believe very strongly that buyers in this environment and the environment going forward don't want to wait for a home. And they want to move quickly and we have that inventory for them. That said obviously, our April starts are going to be down significantly. We don't report starts, but I can tell you our April starts will be down significantly from previous months and from what normal for us, because we're fine tuning where we want specs and where we don't, we have made – where we'd have too many and where we don't have enough. And where we're selling houses at a fast rate and there are many places, we're – building specs. So how do we manage that we manage daily, every day we figure out what we sold and where we need to replace it. And Phillippe and I together, Phillippe leads the effort on that I support him. I can tell you this is hand to hand combat. We're managing that part of the business very aggressively as we're managing our land acquisitions, our land development. Not just about conserving cash, but about putting the right product on the ground – the right place at the right price.

That's very helpful. I appreciate – the insights there. Your second question, just as you think about your footprint, I know it seems like there's some markets that at least from a job perspective are being hit harder by this current pandemic when you're thinking about say Houston with what's going on with oil or maybe Orlando. Obviously with the Disney resorts there being shutdown indefinitely. So when you look across your footprint, are you seeing any discernible differences and trends of late maybe ones where the demand hasn't seemed to bounce back as sharply perhaps due to that job uncertainty or is this strength over the last week or two? Is that is that pretty widespread across your footprint?

I would say that, I think about the kind of just the way you just laid it out going into this pandemic and through it, I was most concerned about Orlando and Houston right. There is 75,000 people in Orlando that work for Disney. They furloughed 43,000 people a couple few weeks ago – it's a resort market, a travel leisure market, very worried about Orlando, also very worried about Houston with almost zero dollars for a barrel of oil. But surprisingly our sales in Houston have been very robust for April. I'm awed how well we're selling homes in Houston this month. Orlando, sales have been off, but not as much as I would have expected. Really – where we're having the most challenges at this moment would be California. California I think is the one state that we could be most challenged by. Fortunately, our footprint in California is not that large. We only have 29 communities in California, but that's what I'm concerned about. I'm also a bit concerned about Colorado. Our community count has fallen dramatically in Colorado from 23 a year ago to 13 because we've been selling out of communities and replacing them with new lower price into local communities. But the price of housing is pretty high in Colorado and I think buyers there are being a little bit more cautious. But demand in Arizona is stellar, even through the last six weeks, and demand in most of our Texas market continues to be very good as well. So hopefully that answered your question.

Yes that's great. Thank you for the color and good luck and stay healthy.

Thank you.

Thank you. Our next question is coming from Truman Patterson of Wells Fargo. Please go ahead.

Thanks, actually it's Paul Przybylski. I guess, Steve as we look for an inflection in demand, what would you need to see, to give you comfort to reengage the land market and develop it. How long would you remain conservative?

Well, we're not unengaged, okay? We're going through our land pipeline, maybe we had a couple hundred deals in escrow, may be a 100 of them we've gone hard on. We're reviewing those. We may have some of those, a modest amount of those that we decide to part ways with. And so, we're not just going to completely blow up the land pipeline. We're going to reanalyze every one of them. Every market is different. I think some land prices are going to be somewhat sticky in certain places, but I think in other places they may go down and we don't want to be in a position we overpaid for land. We also think, other builders, private builders are going to be stressed in this environment and they're going to have to let go of some land that we maybe wanting to buy that we couldn't buy, the maybe now we'll be able to buy. And we're going to be very strategic, and we're going to use this opportunity, this is an opportunity to increase our market share. So, I don't know that we're going to be running out and buying land tomorrow. But we're going to be ready this summer, for sure. Particularly if this – if our city sales rates were – that we experienced particularly and some markets hold up, we're going to be ready to buy land where it makes sense. So as I said earlier, it's not 2008 where we're just throwing the pots and pans off the ship to stay afloat. This is a different situation.

Just to clarify Paul, we've only walked away from a handful of deals so far. For the most part, all we've done is just pushed out the timeline for the deals that we have.

We’ll have some more deals that we’ll walk away from this quarter and there'll be some expense too for that, but I don't think it's going to be that material.

Okay, and Hilla earlier on the call you mentioned you had significant headroom on the incentive front before triggering impairments. Do you have any color on the magnitude? Is it probably in the like 10% range?

Yes, I mean, you guys saw the margin this quarter were 20%. So there is quite a long runway between that and breakeven. There is some additional costs for not to get too geeky on the accounting part, but the auditors is making still on a little bit more money, but you probably have between 10% and 15% decline before we would – in ASPs, before we would even need to start having conversations about impairments. And that's assuming that there is no price concessions at all to be gotten in the market today, which obviously there are. So I think that kind of combination of all of those items gives us a lot of breathing room.

We had 30% to 40% price declines in the last great recession, which certainly caused all those impairments. Our margins were really strong and now they were even stronger at that time. But we're not seeing any real price declines yet. That certainly incentives picked up a little bit, but not meaningfully.

Okay, thank you.

Thank you. Our next question is coming from Stephen Kim of Evercore ISI. Please go ahead.

Yes, thanks a lot guys. Encouraging stuff. Good to hear. Yes, it certainly does seem like things are holding up a lot better than they were looking like they were going to be a few weeks ago. I guess I'm curious as to whether you could comment on what you're expecting or what you're anticipating will be different as you in the markets where you reopen versus the markets, I mean, where the states are kind of reopening versus the states where it will be more delayed and what specifically are you looking for in these markets that are opening up earlier to gauge how you're going to perhaps pivot your strategy in the other markets that may follow?

Well, I mean, it's traffic, it's sales activity, it is buyer engagement, and it's pricing. What incentives are necessary or not necessary to get people to transact. I mean, it is no different than in a good time than in a bad time. And the activity that we're seeing in the field and in the communities is really going to drive our decisions around building specs and buying land. It's a pretty simple formula. I mean, we in the markets, Georgia opened up a little bit, South Carolina, we're now seeing Texas open up here. In the markets that are sort of paving the way for opening. We're seeing incremental traffic right away. We're seeing buyer engagement as Steve articulated. So we're seeing all that. I mean, it'll just be key to watch the sort of the economic landscape for each one of these markets. I think someone mentioned where the job loss is going to occur, keep an eye on that. But we've, but we've already seen buyer engagement improve just with the idea of opening back up. So we're certainly expecting incremental activity in traffic when we actually can be opened up without in a non-virtual appointment only environment.

Yes, absolutely. Particularly, seeing things improve over the last couple of weeks is important. Do you attribute or how are you anticipating that you're going to utilize incentives during this, what you might call a diagnostic phase? You've indicated you've seen some nice pickup and traffic and buyer engagement. I'm assuming that is in the absence of a material increase in incentives on your part or any special programs. Can you talk about the degree to which you are planning to maybe pull back on incentives in the near-term or conversely to increase incentives as these markets open up?

Well, the question really should be more what were our incentives in April? And I would say, we used a variety of tools in April, but they all add up to about 150 bps. Some of it was commissions, some of it was a more closing cost, a variety of different things that we did, that said we were raising prices in March. So I don't believe that our April incentives that 150 bps that we spent is going to have a meaningful impact on our margin because I think our prices were on the upswing of our inventory going into April. So then it kind of watches. But I'm going to refrain from telling you what we're going to do in May. I know a lot of our competitors are listening to these calls as well reading the transcripts, so I don't want to telegraph to the market what we're going to do. But I can tell you this, we're not going to sit on our hands and watch the movie go by. We're going to be aggressive and active in making sure that we maintain our volume to a reasonable level and move our product and compete. And that's what the really good entry level builders do, and I just had this - what the good builders do. They did it in the last downturn, they're going to do it now. And we're going to be right up there with them. So I don't know what else I can tell you on that, but I'm not going to tell you precisely what incentives we're going to be offering.

I would just add, this is not a peanut butter approach. Every community has a different story. We believe we're going to sell over 650 houses in April, in a largely sheltering in place environment. We have a lot of communities, especially in the entry level that performed at or above our original underwriting expectations. We're not looking to over incentivize those especially as we think they'll do better coming out of this. So every community we look at, and we evaluate what our competition is doing, and what's the story on that community, what's our spec story? So it's a community by community thing, a market by market thing. And then I would also tell you, again I believe this is the advantage of having specs. When you look at incentivizing specs, it's very different than incentivizing dirt. You can control the margin erosion much better.

Yes, I know it's all very encouraging. I appreciate it. And you also didn't mention the fact that lending standards tightened a little bit too in the recent weeks and so the strength is really encouraging. Thanks a lot guys. I appreciate it.

Thank you.

Thank you. Our next question is coming from Carl Reichardt of BTIG. Please go ahead.

Thanks, good morning folks. Glad to hear you're well. I was curious Phillippe if you could talk about April in terms of entry level LiVE.NOW spec versus the move up side of the business and maybe how absorptions on a net or gross basis had turned in between those two segments?

No, I don't have those stats right in front of me for April yet on how much of that was entry level versus 1MU versus sort of our non-strategic assets. But I can look at the data just in front of me and I can tell you the LiVE.NOW is continuing to perform very strongly. There has been modest pullback in the 1MU. It's definitely stronger there than it was now. And then the 2MU stuff is definitely more slower, much more slower than in the first quarter. So I would just tell you in general, entry level, entry level plots, lower end first 1MU is all performing much better than the higher end stuff. And I think you'll see that trend in April and as we come into May as well.

Higher end stuff cost was only 6% of total volume for Q1. It's not really even a footnote for us anymore, and the pace is holding relatively consistent at about 150% of first time movers and entry level is about 150% absorption space, and first time movers and those ratios are holding relatively consistent.

We've been watching some of our competitors and we do have a few communities that are closer to what I would deem as ultra-entry level, and I see that some of those are more challenged because they're impacted - the buyers are less creditworthy and they're tending to have a lower credit score. We cater to a little bit more of a premium entry level buyer, who has a better credit score. Our entry level buyers credit is generally over 700. We do have some in the 600s, but we don't have any of those low 600 even high 500 entry level buyers that some other people might have. So our entry level communities have not really seen a drop off in activity.

Okay, I appreciate that answer. Thanks, guys. And then, Hilla, you talked before at the Analyst Day and previously about community count what 20 would have been, which was a transition year before 21 community count grew. If - let's operate under the assumption that you're sort of down 25%, 30% and that's sort of where we are for a few months, before there is some type of a rebound. Is your sense then that effectively, you'll just run your community count down, or replace communities that do sell out at a slow rate? I guess the question to me is, what does the market need to look like, before you start to think about a more aggressive expansion of your community count?

Carl, that's just too hard to answer at this moment, because we got so many moving parts. We have some communities that we've frozen development for a short period of time to see what's going on. So those will be – but some of those will be delayed. That had plan opening later this year. We have some communities that are selling out a little bit slower than maybe continue to be open through the year. We have some that are going faster. We're just in the eye of the storm right now. And I don’t want – we don't want to give any guidance on community counts until we get a little farther down the road with this. I think next quarter its more reasonable question to ask. We definitely still have our mindset and our target on getting to that 300 communities, wanting to be there by the end of 2021. We're still going to get there. It is just going to take us a little bit longer. We were dealt a curve ball here. And I think, with these low interest rates and the tight supply of housing, that we're going to get through this in a pretty good way. But I don't want to give any kind of guidance like that yet.

I think that Steve had in his prepared remarks. We're just trying to navigate the short and midterm, but nothing is changed for us long-term. That's still the strategy is to hit the 300 community mark. Not sure it's going to happen on the quarter that we thought it was going to happen in, but that's still the eye on the prize.

Okay, I appreciate it. Thanks.

Thank you. Our next question is coming from Michael Rehaut of JPMorgan. Please proceed with your questions.

Thanks and good morning everyone and I hope everyone is healthy and safe. First question, I was just hoping to get maybe in some ways a more of a clarification on some of the numbers provided earlier, specifically, just around – down 25% to 30% in April that appears to be more of a gross decline and if you kind of extrapolate the…?

Mike we had – I think there's a slide in our presentation, we had 916 sales last year’s April net, and we're projecting north of 650 net. So that's how we're getting to the 25% to 30%. So that already has all of the cancellations in there.

Okay that's helpful I guess, maybe we could follow up offline with some of those numbers and, but also around the down 50% to 60% early in April and then down 20 in the last couple of weeks, is that also net or gross?

This is all net. So, the first two weeks of April we were – and I'm trying to think about week-to-week trends year-over-year is what the question was, and I'm not sure if I'm spot on. I think the point is the last two weeks, and as we move through this week, are meaningfully stronger than the first two weeks of April.

And maybe wouldn't get caught up on the weekly percentages. I think the takeaway is that was rougher in March. It's been improving steadily ever since and we expect April to close out 25% to 30% net. And as Phillippe mentioned, likely April will be the toughest of the month considering almost the entire country shelter-in-place right now and we're exiting out of that going into next year.

Yes and Mike I know you've notice a long time. But sales numbers always build as you get later in the month okay, because incentives expire, salespeople get more motivated, they work harder at the end of the month than they do at the beginning of the month. People clean up their backlog and takes cans. So as you move through a month, numbers are always building. So that said, the last two weeks in March as Hilla said, numbers were declining. And the first two weeks of April numbers we're lower than what you expect for the prime time of the selling season. But the last couple of weeks, particularly last week, it's been pretty strong. But we, we endeavor to deal with our cans on a daily basis and we're always reporting net numbers.

Okay, okay I think maybe I was also just confused with the - on the bar chart there was a 600 number in there for the month. Basically that's again where we can followup on, but I appreciate the clarity. I guess secondly, just on the gross margins in the first quarter understanding a lot will change, off of the current market conditions going forward. But, there was a very, impressive number around 20% gross margin for the first quarter and compares to the mid 18s that you were expecting? So I was just hoping to get a little bit in terms of what the drivers were of that upside on a relative basis and if that's kind of the new starting point, all else equal. If you were to kind of take out maybe one incentives and market demand is going to do, but if there was any type of, kind of mix shift or timing that benefited that quarter, or if structurally perhaps you're at a higher level than you realize?

Well here's the thing with our strategy and our model. We're able to sell homes in the quarter and close them okay, because we had a 83% conversion ratio in Q1. So we had a robust January and a robust first half of February, and we were able to sell inventory and close it within the quarter, which allowed us to outperform the guidance that we gave you for closings, which drove higher margin because we didn't have to, create any additional overhead to produce outside revenue. So, that's why it's important to keep building and selling, because the overhead leverage is significant, and has a tremendous impact on the bottom line. So, because January, February we saw strong and we sold quite a few more homes than we expected to. We were able to close those and produce a better gross margin.

So Mike, if we're looking for year-over-year, Q1-to-Q1 of that 330 bps improvement about 80 bps of that is increased leverage from the higher volume. The rest of that is a combination of what we talked about, which is our ability to increase pricing. The strength that we talked about coming into the quarter, but also those cost efficiencies we've been improving our processes and our product, as we've been talking about for the last couple years. So the combination of all that really became evident in our closings in Q1 so again, that 330 is mostly comprised from improved processes and cost reductions, although there is 80 bps in there from that overhead, leveraging from the additional volume.

Okay, thank you.

Excuse me, thank you. Our next question is coming from Jade Rahmani of KBW. Please go ahead.

Good morning. This is actually Ryan Tomasello on for Jade. Thanks for taking the questions. I was wondering if you're seeing any early indications for a potential increase in acquisition opportunities across the landscape and including large scale M&A in the market?

No, no one's looking at acquisitions in the middle of a pandemic. And then even I don't think any builders are inclined to be selling right now unless they're looking for a lifeline. So, short answer is no.

Okay, and then are you seeing any preliminary signs in your market today of increasing demand as a result of specifically the pandemic, from multifamily renters?

I think it's too early to tell. I mean, we believe long-term that people are going to want to own a home. They're going to want to be in the suburbs. They're going to want to socially distance you know, not live in tight quarters. We think we're getting influx of people from a high density cities to move out to the Sunbelt where we build. But, we're just rolling a few weeks into this thing and it's just you can't really, take any trends away from this based upon anecdotal evidence, yes too early okay. Next question, operator.

Certainly, our next question is coming from Alex Barrón of Housing Research Center. Please go ahead. Alex Barrón: Yes, thanks. Hope you guys are well. I wanted to ask about how much is your build time being affected by social distancing and all that stuff?

Yes. Thanks Alex. This is Phillippe. Well,the first thing I would say is, it's not getting any worse. In fact, I will tell you that we're seeing more effective construction activity. We think that's largely attributed to us being an essential service being carved out. This is what the trade crews are performing at a very high level right now. They are getting to the job site faster. They have less other work to do. That's a distraction. Supply chains are moving effectively at this point. And so we're building houses probably faster than we ever have right now because of all those reasons and our cycle times are still extremely tight. I think we are seeing a little bit of a lag with permits and things like that, but it's nothing too big, and we're certainly making that up on the build times, the actual vertical build time. So, again, I think this will start to unwind over time, but I will tell you, the trade crews are performing the best I've ever seen in the last five to 10 years it's been such a struggle, and right now they're executing an extremely high level.

Yes, I would say Alex, one or two of our big bills are friends early in the pandemic shutdown construction, and those crews came over to our job site, and say can we double up, and we said, sure come on over, let's just get some more stuff built. So both guys are reading the paper too, and they're nervous and they're working hard to maintain their share as well.

That's good to hear. The other question is Steve, you said, you're not going to let anybody else I guess, are you going to be aggressive and not let others take your market share? So, my question is how much flexibility does each individual salesperson have on getting a sale done? In other words, do they have some pool of money that they can work on incentives or do they need to check more all the way up to you guys? I guess I'm trying to understand how centrally controlled the sales and incentives are versus does each salesperson have their own kind of flexibility? I'm just trying to get the sale done regardless of what it takes?

Obviously, they have a little bit of pocket discretion. But we control things locally at the division office to the regional leadership, and centrally corporate. So, this is our job, that’s Phillippe's job. He monitors that every day. He has his hands on the wheel. He is pulling the levers as needed. And we don't have any delay in reacting to what's happening on the ground.

Yes. And I mean, we rarely go into an environment where salespeople are empowered to just get buyers on paper at whatever cost.

Yes.

We're certainly a long way from that.

Yes, that's not how we operate.

Okay, my last question is, if you guys have any communities that maybe haven't had a sale for a few weeks, or what is the trigger to kind of reevaluate your incentive or your pricing, how many weeks would need to go by without seeing any activity before you need to kind of relook that?

Yes, that's a little too granular. I don't think we're going to talk about that. But yes, clearly we haven't. We're not showing houses somewhere or whatever the reason is, there could be multiple reasons. It could be something with a salesperson, it could be something wrong with the product, it can be rational what the competition is doing, et cetera. We're going to send the SWAT team in there, figure out what the problem is, and make the adjustments accordingly. But we don't - I can't tell you a formula after three weeks, we're going to have to slash the price. We don't function that way.

Okay, thanks and best of luck for this.

Thanks Alex, stay well. Operator I think we're getting close to the end. Do we have any more questions? We may take one more.

We are showing time for one last question, which will be from Charles Perron from Goldman Sachs. Please go ahead.

Hey, good morning, gentlemen. I'm filling in for Susan today. And my first question is, can we discuss the different trends that you're seeing in the labor and material costs through April. And if you believe these to provide a tailwind to the margins in 2020, assuming a weaker demand environment?

I would say that - we haven't had any price increases in April. Our cost increase is from our trade base. Certainly we did experience some in March, but it's been more muted. I do think with the low price of oil, we will be able to get some price concessions going forward, cost concessions, I should say from our trade base. And I also believe that lumber is - we have a lot of lumber contracts expiring tomorrow, and we're going to be renewing those contracts, we believe at lower cost maybe 10% to 20% lower in certain geographies, of course, more than others and others less than others. But I think the cost environment has become more favorable for us and for builders moving forward.

Okay, thank you. That's very helpful. And second, I would like to go back a little bit more on the SG&A. And obviously, even if you don't hit your 10% target for the year, can you give us a sense of like where things could go on the agenda for this year? And what do you expect to trend overall for the year?

That would be guidance. We're not giving guidance. So I don't know how to respond to that.

We can't. That percentage is a function of revenue and we're not giving out revenue numbers. The only thing we will say and we said it a couple times during the prepared remarks, is we're pulling back dramatically on non-essential discretionary spend. So we're going to be controlling costs very tightly, but the revenue piece is so murky, so I don't think we're prepared to provide any guidance on SG&A right now.

Okay, that’s very helpful. Have a good day.

Okay, thank you. So that concludes our question-and-answer and prepared remarks here today. We appreciate everybody coming in and joining on our call. We hope you stay well and navigate through this crisis and come out on the other side. So we'll look forward to talking to you again next quarter. Thank you very much. Have a great day.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and have a wonderful day.